CHARTER SCHOOL REFERENCE GUIDE
This Reference Guide is keyed to the Charter School Guide Sheet numbering.
Background
Charter schools operate under a funding agreement (typically a charter) with a state or local
government agency that provides them with public funds. Government involvement includes
granting a charter to, funding and otherwise regulating charter schools. The charter sets forth
requirements for which the school will be held accountable, but leaves the implementation of
these requirements to the charter school’s governing body. Typically, the governing body
consists of the school’s board of directors. A charter school that is operated wholly or
predominantly from government funds or property under a funding agreement must meet the
requirements of §§ 501(c)(3) and 170(b)(1)(A)(ii) to qualify as a tax-exempt school, except that it
is not subject to the racial nondiscrimination provisions of Rev. Proc. 75-50, 1975-2 C.B. 587.
The predominant issue in charter school exemption applications is the possibility of
impermissible private benefit to a management company. Therefore, the Charter School Guide
Sheet is designed to examine whether the charter school is independent of the for-profit
management company and whether the management agreement has been negotiated at arm’s
length. Arm’s length describes a transaction between parties having adverse (or opposing)
interests; where none of the participants are in a position to exercise substantial influence over the
transaction because of business or family relationship(s) with more than one of the parties.
For example, a charter school’s governing body is likely to be independent of a management
company where (1) the board members are unaffiliated with the management company and
consist of members of the community or persons who are otherwise qualified to serve on a school
board; (2) the board members have authority over and are actively involved in major school
policies, including the budget, curriculum, and hiring and firing; and (3) the board members
negotiated with the management company before signing the management agreement.
Conversely, a charter school’s governing body is less likely to be independent of a management
company where (1) the management company was involved in forming the school and applying
for its charter; (2) the board is controlled by the management company; (3) the board members
have no authority under the management agreement over major school policies, including the
budget, curriculum, and hiring and firing, (4) the management company directly employs key
employees who provide services to the school; (5) the management agreement, or administrators’
and teachers’ contracts, provides that the school may not hire the administrators or teachers upon
a termination of the management agreement; (6) the term of the management agreement is more
than five years; and (7) the management agreement provides for a significant penalty on
termination that would compromise the school’s ability to terminate the agreement, such as a
lump sum penalty or loss of facilities, equipment, curriculum, use of name, or similar penalty.
Since development of the issue of private benefit requires a consideration of all the relevant facts
and circumstances, this is a lengthy Guide Sheet. Upon completion of the Guide Sheet, a
conclusion should be drawn based on a weighing of all the relevant facts and circumstances.
Formation and Operation
1.a. Has the school begun operations or has it disclosed when it will begin operations?