Sizing Up Nonprofits, Charities
by Lee Cheng

Charitable organizations occupy an enviable place in American society. As fictitious entities, they are theoretically immortal. Supposedly formed for the public good, they are also free from taxation. In fact, the government even allows contributors to deduct the value of gifts to charity from their taxable incomes.

In recent years, though, several highly publicized scandals involving nationally renowned charitable organizations have rocked public confidence in nonprofit organizations. The United Way, which serves essentially as a distributor of funding for local charities, has only recently shaken the taint from revelations that its once high-flying and imperious president, William Aramony, embezzled or squandered more than a million dollars of the charity’s funds and placed close friends and relatives in fictitious jobs. The National Baptist Convention, purportedly the largest black church organization in the country, is attempting to rebuild after its former leader, Rev. Henry Lyon, was caught falsifying membership records to create an illusion of greater influence and using donations to, among other things, buy real estate with his mistress.

In addition, a growing segment of the public has grown increasingly frustrated with charities because of the often accurate perception that they serve ideological special interests rather than the public good. Homeowners and small businesses often seem to find themselves running afoul of relatively large, well-financed charities and nonprofit organizations. While the individuals and interests ostensibly served by groups like the Sierra Club or the Tenderloin Housing Clinic are either conceptual or too poor to afford adequate representation, the individuals and interests such groups often oppose are often not significantly better off.

One recent case that received extensive coverage in Asianweek involved an Asian American landlord who tried to invoke the Ellis Act, a state law permitting owners to evict tenants in order to occupy units themselves -- in this case, to evict tenants to make room for the landowner’s own growing family. While the immigrant landlord -- who owned a laundry service and was hardly rich -- had to stretch his meager resources to afford the $200-an-hour legal fees, the tenants were able to rely on experienced legal representation more or less free of charge.

Scandals like those faced by the United Way and the perception that charities are special interest groups in disguise have fueled demands for greater disclosure requirements. Nonprofits have long been expected to open their books to office visitors, but many have refused to comply because of the perceived burden of compliance and a desire to protect the confidentiality of supporters and donors. Perhaps, too, nonprofits arrogantly believe that the importance of their ideological goals give them the right to ignore or resist demands for information.

Recently, the Internal Revenue Service has declared that nonprofits, due to their tax-exempt status, have a duty to provide information to anyone who makes a request, making nonprofits analogous to governmental agencies under the disclosure requirements of the Freedom of Information Act. It is not hard to make the case that the public should have the right to demand information from nonprofits and charities, as opposed to for-profit, privately held companies. One could easily make the case that nonprofits should be subject to more careful scrutiny.

When people deal with nonprofits and charities, they typically let their guard down because nonprofits inherently appeal to the good side of human nature. As a result, people are more vulnerable to fraud, and more likely to overlook or forgive ineptitude or corruption. In addition, many nonprofits are, in fact, relatively and absolutely better funded than entities and individuals with competing interests. At the very least -- just to make the playing field more level -- those competing entities and individuals should be allowed to find out who or what they are competing against.

And yet, as a co-founder and director of a small nonprofit organization, the Asian American Legal Foundation, I am acutely conscious of the dangers such organizations face from a liberally constructed disclosure law. I can easily see how small nonprofits, like small businesses, would find their already meager resources strained even further by the need to respond to public inquiries. I can easily see how a small nonprofit’s very existence can be threatened by being inundated with thousands of frivolous, ideologically-motivated information requests. Many of the smaller organizations would either have to cut their services or go out of business altogether. Without some sort of limit, an open-ended disclosure requirement has a great deal of potential to become the sort of bureaucratic red tape that ends up strangling so many promising businesses and ideas in the for-profit sector.

I believe that the solution, as with so many problems pitting competing public policy needs, lies in a compromise modeled on regulations from the for-profit world. Instead of requiring all charities to provide information to everyone who asks for it, disclosure, in terms of both frequency and detail, should be progressive -- based on the size of the charity, measured either by endowment value or contribution levels. Larger charities, like public companies, would have to file more frequent and detailed reports and provide at least a minimum level of disclosure. Smaller charities, like private companies, would file less frequently, and would be exempt from having to affirmatively respond to casual inquiry.

Both large and small, charities, however, would still have to open their books to anyone diligent enough to visit their offices.

Lee Cheng is a corporate attorney based in the Bay Area.