Does Open Stories Foundation Qualify As Tax-Exempt?

Last week, Peggy Fletcher Stack wrote an article about John Delhin’s finances. A couple things leaped out at me, particularly salient, perhaps, because of research I’ve been doing recently, and because they raise difficult-to-see red flags, both for the Open Stories Foundation (“OSF”) and for other Mormons (or, more generally, Americans) who want to start a tax-exempt organization.[fn1]

Tl;dr: OSF looks like it is violating the prohibition against private inurement, which would compromise its tax-exempt status; it should at the very least get a tax practitioner with experience in the tax-exempt area to look closely. Also, anybody who wants to operate a tax-exempt entity needs to get competent legal advice upfront: the tax-exempt area is a minefield of compliance traps.

Although we call tax-exempt organizations non-profits, that’s really a misnomer. A tax-exempt organization is permitted to make a profit. What it cannot do is distribute that profit to any individual. Instead, it must use its profit in the pursuit of its tax-exempt purpose.

Broadly speaking, what this means is that tax-exempt organizations cannot pay dividends to their owners (and, in fact, they really can’t have equity owners). But there are ways to get around an anti-dividend rule. Instead of dividends, for example, you could hire yourself as an employee (or director or officer or whatever) and pay yourself an outrageous salary.

Why is that a bad thing? Because donations to 501(c)(3)s are deductible, which means that the government (and, by extension, taxpayers in general) bear a portion of the cost. In its most egregious form, imagine this: Wealthy Mom (“WM”) sets up a private charitable foundation, exempt under 501(c)(3). WM makes tax-deductible donations to the foundation, which then funds other charitable organizations. At the same time, WM hires her daughter to run the foundation; the foundation pays daughter $2 million a year for her services and, at the same time, distributes virtually none of its assets to charity.

What we have, in essence, is WM giving money to her daughter and, at the same time, taking a deduction for that money. Intuitively (and, in fact, legally) that feels wrong.

But how to prevent this kind of abuse? We can’t simply prohibit charitable organizations from hiring and paying people—if we did that, charitable organizations would find it basically impossible to run, as most people can’t afford to run a charitable organization for free.

Ultimately, the courts have provided a conceptually simple, but administratively difficult, answer: “Salaries may be paid, but unreasonable salaries constitute inurement of benefit.”[fn2] Basically, deductible donations made to a tax-exempt organization must benefit the public at large, and not insiders.

So here’s the problem that a tax-exempt organization has to answer: what’s an unreasonable salary?

The answer: it’s complicated. (In fact, this question alone demonstrates the importance of good tax advice.) It’s complicated because there is no clear standard; instead, it’s a fact-and-circumstances inquiry, where the court essentially takes a holistic approach. The case law points to the following criteria, among other things, in deciding whether compensation constitutes private inurement:

  1. Benefits to an insider at the charity can constitute private inurement.[fn3]
  2. Constant, significant increase in compensation, irrespective of entity revenue or amount of work performed.[fn4]
  3. Significant control over the tax-exempt entity (including a significant say in setting one’s own compensation).[fn5]
  4. The compensation is in line with compensation at comparable charities. (Note that it is the charity’s responsibility to provide comparability reports; even if it had a disinterested board approve the compensation, without those objective reports, it is hard to prove that compensation is reasonable.)[fn6]

How does OSF fare on this? John Dehlin is clearly an insider—he founded OSF and serves as its vice-president. His compensation has increased materially over the last four years, and has done so irrespective of the amount of donations received.[fn7]

Open Stories Foundation graph

 

Moreover, Dehlin is one of three board members; though I don’t know the details, I would assume he has a significant say in his compensation.

As for the compensation of comparable individuals: this is where actual legal and tax advice would come in really handy. Dehlin’s annual salary has never been less than 25% of OSF’s annual revenues, and has been as high as 66%. I’ve done a quick search for tax-exempts in the religious area with revenue of between $100,000 and $500,000 a year, and the closest I’ve seen is in the 25% range, but my search hasn’t been exhaustive by any means. Still, unless OSF has comparability data, even if the board setting compensation were independent, the salary would look like private inurement.[fn8]

Also weighing against OSF’s claim to be a tax-exempt organization: it seems to have been formed for the purpose of supporting Dehlin. The Tribune article quotes Dehlin as he’s forming the tax-exempt organization as essentially selling OSF as a way to support him in exchange for his producing Mormon Stories:

“Your donations will go toward tuition, groceries, insurance and any other expenses I incur,” the podcaster told them. “What I’ll give back is building resources to meet your needs.”

That seems to reflect his mindset: in 2010, he wrote:

Back in the summer of 2010 I made a deal w/ the listeners.  If enough of you would sign up for monthly financial donations to Mormon Stories , I would promise to release a quality episode each week.  The way that I was able to make this happen as a super busy Clinical Psychology Ph.D. student was to turn down other paid assistantships and do Mormon Stories as my part time job while in school.  While the money in no way covers my family’s annual expenses, it does help us pay for things like health insurance, groceries, etc.

The problem with this: supporting Dehlin—or any other individual—is not a charitable endeavor, and does not qualify for deductible donations. Section 501(c)(3) was designed with public, not private, good in mind.

Two things to keep in mind here: first, there is no legal problem with donating to somebody to support that person. That’s the basic design behind Kickstarter, Indiegogo, and dozens of other crowdfunding sites. The difference is, funding somebody (or somebody’s project) on those sites doesn’t allow donors to deduct their donations. The anti-private inurement rules kick in solely as a result of exemption from taxation.

Second, I’m not trying to suggest that Dehlin or OSF acted fraudulently, or deliberately took advantage of the tax law. Seriously, everybody who has ever heard of “private inurement” before this post, please raise your hand. Okay, tax attorneys and employees of major non-profits, put your hands down.

Anybody left? I didn’t think so. Mostly, people don’t use tax-exempt organizations to cheat the system. They’re subject to tight regulation and broad financial disclosure requirements. But unless you’re familiar with the area, there are tons (and tons and tons) of potential traps. Maybe OSF successfully navigated them. But, on my surface-level review, I’m skeptical.

Two final things: I reiterate my strong recommendation that OSF engage a competent legal advisor. (And note that I am not that person: though I can read the tax law, I don’t have professional experience directly on point, so I don’t know where you would go to figure out comparable salaries, etc.) Ditto for anybody else thinking about starting a tax-exempt organization.

Second, this is not the place to discuss disciplinary councils or the ethics of making money in church-related endeavors. It’s not a place to praise or slander Dehlin, Mormon Stories, OSF, or the church.

Also, yes, I know OSF discloses its finances and the church doesn’t, but, for the sake of this post, I don’t care. The tax law requires most tax-exempt organizations to disclose (and thus, OSF is complying with the tax law), but it doesn’t require churches to (and thus, the church is complying with the tax law).

There are plenty of places in the bloggernacle to do any of those things, and I’ll ruthlessly delete anything that goes in that direction. This post is directed specifically at tax-exempt compliance, and more specifically, at private inurement.

[fn1] A couple caveats:

Can I use this post as legal and/or tax advice? No. I’m probably not licensed in your jurisdiction, and I’m not interested in giving legal or tax advice now. I would recommend getting competent legal and tax advice, though, if anything I write concerns you.

Why are you writing this now? Are you out to get John Delhin? Nope. I actually hope this is helpful to him and OSF. I don’t actually listen to Mormon Stories, and don’t follow that world except when it steps into the world I do follow. Which it has. (Also, the IRS is perpetually underfunded. One way it manages to do enforcement is by waiting until a potential violation makes the news. And OSF’s finances have made the news in a big way.)

But aren’t you trying to discredit Dehlin? Honestly, no. I don’t have a problem with a person making a living, even making a living that revolves around the church. (Seriously, even though the Book of Mormon says “priestcraft,” I feel like we wield that as a fuzzy-concepted sword far too easily.) And I honestly don’t think he set up OSF to try to engage in private inurement; though it’s an important concept in the 501(c)(3) rules, it’s not necessarily an intuitive one. But even though I don’t believe he (or the board of OSF) acted with bad intent, that doesn’t vitiate the potential violation of OSF’s tax exemption.

[fn2] Bubbling Well Church of Universal Love v. Comm’r, 670 F.2d 104 (9th Cir. 1981).

[fn3] United Cancer Council, Inc. v. Comm’r, 165 F.3d 1173 (7th Cir.1999).

[fn4] Founding Church of Scientology v United States, 188 Ct Cl 490 (1969).

[fn5] Id. In this case, L. Ron Hubbard and his wife were two of the three board members.

[fn6] Family Trust of Massachussetts, Inc. v. United States, 892 F.Supp.2d 149 (D.C.D.C. 2012).

[fn7] It also doesn’t reflect additional work he’s done: each year’s Form 990 estimates that he works 50 hours a week on OSF stuff.

[fn8] FWIW, there don’t seem to be a lot of tax-exempt organizations in this precise space. Salary-wise, though, by way of comparison, Ira Glass made about $280,000 in 2013. (I frankly expected him to make a lot more than that.) But Ira Glass is not, I suspect, a good comparison.

Comments

  1. >> Second, this is not the place to discuss disciplinary councils or the ethics of making money in church-related endeavors. It’s not a place to praise or slander Dehlin, Mormon Stories, OSF, or the church.

    Well then what is there to talk about for those of us that aren’t tax attorneys! :)

    On a serious note – very interesting and a good warning to have out there. At least three families in my ward have set up 503cs to fund raise for various worthy causes. Some for international aid / education, and one for research / awareness for a rare disease, so I don’t think it’s uncommon for members to organize themselves this way and your council to get tax advice is sound.

    That being said, my fear is that good tax lawyer is expensive, and for these tiny 503cs that may raise 30k a year at best, dropping 5k on a tax lawyer seems quite unnecessary and counter productive to their fundraising goals.

  2. for these tiny 503cs that may raise 30k a year at best, dropping 5k on a tax lawyer seems quite unnecessary and counter productive to their fundraising goals

    Good point, Brd529. Still, given the stakes of noncompliance, it’s probably worth spending the money.

    But there are ways to reduce what you have to pay. For example, when I was in practice, my firm would provide pro bono support for the occasional small 501(c)(3); that’s one option. Also, a number of law schools have clinics that will provide free advice to people looking to form a small tax-exempt organization.

  3. The salaries shown on the chart do a great deal more than make up for giving up an assistantship!

  4. What is the rationale for the IRS in using comparability data? What if everyone laid absurd salaries?

  5. I never thought tax law could actually be interesting.

  6. J. Stapley says:

    Tremendously interesting. Thanks, Sam.

  7. Where in the law does it say that the compensation has to be compared to the total amount the organization takes in to be a “reasonable compensation?” I am admittedly almost completely ignorant as to this area of law, but I thought the salary had to be reasonable as compared to other similar salaries at other similar non-profits or reasonable as to what will keep the organization benefiting the public. I would be surprised if Dehlin doesn’t consult an attorney to avoid issues like this, but then again, a lot of people don’t want to spend the money. If he did consult an attorney I am guessing that there are some inner workings to the compensation decisions that we do not know about that are used to avoid possible violation of the law.

    It seems that one of his biggest mistakes may be his repeated characterization of the purpose of his podcast as helping him get through school and pay the bills. He probably has also characterized his work as a service to the public. In reality it is both.

    Thanks for pointing this potential legal issue out. It is interesting to read about and a good reminder to consult an expert before starting something like this.

  8. cn, I haven’t run down the origins of using comparability data, so I can’t say why the courts have chosen to use it, but I can say why I think it’s a good idea.

    In the first instance, we don’t want the courts or the IRS to decide what appropriate compensation is (and, in fact, they don’t have or claim expertise in the area). We’re not generally concerned with people who have been hired at an arm’s-length. The concern is insiders, who haven’t had to go through arm’s-length negotiations. So looking at other comparable tax-exempt organizations provides a decent idea of what an insider should be paid.

    Moreover, it isn’t the only criterion. If all of the tax-exempts have colluded, the IRS and the courts can look at other factors to determine if there is private inurement.

  9. Very nice post.

  10. ryann, the issue is whether compensation represents an impermissible private inurement. Comparables are a major way of figuring that out, but they’re not the only one. Courts and the IRS look at all of the facts surrounding the compensation. And where a significant percentage of donations end up going to one insider, that looks a lot like private inurement rather than pursuing a charitable mission. But, like I said, there is no bright line here, which is why, in creating a tax-exempt entity, it pays to get competent and knowledgeable advice.

  11. The fact that 66% of donations go to Dehlin’s salary seems troubling. Assuming the worst, would the IRS come after donors because of an improper deduction?

  12. “[OSF] seems to have been formed for the purpose of…”
    (a) “supporting Dehlin.”
    (b) “creating online and in-person environments that allow for authentic self-expression and the open discussion of Mormonism”.

    If John’s far-sighted business plan was to leave Microsoft to start a podcast in 2005 without pay, thereafter almost singlehandedly scheduling guests, recording, and editing 2+ hours of podcast per week for 5 years straight, in the expectation that 8 years later he could set up a foundation to enrich himself as a C-level executive with a whopping 5-figure salary, then (as the post suggests) he does need professional help.

    I think I’m going with (b).

  13. “[fn7] It also doesn’t reflect additional work he’s done: each year’s Form 990 estimates that he works 50 hours a week on OSF stuff.”

    ($90K/year)/(50 weeks/year)/(40 hours/week) = $45/hour (excluding benefits).
    I’m guessing the IRS considers this unreasonably high for a postgraduate professional with several decades’ job experience?

  14. John Mansfield says:

    Can you think of any other Mormon-interest organizations where private inurement could be an issue?

  15. A Happy Hubby says:

    I am sure there is NOM or exmo tax lawyer that will donate some time to OSF on the issue.

    This was an interesting post.

  16. Once again, Sam, a breath of fresh air in an area that’s full of anything but. Thanks!

    I will admit that the little devil on my right shoulder whispered “Clinton Foundation” and “Chelsea Clinton” when I read your hypothetical about Wealthy Mom, etc. I’m waiting to hear from the little devil on my left shoulder. (And I have no knowledge whatever about the Clinton foundation’s finances, including the amounts that are paid to any of its employees named Clinton.)

  17. John Mansfield says:

    I’m reminded of a similar-sounding tax issue at a company I worked for. It was a small company, about 20 employees, and it had a problem with the IRS over our 401(k) plan because too large a portion of the contributions to it were for one of the owners. The employees’ feeling was that if the company increased its 25% match to 50%, then we would increase our contributions and solve the problem, but the owners had other ideas.

  18. Sam,

    I had actually been thinking about this topic for a while (can I keep my hand raised since I am merely a tax accountant, not an attorney, lol? [[also, I’m not sure whether to say ‘damn you’ or ‘bless you’ for scooping up all these great tax topics on the bloggernacle while I just sit around thinking to myself]), but I have a question that loops throughout this all:

    I definitely think that the way JD has discussed his “deal” with OSF folks (e.g., “If y’all pay for my schooling/groceries/etc., then I’ll keep producing podcasts”) is very problematic as a tax-exempt purpose (but JD’s candidness in stating that purpose suggests to me that there is nothing untoward going on here — I suspect his tax adviser simply may not have informed him about this tricky issue so he may see nothing wrong with these sorts of statements.)

    But the other thing I’ve been thinking about is this: the exempt purpose of the podcast is creating podcasts, support groups, etc., etc., for various Mormons. If we just focus on the podcasts (which I would guess are the “majority” of the work of OSF), then I ask myself: “What sort of expenses would arise with hosting this podcast?” I can of course think of internet hosting and bandwidth fees, equipment, etc., etc., etc., (Other people online have definitely raised to my attention to other purposes they thought the donations were being used for, though, but those are just ideas.) But if I think about where a majority of expense might be, I might think, “time” — and what’s the price of time if not a salary?

    I am far far far too lazy to do any sort of analysis over time spent per year, but couldn’t someone there be some analysis of time spent per year (rather than donations received per year)…this would probably be better for the OSF board of directors to do than for us to read tea leaves about.

    P.S., can you say something about the idea that seems to go around (e.g., in these very comments) that one’s pay in the for-profit space has any say on reasonable compensation in a non-profit space? (e.g., does forgoing a six-figure salary for much smaller amounts have any purpose in the analysis? My suspicion is that it doesn’t — that comparables can’t be based on what JD could make elsewhere, but only about what other similarly situated non-profits might be expected to pay.)

  19. “Your donations will go toward tuition, groceries, insurance and any other expenses I incur,” the podcaster told them. “What I’ll give back is building resources to meet your needs.”

    I’m not a tax attorney and haven’t spent any time researching the issue, but this sort of comment does not strike me as something that ought to be problematic. (Whether there is authority to suggest it actually is is obviously another matter.)

    Dehlin is simply saying that Mormon Stories can’t happen unless he gets compensated for his time. As you note, that he’s compensated for his time is entirely appropriate under the existing regulations. I see no good reason why acknowledging that his salary might pay for groceries or health insurance changes the situation from one of appropriate compensation to inappropriate private inurement. If I were to try and raise money to start a local soup kitchen, I might very well say the same thing.

  20. My experience with non – profits has been almost exclusively in the Northwest, and Oregon in particular. I am pretty sure I could come up with at least 6 or 7 comparable for media nonprofit organizations, although I have been off their boards long enough that they may be significantly higher. Comparables are not bound strictly by the amount brought in, but can go by listener base, for small NPR radio stations, when a 501c3 is in a media bracket.

    I can’t comment further without significantly more info, and I am not feeling well enough to look. Still, I think that understanding the specific issues with media 501c3 organizations may answer many of the questions brought up.

  21. Great and useful post. I’m most fascinated by the ways we use the tax code to talk about morality. Disclaimers: I don’t believe that OSP intentionally committed tax fraud or whatever other dysphemism we attach to not understanding regulatory arcana. Implicit in the act and in the discussion here is that the IRS tax-exempt status is about affirming that OSP represents a worthy, as opposed to a mercenary pursuit. In a charged environment where certain behaviors may be seen as leading a schism (i.e. becoming a sectarian religious leader), it seems very important to separate oneself from the simply capitalist economy, and for most people (including me), “non-profit” communicates that message. Through the tax code, as Brunson notes, we as a society have negotiated a general subsidy for such endeavors that communicates the high moral purpose of the activities, but in our pluralist society we have concerns about the over-use of this subsidy for small businesses that people feel passionate about. This post has been helpful for making me think more carefully about what exactly we communicate and how and to wonder whether we need a third rhetorical category for organized activity associated with the transfer of money, an unsubsidized non-profit. Esq. Brunson, is there such a tertium quid between small business and tax-subsidized non-profit?

  22. Thank you all for your comments—I’m preparing for class, so forgive the shortness here, but a couple responses:

    smb: there is a space that’s trying (with varying levels of success) to open there. Right now it’s represented by L3Cs, benefit corporations, B-corps, and stuff like that. Maybe sometime I’ll try to write a little about that area. (Also, I love the idea of the tax law being a way to talk about morality/cultural goodness.)

    Randy, mostly my objection is a feeling—I don’t have time to do in-depth research. But rhetorically, what we have is a transaction: you support me, I’ll provide you with podcasts and community. And there’s nothing wrong with transactions like that. That’s what Andrew Sullivan did, that’s what Eric Snider sometimes does, and that’s the underlying raison d’etre for crowdsourcing. But that kind of transactional support is not the kind of thing we subsidize with the tax code, and, in fact, the no-private-inurement is meant to nip that kind of transactional benefit in the bud.

    Andrew, I probably should have said “tax professional” and not “tax attorney.” So I guess you need to put your hand down.

    I think your intuition—that private sector work isn’t comparable, generally, to non-profit work—is spot-on. Or, in other words, part of the compensation for entering the non-profit sector is the feeling of doing good, or of having more control, and that altruism or sense of control make up for lost income. Entrepreneurs take pay cuts all the time, those of us who went from legal practice into legal academia often take pay cuts. But the trade-off is worth it—the private sector is a different animal than the non-profit sector.

  23. Sean Lindsay says:

    Wait, wait. I didn’t see where the outlined legal analysis compared Dehlin’s earnings with other NFP corporation leaders. Wouldn’t that tell us more about whether the compensation he’s getting is reasonable than any other data point? When I’ve been in public company boardrooms dealing with public company leaders’ compensation, well more than half of the data that was considered was comparison data of similarly situated leaders’ compensation and peer company compensation information. My guess is that you’d have a hard time finding mid-quartile NFP principals working for as little as Dehlin has.

    And frankly, it seems more than a little irresponsible to attempt a public legal critique of a NFP’s allocation of resources without actually considering its output and the nature of the specific services that the NFP was founded to promote and provide. As other prominent NFPs we might think of can demonstrate, actual distribution of donations to the public in the form of charity is not the only appropriate measure of whether such an organization qualifies for NFP status.

  24. Sean, in my casual search, insiders at tax-exempts with $100,000-$200,000 of annual revenue (roughly) are paid a lot less. But my research didn’t go into any depth—I’m really not sure what space this is in and couldn’t find a lot of tax-exempt podcasters to compare. (The one I found—On Being—just because an independent tax-exempt a year ago or so, and thus hasn’t filed a 990 yet. Also, it seems to produce a podcast distributed through NPR, so I suspect it’s not a good comparable anyway. Most of the other NPR shows are produced by NPR stations, so aren’t stand-alone, while most podcasts, when the elicit donations, don’t do so in the tax-exempt area. WTF with Maron, for example, raises revenue, but in the transactional, not the tax-exempt, space. I’d love to see a list of comparable tax-exempts, but don’t have the time or desire to research it out myself.) FWIW, though, courts have held that absolute dollars paid is an irrelevant measure.

    Basically what I’m doing here is flagging an issue that represents a real potential problem for people who, for altruistic reasons, want to start something that helps other people, but also want to get paid for it. They can get paid, but they have to demonstrate that their payment doesn’t represent personal inurement.

    (As for your not-so-subtle swipe at the church—a church is a per se tax-exempt entity; tax exemption is not founded on distributing money to the poor, but on fitting into a category that the tax law has carved out for exemption.)

  25. Sean! Long time no see, man. You too, Randy. How you guys been.

  26. I distinctly recall (and this may have been at the end of the first iteration of Mormon Stories) that John Dehlin repeatedly asked for donations to cover bandwidth and hosting charges. I wondered at the time how much that could possibly be. I am sure that those expenses are larger now, but even so it would be cheap. I do not recall him asking for money to buy things for himself at that time. Such a request would have raised my eyebrows.

  27. Serious Steve, long time. I didn’t even know you had moved until someone mentioned it the other day.

    Sam: “But rhetorically, what we have is a transaction: you support me, I’ll provide you with podcasts and community…. But that kind of transactional support is not the kind of thing we subsidize with the tax code….”

    I’m not trying to be obtuse or anything, but this simply doesn’t follow for me. We could just as easily say, “if you support me, I’ll feed the homeless.” That wouldn’t make a non-profit soup kitchen improper. Every time a non-profit makes a hire, that’s transactional support. I’m not aware of a provision in the tax code that prohibits that sort of thing. Are you? If it’s really just a “feeling” you have, that’s kinda squishy.

  28. Sean Lindsay says:

    “A section 501(c)(3) organization must not be organized or operated for the benefit of private interests…”

    In such a context, inurement by definition takes into account the asserted function of the not-for-profit. If the NFP is explicitly a way to provide tax-free money to another person, it’s inurement. If it’s a more sneaky and deceptive version that starts with window dressing of being something else, but is really just a tax-dodging way of funding an individual, it’s inurement.

    But what inurement is not is a vigorous, highly engaged, educational, and compassionate outreach that compensates its employees. That’s why it’s irresponsible to sketch out a legal analysis while disregarding the actual service provided for free to everyone: there are literally hundreds and hundreds of hours of podcasts that are accessed by, I’d imagine, thousands of downloads per episode. There are lots of NFP educational institutions that don’t begin to reach that many minds. That Dehlin and those working with him have figured out a way to produce, process, and make available such content on a relative shoestring operation speaks volumes about their efficiency and dedication.

    I read Dehlin’s original proffer to the MS podcast community as an employment proposal to the contemplated NFP: if you hire me to provide podcasts, I’ll forego other employment and undertake the job. MS podcast community apparently thought it a good deal, and they hired him. But what this is most clearly *not* is a rich benefactor over-funding a beneficiary through a tax dodge, nor is it Dehlin sitting on his back porch collecting a monthly stipend while he watches the daisies grow. Even the most cursory exploration of the content on the MS podcast website reveals that whatever one may think of Dehlin’s rhetorical stance, he’s producing disproportionately influential content on a relative shoestring. Exactly as his contributors imagined he could.

  29. Randy, I actually am saying that would be improper—supporting you is not an appropriate tax-exempt purpose; supporting your soup kitchen may be. And there’s a difference there. The rhetorical misstatement doesn’t, of itself, invalidate an appropriate charitable purpose, but it does provide a bad fact in doing the weighing.

  30. And Sean, the problem isn’t hiring and paying someone—it’s hiring and paying the founder, who also sits on the board and, presumably, has significant say in his compensation. That’s where we risk inurement.

    I’m not accusing Dehlin of bad faith, but there’s no men’s rea requirement here.

  31. John Mansfield says:

    Does the tax code care where the donations come from, if the donations come from dozens of donors with no more than a few percent from any one person vs. one or two donors with deep pockets and big income tax deductions?

  32. Sam, that’s a pretty hyper-technical reading. My soup kitchen depends on me running it. Supporting me *is* supporting my soup kitchen. That is precisely what John is saying. And I’m not aware of any provision in the tax code that would preclude us from acknowledging that economic reality.

    I suppose your point would make more sense if there were some reason to believe that the *sole* purpose here was to employ John. But I don’t think that’s your argument. It strikes me as pretty obvious that Mormon Stories has a purpose that goes well beyond enabling John to pay rent.

    This American Life doesn’t happen without Ira. Mormon Stories doesn’t happen without John. Both are “transactionally supported” for what they do. And if you asked Ira, I bet he’d even admit to using the money he makes to buy groceries.

  33. Sam Gappmayer says:

    I did a search for religious NPO’s who have podcasts as a central part of their mission and income under $500k on Guidestar. Guidestar is an online database of information on NPO’s that donors use to make decisions about their giving. I pulled the 990’s for the first five I found that met my criteria (A 990 is the the tax form NPO’s are required to file each year and include levels of compensation for top employees) and can say that based on my very limited sampling that John Dehlin’s compensation is average.

    The bigger issue here is that it seems that he is a member of the governing board that determines his level of compensation–a touchy issue because of the conflict of interests. This, combined with overcompensation of key executives would, in my opinion raise the issue of private inurement. Since the latter is not present, I just don’t see it being a likely issue with OSF.

    Having said that I would highly recommend that OSF take a step from that crazy edge by:

    1. Requiring that John recuse himself when when his compensation is discussed. This may already be happening. A much better option would be to make him a nonvoting participant at board meetings (not on board but gets to attend). The second option reflects best practices.

    2. They should take a really close look at Part 6 Section B of their 990. The fact that as of their most recent filing they reported having no conflict of interest policy, no whistleblower policy, no document retention policy and no policy for “review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision” for determining executive compensation are issues that should be resolved if they haven’t been already. I was also concerned that they checked the “no” box on whether the filing had been reviewed by members of the board before filing. These are not statutory requirements but rather reflect a level of ethical engagement with donors and the public served that go beyond financial transparency (which is required by law in this circumstance).

  34. Sam, I did a quick Guidestar search last night on tax-exempts in the same revenue space as OSF, with the same code (X-something, I think: it had to do with religion) in Utah. In general, the board members were either unpaid or minimally-paid. Non-officer employees may well have made more.

    That said, I totally agree with your (1): if he had no hand in determining his compensation, it would look a lot less like inurement to me. (Also, the sometimes-meteoric rise in compensation looks a little off.)

    And thanks for bringing up Part 6 Section B; I didn’t really look at that portion.

    I’ll repeat, I don’t think there is any bad intent with using the tax-exempt form. But there is so much regulation that anyone entering the space really, really needs good advice.

  35. Sam, interesting discussion as always. I do think your criteria 2 (“Constant, significant increase in compensation, irrespective of entity revenue or amount of work performed”, referencing The Founding Church of Scientology vs. U.S.) with the revenue vs. compensation chart that follows, is a little confusing and potentially misleading. To make the simple point, an increase that is independent of revenue or work can indicate private inurement, but an increase in compensation that is directly in line with entity revenue can also be an indicator of private inurement (see the same case, which included L. Ron Hubbard receiving 10 percent of the gross income of the The Church of Scientology). More generally, what we’re looking for is essentially the difference between labor income and capital income. If the compensation is really all labor income, it should not be private inurement. Everything else is about finding, demonstrating and proving what’s really going on.
    I’d also like to pitch in (in small part responding to smb’s question about a third way) that there is (has been for a long time) a distinction between not-for-profit or tax exempt (meaning that the entity does not pay taxes), which we accord to quite a wide swath of ‘good for us’ activities, and the subset of tax exempt organizations for which contributions are deductible by the donor, which we police quite carefully (except for churches some would argue). There is yet another set of distinctions between public charities (broader support, generally a large number of smaller donors) and private foundations (narrower support, often a small number of large donors), where insider activity is much more closely watched in the private foundation arena.
    This is to say that (a) it is complicated and (b) whether one agrees or disagrees with the lines that have been drawn, the tax law is cognizant of pretty much every issue that’s been raised.

  36. Thanks, Christian.

  37. Someone should feed this post to the Deseret News.

  38. I_need_to_go_to_the_gym says:
  39. As a total tax amateur, I have a couple of questions about the graph data and criteria #2. 2013 is the only year where revenue decreased but Dehlin’s compensation increased. However, wouldn’t Dehlin’s 2013 compensation have been decided at the end of 2012, obviously well before they knew what the 2013 revenue would be? Wouldn’t the board have looked at the doubling of revenue from 2011 to 2012 and concluded that Dehlin deserved a significant raise for 2013? I would guess that the board made a rational guess that donations would increase from 2012 to 2013, and thus anticipated that the percentage of revenue going to Dehlin would drop even lower than 25%. Things didn’t work out that way for whatever reason, but perhaps it wasn’t for lack of trying.

    To my inexperienced eyes, it seems like Dehlin’s compensation changes thus far have indeed been made respective to the amount of donations received, despite the appearance otherwise on the graph.