Newman’s Own is a salad dressing brand which proclaims that “100% Profits to Charity” presumably meaning that all of the profits Newman’s Own makes from selling salad dressing go to the Newman’s Own Foundation, familiar to anyone who watches PBS. If you’re of a certain cast of mind, it doesn’t even take five minutes to come up with this little scenario:
Newman’s Own is the well-known corporation, but it buys all of its ingredients and rents all of its property and, Hell, licenses its trademark from some other corporation with a name that never gets advertised. Call it the Invisible Corporation. Invisible Corporation makes no promises and gives to no charities, it simply arranges its prices such that 99% of what Newman’s Own takes in isn’t profit. It shifts prices on a quarterly basis, if not more frequently, such that the Newman’s Own Foundation is getting something close to nothing but different from the day before off of the raspberry vinaigrette and all the other dressings Newman’s Own sells; the Invisible Corporation exists to be the profit-making entity in the relationship, Newman’s Own exists to get tax benefits, and Newman’s Own Foundation exists to look good to people who buy somewhat more expensive salad dressings.
It’s what’s commonly known as Hollywood accounting.
Movie studios often sign up actors with a promise that they’ll get a share of the profits from the film when it’s released. But then the studios arrange the production so that the film never generates any profit on paper.
An easy way to do this is to divide things up between several supposedly separate and independent companies (all of which the studio owns). Money that comes in can then be shifted out of one company which would owe a profit into another company which does not - but the studio owns both companies and ultimately keeps the money.
Yep you can cheat at both the “profit” and “charity” part.
IKEA does a master class in this. It’s a $36 billion charity. Most of the money it makes is spent on licensing the IKEA name from the founder. It’s a good job such payments are essentially tax free…
The practice is known as “transfer pricing”; related bodies trade among themselves at prices which are not market prices, but are engineered to ensure that the bulk of the profit accrues where it will be most advantageous. Most of the time this isn’t drive by the desire to be able to make a marketing claim such as is made on the Newman salad dressing label, but by the desire to ensure that the profits are not subjected to tax.
Tax authorities, for obvious reasons, take various measures to combat transfer pricing or to render it ineffective for tax purposes, which in turn drives taxpayers and their advisers to develop ever more creative ways of acheiving the aim of minimising tax.
Ironically, if the aim is to mimise tax you actually do want the profits to accrue to the charitable entity, since they will be tax-exmpt there. If you engage in transfer pricing to ensure that the profits acccrue to the privately-owned for-profit corporation, they’ll be taxed.
Plus, charitable entities are subject to a higher degree of scrutiny that most other entities, in that both the tax authorities and the charity regulators take an interest in their affairs. Obviously the effectiveness of this scrutiny will vary from jurisdiction to jurisdiction, but in general charities over=-paying for goods and services sourced from related for-profit entities is something both tax and charity regulators can get quite shirty about.
The salaries don’t even need to be for executives, nor do they need to be inflated. A company (or non-profit) could establish run-of-the-mill “employment” positions that are effectively sinecures. The owner could reward or support his cronies or extended family by hiring them as “administrative assistants”, “managers”, “image consultants”, etc. and paying them a market-rate salary with the understanding that they don’t even need to show up at the office.
I don’t know about charities, but this method is commonly used for tax evasion. Bigcorporation France makes almost no profit (hence pays almost no taxes) because it pays huge fees for a variety of services provided or supposedly provided by Bigcorporation Caïman Islands, for instance.
It’s only illegal if somebody lies to the tax authorities or the charity regulators, and it’s very easy to set up a company structure such that lying is completely unnecessary. For the charity, simply set it up as a charity. There’s no need for the charity to be involved in the salad dressing business. All it needs to do is receive and disburse money and have some good looking person appear at media and corporate events. And the charity regulators’ interest is only going to be in the charity. For the operating company that’s actually in the salad dressing business, decide how much the overall enterprise wants to give to the charity. That’s the operating company’s profits, 100% of which goes to the charity. That company’s sales revenue may greatly exceed its costs of sales and other direct expenses. Which is why you have a third company in the enterprise, the profit-making company. That company owns the intellectual property, such as the recipe and brand, which it leases to the operating company. It also charges management fees and various other service fees. All of these charges just happen to equal that difference between the operating company’s sales revenue and direct expenses. It takes some budgeting and manipulation to get the numbers right, and some paperwork to make it legal, but global corporations do it all the time. It’s the transfer pricing that UDS wrote about. And, as clairobscur noted, structuring the enterprise this way allows the profit-making company to set itself up in some low-tax locale where it can retain as much of the profits as possible.
For specific clarification to get at a general point: doesn’t Newman’s Own, in particular, go on to spell out that they’ve donated [checks wiki] over half a billion dollars to charity in the process? So, yeah, they lead off by just saying the ‘100%’ part; but then they add ‘hundreds and hundreds of millions’, right?
How are “C-Suite” salaries and benefits part of your COGS? There is a difference between gross profit and net profit. Maybe Newman’s Own has clarified their label statement on their website. I’m sure the foundation has an annual report that you can find on their website, or request a copy of.
Here in Minnesota, we have public financing for political candidates who meet certain requirements.
I know of one case, a new candidate running against a very well-supported incumbent, who filed for public financing. He hired his wife as campaign manager, and his teenage sons as campaign workers. Their salaries over 4 months used up nearly all the public financing – just a little left over to print some literature & lawn signs. All quite legal, at the time.
Various consumer credit/debt management companies have bragged about being “non-profit”, misleading people into thinking that the company was good hearted folk trying to help people out of debt.
The above mentioned huge salaries to family and friends belie all that.
I worked for a (honest) non-profit. I wasn’t involved in fundraising, but I heard enough from our development people to know there are all kinds of ways businesses can define “profit” and, for that matter, “donation.” For that matter there are all sorts of ways for a charity to define “operating expenses” and “program expenses.”
I’m an accountant that specializes in nonprofits. There might be lots of ways, but there is also over sight, and people can and do lose their 501 status by doing it illegally.
As UDS discusses, that particular tax dodge is well known.
In Hawaii, the LDS Church runs the highly successful Polynesian Cultural Center with shows for tourists. That is a for-profit business, but they have a variable price lease on the land which is owned by the LDS Church, a non-profit organization.
When sales are good more of the revenue can be transferred to the entity which is not taxed. When sales are not good, then less money is transferred.
You can find a ton of smaller “charities” where the owner is basically the only person running the charity and most of the donations accrued going to paying for their living/travel expenses. They’re still somehow able to claim they’re legit by putting all remaining money left-over into charity work and claiming since they have no overhead they can donate the maximum to charity.
Churches are not “Non-profit Organizations” they are churches. Non-profits file tax returns, churches don’t. Non-profits pay (depending on your state) sales tax, use tax, property tax, amusement tax. Churches don’t. Non-profits can be audited by regular IRS, state, or municipal auditors. Churches can’t.
Churches have only been exempt from oversight for a few years, but since the change, there are now churches that own cattle ranches and oil refineries. The thing to do about it is get Congress to change the law back to where it was so we can audit churches again.
Non-profits get audited, and there is regulation and oversight. People can cheat, but they get caught and punished for it. Churches are another story.