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FORT WAYNE, Ind. – The biggest question facing the Internal Revenue Service when it decides whether to grant tax-exempt status to a hopeful non-profit is who benefits from the non-profit’s operations, according to agency guidelines.
If benefits go to anyone or anything besides the organization’s charitable purpose, then it does not qualify as tax-exempt, the IRS says.
That becomes critical for charter schools in Indiana, because state law requires them to be tax-exempt. Lose your tax-exempt status, lose your school.
But drawing the line between public and private benefit gets especially tricky for charter schools, because most are run by educational management organizations – called EMOs in the industry – some of which are for-profit companies.
Officials at Imagine Schools Inc., in Arlington, Va., often claim they are non-profit, but Imagine Schools Inc. is, in fact, a for-profit company formed after Dennis Bakke and his wife bought another for-profit EMO, Chancellor Beacon Academies. Imagine is the EMO for two charter schools operating in Fort Wayne as well as for a third proposed to open next year.
In 2005, Bakke incorporated a separate company, Imagine Schools Non-Profit Inc. in Virginia, but that company has not yet been granted tax-exempt status by the IRS. Even if it had been granted, the charter schools’ contracts in Fort Wayne are with Imagine Schools Inc., the for-profit version of the company, not Imagine Schools Non-Profit.
Imagine MASTer Academy received $2.9 million in tax revenue for the 2007-2008 school year; it paid Imagine Schools Inc. $343,757 in management fees.
Bakke did not return several calls seeking comment.
“We operate as a non-profit organization and do not extract profits from our schools,” Imagine’s Web site says. “We are awaiting final notification from the IRS of our non-profit status.”
They’ve been waiting four years.
IRS spokeswoman Jodie Reynolds said the agency cannot comment on any tax situation, cannot confirm or deny any investigations and cannot speak in general terms as to how IRS rules should be applied. She referred those with questions to the IRS Web site, www.irs.gov.
The IRS can, and occasionally does, revoke an entity’s tax-exempt status, but it is rare. In 2004, court documents show, the IRS revoked the tax-exempt status of a charter school in San Antonio, but that was only after the state revoked the school’s charter four years before.
“The predominant issue in charter school exemption applications is the possibility of impermissible private benefit to a management company,” says the IRS Charter School Guide Sheet. It can be found online at tiny.cc/TUUXb.
The information provided below in response to the questions in that guide is from meeting minutes, federal tax returns, corporate documents on file with the Indiana secretary of state, and charter documents submitted to Ball State University.
The guide sheet says “yes” answers to the following questions are warning signs of private benefit.
Was the management company involved in forming the school and applying for its charter?
Imagine Schools Executive Vice President Jason Bryant was the registered agent for all three Imagine schools in Fort Wayne, and for the first one, Imagine-Fort Wayne Charter School Inc., its address was his home. The later schools used his office as their address.
Bryant was also the applicant for all three schools’ charters from Ball State University. All three companies were incorporated by Imagine attorney Joseph Miller, who also handled all three applications for tax-exempt status.
Is the board controlled by the management company? Does the contract take away board members’ power over major school policies, including budget, curriculum, and hiring and firing?
Imagine Schools officials – not board members – decided to open the school on Broadway and the proposed Bridge Academy. Imagine hires and fires all staff, with board members only having the right to affirm Imagine’s choice of principal. The boards technically control curriculum, but it was decided by Imagine officials before the boards began meeting. The board has no say over busing, the lunch program, construction and remodeling, or benefits for employees. The board approves the budget, but the contract says board members cannot unreasonably withhold their approval.
Was the contract with the EMO negotiated at arm’s length, meaning both sides had competing interests and equal standing? Does the contract contain boilerplate terms not specific to the school?
Board members never voted on Imagine’s contracts with any of the three schools in Fort Wayne. The contracts for all three of Imagine’s charter schools in the city are identical.
Is the term of the contract equal to or longer than the term of the charter? Is it longer than five years? Automatically renewable?
The contract says it continues as long as the school has a charter and automatically renews if the charter is renewed.
Do the school and the management company have the same legal representation?
The local board has since hired its own attorney, but all three local entities were incorporated by Imagine attorney Joseph Miller, who also filed the tax-exempt applications for all three.
Were other management companies submitted? Did they submit bids?
There is no indication any other management company was considered. Imagine Schools officials were on site when local entrepreneur Don Willis announced plans for the school, and Imagine Schools bought the Wells Street campus months before the school was incorporated or applied for a charter. Willis acknowledged having a handshake deal with Imagine before any official steps were taken. The first board meeting did not occur until five months after the contract was signed.
Does the company provide comprehensive services, which makes the school reliant on them for almost everything and making it more difficult to terminate the contract?
Imagine Schools provides or subcontracts every service for running the school.
If the contract is terminated, will the school have a facility, equipment, teachers, administrators, staff and rights to its name and curriculum to allow it to continue operations?
The school rented the facility on Wells Street from an Imagine Schools subsidiary for $746,144 a year. The campus has since been sold to a real estate investment trust, which is now the leaseholder.
The Imagine Schools on Broadway building is owned by Imagine Schools and leased to the school. Teacher contracts would transfer to the school, but the school would be without benefits for employees. The school would also lose its name and Web site.
Is the contractor’s compensation based on total income, regardless of expenses?
The original contract called for Imagine Schools Inc. to receive 12 percent of all revenues, regardless of expenses, but was later amended to remove food and some other revenues. For the 2007-08 school year, Imagine Schools was paid 11.1 percent of the Imagine MASTer Academy’s total revenue.
In reality, all Imagine brings is the concept and the money, said Troy Bell, a former executive with the company. If a local group could find third-party financing, it would be able to open a charter school outside the Imagine umbrella and restrictions, he said. It’s local people being hired to work in the schools and run them, all who presumably understand how education works.
“Even though Imagine’s name is on the schools, … the majority of the people are local people,” Bell said. “Really, if you ask yourself, what value does Imagine bring to the table to these schools? It’s just the concept.”
Kelly Soderlund of The Journal Gazette contributed to this story.
