“Not everything that counts can be counted, and not everything that can be counted counts.”
(Sign hanging in Einstein’s office at Princeton)

Back in May, Stephanie Strom of The New York Times wrote an article about increasing challenges to the tax-exempt status of nonprofits. I think there are plenty of rational positions to take on issues like whether universities should be required to pay out a certain percentage of their endowment, whether nonprofit hospitals deserve full tax exempt status, or if nonprofits who serve wealthy clientele (such as the opera) should be given a tax exemption. However, there is another theme to the article that I want to explore.

Strom writes about how last year the Minnesota Supreme Court denied a property tax exemption to a nonprofit day care agency because (in Strom’s words) “it gave nothing away.” Audrey Alvarado, executive director of the National Council of Nonprofit Associations, agreed with Strom’s interpretation of the court decision declaring that the court “is saying, ‘wait a minute, charities are supposed to give things away for free.’”

This is a disturbing concept. Recently I’ve been writing about how philanthropy is not defined by making the gift of money, it is the impact that the gift achieves. The idea that “free” equals maximum impact is asinine. Nonprofits are not supposed to “give things away,” they are suppose to provide public goods and services (goods and services that benefit society as a whole). The government also has the role of providing public goods and services. But imagine the outrage if the government made it policy to only give things away for free: No more toll bridges, museums all free, welfare checks and college tuition aid given without any expectations of the recipient.

Doing good is not the same as giving something away for free. Let’s set aside the intellectual argument for a minute and just look at how nonprofits actually work. According to the Urban Institute, in 2005 nonprofits collected $1.6 TRILLION in revenue. Nonprofits are simply not in the business of giving things away for free.

The Minnesota Supreme court ruling is damaging because it reinforces the idea that running a nonprofit is easy (jeez, you’re just giving stuff away, how hard can that be?) and it validates the idea that nonprofits should keep operating expenses very low. (If you’re just giving things away, why would you need a complex infrastructure and highly talented employees?).

Why then has the court taken this position? It seems to me that the court is essentially saying that the products and services that nonprofits offer have no knowable value and therefore should be given away for free. In a world where measuring impact is difficult, the court is saying that if the impact is not accounted for it can be assumed that it is zero. If the court believed that nonprofit products and services had value, then it would have made more sense for them to argue that nonprofits must provide products and services at a lower cost than the for-profit market can achieve.

Writing in a comment on my blog Tactical Philanthropy, Dan Moore, vice president of public affairs for GuideStar and former chief law enforcement official overseeing charitable organizations in the Attorney General’s Office in the State of New Mexico, wrote:

“[The court asks] ‘where’s the difference’ between a for-profit and a nonprofit provider? Or rather, ‘where is the charity’ in this work? Giving things away for free is a simple(istic) proxy for measuring the difference. From the government’s perspective, they are ‘giving away’ tax revenue. They want to know what they are getting in return. Finding ‘no difference’ in the Minnesota case, the government is looking to collect some tax revenue.”

It seems to me that the court is putting the social sector on notice. In the absence of effective impact measurement, the court will assume that nonprofit impact is zero and therefore nonprofit goods and services must be given away “for free.” Impact measurement might be difficult. Accurate quantitative measurement might be impossible. But like it or not, the social sector better get moving on demonstrating their impact or risk an erosion of their tax exempt status.

AdvertisementSean Stannard-Stockton is a principal and director of Tactical Philanthropy at Ensemble Capital Management. Ensemble Capital provides families both traditional investment management and philanthropic planning. He is the author of the blog Tactical Philanthropy and writes the column On Philanthropy for the Financial Times.