Curbing Charity Abuses

Tuesday, March 25, at 12 noon, U.S. Eastern time

Dean A. Zerbe is the former senior counsel to Sen. Charles E. Grassley, an Iowa Republican and the former chairman of the Senate Finance Committee.

In February, Mr. Zerbe left that position to work in the Washington office of the Alliant Group, a Houston tax-consulting company.

In addition to helping to pass the Pension Protection Act in 2006 -- which instituted new curbs on nonprofit activities as well as new giving incentives -- Mr. Zerbe also helped Mr. Grassley undertake numerous investigations of charity abuses.

A transcript of the chat follows.

Peter Panepento (Moderator):
    Welcome to today's online discussion with Dean Zerbe. As many of you know, Mr. Zerbe was a key player in Congress's push to regulate the nonprofit sector as a top aide to Sen. Charles Grassley of Iowa. He recently left that position for new job with Alliant Group in Washington and he's here today to take your questions for the next hour. I expect this to be an interesting discussion. So let's get started.

Question from John C. McGee, Nonprofit Consultant:
    With nonprofit organizations coming in various sizes, shapes and missions, how do you see legislation (regulatory or tax) being tailored to account for the diverse nature of the sector and what steps will be built into those legislative actions to insure that the message is delivered to the entire sector and not just those who have staff who can monitor the activities of Congress?

Dean A. Zerbe:
    There is always a tension in dealing with actors of different sizes when it comes to legislation and regulations. I am seeing first-hand in my new job the difficulties small and medium businesses are having grappling with a tax code and regulations that is often written with an eye toward large corporations.

That said, there are real problems in the charity sector that continue to need to be addressed. These problems sometimes are limited to big actors but many are not (the abuses of façade easements and conservation easements was particularly an issue in small charities). I worry that too often many in the charitable sector think that they have uttered some all-encompassing truth with the statement “one size doesn’t fit all” in response to policy proposals. While solutions can be tailored to deal with fair concerns, the charity community needs to recognize that just as good work is done by big and small charities, problems and abuses come in all sizes as well.

As to your good point about getting information out to all charities, particularly small charities, I go back to the staff discussion draft that called for funding for education and training for charities. It was very much with small charities in mind that that was drafted. In addition, I think it is a natural role for community foundations to show leadership at the local level. My hope is that Congress and the IRS will pick up the call for education and training from the staff discussion draft and put real teeth into it in the months ahead.

Peter Panepento (Moderator):
    A quick reminder: You can ask Dean a question at any time during this discussion by hitting the "ask a question" link on this page. He'll try to answer your query as quickly as possible.

Question from Ron, Corporate Business Consultant:
    Corporate surplus real estate donations are increasing. There is a 501(c)(3)that has completed $50,000,000 in donations using what they claim to be an IRS santioned program they call the 561 Exchange. The following is right from their web site. "The 561 Exchange is an IRS approved transaction that is different from the 1031 Exchange and is also different from a traditional charitable contribution. In the 561 Exchange, title is conveyed in return for a cash benefit usually, exceeding the cash benefit of selling it at list price".

I have called IRS and they tell me there is on such santioned program.

My questions, have you ever heard of an IRS santioned 561 Tax Exchange Program. How can your get FMV appraisals 2 times higher that the "list price" when the property has been on the market for in some cases 3 years. Is there something deceprive here. Something seems wrong.

Dean A. Zerbe:
    The”561 exchange” seems to be the newest gift from the weasels. As far as I can tell from looking at the material on the web, it seems to be trying to put new wrapping paper around the current laws regarding charitable deductions and trying to package it as something new (your “cash benefit” is your charitable deduction). The websites refer to IRS publication 561 but IRS publication 561 is just the IRS pub “Determining the Value of Donated Property” – the 101 of valuation. As you may know, the Congress did a lot of work here in increasing penalties as it applies to valuation and the donation of land is something the IRS is watching closely. I agree with you that anything that suggests an FMV appraisal of 2 times “list price” as you note raises huge red flags.

The key in these land donations is always to have your feet on the ground regarding the valuation (ie get a good honest appraiser with experience in the area) and avoid the temptation to pick a number and find an appraiser who will bless it. I would suggest you might want to talk (or email they have websites) to JJ McNab and Jay Adkisson at quatloos (they both testified before the senate finance committee on charity scams) and run it by them. If you want to do a legitimate donation or conservation easement happy to steer you in the right direction. I appreciate you bringing this to folks attention – its important to remember there are people out there who are actively soliciting this stuff on a daily basis.

Question from Layton Olson, Howe & Hutton, Ltd. Chicago, Law firm for Associations representing SME charitable and trade associations.:
    How will electronic data elements from current and 2008 990s as well as other IRS data link with "data exchange" models used for state and local oversight and planning purposes? With a particular focus on outcomes-tracking by NFP's similar to learning outcomes-tracking of educational institutions (No Child Left Behind). Thank you.

Dean A. Zerbe:
    I’m not certain I understand this question. I think the question is getting to outcome tracking – the new 990 will help. I’ve always thought that to get good reporting from the charities the 990 and other reporting is perhaps not the easiest way to accomplish it (not to say there shouldn’t be some reporting). But to get at apples and apples reporting on outcomes, I’ve been of a mind that that needs to come from leadership in the charitable sector. It would be wonderful to have leading donors (esp. private foundations and community foundations) to ban together for common requirements on reporting outcomes – 1) to lessen the multitude of reporting for charities, particularly small charities; and 2) have common measurements for donors and the public to consider (and it might serve as a useful tool for boards of charities to consider in evaluation). Perhaps establishing or developing common reporting requirements for different types of charities is something that the multitude of university programs in philanthropy could spend some useful time doing.

Question from Deborah, small national nonprofit:
    In order to receive funds from the Combined Federal Campaign, a charitable organization must spend less than 25% of its revenue each year on administrative and fundraising costs. When OPM set this standard, it influenced United Way campaigns across the nation to also adopt the same standard. Now, charity watchdogs and regulators publicize the same ratio to donors, leading the public to believe that a charity’s legitimacy, honesty, and effectiveness can be measured by a simple ratio. Many studies by universities and foundations have shown that such “efficiency comparisons” do not measure efficiency or accountability at all, and may actually be "fundamentally misleading and even dangerous to the sector" because they favor the large, well-known organizations with the most popular causes and unintentionally undermine program services. The unscrupulous or fly-by-night 501c3s can easily hide behind creative accounting, while the policy encourages some good non-profits to under-invest in critically important activities such as good accounting, compliance, governance, staff development, strategic planning, and evaluation.

Should the CFC, United Way, and other watchdog organizations change their policies? How can we change the way policy-makers, donors, and the public view a charity’s value and contribution to the community without using financial information in a meaningless or even negative way?

Dean A. Zerbe:
    The CFC – one of my great regrets in leaving the Congress that I didn’t do more in this area to clean it up. I think it is a complete gum-up and OPM should be embarrassed by what a goat rodeo they have made of the CFC. Hats off to the good reporting of chronicle of philanthropy on this matter.

You make several good points (particularly about the unscrupulous getting around the rules) but I must admit I (and the public certainly does) still like to see measurements – particularly on costs of fundraising. I think you are right that looking at outcomes and also highlighting that there are fair and legitimate reasons for administration costs should be better considered (particularly in terms of good governance, program oversight, performance, etc.). Perhaps a more nuanced review of what are administrative costs that are legitimate for efficiency etc. I know this is something that the Independent Sector has shown a lot of leadership on and perhaps they can take this up. I think though part of the answer is getting the CFC out of the hands of the folks at OPM – given the leadership of the IRS -- now much more active in governance and reporting -- as well the role of the Corporation for National and Community Service (I think that’s the title?) these would be better agencies (in cooperation with the charities) to come up with a stronger statement of what information should count or not count.

Question from Sonya Behnke, Georgetown University:
    Do you think it is an appropriate role for the government to encourage foundations to allocate more funding into certain endeavors, such as to encourage (or even mandate) giving to rural areas?

Dean A. Zerbe:
    Senator Baucus has certainly done a great deal of good work highlighting the enormous needs for charity and philanthropic work in rural America. I worry that the charities haven’t done as much as they can in response to his call

We already in the tax code have provisions to target charitable giving to particular activities (donations of goods by corporations to assist infants) and certainly do a fair amount of targeting tax benefits to certain communities (think empowerment zones). To target charitable giving to communities that Congress believes are in need is not out of the realm of possibility (Congress did a bit of that with the Katrina legislation).

To mandate giving (say by a private foundation) to certain areas would be a bridge too far. To encourage such giving is a different matter – but one thing to use the bully pulpit another to use the tax code (caution). My sense is that members in both the House and Senate are interested in doing more to encourage charitable giving that will target social needs – either in rural or urban areas. Whether they take additional steps in the tax code to accomplish that its hard to say and may depend on the charities to a certain extent.

Peter Panepento (Moderator):
    A quick note: Sen. Max Baucus, a Democrat from Montana, is the chairman of the Senate Finance Committee. Sen. Grassley is the ranking minority member of that committee and had been its chairman prior to the Democratic party taking control of the Senate.

Question from Kevin Feldman, Nonprofit Consultant:
    After working professionally with nonprofits over the past 20 years, I have met many people who have witnessed regular abuses in the charities where they are employed. Yet, few have ever mentioned the desire to report these abuses to authorities -- not because they are afraid of losing their jobs, but because these caring folks don't want to hurt the organizations that have been serving causes they're passionate about. Can any legislation help to protect good nonprofits from the negative press that typically follows the exposed abuses by a few bad employees?

Dean A. Zerbe:
    I think that if possible working within the charity (and particularly the board -- which may not have a clue that there are problems) is the best route. Its hard to imagine legislation that would inoculate you from the press. The best way to avoid bad press though is to get ahead of the problem, admit it, reform and move on. It will come as a shock to some but the Finance Committee actually had several investigations where we contacted the charity, told them of problems that were occurring and they corrected them without any fanfare. For Senator Grassley, change and improvement is his interest. The sad reality is for many organizations (charities only one example) the only way the wake up is going to happen is through the press. I think the problem is if you let a problem continue on it will only get worse, ultimately come to light, and will be a disaster (particularly because of the "you knew about it and did nothing" factor). Think how much better the Smithsonian would have been if they had encouraged and listened to whistleblowers early on instead of hoping no one would ever turn on the lights.

Question from Frank Granger - state supported higher ed:
    How close are we to ending tax breaks to these religious family businesses. (I have personally witnessed this abuse while on the payroll of a famous TV preacher.)

Dean A. Zerbe:
    Senators Grassley and Baucus just sent off a recent letter to several ministries asking for a series of detailed questions on the operations of certain ministries. The information will be very useful for the Finance Committee to understand better the operations of these large, complex organizations. It is similar to oversight performed by the Finance Committee of nonprofit hospitals and colleges – also organizations that have become far more complex than ever envisioned in the 1969 laws (the last time Congress teeth-to-tail reformed the charitable laws). If you have any information regarding abuses, suggest you contact the Senate Finance Committee at (202) 224 5315. They will be happy to talk to you.

Question from Stacy Caldwell, Dallas Social Venture Partners:
    I have two questions: What are your thoughts about the idea around an SBA for non-profits? http://www.democracyjournal.org/article.php?ID=6601&err=1&err1=1 2. As more people feel empowered to create new social institutions via social entrepreneurship, how can we be certain that the additional organizations strengthen the sector instead of weaken the sector?

Dean A. Zerbe:
    I am strongly concerned about anything that would decouple tax-exempt organizations from the IRS (given the integration of the tax code) when it comes to enforcement of the tax laws. That said, if the interest is to strengthen, improve the sector, if there is a feeling (not an unfair point) that the IRS might not be the best place for such efforts, rather than creating something new perhaps beefing up the Corporation for National and Community Service and having this be in its balliwick might be a better answer. Alternatively, is it possible that it might make sense that rather than turning for the government to answer this, that we look to the natural leaders in the charitable community -- community foundations, leading private foundations, umbrella organizations such as independent sector, council of foundations -- to serve or fund this role. I don't have the answer but I wonder would the charity community be happier hearing guidance from their own sector as opposed to the government?

Peter Panepento (Moderator):
    As we reach the halfway point of today's discussion, I'd like to remind you again that you are welcome to submit your questions for Dean Zerbe at any time. He is offering some very pointed and detailed responses. So here's your chance to get his thoughts on some very important issues.

Question from Jack Siegel, Charity Governance Consulting LLC:
    Do you think Congress will eventually enact legislation mandating a minimum endowment spending rate? If so, will it be limited to colleges and universities, or will it apply to all 501(c)(3) organizations that have a endowments exceeding a specified amount? Thank you.

Dean A. Zerbe:
    I think that will depend to a certain extent to the voluntary response by the colleges. So far, many have taken some real reform and changes. However, much more can be done (speaking here really of endowments over $500 million would be Congress' interests I would think). While minimum endowment spending is an issue for colleges I think there is a significant interest (across the board for all charities) in the "commensurate test" that was raised by Commissioner Evcerson and Deputy Commissioner Miller and then discussed and supported by Senators Baucus and Grassley in their letter that was mostly focussed on reporting. As readers know, the commensurate test in a nutshell is that an organization needs to conduct charitable activities commensurate with its resources. Senator Grassley raised the issue of the commensurate test with the new Commissioner in his questions for the record so it remains a very live wire. So, I guess bottom line, if there was a required spending, it would be for those over a certain dollar amount (say $500 million) and I think the main interest is colleges. I think this reflects that in general we haven't seen a significant number of endowments over $500 million in fields outside of colleges (a little in hospitals but of course that is an ongoing area of review for the committee as well). In addition, the focus on colleges reflects that Congress spends (either directly or through tax breaks) so much to support affordability of college tuition -- so of great focus. By contrast, Congress doesn't spend so much on making it possible for folks to go to art museums (so therefore the metropolitan art museum maybe not a real concern).

Question from Putnam Barber:
    The Pension Protection Act and other recent federal legislation have made numerous changes to the terms and conditions of tax-exemptions and the work of tax-exempt organizations. Do you believe Congress should take a more comprehensive look at the privileges and exemptions afforded to charitable and similar activities?

Dean A. Zerbe:
    As I mentioned earlier, I think Congress is more and more focussed on supporting charities (and donations to those charities) that are helping meet social needs of individuals (particularly with the tough economy). This gets to the question of should we revisit "what is a charity?" I think it would be healthy to look at the question (not deciding yet whether there needs to be a change). I think the charity community should recognize that the public and Congress' view of what is a "charity" is far afield from what is a charity under the law. While not quite on point but as a ballpark example, members and staff were astonished by the gap between what they thought nonprofit hospitals did versus the reality (in regards to some hospitals that were overcharging the poor, engaging in hard debt collection practices, little no charity care, etc.).

I think another area this is coming up is where we are seeing charities more and more getting involved in business -- running shopping malls as a for instance. As I am working with small and medium businesses to lessen their tax burden, it is astonishing to me how often I see them having to compete with a tax-exempt entity doing basically the same work. The 990T being made public, and reporting from the Chronicle of Philanthropy, has been a real eye opener.

Peter Panepento (Moderator):
    A reminder that next week our live discussion will begin a bit later -- 2:30 p.m. Eastern time. We'll be talking with Paulette Maehara, the president and CEO of the Association of Fundraising Professionals live from the organization's annual conference in San Diego.

Question from Bruce Trachtenberg, Communications Network:
    Do you see any irony in that there's been more of a push in Congress to impose potentially costly and restrictive regulations on the charitable sector while over the past many years whole sections of Wall Street have gone unregulated -- a factor contributing to the credit crunch, the frightening number of foreclosures, and our economic downturn?

Dean A. Zerbe:
    During your time period of the "past many years" I don't know if Sarbanes-Oxley was viewed as a walk in the park by Wall Street or the business community when it comes to regulation. In addition, the amount of regulations on the charity sector (10% of the workforce) has been modest. The chicken littles in the charity community have squawked mightily but want to ignore the fact that the IRS was highlighting very significant abuses to Congress (often on the dirty dozen list of top abuses in the entire tax code) involving charities and charitable giving. My discussions with charities is that by and large after they stopped listening to the chicken littles they were able to modify and conform their work and drive on. For the Finance Committee the work has been very balanced -- taking hard looks at everyone. The Committee has conducted vigorous oversight of corporate tax shelters and has passed anti-abuse and anti-shelter legislation in this area that dwarfs the charitable reforms.

I can't take as serious though a suggestion that but for the Finance Committee trying to end the abuse of facade easement donations or high flying at the Smithsonian, Congress as a whole would have been able to prevent the problems of derivatives. There are other committees (committees with jurisdiction right down the plate) that had authority in this area. Your complaint lies elsewhere -- not with the good work of th Finance Committee in addressing abuses in charities and charitable donations.

Question from Lou:
    Grassley is stingy when it comes to his personal charitable giving. Why don't I read about this in the media?

Dean A. Zerbe:
    Senator Grassley is extraordinarily giving to charities. He is a man who came from modest means and yet still does much for charities. I believe you will find if you do a google news search for "grassley" that it was just recently announced that he gave a considerable part of his estate to his beloved school, the University of Northern Iowa (the panthers). Grassley IS stingy when it comes to the taxpayers money -- how taxpayer money is spent and not wasted (department of defense in particular) and how special tax breaks (which are effectively subsidized by taxpayers) are utilized and whether they are effective. I like him stingy when it comes to the taxpayer money, and you should as well. He is not stingy with his own money though in supporting the many good charities in his community. He (and I) both recognize the enormous good that is accomplished by the charities we support.

Question from David Hardy, small nonprofit:
    Do you forsee any material changes with respect to the tax treatment for donations benefiting college athletic programs, donations made for the right to purchase tickets or the availability of tax-exempt bonds to fund college athletic facilities?

Dean A. Zerbe:
    It is something that Congress is interested in. Specifically, what is the benefit that is being realized with the tax breaks in this area -- how is it helping provide good, affordable education, especially for students from working families. One area in particular is can there be better transparency in this area so that the public and the board of the college have a better understanding of all the issues and dollars involved. This is an matter that got somewhat sidetracked by the Finance Committee because of the review of endowments but I suspect Congress will continue to look at it -- possibly as part of overall tax reform.

Question from Juanita Perez, small family foundation:
    What do you think is in store for Foundations in the rest of and in the coming Congress? While Community Foundations are a seperate issue entirely (being treated on the tax front the same as a charity), do you foresee any new regulations of foundations on the legislative calendar?

Dean A. Zerbe:
    Members of Congress remain concerned about foundations that pay family members big salaries for little work as well as many of the abuses that were highlighted in the Boston Globe series several years ago that still have not been adequately addressed (see Rick Cohen's great piece revisiting what has happened to these private foundation's highlighted in the Boston Globe series). In addition, there is concern from some Members who see a possibility of the very wealthy using private foundations as a way to get around the estate tax laws. There needs to be better leadership from the foundation community in this area overall to address these problems. The private foundations should come forward with their proposals of reform and not wait for Congress.

Peter Panepento (Moderator):
    That's a wrap. Thank you to everyone who joined us today. And a special thank you to Dean Zerbe, for taking time from his busy schedule to answer your questions. We'll see you all again next Tuesday at 2:30 p.m. Eastern.