Not-for-profit institutions are making out like bandits, the Philadelphia Inquirer told readers in a blistering series of news articles and editorials last spring. Although it did not single out arts organizations, the newspaper questioned the charitable merits of nonprofits ranging from hospitals, universities, foundations and museums to country clubs, trade groups and professional surfers. Added up, their tax exemptions deprived the Treasury of $36.5 billion in 1992, according to the Inquirer, and that figure excludes local property taxes, state and city sales taxes and taxes waived for churches and religious groups.
Flawed assumptions and oversimplifications aside, the energetic crusade struck a resonant chord in Congress. With a gaping deficit to worry about, not-for-profit tax breaks must look to lawmakers a lot like Charlie Chaplin to his starving companion in The Gold Rush. Mighty tempting. With direct support slashed almost to the bone, legislators have already begun chipping away at special postal rates and other indirect subsidies.
Seizing this hot issue, Rep. J.J. Pickle (D-Tex.) convened the House Ways and Means Oversight Subcommittee in June to review whether not-for-profit entities are complying with the spirit of the tax code. In opening remarks, Pickle charged that widespread abuses are cheating the federal government of tax revenues. He put not-for-profit institutions on notice to expect a full reappraisal. “Change is needed and long overdue,” he declared.
No one is predicting yet a wholesale sack of the not-for-profit community, but congressional prodding and media broadsides are likely to trigger a great deal of soul-searching in the theatre community and some legal steps to safeguard tax benefits. “It means profound change possibly, profound reexamination certainly,” warns Judith Golub, executive director of the American Arts Alliance.
For now, theatres face added time and costs for compliance with existing legislation. Farther down the road, everything is up for grabs. “We don’t know what is in Mr. Pickle’s head,” Golub says.
But theatres may have reason to fear legislators’ scalpels. “Because theatre is the only performing art with both nonprofit and commercial wings, theatres must be especially vigilant or they could face added scrutiny,” cautions Peter Zeisler, executive director of the Theatre Communications Group. Acting to preserve its tax exempt status while fostering co-operation with commercial producers, the Manhattan Theatre Club recently established a wholly owned, for-profit subsidiary. “We took a conservative position,” says managing director Barry Grove, “because our tax status is important to us.”
Meantime, the Inquirer is expected to repackage its reporting in book form that should gain even wider attention. To be sure, some of the grievances are well founded. The newspaper documented the nonprofit sector’s size and extraordinary growth, the slack requirements for exemption and a few egregious cases of overcompensation and other abuses, especially among well-heeled hospitals, universities and religious institutions. No one in the bona fide not-for-profit world doubts that some abuses exist witness the scandal at United Way that sent its richly paid executive director packing–or questions the need to punish organizations that commit fraud in not-for-profit guises.
In its zeal to justify headlines, however, the Inquirer overlooked reasons why some institutions received tax benefits in the first place. By defining the not-for-profit mission in its narrowest sense as charitable services provided free to the poor by volunteers and poorly paid staffers the reporting glosses over social benefits of medical, educational, human resources and cultural activities that cannot survive on a commercial basis. Although the Internal Revenue Service lists 25 separate not-for-profit categories, the Inquirer lumps them together with scant distinctions. By setting such a narrow guideline that few not-for-profit institutions can or should satisfy, the series impugns thousands of institutions that try honestly and at considerable expense to abide by the letter and spirit of the law.
Seven good reasons
The attack also failed to recognize a critical distinction between “profits” and “revenues.” Even private sector companies do not pay taxes on revenues, the total proceeds received from customers. They are taxed on the income left over after meeting payrolls and other expense–including lavish promotions. Moreover, exemption from federal income tax does not automatically excuse institutions from paying state and local taxes in many states. That is certainly true for theatres and other arts organizations that rent space, because rent payments often cover property taxes.
Ever since World War II, theatres and other cultural organizations have enjoyed tax exemptions for well-defined reasons. Independent Sector, an umbrella organization representing hundreds of nonprofit groups, lists seven: (1) communication within and among communities, (2) pluralism with respect to different ideas and viewpoints, (3) preservation of art and artifacts, (4) creative expression, (5) standards of excellence, (6) discipline and (7) altruism, But the momentum that won special tax status has ebbed lately and observers fear an accelerating trend in the other direction. Instead of going to bat for additional funds, the American Arts Alliance and other nonprofit advocacy groups must wage constant battles to head off legislative and regulatory inroads.
In recent battles, the Alliance and its allies have achieved mixed results. They persuaded senators to vote down a bill that would have required non-profit institutions to supply names and addresses of donors who contributed $2,000 or more–an administrative nightmare to say nothing of the ominous intrusion on privacy. Non-profit lobbying groups scored only a limited victory, however, against efforts to boost postal rates and lost a battle against grouping charitable deductions together with other itemized deductions required to comply with a three percent floor on deductibility. That removes an important incentive for many contributors. But all considered, the Alliance’s Golub is glad the damage isn’t worse. “We’ve been lucky so far,” she says.
Wary of closer scrutiny, the Manhattan Theatre Club acted recently to preserve the line between nonprofit and commercial activities. It formed the commercial subsidiary to support a production on Broadway of A Small Family Business by the British playwright Alan Ayckbourn. Attorneys John Breglio and Jeffrey Samuels of the New York City law firm Paul, Weiss, Rifkind, Wharton & Garrison drew up the papers on behalf of the Manhattan Theatre Club and their clients, Walt and Beth Weissman. Says Breglio: “The minute a not-for-profit theatre starts to get involved with an individual who is not tax exempt, it has to be concerned with how that relationship is structured to be consistent with its not-for-profit status.”
The investors’ desire to participate as equal partners in any business decisions formed the pivotal argument for structuring a subsidiary. Says Barry Grove, MTC’s managing director: “When someone wanted to contribute and wanted joint control, we felt strongly that that was crossing the line into for-profit activity.”
Theatre managers who suppose a wink and a nod can replace formal steps put their tax status in jeopardy, Breglio warns. “I hope they are second-guessing themselves,” he says. “It is too glib to say that everyone needs money these days and there is money out there, so take it and worry about consequences later.” In the current climate, consequences might be swift and irrevocable.
Blurring the line
“There has got to be a good reason why the government does not tax you,” Breglio says. If regulators see the line blurring between commercial and not-for-profit motives, the reasons for a tax exemption might blur also.
What about a countervailing view that nothing blurs the line between nonprofit and commercial theatre so much as a for-profit subsidiary? Critics say that MTC has drawn attention to the fact that only intent differentiates one venue from the other a slim difference that may rouse the IRS, which seldom gives taxpayers the benefit of the doubt. Grove dismisses this criticism. He argues instead that an organization’s structure, not necessarily its purpose, should determine tax status. Two groups often pursue the same path, one a taxpayer and one exempt a pharmaceutical company and a research lab, for example.
But Grove also takes the high ground on principle. The virtual absence of dramatic plays developed in the commercial theatre and the long list of Broadway failures, should supply proof that producing straight drama is, by nature, a nonprofit venture. It is not quite as easy to make a similar case for musicals, he concedes, given their wider commercial success and lucrative payoff (not to say that there haven’t been plenty of failures). But Grove stresses that most of the musicals on Broadway this season are revivals or else began in England supported by heavy subsidies. There he rests a case for allowing nonprofit theatres to develop musicals in partnership with commercial producers.
It is a case that may soon be tested, now that British super-producer Cameron Mackintosh has promised $1.5 million over the next five years to three New York theatres, the Manhattan Theatre Club, Playwrights Horizons and Lincoln Center Theater. But straight play or musical, Grove is adamant that the length of a run should have no bearing on tax status. Museums, for example, routinely rely on permanent exhibitions. Dance companies keep works in their repertoires for years. And A Chorus Line’s 10-year run never threatened the New York Shakespeare Festival with a loss of its exemption. “In the end,” Grove declares, “theatre is an art form that needs support.”
Cherished assumptions like Grove’s may be due for reevaluation, however. Even foundations, the final bastions of institutional support for the arts, are taking a harder look at whether the recipients of their largesse really deserve it. “I am convinced that somewhere at the bottom of all this is a need to reexamine the meaning of not-for-profit organizational culture,” says Rachel Bellow, an arts funder with the Mellon Foundation. “It has to move beyond the traditional and not very illuminating distinction that not-for-profit is for the public good and for-profit works for private gain. That doesn’t tell you anything.”
No rising wave
It is well and good to talk about social benefits, but federal, state and municipal funds for the arts are depleted and won’t come back. “It’s not like hunkering down and waiting for the wave to rise. It’s not going to,” Bellow says. Withdrawal of public support could quite easily extend to curtailing tax benefits. Corporate donations, too, have passed their peak for the foreseeable future. Bellow blasts the hue and cry over lost corporate dollars, which by her lights are back to the level where they always have been but for a fillip in the ’80s.
Whatever comes of the tempest touched off by the Inquirer, perhaps the series erred most in not considering thousands of men and women who elect to work in the nonprofit sector. In the theatre, certainly, hours are often longer and the work as demanding, if not more demanding, than equivalent management positions in the corporate world. With very few exceptions, their salaries and benefits are modest if not downright abysmal compared to the private sector, and there are no stock options or bonuses. Nor can they hide beneath layers Of bureaucracy; results of their efforts are visible with every new production.