Midterm Exam NPM 301

Take-Home

100 points (99 plus an extra point)

Your midterm consists of two parts:

Part One is a set of short answer and multiple-choice questions.

Part Two consists of the five short cases or questions below. You will be graded on how well you think through the cases/questions and demonstrate your understanding of the course concepts. Make your answers succinct. No more than three pages for the responses to these 5 questions.

Submit your responses using a word document with your name in the title. See Spreadsheet for due date.

Part 1 (24 points):

1. (2 pts.) In one-two sentences, or using bullet points, compare and contrast Carnegie’s definitions of philanthropy and charity.

2. (2 pts.) In one-two sentences, or using bullet points, compare and contrast a public charity and a private foundation.

3. (2 pts.) In one-two sentences, or using bullet points, differentiate between a 501(c)3 and 501(c)4 nonprofit organization.

4. (2 pts.) What is meant by the phrase, “nonprofit organizations are gap fillers”. Explain.

5. (2 pts.) What is nonprofit or philanthropic failure theory? In other words, how do nonprofits fail the public? List and describe the four different aspects of this theory (ways that nonprofits fail to thrive). Give an example for each.

6. (2 pts.) There are three legal duties of board members. What are they? Describe them.

7. (2 pts.) Describe the difference between public goods, private goods, and common goods. Use examples.

8. (2 pts.) Explain why I (Dr. Bernstein) keep saying that for nonprofits, “all they have is their reputation.”

9. (1 pt.) A nonprofit that qualifies under Section 501(c)(3) cannot support candidates for public office and must limit its expenditures on

a. relief of the poor.

b. lobbying.

c. health care.

d. legal counsel. 

10. (1 pt.) What government action is intended to encourage charitable giving and sustain the services provided by charitable nonprofit organizations?

a. Free-riding

b. receiving free health care vouchers in exchange for gifts

c. the lifting of limitations on lobbying

d. tax deductions for gifts/donations 

11. (1 pt.) This principle prevents government funds from going directly to religious congregations or to organizations that would use them for religious activities.

a. separation of church and state/the Johnson Amendment

b. charitable choice provisions

c. tax-exempt provisions

d. the non-distribution test

12. (1 pt.) Nonprofits are

a. self-governing.

b. controlled by the government.

c. controlled by individual owners.

d. controlled by corporate sponsors. 

13. (1 pt.) The  is a guide to every action taken by the organization and is the principal standard against which its performance should be measured.

a. charter

b. business plan

c. mission statement

d. core of values

14. (1 pt.) This concept states that a board member or officer of the organization cannot unreasonably benefit from the organization’s funds.

a. conflict of interest

b. private inurement/non-distribution constraint

c. obedience

d. intermediate sanctions

15. (1 pt.) The Form 990

a. Refers to the tax form all nonprofits with a budget of more than $50,000 must submit annually (unless you are a church).

b. Includes information about the governance structure of the organization.

c. Should be approved by all board members prior to submission.

d. All of the above.

16.  (1 pt.) When a nonprofit alters its goals and activities to satisfy the contributor of funds. This is called

a. performance measurement.

b. goal displacement or mission drift/creep.

c. information asymmetry.

d. population ecology.

Part 2 (15 points for each question):

1. Case Analysis: In one of the largest actions brought to date against charity fraud, on May 19, 2015, the Federal Trade Commission (FTC) and 50 states’ attorneys general filed a civil complaint against a group of four cancer charities alleging that they bilked donors of $187 million. According to the Washington Post, the government alleged that the scheme was run by a single family through charities known as the Cancer Fund of America, the Children’s Cancer Fund of America, Cancer Support Services, and the Breast Cancer Research Society. At the center of the fraud operation was James T. Reynolds Sr. who opened the Cancer Fund of America in 1987.  

Over the decades, according to the complaint filed by the FTC and the state regulators, Reynolds expanded the enterprise to four separate groups and was joined by his son, friends, and members of his Mormon Church congregation in Knoxville, Tenn.  Prior to starting these nonprofits, he had been fired by the American Cancer Society due to sloppy bookkeeping, irregular hours, and taking the title to a car meant to be auctioned for the charity.

Although the charities said they spent 100 percent of their donations on services such as hospice care, chemotherapy and pain medication for children, the charities spent less than 3 percent of donations on cancer patients.  During 2007-2015, the Cancer Fund and its affiliate raised $187 million, of which $75 million went to telemarketers and direct mail consultants.  The enterprise paid out salaries of $8 million in 2011 alone – thirteen times more than patients received in support from the organization during that same period, according to the Tampa Bay Times, of which $1 million went to Reynolds family members.

According to the suit, the four groups spent the vast majority of the donations, not on providing services to cancer patients, but rather to pay for fundraising to increase donations, extremely large salaries and bonuses, luxury cruises, all-expense paid trips to Walt Disney World and other trips, college tuition, cars for personal use, gym and dating site memberships– all for family members and friends.

The charities’ marketing was designed to be emotional.  According to the Washington Post, one letter told potential donors that "one in eight women will be diagnosed with breast cancer in America” and had pictures of a women who were bald, presumably from chemotherapy. The charities promised to give the money to patients to pay for pain medications and hospice services.

“Some charities use donations to send children with cancer to Disney World,” said Mark Hammond, secretary of state for South Carolina, whose office joined the investigation of the groups in 2012. “In this case, the Children’s Cancer Fund of America used donations to send themselves to Disney World.” 

According to Jessica Rich, Director of the FTC’s Bureau of Consumer Projection, the charities, “siphoned hundreds of millions of dollars away from well-meaning charities and people with cancer who needed the services the defendants falsely promised.”

The complaint stated that they hired professional fundraisers who often pocketed 85% or more of every donation. The charities spent more than $120 million on such firms from 2008-2012. The lawsuit also accused the charities of falsifying financial documents, reporting inflated revenues and overvaluing gift donation, and not delivering much of donated goods to cancer patients.  Instead, patients were sent boxes of “seemingly random items” such as Little Debby snack cakes, Carnation Instant Breakfast drink, adult briefs, sample-sized soap, and blank greeting cards. Much of these were purchased from procurement agents who sell discontinued products to nonprofits at a fraction of their retail value.

A settlement was reached, although there was little left of the millions raised from the public.  As part of the settlement, the charities agreed to be permanently dissolved and liquidate their assets.  James Reynolds Sr. was to surrender an unspecified amount of his personal assets and he and other family members were banned for life for managing charitable assets or being a board member of a charity.  The settlement imposed tens of millions of dollars in penalties on the charities and the individuals, but little money was recovered because most of it was already spent, according to the FTC.

Answer the following questions in reference to the Cancer Fund of America case:

a. What were the underlying governance issues that created the conditions for this fraud?

b. Who was responsible for the fraud that happened and why?

c. Why do you think it took the regulatory authorities so long to act? Should the external regulatory authorities have intervened in a different way? If so, when and how?  To answer these questions, think about which agencies oversee nonprofit organizations and have the power to bring charges.

d. What are lessons learned about governance that can keep this type of scam from happening to other nonprofits?

2. Case Analysis: You are president of the board of the Theler Community Center in Belfair, WA. Revenues have come from facilities rental, donations, grants, and community classes. The next year’s revenues are projected to be $71,000. Expenses cover insurance, utilities, supplies, taxes, and payroll. Expenses are projected to be $68,000. During a board meeting the interim Executive Director (ED) informs you, the board and the public that the center is faced with $162,000 in debt and back taxes. In addition, there is a criminal investigation into the center’s former ED. The interim ED was hired last month after the former ED was put on suspension and ultimately, fired. The new ED informed the group that the former ED had created a financial mess that dated back six years when the center last filed a tax return. The center owes state unemployment taxes and Social Security and Medicare taxes for the employees to the tune of $97,000. The IRS has additionally levied the center’s bank accounts because of the failure to file for the past 5 years, making it unable to pay its bills this month. What are the ramifications of not having filed the 990 tax forms with the IRS? Besides not being able to pay the bills how will this contribute to the financial situation? What impact does this have on receiving donations and grants from foundations? How may you, and the board members, be held accountable by the IRS? Do the board members have a duty to keep the organization from losing money? Explain.

3. There are two parts to this question:

a. You read three short stories, Dialogue Between the Head and the Heart, The Snow Image, and True and False Philanthropy. Define philanthropy. Explain the metaphor between these essays and philanthropy. Then use examples from class or knowledge of other nonprofits (personal experience or from the news, etc.) to illustrate why these stories are still relevant. (In the Dialogue Between the Head and the Heart focus on the three relevant sub plots.) 

b. You and your friends have decided to start a nonprofit. The goal of your nonprofit is to provide immigrants from Afghanistan with a center where they can learn about “all things American”. This would include getting financial aid, legal advice, housing, health care referrals, and have a place for displaced Afghan folks to get together. Would you want to become a 501(c)(3) or 501(c)(4)? Why?  What is the difference between these two classifications? 

4. Case Analysis: Following a board meeting of the local community foundation, the new board chair swiveled around her chair and addressed the ED. “Tom”, Mary said, “what are we going to do about those three people--those statues? The three of them remind me of those little marble figurines: ‘See no evil, hear no evil, and speak no evil.”

“What can we do?” said Tom.

“I don’t know yet, but something has to change.”

Mary has just conducted her first meeting as chair of the nine-member board. Now in her fourth year on the Board, Mary headed the search committee to find a new ED two years before. Since then, she and Tom have created a future vision for the foundation. To reach this goal it would require years of hard work-plus major new resources. At this meeting the board authorized a new capital campaign, the largest ever.

“We can’t succeed unless we have more manpower,” said Mary. “We have nine people on the board. Six are jewels—but three are not pulling their weight. When I was a board member, I didn’t worry about those three non-performers. Now that I’m chairperson, I realize that to foundation can’t afford such deadwood.”

“What can we do?” asked Tom. “You know even better than I the situation with these three people. Statue number one only happens to be the granddaughter of the founder of this foundation. She hardly ever attends a meeting. When she does, her ideas are off base. Statue number two only happens to be the guy who ten years ago made the largest gift ever to the foundation. He hasn’t given a nickel since. Furthermore, he never says a single word at board meetings. He’s a sphinx. And statue number three? Boy, she’s got an opinion about everything, she never shuts up at meetings, and she’s a general pain; besides, she’s a partner in my wife’s law firm.”

What should Mary do? Back up all your decisions using the course concepts!

5. Case Analysis: People for the Ethical treatment of Animals (PETA) is a nonprofit organization founded in 1980 and became first a national, then international, voice for animal rights. Over its history, PETA has taken on a number of issues such as the cruel treatment of animals in factory farms, in research labs, and in circuses. Its activities have included undercover reporting, protests, advertising campaigns and litigation. PETA has scored a number of victories. Undercover investigation by PETA of a lab in Silver Springs, MD, led to the first US police raid on an animal treatment facility. A protest campaign against McDonald’s in 2000 led to its becoming the first major US corporation to impose, on all their suppliers, minimum standards in the treatment of chickens.

While the ultimate goal of the organization is the liberation of all animals from suffering caused by humans, PETA does not itself engage in the more extreme forms of activism that characterize other groups, such as Animal Liberation Front (ALF). Instead, PETA aims at improving the living conditions for animals and reducing the demand for animal products. This approach has sometimes led to the criticism from more radical animal rights groups that PETA is not so much about animal rights as it is about animal welfare.

The founder and guiding force behind PETA, Ingrid Newkirk, has long used aggressive, attention-grabbing campaigns to bring the organization’s message to the public. It would seem that nothing is too tasteless or offensive for PETA as long as people talk. For example, linking treatment of animals to the Holocaust, to slavery and to certain infamous serial killers. PETA volunteers have disrupted fashion shows, dragged themselves through the streets in leg-hold traps, and have dumped money soaked in fake blood on audiences at fur fashion shows.

Another technique used is to attract attention through sex. To protest against the running of the bulls in Pamplona, Spain, it sponsored a “Running of the Nudes” two days before. To protest against wear furs, they featured attractive models (both male and female) in the campaign, “I’d Rather Go Nude Than Wear Fur.” To promote vegan diets, they sent out photos of “Lettuce Ladies,” dressed in bikinis made of strategically placed lettuce leaves.

Needless to say, some of these tactics have drawn criticism from women’s organizations!

Respond to the above by writing from the following two perspectives. First that you approve of the tactics used by PETA. Second that you disapprove of the tactics used by PETA. Use sound reasoning and the concepts of ethics discussed in class and drawn from the readings. Then answer the following two questions:

1. How would you rate the success of such campaigns to further a mission?

2. Are the tactics used aligned to the mission of the organization.