A few weeks ago, the Board of Directors of Pearson Charitable Foundation, the Section 501(c)(3) organization affiliated with the educational publishing company Pearson PLC, announced that it will be closing the Foundation at the end of the year after a decade of operations. According to the Foundation’s website, the decision to close the Foundation comes after a decision by Pearson PLC to “integrate all of its corporate responsibility activities and functions into its business as a way to maximi[z]e social impact and to no longer fund the Foundation as the primary vehicle for its philanthropic and community activities.”
The announcement comes after several years of controversy surrounding the Foundation, including an investigation by the New York Attorney General. According the Attorney General, the Foundation was being operated in a manner that was for the benefit of Pearson PLC. Specifically, the Attorney General found that the Foundation had engaged in activities relating to the development of educational products, including course materials, related to the Common Core State Standards (a set of academic standards that has been adopted by most states) to be sold by Pearson PLC. The Attorney General also found that the Foundation had helped to attract clients to Pearson PLC by paying for them to attend education conferences sponsored by the Foundation and at which Pearson PLC executives were present. Both the Foundation and Pearson PLC have denied any wrongdoing, but the Foundation agreed to pay $7.7 million to settle the Attorney General’s investigation. $7.5 million of the settlement amount was to be paid into a fund to support the work of 100Kin10, a network of organizations focused on placing science and math teachers in U.S. schools.
The investigation, and resulting dissolution, of the Foundation serve as an important reminder of the requirement that Section 501(c)(3) exempt organizations operate to serve a public, rather than a private, interest. This remains true even when an exempt organization is affiliated with a for-profit entity. Such affiliated nonprofits (and all nonprofits generally) hold their assets in charitable trust for use in furtherance of their exempt purposes and are prohibited from using such assets to benefit their for-profit affiliates.
501(c)(3) exempt organizations are also prohibited from providing prohibited private benefits, permitting private inurement, or entering into excess benefit transactions. Private foundations are also subject to strict self-dealing rules under Internal Revenue Code Section 4941 which generally prohibit foundations from engaging in transactions with certain defined disqualified persons. See our prior posts on these topics for more information.