As part of a broad strategy to reduce the deficit, the President recently called on Congress to enact comprehensive reform to simplify the tax code and create a more equitable system. Like a purposeful arrow, this request was aimed at Congress and intended to spur legislation that uses the tax code to accelerate economic recovery. People on both sides of the aisle applauded his suggestion to make the tax code more “fair and simple,” but less so his plan to alter tax benefits available to the wealthiest Americans. This debate unfolds at a time when our nation faces a number of fiscal hurdles with our coffers depleted, our deficit swelling, and our tax base shrinking.
As public officials intensify their examination of the tax code, they will likely redouble their scrutiny of the tax-exempt sector. In the process, they will carefully weigh the trade off between the deductions and exclusions conferred on tax-exempt organizations and the social benefits we deliver to society. Our ability to articulate clearly the value that we bring to communities as well as what it takes to run our organizations could not be more necessary.
Over the last six months, the Senate Finance Committee has shown growing interest in an emerging category of “hybrid” entities, defined as organizations that blend characteristics of for-profits and nonprofits. Last fall, Russ Sullivan, staff director for the Committee, spoke with our board about the merits of creating a new category of hybrid ventures. (You may have read about this in the Chronicle of Philanthropy.) Some of this interest appears to have been stimulated by law makers’ desire to think through how we might best treat Consumer Owned and Operated Plans (CO-OPs). Under provisions of health care reform legislation, states over the next two years will create CO-OPs – consumer governed, tax-exempt organizations – to provide individual and small group health insurance. Independent Sector has been invited to offer recommendations regarding the tax treatment of these new hybrid organizations.
To facilitate our understanding of these issues, we convened 30+ world-class academics, legal experts, and practitioners in mid-April. Supporters of these entities pointed out that more and more people want to “do good” and “do well” through blended organizations that benefit society and generate profit. Examples include Newman’s Own and Stonyfield Farm, which employ sustainable business models with double- or triple-bottom lines. Newman’s Own donates all profit to charity ($300 million to date); Stonyfield Farm gives 10 percent of its profit to environmental causes ($12 million to date).
Other hybrid organizations draw on private investments to achieve their mission and strive to receive compensation and benefits that are not generally available in the nonprofit world. For instance, Maryland, Vermont, New Jersey, and Virginia have passed legislation creating a new corporate form – For-Benefit or Benefit Corporations – and 6 more states may do so sometime this year. Under these laws, directors and officers of the corporation can pursue social or environmental good without fear of shareholder lawsuits claiming waste or breach of fiduciary duties. California is considering another new corporate form, the Flexible Purpose Corporation, with greater flexibility for combining profitability with another purpose, perhaps a broader social or environmental goal.
During our conclave, many commented on whether hybrid entities can serve two masters: gaining maximum profit for shareholders on the one hand; being committed to serving the public good, on the other. One participant said these two purposes are fundamentally at odds and, he lamented, “You can’t have it both ways.” Others reminded the group that these organizations already exist and we would do well to find a way to accommodate and accept this new reality: “It’s real. It’s happening, whether we like it or not. The question is how and where do we, as a sector, draw the lines in a responsible way?” Still others worried that the appeal of a special tax status could attract bad actors, whose only purposes are to reap the benefit of tax deductions or exemptions, while maximizing profit.
Ultimately, we gained broad agreement on the need for further study of the ramifications of hybrid organizations. At the same time, there was overwhelming consensus on the importance of clarifying the current rules governing joint ventures between for-profit and non-profit organizations, including steps as simple as updating IRS examples of Program Related Investments (PRIs).
In the end, what became clear is that we are, in fact, only at the beginning of this conversation. We need to understand the existing landscape better and the consequences of creating a new, separate exempt category for hybrid ventures. Do you believe the dual fiduciary duties of hybrids are mutually exclusive? I invite you to respond to this question or other issues I’ve raised here. We will continue to keep you informed of IS’s activities on hybrid organizations and, more importantly, what we believe Congress is planning to do.