Reviews are less than charitable for nonprofit film bash

Glitz hits the Santa Monica sands today when stars like Josh Hartnett, Christina Ricci, Tobey Maguire and Sharon Stone walk the paparazzi-lined red carpet into a giant beach-side tent for Film Independent’s Spirit Awards.

Billed as the independent film community’s biggest party, the 22nd annual gala will be televised on two cable channels, with a third offering a fashion-and-gossip preview. Nominees include best-feature entry “Little Miss Sunshine,” actors Edward Norton (“The Painted Veil”) and Aaron Eckhart (“Thank You for Smoking”) and director Steven Soderbergh (“Bubble”). Comedian Sarah Silverman will host.

With its casual glamour and army of A-listers, the Film Independent bash is often described as an edgier warmup for the Academy Awards. But unlike the Oscars -- or the Golden Globes, for that matter -- the Spirit Awards ceremony is subsidized by taxpayers as a charitable service, much like American Red Cross shelters and skid row soup kitchens.

Film Independent, whose main mission is to nurture the careers of moviemakers who lack studio backing, is one of several cinema-related nonprofits that employ their tax-free status to stage awards shows and buzz-generating film festivals.

Some state on their tax returns that the televised awards themselves fulfill a charitable, tax-exempt purpose by educating the public about film.

But philanthropy watchdogs give the practice less-than-glowing reviews.

“How is that a public service?” asked Daniel Borochoff, president of the American Institute of Philanthropy.

“It’s kind of a perverse use of the nonprofit designation,” said Trent Stamp, president of Charity Navigator, which rates the spending practices of 5,000 nonprofits. It and other nonprofit evaluators have seen their influence grow as they post more of their findings on the Internet.

For fiscal 2004 and 2005, Film Independent, which also owns the Los Angeles Film Festival, received Charity Navigator’s lowest score -- zero stars out of four.

The chief reason: Barely half of Film Independent’s budget went to workshops, laboratories and other charitable services that directly benefit struggling auteurs. Its two single largest expenses were the June film festival and the Spirit Awards, its principal fundraiser.

Tickets to the festival’s screenings are $10, but the Spirit Awards charges $15,000 to $40,000 for a table of 10.

After The Times questioned Film Independent’s finances, the organization amended its two most recent tax returns to reclassify the festival and awards show as charitable services. They previously were listed as special events whose primary purpose was fundraising.

Charities -- known as 501c3 nonprofits, after their IRS designation -- must provide programs that are generally beneficial to the public, even if their specific services target a narrower segment of people. The 501c3 category includes educational and religious organizations, literary and scientific societies and groups that help the poor.

The changes in Film Independent’s returns boosted its program-spending ratio -- the portion of its budget devoted to charitable services, a key measurement to nonprofit raters -- to about 75%.

“There’s hardly anything we do that is not a service,” said Dawn Hudson, Film Independent’s executive director.

But Stamp, of Charity Navigator, panned the tax rewrite.

“All of a sudden, they decided their federal tax returns were false,” he said. “It’s a quick and dirty whitewashing of their financial forms.”

In written comments to The Times, Film Independent’s board president, actor-director Vondie Curtis Hall, dismissed Charity Navigator as an “inappropriate yardstick” for the nonprofit’s accomplishments.

At the same time, however, Film Independent said the amended returns -- representatives termed them a correction of overly conservative accounting methods -- should warrant a Charity Navigator score of two or three stars.

The two organizations that produce the Academy Awards and Golden Globes need not worry about such ratings; they operate as a different type of nonprofit, a 501c6, rather than a so-called public charity. They are registered with the Internal Revenue Service as business associations.

The distinction is crucial. Unlike contributions to 501c3s, donations to business associations and many other types of nonprofits typically are not tax-deductible as charitable gifts. Tickets to the Oscars, for example, cannot be written off as a contribution to good works.

‘It doesn’t look good’

The Times examined the last two available tax returns for seven movie-related nonprofits, with a focus on the amount of money that they spend on program services, salaries and other administrative costs, as well as awards shows.

Until it amended its returns, Film Independent had the lowest program-spending ratios by far -- 50% and 49% -- in fiscal 2004 and 2005, with the rest of its budget going to the Spirit Awards, festivals, fundraising expenses and administration. Ratios for the other six nonprofits ranged from the Sundance Institute’s 74% and 72% to American Cinematheque’s 90% and 87%.

Barring unusual circumstances, a well-run charity spends at least two-thirds of its budget on programs, say Charity Navigator, the American Institute of Philanthropy and the Better Business Bureau.

When program spending falls below 65% or so, the raters assign charities poor grades as a heads-up to donors. The IRS requires no set percentage for program spending, although if a charity’s numbers remain low from year to year, it risks a government audit -- and, in extreme cases, loss of its tax exemption.

Thus nonprofits tend to report as much of their costs as possible as program expenses, and the IRS gives them wide latitude, tax attorneys and accountants say.

Of the charities examined by The Times, Film Independent spent the largest portion of its budget on its awards show in 2005 -- $1.3 million of $6.3 million, or 20%, according to its amended tax return. Its film festival cost $2 million. The Times is a festival presenter and publishes an advertising supplement to promote it.

In 2005, Film Independent reported spending $1.5 million on the workshops and other services for filmmakers. Since 2003, that amount dropped by about $500,000, while expenses for the awards show and festival climbed by $880,000.

“It doesn’t look good,” Borochoff, the American Institute of Philanthropy president, said of Film Independent’s spending priorities.

Film Independent says the reported decline in program spending actually reflected new accounting methods, not service cuts.

In two letters to The Times, Hall also said the newspaper’s inquiries about the nonprofit seemed to ignore the importance of the Spirit Awards, which recognizes movies with budgets of under $20 million.

“Indeed, it is fair to say that over the past 20 years, the Spirit Awards have done more than any other single event to put independent film on the map and in the public consciousness,” Hall said.

Formerly known as Independent Feature Project/Los Angeles, Film Independent says it is the largest group serving indie moviemakers, with 6,300 members. It leases a suite of offices near Beverly Hills and offers 278 screenings, seminars, forums and other programs annually, not counting the awards show and festival.

Film Independent pays its executive well. Hudson, who has led the organization since 1991, received slightly more in 2005 base salary -- $265,000 -- than the heads of the Oscars-affiliated Academy Foundation and the American Film Institute, which are much larger than Film Independent.

Hudson was paid nearly four times as much as her counterpart at American Cinematheque. Her salary was considerably less than Sundance Executive Director Kenneth Brecher’s $387,500. But Sundance has more than 2 1/2 times the revenue of Film Independent.

Film Independent attorney Michael Donaldson defended Hudson’s pay, saying it was reasonable for an arts charity Film Independent’s size.

“She earns every cent,” he said.

A salute to Clooney

Meanwhile, American Cinematheque and AFI also report their televised awards show costs as charitable expenses. American Cinematheque restored the landmark Egyptian Theatre in Hollywood and regularly screens classic and rare films. Last year, it saluted George Clooney.

“Comparing us to the Salvation Army, it’s not the same thing,” said Barbara Smith, American Cinematheque’s executive director.

AFI runs a conservatory, film preservation center and exhibition theaters. In June, it will present Al Pacino with its Life Achievement Award.

“I do not think there is any question that could be raised about the educational value of those programs,” Jean Firstenberg, AFI’s chief executive, said of the achievement awards.

But Borochoff isn’t convinced. “Honoring Al Pacino and considering it a charitable program, that’s a pretty weak program,” he said.

The watchdogs say film festivals can pass the charitable-program test if they deliver a cultural experience unavailable in the marketplace, offer some free or discounted tickets and avoid becoming highly commercialized promotional vehicles for studios and other corporate interests.

“The devil is in the details,” Stamp said.

Robert Redford’s Sundance Festival is lauded for championing non-mainstream films. It comps tickets for various groups and does not report its awards dinner as a charitable program.

But it also serves as a de facto market for studios, and its Park City, Utah, surroundings have become a promotional bazaar for corporations and celebrities. Festival organizers say those forces are beyond their control and have not sullied the program.

On its 2005 tax return, Sundance listed $7 million of its festival costs as charitable service expenses, out of a total budget of $15 million. The institute netted $1.2 million from the event. It spent about $4 million on filmmaking and theatrical laboratories, music programs and other services.

“We do quite a lot for a little,” said Jill Miller, Sundance’s managing director.

paul. pringle@latimes.com