Nonprofit Groups Urge Congress to Curb Tax Shelters, Inactive Funds

Preliminary recommendations from an influential group of nonprofit leaders urge members of Congress to take swift action to fix problems with donor-advised funds, improperly used supporting organizations, and abusive tax shelters — and offer more than 100 proposals for making the activities of charities and foundations more transparent and accountable to the public.

The recommendations drew criticism from some nonprofit observers who say they gloss over several key concerns that lawmakers and the Internal Revenue Service have raised, including excessive tax deductions for gifts of clothing and other household items and abuses of conservation and facade easements.

Among the highlights of the recommendations, which were put together by a committee of more than 175 nonprofit experts organized by Independent Sector, a coalition of charities and foundations:

• Charities and foundations should include far more detailed information about executive and board compensation and the independence of board members on their informational tax forms — but should not be required to place limits on what they pay their top officials or board members.
• First-class travel and the personal use of vehicles and other perks by charity and foundation employees should be discouraged but not prohibited.
• Donor-advised funds should be required by law to give away annually at least 5 percent of their total assets, but each donor-advised account should not have to distribute a minimum amount to charity every year.
• Congress should put in place tighter rules for certain types of supporting organizations, requiring them to distribute 5 percent of their net assets every year to the charitable organizations they support and making them adhere to self-dealing rules and penalties that apply to private foundations. Supporting organizations are designed to finance the work of specific charities. Many large nonprofit groups have supporting organizations that generate revenue by investing in stocks or by operating businesses.

The recommendations come as members of the Senate Finance Committee are completing a yearlong inquiry into abuses at charities and foundations and are expected to propose comprehensive legislation this summer that would attempt to spur charitable giving and help put an end to problems they see in nonprofit organizations.

The nonprofit panel’s work was produced in response to a request from the Senate committee to develop ideas for how to improve governance and accountability in the nonprofit world. The panel’s recommendations are preliminary and must be reviewed by more nonprofit experts before they are submitted to senators in late June.

Even before a comprehensive proposal is released in the Senate, some lawmakers want to move quickly to deal with certain types of charitable abuses. Sen. Charles E. Grassley, Republican of Iowa and chairman of the Finance Committee, and Max S. Baucus, of Montana, the committee’s top Democrat, introduced a bill this month to crack down on individuals and companies that improperly benefit from charity-owned life-insurance policies.

Senate aides say they intend to introduce other measures soon to deal with abusive tax shelters and donors who take tax deductions for contributions to donor-advised funds but fail to distribute money to charities. Lawmakers also expect to put forth legislation that would place tighter restrictions on certain types of supporting organizations.

More than 45,000 supporting organizations with cumulative assets of approximately $76-billion are now operating, according to the Congressional Research Service — and some members of Congress are concerned that many of those groups do not distribute money to the organizations they support and that some people who have set up supporting organizations have made loans to themselves and improperly benefited from the groups they established.

Cracking Down on Donors

Some of the strongest language in the 49-page document concerns ways to prevent donors from personally benefiting from organizations they set up to support charities.

For example, the recommendations suggest imposing a penalty on managers of donor-advised funds who “knowingly and willingly” make payments that reimburse donors for their expenses. Donors or their advisers who receive any compensation from such charitable funds should also be penalized, the document says.

To help prevent abuses of donor-advised funds, the recommendations call on members of Congress to prohibit grants, loans, or other payments from donor-advised accounts to any private foundation. The document also suggests giving the federal government the authority to suspend the tax exemption of a donor-advised fund manager — such as a community foundation — that commits “multiple egregious or flagrant violations” in which donors personally benefit from their association with a donor-advised fund.

To prevent donors from improperly benefiting from supporting organizations they set up, the nonprofit panel makes several proposals for increasing the transparency and accountability of supporting organizations, including a requirement that every organization give the groups it supports an annual report of its activities.

Some of the panel’s recommendations drew praise for the creative ways they responded to problems lawmakers have raised. For example, aides to the Senate Finance Committee have expressed concerns about noncash items that are difficult to value and the possibility that some taxpayers overestimate the value of noncash gifts to charities.

The panel suggests that Congress put in place rules that would tighten the restrictions on who is permitted to appraise property given to charity. In addition, the panel believes penalties on taxpayers who claim inflated tax deductions should be expanded.

But the majority of suggestions in the document call on nonprofit organizations — not the federal government — to clean up their own operations, in part by clarifying their financial reporting.

The document suggests about a dozen ways groups could become more transparent by providing additional information on their federal tax returns.

One change calls for revising the tax form to require organizations to report the base salary, benefits (including insurance and car or housing allowances), bonuses and the criteria for awarding them, and other types of compensation of the organization’s five highest-paid employees.

Another idea considers amending the tax form to give groups that want to report more information about their charitable activities a place where they could do that on the form.

Diana Aviv, president of Independent Sector, says that the nonprofit panel will continue to discuss ideas about donations of clothing and other household items, conservation and facade easements, and accreditation programs that might help make it easier for the public to decide which charities deserve their money.

To see a copy of the nonprofit panel’s work, go to http://www.nonprofitpanel.org.