Shouldn’t charities give something away?

Sounds obvious, right? But according to a story in the New York Times, there is growing confusion over what constitutes a charity these days. Specifically, the story reports that recent court rulings are challenging the tax-exempt status of nonprofits.

Think about this the next time your alma mater solicits a donation: Harvard University, with a $35 billion (with a “b”) endowment, is a nonprofit, but does it give away enough of it services, presumably scholarships, to needy students? Is it too rich to be considered a nonprofit anymore and, therefore, be exempt from federal taxes?

The Times says,

“The idea behind tax exemptions is that the organizations provide a public service or substantially reduce the burdens of government. Standards from property-tax exemptions are set by the states, while the federal exemption means charities are not taxed on their income.”

What about Mall of America, a 4.2 million square foot complext with its indoor rollercoaster, wedding chapel, and 520 shops? The Mall claims that, as a major tourist attraction for the state of Minnesota, it actually does reduce the burden of the state government by drawing tourism dollars. Where are the Mall’s tax exemptions?

Obviously, donors want to give to a nonprofit whose mission they believe in, but it’s totally acceptable to find out how much service the nonprofit provides to the community and how much of its income is derived from donations and/or a foundation or trust.

Again, according to the Times,

“Almost 88 percent of overall nonprofit revenues in 2005, the most recent year for which figures are available, came from fees for services, sales and sources other than charitable contributions, according to the National Center for Charitable Statistics.”

So on the one hand, the government may not allow tax exemptions to entities whose income does not come mostly from charitable contributions, but on the other hand charities today cannot afford to provide services on without a significant amount of non-charitable contributions. The closer a nonproft gets to being run like a business, the more it risks being taxed like a business.