Fighting Nonprofit Abuses

A top Senate aide pursues tough questions about charities

Leaning forward, head down, Dean A. Zerbe moves briskly through the Senate Dirksen Office Building, through a room

where a sign beside a coffeepot says “Senators Only,” and into a crowded hearing where TV lights cast a glare in his face. He whispers in someone’s ear, flashes out of the room, and darts down a hallway.

He looks so clearly in command it is not surprising that an eager young staff member, passing him in the hall one day, paid Mr. Zerbe the ultimate Capitol Hill compliment by mistakenly calling him “senator.”

While Mr. Zerbe is the motor that keeps the ambitious nonprofit agenda of Sen. Charles E. Grassley churning, he never loses sight of his role as a Senate staff member. After all, he notes, Mr. Grassley, a Republican, is “the one who gets over 70 percent of the vote,” from his constituents in Iowa. “I don’t.”

Shaping Legislation

Still, as senators prepare this week for their third hearing in the past year on charities and foundations, it is Mr. Zerbe, 40, a senior tax lawyer and investigator for the Senate Finance Committee — which Mr. Grassley chairs — who is widely viewed as the central character shaping what happens behind the scenes.

Since he joined the committee’s staff in 2001, he and Democratic aides have met with nonprofit leaders nearly 500 times, and in the past year he has made about 20 speeches at nonprofit gatherings. He has also started more than a dozen investigations of charitable activities that have long drawn little attention on Capitol Hill, such as the tax breaks donors take for gifts of land and deals between charities and insurance companies. And he led Senate aides in drafting a memo last summer that had more than 200 ideas for overhauling tax laws that govern charities and foundations — as well as their boards and donors.

Underlying his activities: a strong belief that current law has too many loopholes that allow donors, trustees, and nonprofit executives to use tax-exempt money for purposes that have little to do with charity.

Senator Grassley has given Mr. Zerbe latitude that is unusually wide on Capitol Hill. He says he knows he can count on Mr. Zerbe’s skills, which he honed through some of Congress’s most high-profile investigations into wrongdoing at corporations and in government.

“If Dean smells smoke, he knows there’s a fire,” Senator Grassley says. “And I know he’s going to put the fire out.”

Nonprofit leaders recognize Mr. Zerbe’s influence — so much so that few will speak on the record with more than words of praise. But in private, charity leaders and lobbyists for nonprofit groups say that in some cases, Mr. Zerbe’s work has amounted to more smoke than fire.

Those officials say that several of the wide-ranging investigations he and other Finance Committee staff members have pursued have started with a bang but not yet accomplished much — and they fear that some inquiries have raised suspicions that unfairly taint the public’s view of all charities.

‘Lazy Intellectualism’

Mr. Zerbe dismisses such concerns and says he is confident that his work will lead to a significant overhaul of nonprofit laws. With the backing of Senator Grassley, he hopes to put in place new rules that would force charities to disclose more information about their operations and help determine whether certain groups deserve to keep their tax exemptions. He also aims to help speed through legislation this year designed to end specific nonprofit legal abuses he has found in his investigations.

After spending the past several years looking closely at nonprofit organizations, he says he is growing increasingly frustrated by what he sees as a paucity of original ideas from nonprofit officials.

“I’ve never seen so much lazy intellectualism,” Mr. Zerbe says. “I don’t know when these charity people are going to get it, but we need to build more accountability into the nonprofit world if people are going to get these big tax breaks.”

Raising Questions

Provocative, unpredictable, and sometimes confrontational in both his public and private comments, Mr. Zerbe bubbles over with ideas and emotion. His methods of surprising people and raising a range of issues, some of which he admits lawmakers will probably never put forth in legislation, are meant to draw attention, challenge conventional wisdom — and persuade nonprofit leaders to take strong steps to correct problems lawmakers see.

In his role as an investigator, Mr. Zerbe sometimes comes across as intimidating to nonprofit officials who are not accustomed to having their organizations examined. Before he sits down with nonprofit leaders, Mr. Zerbe reads informational tax forms and does other research about their organizations. A few weeks ago, a colleague of Senator Grassley asked Mr. Zerbe to provide some information on a foundation whose top official had requested a meeting to discuss a broad charity topic. Mr. Zerbe pointed out three illegal tax shelters on the organization’s tax filing.

While Mr. Zerbe’s methods do not always sit well with nonprofit officials, his work has drawn the respect of many of his colleagues on Capitol Hill and at federal agencies. His inquiries into big corporations and wealthy foundations — areas sometimes thought to be off-limits for Republican staff members to probe because they represent the interests of so many well-to-do Republican donors — are so exhaustive that House and Senate aides jokingly named him “Best Democratic Staffer” at a holiday party last year. In April, at a meeting of several hundred nonprofit tax lawyers from around the country, Catherine Livingston, an Internal Revenue Service lawyer, walked up behind Mr. Zerbe and hugged him.

“You’re like a phenomenon,” she gushed. “People talk about you all around our building. They’re like, Deeeeeeean!”

Iran-Contra Scandal

From his earliest days on the Hill, Mr. Zerbe has gravitated to high-profile inquiries. As a 20-year-old aide in the House of Representatives, Mr. Zerbe worked with House and Senate staff members as they persuaded members of Congress to freeze government spending on defense during the cold war after discovering excessive spending at the Department of Defense. A year later, in 1986, Mr. Zerbe and his colleagues in the Senate and House got word that the United States was selling arms to the Middle East and diverting some of the proceeds to supply Nicaraguan rebels with military support. The inquiry, conducted mostly by others, led to what was known as the Iran-Contra scandal. When news of it broke, causing a stir around the world, Mr. Zerbe knew he had found his calling.

Raised in a lower middle-class home in Santa Monica, Calif., Mr. Zerbe grew up believing he needed to fight hard to overcome his circumstances. He became a scrappy and tireless student of whatever he pursued, practicing piano six hours a day through much of his childhood and graduating high school at age 15 to pursue a career as a concert pianist, then putting himself through film school in part by performing in jazz bars.

Film school taught Mr. Zerbe how to collaborate with others, he says, and to connect disjointed and sometimes complex material into a story that many people could follow — two skills that he uses frequently in his current job.

Mr. Zerbe meets every day with Democratic aides on the Finance Committee, and brings people from the House Ways and Means Committee, the IRS, the Treasury Department, and Congress’s Joint Committee on Taxation in to discuss ideas. He also understands the importance of taking complex legal terms and reducing them to language the average American can understand. And he knows how to tell — and sell — a story.

“I learned long ago that you could write to the Pentagon until you’re blue in the face, but if you get one segment on 60 Minutes or 20/20, people will get it,” Mr. Zerbe says. Every year, he helps get Mr. Grassley’s work mentioned dozens of times in national newspapers and on TV. At a Senate hearing on nonprofit abuses, in April, he persuaded Senator Grassley to hold a stuffed antelope head to draw news-media attention. The gimmick worked, garnering the incident prominent notice in numerous publications.

Many members of Congress expect their subordinates to act like they do and fall in line behind them, but Senator Grassley allows his closest aides enormous freedom to look into problems they discover and come up with ways to fix them. On the surface, the senator and his charity investigator could not be more different. Mr. Grassley chooses his words carefully, looks people in the eye, and uses analogies from his years as a farmer to get his points across.

Mr. Zerbe has so much energy and so many appointments scheduled and projects in the air, he frequently works 13-hour days, pausing only to fire off his trademark unpunctuated, one-line e-mail messages from his BlackBerry. He says he often gets his most meaningful work done while meeting with people to talk about his investigations over late-night dinners. In addition to overseeing the Finance Committee’s nonprofit inquiries, Mr. Zerbe heads the committee’s oversight of the Internal Revenue Service, investigates corporate corruption, and is playing a key role in introducing new rules to regulate interstate commerce. Working for the chief tax counsel, Mark Prater, Mr. Zerbe is also responsible for handling about one-fourth of the technical tax issues that come up in Senate bills. The furious pace Mr. Zerbe keeps has led Mr. Grassley to refer to him as the “white tornado.”

Trimming the Budget Deficit

Part of Mr. Zerbe’s job is to come up with ways to reduce the increasing federal deficit. He does that in part by trying to close tax loopholes and shut down tax shelters and scams. He did not set out to find those sorts of problems in nonprofit organizations, he says, but once he started looking into allegations of abuse, he found many questionable practices.

“I didn’t wake up thinking I wanted to go get charities,” Mr. Zerbe says. “This was here before me, and a lot of streams have fed the river we’re at now.”

Following the terrorist attacks of September 11, 2001, when the American Red Cross set aside some of the donations given for victims’ families for future catastrophes without telling donors, the Senate Finance Committee started an investigation into activities at the organization. Then came a series of well-publicized news accounts of sweetheart deals involving foundation officials, donors, and trustees, excessive compensation of nonprofit officials, and other improper activities that convinced lawmakers that the nonprofit world needed a closer look.

Soon, members of the Finance Committee were not the only ones asking questions. The House Ways and Means Committee opened an investigation, the Internal Revenue Service announced that nonprofit tax scams were happening with increasing frequency, and Congress’s Joint Committee on Taxation began raising questions about whether donors were exaggerating the value of their gifts to take bigger tax deductions than they deserved. While some nonprofit officials have tried to portray Mr. Zerbe as the lone voice arguing for increased charity regulation, he is clearly not alone.

Still, Mr. Zerbe feels the need to clarify that he has no ax to grind with charities. “For me, this is part of the tax code,” he says. “We do oversight of defense, corporations, all sorts of things.” He says he brings an equal fervor to all his work and is motivated by fixing abuses he sees.

Certain practices of charities and foundations clearly bother Mr. Zerbe more than others. He is particularly put off that he has heard so few suggestions from nonprofit officials, lawyers, and accountants about how to fix problems in charities and foundations. Instead, he says, many people only give reasons why they think many of the more than 200 ideas proposed by the Senate Finance Committee’s staff members last summer will not work.

Mr. Zerbe tries to make light of the situation, dividing many of the nonprofit people he has dealt with into three camps — what he refers to as ostriches, Luddites, and fig-leaf reformers. Ostriches, he says, deny problems; Luddites believe there is no need for change but advocate stiffer enforcement of nonprofit laws; and fig-leaf reformers come up with ideas that appear to offer solutions but that actually allow problems to persist.

But the reluctance of some nonprofit officials to go beyond issues that staff members raised in their memo clearly bothers him, saying that members of the Finance Committee could “walk away from all this at any time.” If that happened, Mr. Zerbe says, charities would lose out because several legislative proposals designed to spur charitable giving — including a provision encouraging older people to give money from their individual retirement accounts to charity — would not get introduced. But several measures designed to wipe out specific nonprofit abuses would find their way into other bills, he says, because they can help the federal treasury raise money.

‘Dirty Sock Donations’

In part because Mr. Zerbe led the committee’s investigation on the implosion of Enron, he has little tolerance for nonprofit groups that act in ways that are illegal for corporations, such as providing tax-free perks to their executives.

“Why is it that nonprofits can pay for country-club memberships when corporations can’t even deduct those fees?” he says.

Americans who inflate the value of their clothes and other household items they donate to charities — Mr. Zerbe calls them “dirty sock donations” — led him to look into how many donated clothes get distributed to people in need. One of the 19 books on his nightstand at home, The Travels of a T-Shirt in the Global Economy, has a chapter that discusses how clothing donations from the United States make their way to Africa and other countries. Mr. Zerbe says he is in conversations with several charities about how many of the donations they receive get sold to middlemen, bundled, and shipped to Africa, a process that Mr. Zerbe says has allegedly “destroyed tens of thousands” of jobs for African seamstresses.

Congress’s Joint Committee on Taxation believes that changing the rules for how much people can write off when they make donations of apparel and other household items could save the federal treasury about $1.9-billion over nine years. The tax committee has proposed limiting each taxpayer’s tax deduction to $500 for any gifts of clothes or other household items. As a trade-off, Mr. Zerbe has suggested putting the IRA legislation — estimated to cost the federal treasury about $3.1-billion over 10 years if it were put into law — into proposed charity legislation.

“What do you want more?” Mr. Zerbe asks charity leaders hypothetically. “Your dirty-socks contribution or the IRA rollover?”

‘Fear Factor’

Criticism that Mr. Zerbe is a man who has lots of ideas but has failed to kick-start charity legislation started to fade after he helped push through a measure last fall intended to put an end to inflated write-offs for car donations and intellectual property.

Several similar measures — including one that Senators Grassley and Max S. Baucus, the Finance Committee’s top Democrat, introduced last month to crack down on people and companies that improperly benefit from charity-owned life-insurance policies — are expected to get the attention of lawmakers this summer. And as the possibility of more legislation looms, Mr. Zerbe’s profile is expected to grow.

“A lot of people think they can roll Dean, but look at what happened to the Nature Conservancy, credit-counseling groups, and the car-donation guys,” says Rick Grafmeyer, a Washington lobbyist who has worked for colleges, hospitals, foundations, and other nonprofit organizations, referring to groups or coalitions that have faced intense scrutiny in the past year. “Those victories just add to Dean’s fear factor.”

Although Mr. Zerbe insists that he has the best job in the world for someone who loves to uncover abuses that cost the government money, he has entertained ideas of what he might do later in his career. With his experience on Capitol Hill, he could easily go into private practice and make more than the $125,000 a year he earns now.

Years ago, Mr. Zerbe considered running for a Congressional seat in Nebraska, where he was born. Like any good politician, he will not rule out the possibility of someday running for office. But when the idea of entering politics came up one night when he and several colleagues were having dinner, one of those in attendance, a former Senate aide and now a member of Congress, wondered aloud, “Why would any of you run for office? You would lose all the power you have.”