Monday, November 2, 2009
This story in the Fort Wayne, IN Journal-Gazette raises some interesting questions regarding tax-exemption for privately-run charter schools. As the story notes, many charter schools are run by private, for-profit management organizations. Ergo, though the school itself may be organized as a nonprofit, management fees paid by the school to the for-profit management might result in excessive private benefit.
While an arms-length contract between a nonprofit and for-profit that pays market value for services rendered should not result in exemption problems (think "phone bill" or "trash collection" or any number of other services that nonprofits pay for on a daily basis), the charter school situation in Fort Wayne raises some serious red flags. For example, in these cases the management company actually formed the schools, instead of being hired independently. The management contract extends for as long as the schools have a charter, and the school boards never voted on the management contract - nor does it appear that the boards have any real control over the schools.
In short, this appears to be a situation in which a nonprofit has given "special" economic rights (in this case, an un-negotiated exclusive contract) to a for-profit entity, a situation which both Darryll Jones and I have concluded results in private benefit. See John D. Colombo, In Search of Private Benefit, 58 Fla. L. Rev. 639 (2006); Darryll K. Jones,The Scintilla of Individual Profit: In Search of Private Inurement and Excess Benefit, 19 Va. Tax Rev. 575 (2000).