Taking Aim at Charity

At Senate hearing, nonprofit leaders voice concerns as lawmakers prepare rules to stem abuses

Lawmakers are preparing to introduce an ambitious legislative package that they say could alter the

nonprofit world more than any government action in the past three decades.

For more than a year, as U.S. senators and their aides have delved into abuses they have seen in the nonprofit world, they have spoken with hundreds of charity and foundation leaders and read thousands of pages of documents detailing how changes they seek could hurt charities.

Last week, at the second Senate Finance Committee hearing on the subject in the past 10 months, Internal Revenue Service Commissioner Mark W. Everson raised the stakes in the fight to curb nonprofit abuses when he told lawmakers that indiscretions by nonprofit groups and donors are costing the federal government about $15-billion a year in lost revenue.

At the hearing, senators took aim at charities and foundations that pay excessive salaries to their executives, donors who write off bogus amounts on their taxes for noncash gifts, and wealthy people who bilk the tax system by using nonprofit organizations as a front to help pay for their personal expenses.

Few nonprofit areas were left unscathed, as senators questioned practices at tax-exempt hospitals, colleges and universities, arts groups, social-service organizations, private foundations, and many other nonprofit organizations during the three-hour hearing.

Charles R. Grassley, Republican of Iowa and chairman of the Finance Committee, called the hearing to discuss ways to strengthen charitable governance and reduce nonprofit improprieties that he and other lawmakers say cost the federal treasury money.

The IRS commissioner provided some of the most damning evidence against charities and foundations, calling abuses involving tax-exempt groups “increasingly present” and saying that if Congress does not act soon to end the abuses, public support for charities will “wither.”

“There are increasing indications that the twin cancers of technical manipulation and outright abuse that we saw develop in the profit-making segments of the economy are now spreading to pockets of the nonprofit sector,” Mr. Everson said.

Mr. Everson estimated that American taxpayers write off between $15-billion and $18-billion a year more than they should be allowed to set aside tax-free because of laws that he said allow taxpayers to inflate the values of land, art, and other noncash items they donate.

George K. Yin, chief of staff of Congress’s Joint Taxation Committee, told the senators that the federal treasury could bring in more than $2.5-billion over the next nine years if donors limited their deduction from property to the portions they own outright, rather than the fair market value, as they can do now.

Noncash Gifts

The idea that lawmakers might consider imposing new rules to prevent inflated tax write-offs for noncash items drew heated debate at the hearing and has stirred nonprofit leaders across the country into action.

At least four senators, including Orrin G. Hatch, Republican of Utah; James M. Jeffords, an independent of Vermont; Rick Santorum, Republican of Pennsylvania; and Charles E. Schumer, Democrat of New York, voiced concerns that any changes could discourage legitimate charitable giving.

“I do not accept the concerns about noncash donations,” Mr. Jeffords said. He said farmers, for example, should be permitted to donate land and take a full tax deduction for the value of the land. “The government has no problem taxing that land at its fair market value. It can’t have it both ways.”

Senator Grassley said after the hearing that he believes many members of Congress will join him in making changes to end abuses where donors take excessive tax deductions for noncash items.

“We’re talking about giving people a tax deduction based on an independent assessment of the value of property,” the senator said. “Who’s going to argue with that?”

Charity officials certainly don’t like it. At the hearing, Diana Aviv, president of Independent Sector, whose coalition of 500 charities and foundations has established a national panel of 175 nonprofit experts to work with senators on ways to improve charitable governance and accountability, testified that her panel is “deeply troubled” by the Joint Taxation Committee’s proposal to limit the tax deduction people can take on gifts of property.

Meanwhile, many other nonprofit officials and tax-planning experts say they are troubled that senators would consider a rule that they say puts noncash gifts in jeopardy.

“Every university in the country — every major donor who has any influence on any member of Congress — is going to be all over this,” says Robert F. Sharpe Jr., a planned-giving consultant in Memphis. “The nonprofit sector will mobilize to protect gifts of noncash property.”

Some signs indicated that was already happening. At its annual meeting last week, the Association of Fundraising Professionals, which has 26,000 nonprofit members, set up phone banks from which many of its members placed calls to Congressional offices, urging lawmakers to preserve the current rules for noncash contributions.

Just how much money is at stake for charities is difficult to tell, in part because of the way the IRS keeps records. But in 2002, the most recent year for which information is available, IRS data show that noncash contributions constitute 24 percent — or $34-billion — of the charitable donations made by people who itemize on their tax returns. That sum includes gifts of stock, which several tax experts say account for the majority of noncash donations. The proposed rules would not affect donations of stock.

Even if a small percentage of the billions that come in through noncash donations are held back from charities because of a change in regulations, it could harm many groups, says Sam Singh, president of the Michigan Nonprofit Association, in East Lansing, a coalition of about 700 groups. He said that colleges, hospitals, and conservation groups are among the organizations in his state that attract the most real-estate gifts.

In Southern California, where the real-estate market has soared in the past decade, institutions like the University of California at Los Angeles have put an increased focus on getting donors to make outright gifts of their property, or to bequeath their homes to the university. The efforts have paid off, as about $5.8-million, or one-fourth, of all planned gifts the university attracted in its 2004 fiscal year were donations of real estate, says Rosalind Shumway, the university’s senior associate director of gift planning.

“Many of our donors are interested in these types of gifts because their real-estate holdings constitute a majority of their assets,” Ms. Shumway says. “Not everyone is completely motivated by the tax deduction, but if you lessen the tax deduction it would certainly have a negative effect on donations.”

Compensation Issues

Several senators at the hearing also took issue with how much money and how many perks nonprofit officials receive. Mr. Everson said the IRS is currently reviewing the compensation practices at more than 2,000 charities and foundations and that charity officials who take excessive salaries remain an area of deep concern.

Mr. Everson also told the senators that the IRS has discovered many abuses by donor-advised funds and supporting organizations — two areas the Finance Committee has been investigating for the past year — and said the IRS is examining the tax returns of more than 300 donors for possible violations of tax laws. He said the service expects to audit many more people in the next year to uncover potential problems with those types of giving.

Donor-advised funds allow people to give cash, stock, or other assets to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how, when, and to which charities the money in the account should be distributed. Members of Congress have criticized donors who take a deduction for gifts they make to donor-advised funds but delay or never make the contribution to charity.

At the hearing, Jane G. Gravelle, a researcher at the Congressional Research Service, said that she had conducted a survey of donor-advised funds at community foundations. She said her survey had found that last year 20 percent of donors did not distribute any money to charity from their donor-advised fund accounts — and that about two-thirds of donors distributed less than 5 percent of the money in their funds annually to charities. Ms. Gravelle also said financial institutions that offer donor-advised funds often charge excessive fees to manage the funds.

Lawmakers have also expressed concerns about “supporting organizations,” which are designed to finance the work of specific charities. Many universities and other large nonprofit groups have supporting organizations that generate revenue by investing in stocks or by operating businesses. More than 45,000 supporting organizations with cumulative assets of approximately $76-billion are now operating, according to Ms. Gravelle. Some lawmakers are concerned that many people who have set up supporting organizations have made loans to themselves and improperly benefited from the groups they established.

Self-Regulation

Many charity officials are working hard to persuade lawmakers to allow the nonprofit world to come up with ways to govern itself more effectively and avoid what they consider unnecessary legislation.

Leon E. Panetta, a former chief of staff in the Clinton White House, suggested that a national accrediting organization, to be run by private organizations, be set up to prevent abuses and raise the standards of accountability in the nonprofit world.

“It would relieve the burden put on the IRS to oversee charities and preserve the independence of the sector,” said Mr. Panetta, who is now co-director of the Panetta Institute, a center for the study of public policy at California State University-Monterey Bay, in Seaside.

But Mike Hatch, the attorney general of Minnesota, testified that self-regulation would not do enough to prevent the widespread abuses he has seen in the nonprofit world. In his state, which has more than 25,000 charitable groups, he said he has caught many organizations spending lavishly on luxury items unrelated to their charitable purpose. One health-maintenance organization, he said, spent $35,000 on a phony trade mission to Brazil; another group purchased season tickets to sports events.

“These activities aren’t criminal, but they are just awfully stupid,” said Mr. Hatch. “We need to do better oversight.”

The Senate Finance Committee has made a broadcast of the hearing available via the Internet. To see it, go to http://finance.senate.gov.