Charity and Foundation Officials Offer Criticism and Support for Proposals on Nonprofit Regulation

By Brad Wolverton

As Senators consider new legislation to stomp out legal abuses at charities and foundations, key Senate aides met on Thursday with about 100 nonprofit officials to solicit their views on ideas for changes that have been floated in the past month.

Many participants in the discussion -- which was organized by aides to the Senate Finance Committee following its hearing last month on charitable abuses -- agreed on the need for an increased appropriation to the Internal Revenue Service to assist in enforcing charitable improprieties and called for extensive changes to informational tax returns, which could help nonprofit groups become more transparent to prospective donors, they said.

But many nonprofit officials questioned the role of lawmakers in setting requirements for how nonprofit organizations should be governed, including how large boards of directors should be and what type of information charities should include on their informational tax returns, 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 get more responsibility for overseeing charities -- including administering a charity-accreditation program -- when IRS officials say they already have trouble monitoring 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, did little to dispel any notion that lawmakers might back down from major legislative changes. He said that he and other senators intend to introduce legislative changes "quickly, perhaps even this year depending on other factors." He added, however, that more substantive regulatory action "may take more time to refine."

Last month, a day before the Senate Finance Committee held its hearing to open a comprehensive review of nonprofit organizations, aides to the committee circulated a discussion draft, in which they floated more than 200 ideas concerning how government might start regulating the activities of charities, foundations, and donors.

Nonprofit officials who have responded to the discussion draft -- and those who spoke in Thursday's meeting -- seem to agree with much of its tone and intent. But they express concerns with certain parts of the document. Among the topics that elicited the most concerns:

• A five-year review of tax-exempt organizations. Aides to the Finance Committee suggested in their discussion draft that charities should have to start reapplying to the IRS every five years to maintain their tax-exempt status. Many groups, including the Association of Fundraising Professionals, in Alexandria, Va., oppose the idea. The proposal would "prove onerous for both tax-exempt organizations and the IRS," the fund-raisers' group writes in its response to the Finance Commitee. 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 hearing last month that he wants to place limits on donor-advised funds to ensure they are not misused 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 how, when, and 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 at least 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.
  
  The United Way of America and other groups said that requiring donor-advised funds to only accept gifts of cash or stock -- and requiring them to distribute 5 percent every year -- would impose too many limits on the funds.
  
  
• Sweetheart deals. The discussion memo suggested that the government should 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 given charities, particularly smaller groups, goods and services at substantially below-market rates, it said.
  
  
• Nonprofit spending. In the discussion draft, Senate staff members suggested that the IRS might want to set a rate for how much nonprofit groups should 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."
  
  

To see copies of the comments submitted to the Senate Finance Committee, go to http://finance.senate.gov/sitepages/round.htm.