The Nonprofit Status: Universities and the Nonprofit Problem

By Dan Spinelli

Dan Spinelli is a freshman at the University of Pennsylvania studying Philosophy, Politics, and Economics (PPE).

From 1958 to 1970, Philadelphia’s professional football team, the Eagles, played its games at Franklin Field on the campus of the University of Pennsylvania. The stadium, which could hold a maximum capacity of 60,658 fans at the time, hosted legendary games, including the 1960 NFL Championship (the precursor to the Super Bowl), in which the underdog Eagles beat the Green Bay Packers, coached by the legendary Vince Lombardi. So how much did this NFL team pay Penn to use their facilities?

Well...they didn’t.

According to The Eagles Encyclopedia, a history of the football franchise, “The Eagles did not pay rent for use of the stadium because of the nonprofit status of the university.” [1] In a deal practically unthinkable now, Penn only collected parking and concession revenues and let the Eagles keep the rest of the game day haul. While the team donated between $75,000 to $1000,000 for “maintenance and other expenses,” the donations were certainly not one-­for­-one deals for Penn. In Such an arrangement would be inconceivable in today’s era of nonprofit 
institutions with multibillion-­dollar endowments and hundreds of acres of real estate. Nearly seventy years ago, however, the philosophy underpinning nonprofit entities was very different.

Today, wealthy universities like Penn regularly run a yearly profit. According to a report from the Institute for Research on Poverty, nonprofit institutions “are restricted not in how much income they can generate, but rather in how it is distributed.” [2] Profits must be allocated in 
ways that “serve the tax­-exempt purpose of the organization.” With research universities like Penn, money devoted to research clearly serves a public purpose. However, added funds for real estate and admissions brochures sent to legions of prospective students also work toward the 
university’s purpose of attracting students and strengthening its brand name. For such nonprofits, the name itself is misleading: the profit­-motive may be gone, but profits are surely not.

More troubling is the flexible way nonprofits define their “public purpose.” After the passage of the Sixteenth Amendment paved the way for the federal income tax, Congress excluded “any corporation or association organized and operated exclusively for religious, charitable, or educational purposes.” [3] Even in its early days, this exemption was criticized for its lack of specificity. Various kinds of nonprofits were “lumped together and exempted from tax as though fungible members of an undifferentiated mass.” [4] Vague laws breed broad laws, and soon nonprofit institutions began modeling for­-profit corporations in almost uncanny ways. New York Magazine describes Harvard University as little more than a “real estate and hedge fund concern that happens to have a college attached.” [5]

The sprawling reach of today’s nonprofits has provoked more than a few concerns about their actual interests in the public welfare. As a university located in a large city, the University of Pennsylvania has come under strong criticism for not paying property taxes for its one thousand-acre campus. Because property taxes generally fund the local school district, and Philadelphia’s 1 notoriously underfunded district is currently running an $80 million deficit, Penn’s nonprofit status has been thoroughly scrutinized, with student protesters calling on University 
administrators to make voluntary payments to the city. [6] These payments in lieu of taxes, or PILOTs, are frequently requested of large universities. Penn, which made annual contributions of $1.93 million to Philadelphia from 1995­-2000, has outwardly rejected overtures by 
Philadelphia’s City Council for a new PILOTs agreement. [8] Whether or not Penn should make these voluntary payments is irrelevant — the controversy underlying its presence in civil discourse is evidence enough of dissatisfaction with huge nonprofit institutions.

So, where does the public distrust of large nonprofits leave us? Legislators are left to sift between public disapproval and protest or attempt to simplify the tax code, hardly an enviable task. To their credit, some state governments are up to the task of reform. In Pennsylvania, the state Supreme Court generally determines which organizations qualify as a “purely public charity.” However, the State Senate just approved a proposed constitutional amendment, which would allow the legislature itself to write standards for tax-­exemption. [9] The proposal is now up for a vote in the Pennsylvania General Assembly. With the Assembly’s approval, the proposed amendment can be sent directly to the voters for an “up or down” vote at the polls. While observers see little chance of such an amendment reaching voters, it has certainly sent a jolt to organizations like Penn that preciously covet their tax-­exempt status. Within seventy years, Penn has gone from an institution that forwent thousands of dollars in revenue to lease its football field to the Eagles to one that now operates like a for­-profit corporation. Only time can tell what seventy more years will do.  

[1] Didinger, Ray, and Robert S. Lyons. The Eagles Encyclopedia. Philadelphia: Temple UP, 2005. Print.
[2] Weisbrod, Burton Allen. The Nonprofit Economy. Cambridge, MA: Harvard UP, 1988. Print.
[3] Thorndike, Joseph. "Why Did Congress Exempt Social Welfare Organizations?" Tax History Project. Tax Analysts, 13 June 2013. Web. 30 Mar. 2015. <http://www.taxhistory.org/thp/readings.nsf/ArtWeb/CFFB1CE42BEFA8B285257BE400723DF8?OpenDocument>.
[4] Boris I. Bittker and George K. Rahdert, "The Exemption of Nonprofit Organizations From Federal Income Taxation," 85 Yale L.J. 301 (1976).
[5] Lowrey, Annie. "Take Away Harvard's Nonprofit Status." Daily Intelligencer. New York Magazine, 09 Sept. 2014. Web. 30 Mar. 2015. 
<http://nymag.com/daily/intelligencer/2014/09/take­away­harvards­nonprofit­status.html>.
[6] Graham, Kristen. "Phila. School's Latest Budget Forecasts $80 Million Deficit." Philly.com.  The Philadelphia Inquirer, 11 Feb. 2015. Web. 30 Mar. 2015. <http://articles.philly.com/2015­02­11/news/59010283_1_charter­schools­houstoun­district­run­schools>.2
[7] Spinelli, Dan. “PILOTs resolution passes City Council vote, U. holds firm.” TheDP.com. The Daily Pennsylvanian. 26 Mar. 2015. Web. 30 Mar. 2015. < http://www.thedp.com/article/2015/03/pilots­resolution­passes­city­council>
[8] Alexandersen, Christian. "Constitutional Amendment for Nonprofit Tax­exemptions Passes the Pa. Senate, Goes to House." PennLive. Advance Digital, 17 Feb. 2015. Web. <http://www.pennlive.com/politics/index.ssf/2015/02/constitutional_amendment_for_n.html>.

Photo Credit: Flickr user Lawrence OP