Nonprofit Leaders Express Concern About Some Ideas Advanced by Senate Aides

August 5, 2004 | Read Time: 6 minutes

Washington

As senators consider new legislation to stamp out legal abuses at charities and foundations, key Senate aides met late last month with about 100 nonprofit officials to solicit their views on possible changes to rules governing the nonprofit field.

Many of the comments from nonprofit officials did not focus on key issues that initially prompted members of the Senate Finance Committee to open a comprehensive review of nonprofit organizations in June, including allegations of excessive compensation, abusive tax shelters, and discrepancies between the value of donated goods that charities receive and the amount that donors are allowed to write off on their taxes for making the contributions.

Most of the participants in the discussion, which was organized by the Senate Finance Committee, agreed on the need for an increased appropriation to the Internal Revenue Service to assist in enforcing rules against charitable improprieties. Those who spoke at the meeting also called for extensive changes to informational tax returns, which could help nonprofit groups become more transparent to prospective donors.

But many nonprofit officials questioned the role of lawmakers in setting requirements for how nonprofit organizations should be governed, including what type of information charities should include on their informational tax returns, how large boards of directors should be, and how much compensation groups should be allowed to pay employees and board members, according to people who attended the meeting, which was closed to the public.

Some nonprofit officials also expressed concern over whether the Internal Revenue Service should be given more responsibility for overseeing charities — including administering a charity-accreditation program — when IRS officials say they already lack the time and budget to monitor the activities of the country’s 950,000 charitable organizations.

But Sen. Charles R. Grassley, Republican of Iowa and chairman of the Finance Committee, who spoke briefly to those who attended, dispelled any notion that lawmakers might back down from the major legislative changes they have floated in the past two months. He said that he and other senators intend to introduce changes “quickly, perhaps even this year, depending on other factors.” He added, however, that more-substantive regulatory action “may take more time to refine.”

Controversial Topics

After the meeting, aides to the Senate Finance Committee said that they did not expect to hold further hearings or formal meetings on charitable abuses, but that they planned to continue speaking with key nonprofit officials as they help shape possible legislation.

In June, a day before the Finance Committee held its hearing on charitable abuses, aides to the committee circulated a discussion memorandum, in which they suggested more than 200 ideas concerning how government might increasingly regulate the activities of charities, foundations, and donors (The Chronicle, July 22).

Nonprofit officials who have responded to the discussion memo — and those who spoke at last month’s meeting — seem to agree that some form of additional charity regulation is needed to help clean up malfeasance in the field. But they express concerns about certain parts of the document. Among the topics that elicited the most concerns:

A five-year review of tax-exempt groups. Aides to the Finance Committee suggested that every five years charities should have to submit financial statements and other written documents to the Internal Revenue Service to maintain their tax-exempt status.
“It is a privilege and not a right to continue operating for the public’s good,” Senate aides wrote in the discussion draft.

Many groups oppose the idea of making charities reapply every five years to maintain their tax-exempt status.

The proposal would “prove onerous for both tax-exempt organizations and the IRS,” wrote the Association of Fundraising Professionals in its response to the Finance Committee. And a processing or filing fee suggested as part of the review process, the association says, is “unwarranted and untenable.”
Donor-advised funds. Senator Grassley said at the June hearing that he wants to place limits on donor-advised funds to ensure they are not used by the donors who set them up to pay for personal expenses. Donor-advised funds allow people to donate cash, stock, or other assets to special accounts, claim a charitable deduction on their federal income taxes, and then recommend to which charities the money in the account should be distributed.
Finance Committee aides also have suggested that lawmakers might impose a distribution requirement on donor-advised funds, requiring donors to give away an average of 5 percent of the net assets in their funds to charity every year, in much the same way that foundations must disburse their assets. They also want to disallow contributions of real estate to donor-advised funds.

Few nonprofit officials at last month’s discussion addressed the Finance Committee’s suggestions on changing rules for donor-advised funds, according to several people who attended the meeting. But the United Way of America and other groups said in their written responses to the Finance Committee’s suggestions that requiring donor-advised funds to accept only gifts of cash or stock — and requiring them to distribute 5 percent every year — would impose too many limits on the funds. The United Way of America proposed that a 5-percent payout, if necessary, should be applied to the total annual distribution of a charitable organization’s donor-advised funds — not to each fund every year.
Sweetheart deals. The discussion memo suggested that the government stiffen rules designed to prohibit charity officials from gaining undue financial benefits for themselves, their friends, and their relatives through their nonprofit work — and impose penalties for those who abuse the system. And it suggested that a law designed to prevent “self dealing” by foundations needs to be extended to cover charities.
Independent Sector, a coalition of about 600 nonprofit groups and grant makers, said that applying such rules to charities could be “extremely detrimental” to a number of charities that perform valuable work. Trustees and other “insiders” often give charities, particularly smaller groups, goods and services at substantially below-market rates, it said.
Charity performance. In the discussion memo, Senate Finance Committee staff members suggested that the Internal Revenue Service require groups with budgets of $250,000 or more to spell out their goals and measure their progress in fulfilling their mission — and include that information on their informational tax forms. They also proposed letting the IRS oversee an accreditation program for charities and suggested that the federal government might want to give preference in awarding grants and contracts to groups that can prove they are following “best practices” in their operations.
Many people who responded to the Finance Committee’s suggestions questioned the appropriateness of using a tax-reporting form to assess how well a charity carries out its mission and said that letting the IRS oversee an accreditation program was unwise.

In comments she wrote to the Finance Committee, Evelyn Brody, a law professor at Chicago-Kent College of Law, said that requiring charities to adhere to accreditation standards would place an “unnecessary burden” on charities and cause small groups that lack money to pay for accreditation to appear unworthy of donor support.
Nonprofit spending. In the discussion draft, Senate staff members suggested that the IRS might want to limit how much nonprofit groups may spend on a typical meal, travel, or lodging, just as the government does for its employees.
That might seem reasonable, wrote Audrey R. Alvarado, executive director at the National Council of Nonprofit Associations, in Washington, in her comments to the Finance Committee. But “unlike the government, foundations and charities do not have the purchasing power to negotiate low rates for travel and accommodations,” she wrote. “If the government wants to impose such limitations, it should extend the use of government rates to nonprofit organizations.”