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Nonprofit stockholders?

Charles and David Koch, courtesy of Charles and David Koch, courtesy of

In my last blog I wrote about the public pressure building for the IRS to move faster on awarding 501(c)(4) designation to politically active organizations. I urged the IRS to move cautiously and take the time to make sure these organizations truly meet the test to not be “primarily political.”

This past week’s newspapers reported on another assault on the integrity of the nonprofit sector. The stockholders of the Cato Institute, the Washington-based libertarian think tank, are in a battle over control. No, the term stockholders is not a mistake. Cato is governed by four people, each with a 25 percent stake in the organization. The governance stakes can be bought and sold for cash. Governance stakes that can be bought and sold? I’ll have to admit, that’s a first for me. According to Saturday’s Washington Post, the provisions are permissible under Kansas state law but generally frowned on by the IRS, which must make the final determination about the tax-exempt status of the organization.

The issue here isn’t profit, but control. Cato was started by Charles and David Koch, the Kansas-based billionaire brothers, in the 1970s. With the death of one of the four stockholders, they want to take on a larger stake of the governance. How does selling board seats and control of the organization square with the requirements of a nonprofit institution and a reason for obtaining tax-exempt status? And how is it that a funder – even if they are a founder – can literally control the nonprofit?

This is not some little organization that doesn’t matter. Cato has over 100 full-time staff, plus roughly 100 visiting or adjunct scholars. It has an operating budget of more than $30 million and is working on a capital campaign in the tens of millions. Donations to this stockholder-owned nonprofit organization are tax-deductible.

This is one decision the IRS needs to get right for the sake of the entire nonprofit sector.

Topics: Nonprofit Leadership and Practice