What Does It Mean to Be a Nonprofit Educational ...

1 By Randy Elliot BennettWhat Does It Mean to Be a Nonprofit Educational measurement organization in the 21st century ?iForewordIn this paper, ETS Distinguished Presidential Appointee Randy Bennett asks what it means to be a Nonprofit Educational measurement organization in today s world. That question is terribly important because, throughout the social service sector, the line between what Nonprofit and for- profit organizations do is becoming blurred. This fuzziness is in part the result of financial pressures created by decreased government support for social service institutions, forcing those organizations to become more competitive with one another. That decrease in government support also forces these organizations to find new ways to generate the funds needed to achieve their missions, driving some nonprofits to compete with for-profit corporations. The commercial sector, in turn, has realized that profit can be made from social service, which adds further competitive pressure to the this paper, Bennett uses ETS as a case study.

2 He begins by reviewing the federal tax code relating to Educational Nonprofit organizations. He then analyzes the circumstances that led to ETS s founding. Finally, he offers thoughts on how that tax code and organizational history might be used to guide ETS in making decisions about its the end, Bennett presents much more than a historical account. His work is meant to spark a discussion about how to strike the right balance between upholding and advancing the scientific principles that undergird the field of Educational measurement , on the one hand, and the need to act in a businesslike manner, on the paper s central question how to remain financially viable in a highly competitive business environment, while remaining true to the mission of serving the public good is relevant to all of those with an interest in the institution of Educational ,Kurt M. Landgraf President and CEO ETSiiiiiTable oF ConTenTsAbstract.

3 IvWhat Does It Mean to Be a Nonprofit Educational measurement organization in the 21st century ? .. 1 What Is an Educational Nonprofit ? .. 1 Where Did ETS Come From? .. 3 What Does the Past Imply for the Future? .. 8 Summary .. 11 References .. 12ivabsTraCTThis paper explores the meaning of Nonprofit status in the field of Educational measurement . Educational Testing Service (ETS), the largest Nonprofit Educational measurement organization , is used as a case study. The paper reviews the historical roots of ETS from two perspectives. First, the requirements and history of the Internal Revenue Code governing the establishment and operation of 501(c)(3) organizations are described. Next, the people and events leading to the establishment of ETS as a Nonprofit Educational measurement organization are explored. Finally, the principles underlying Section 501(c)(3) and those of ETS s progenitors are brought together to suggest what it means to be a Nonprofit Educational measurement organization in the 21st am grateful to the following people for providing information, comments, or other assistance to me in developing the presentation on which this paper was based: Isaac Bejar, Michal Beller, Julie Duminiak, Marisa Farnum, Eleanor Horne, Pat Kyllonen, Ernie Price, Larry Stricker, Rich Swartz, Stan von Mayrhauser, Dylan Wiliam, and Ann Willard.

4 However, all opinions contained herein, and any errors of fact, are my own. I am also grateful for the production contributions of Bill Monaghan, Bill Petzinger, and Sally Acquaviva, without whom this report would not have been does It Mean to be a Nonprofit Educational measurement organization in the 21st century ?The philosopher George Santayana (1905) said, Those who cannot remember the past are condemned to repeat it. This quote is often called Santayana s Warning, because it is taken to mean that an un-derstanding of history helps avoid having to relive previous mistakes. But the quote can also be read to suggest that, in order to make reasoned decisions about the future, we need to be cognizant of where we have come from. This claim is especially true for a Nonprofit organization because its continued existence is usually rooted in its founding paper uses Educational Testing Service (ETS), the largest of the Nonprofit Educational measurement organizations, to illustrate the importance of remem-bering the past.

5 The paper is divided into four sections. First, the tax code governing the establishment and operation of Educational nonprofits is reviewed. Second, the history around the founding of ETS is described. Third, the implications of ETS s past for its future are discussed. Finally, the main points of the paper are Is an Educational Nonprofit ?The term Nonprofit refers to how an organization is incorporated under state law. To be federally tax exempt, an Educational Nonprofit must become a 501(c)(3) ,2 What is 501(c)(3)? It is a very important section in the Internal Revenue Code. The section is important because of what it does, and does not, allow Educational nonprofits to do, as well as because of how the section came about. Section 501(c)(3) exempts certain types of organi-zations from federal income To qualify, an organization must meet certain discrete tests. The tests are the organizational test, operational test, inurement test, lobbying restriction, electioneering prohibition, public benefit test, and public policy test (Harris, 2004).

6 Each of these tests is briefly reviewed in the Internal Revenue Code, to be exempt, an organization must be set up exclusively for one or more of the following purposes: charitable, religious, Educational , scientific, literary, testing for public safety, fostering amateur national or international sports competition, or the prevention of cruelty to children or animals (Internal Revenue Service [IRS], 2003b). An entity meets this organizational test if its articles of incorporation limit its function to one or more exempt purposes ( , Educational ) and do not expressly allow the organization to engage, other than insubstantially, in activities that are not consistent with those purposes. ETS s exempt purpose is edu-cational, and its organizing documents specify the activities it can pursue in keeping with that purpose. Paraphrasing the 2005 revision of the organization s Charter and Bylaws ( Educational Testing Service [ETS], 2005), those activities are as follows: conduct Educational testing services; counsel test users on measurement ; serve as a clearinghouse about research in testing; determine the need for, encourage, and carry on research in major areas of assessment; promote understanding of scientific Educational measurement and the maintenance of the highest standards in testing; provide teachers, parents, and students (includ-ing adults) with products and services to improve learning and decisions about opportunities; enhance Educational opportunities for minority and educationally disadvantaged students.

7 And engage in other advisory services and activities in testing and measurement from time to meet the second or operational test, the organization must be run exclusively for one or more of the exempt purposes designated in its articles. The test is met if the organization s stated purpose and activities conform. Although Section 501(c)(3) indicates that the organization must be operated 1 For purposes of this paper, Nonprofit and 501(c)(3) corporation are used to mean the same thing, even though they are legally The terms Nonprofit and not-for-profit are not legally distinct, at least not in the Internal Revenue The IRS lists 27 types of organizations that are tax exempt under 501(c), only one type of which covers those institutions exempt under 501(c)(3) (IRS, 2003a).2 exclusively for exempt purposes, the term exclusively has been interpreted by the IRS to mean primarily or substantially.

8 Thus, Section 501(c)(3) does allow exempt organizations to engage in activities unrelated to their exempt purposes (IRS, 2000). But those activities must not become substantial and tax must generally be paid on this unrelated business that the operational test makes clear that engaging in unrelated activities to support the exempt purpose is, in itself, a non-exempt purpose, if it is done any more than insubstantially (IRS, ).4 To prevent such unrelated activities from becoming so substantial that they threaten tax-exempt status as well as to allow outside investment and limit liability an exempt organization may create for-profit inurement test is often cited as the fundamental difference between for-profit and Nonprofit corpora-tions. This test says that no part of the organization s net earnings may benefit any private individual. For example, there may be no stockholders and no distribution of net earnings, as in a lobbying restriction and electioneering prohi-bition mean, respectively, that no significant part of an organization s activities may consist of carrying on propaganda or otherwise attempting to influence legislation.

9 And that an exempt organization may not participate or intervene in any political campaign for or against any candidate for public office (IRS, ).6 Unlike the lobbying restriction, the electioneering prohibition is meet the public benefit test, the organization must operate for the advantage of public, rather than private, Private interests can be benefited, but only incidentally. Further, the principal beneficiaries of the organization s activities must be sufficiently numerous and well-defined so that the community is, in some way, , there is the public policy test, which essen-tially says that an otherwise qualifying organization s .. purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred (Bob Jones University v. United States, 1983). The quintessential example is Bob Jones University, which lost its tax-exempt status as a result of racially discriminatory practices that the IRS claimed, and the Supreme Court affirmed, violated fundamental public Organizations set up for Educational purposes under 501(c)(3) have several additional requirements (IRS, 2003b).

10 First, the positions they take must be Educational . According to the IRS, .. advocacy of a particular position .. may be Educational if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion (IRS, 2003b, p. 21). Also, the method used by an organization to develop and present its views is a factor in determining if the organization is Educational . What constitutes an Educational method? The IRS says that the method is not Educational when: the presentation of viewpoints unsupported by facts is a significant part of the organization s communications; the facts that purport to support the viewpoints are distorted; or4 There does not appear to be a statutory or regulatory definition of substantial. However, experts in Nonprofit tax law often advise limiting gross unrelated business income to no more than 10 to 20 percent of gross revenue ( , FAQ s - 501(c)(3) status, ).