Key Senate Aides Propose Sweeping New Regulation of Charities and Donors

Nonprofit groups and donors could face stiff new regulations and government oversight if proposals floated by a key Senate committee become law. The proposals were issued in advance of a hearing to be held Tuesday by the Senate Finance Committee on recent legal abuses by nonprofit organizations.

The ideas, developed by the committee's staff in what it calls a "draft discussion paper," range from some that would affect all nonprofit groups to those aimed at specific types of organizations. They include:

• Prohibiting charities from making loans or engaging in other transactions that excessively benefit their top officials. Such restrictions now apply only to private foundations. A Chronicle study published in February found that charities had made more than 1,000 loans to top officials in recent years.
  
  
• Requiring all nonprofit organizations to have their tax-exempt status reviewed every five years by the Internal Revenue Service. As part of the review, organizations would have to provide details about their activities and show that they continue to operate exclusively for a valid nonprofit purpose. The committee staff members also suggested that the IRS encourage the development of "best practices" standards, including the authorization of $10-million to support an accreditation system for charities that would be run either by the IRS or an organization it hired.
  
  
• Limiting compensation for top officials at private foundations to the amount federal government employees are paid for comparable work and prohibiting or severely limiting compensation to foundation trustees or directors.
  
  
• Placing limits on donor-advised funds to ensure they are not used for the private benefit of the donor who created them. 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.
  
  
• Eliminating a type of "supporting organization" in which donors can set up their own charities, stack the board of directors with friends, relatives and business associates, and then engage in personal transactions such as borrowing back the assets of the organization. The recommendation follows a February report in The Chronicle uncovering at least a dozen donors involved in such arrangements.
  
  
• Limiting the activities of nonprofit groups set up to provide consumer credit counseling, so that they could no longer be associated with for-profit credit agencies.
  
  
• Cracking down on donors who involved charities in financial transactions that are just tax shelters and have no philanthropic purpose, and on the nonprofit groups that accept such contributions. Charities involved in such arrangements could lose their ability to allow other donors to receive a tax deduction for donating to them.
  
  
• Granting states the authority to bring lawsuits against nonprofit organizations based on violations of federal tax laws governing tax-exempt groups.
  
  
• Requiring chief executive officers of nonprofit groups to sign their organizations' federal informational tax returns under penalty of perjury and increasing the penalties for failing to file accurate returns on time.
  
  
• Granting the IRS the authority to require the removal of any board member, officer, or employee who is found to have violated the rules designed to prevent individuals from benefiting personally from transactions with the organization.
  
  
• Providing $200-million in additional funds to the IRS Exempt Organizations division and providing $25-million in matching grants to states for regulation of nonprofit groups. The money would come from taxes foundations pay on their investment income.
  
  
• Allowing any director of a nonprofit group to pursue a case before the U.S. Tax Court accusing the organization of substantially misusing its assets, and allowing any individual to submit a formal complaint about the activities of a charity to the IRS.
  
  
• Expanding a wide range of disclosure requirements. Those would include requiring nonprofit groups to disclose all "insider deals" and joint ventures with top officials; all partnerships or affiliations; all opinions from lawyers or other tax advisers concerning agreements with organization officials and possible conflicts of interest; all investments of charities' assets; and all financial statements. The recommendations also call for all IRS audits of tax-exempt organizations to be made public, and would require publicly traded corporations to file a tax return listing all charitable gifts of more than $10,000 -- which would also be made available for public inspection.
  
  

Sen. Max S. Baucus, the ranking Democrat on the Finance Committee, said the draft recommendations are meant to stimulate discussion among senators, leaders of the nonprofit sector, and government officials on how to solve the problems the committee has identified. "We're presenting these ideas in order to create a dialogue that will lead to real solutions," the Montana Democrat said in a written statement. "We're collecting a bevy of ideas from a broad range of parties. These are ideas, not proposals. Some of them may go too far, and some may not go far enough. Part of this process will be to determine to what extent reforms are needed, and how drastic those reforms need to be."

Diana Aviv, president of Independent Sector, which represents 650 national charities and foundations, said the committee is reaching out to leaders of the nonprofit world through the discussion paper and Tuesday's hearing. "The value of this is that it's an opportunity for the sector to see that lawmakers are serious about the problems they've heard about, and are responding to the range of issues," she said. "On many of these issues, we agree that there are problems. On some we agree with the way they're addressed. On others, we think other solutions would be more appropriate. This is a real opportunity that we don't have very often here in Washington, to be involved in the discussion while legislation is being developed. This is a clarion call to the sector to think about what we see in the discussion paper and think about what needs to change."

Rick Cohen, executive director of the National Committee for Responsive Philanthropy, a Washington watchdog group, agreed that the committee draft should stimulate a much-needed discussion about the future of charity regulation and the need for standards. "I don't view it as the comprehensive all-inclusive piece that outlines the future for nonprofit and philanthropic oversight, but rather as something that will stimulate discussion in the sector and between the sector and government about how to strengthen nonprofit and philanthropic accountability," he said. "Everybody has bemoaned the bad apples, but no one has explored what we really need to do to get them out of the barrel. We are being provoked to think a little more concretely now."

Concerns About IRS

Many of the proposals in the draft report by the committee staff would significantly expand the federal government's oversight of charities, but several experts questioned the IRS's capacity to handle the added load.

"I don't disagree that the governance of nonprofits should become more federalized, but I have doubts about whether the IRS can even administer the current law," said Frances Hill, a law professor at the University of Miami School of Law who specializes in nonprofit issues.

Ms. Hill added that providing the IRS with more resources would not solve what she sees as fundamental weaknesses in the way the agency oversees nonprofit groups.

"The problems at the IRS are more profound than just needing more resources and needing to hire more people with appropriate skills," she said. "At the top levels there is an inability to provide guidance as to which issues in the sector are most important, due to a lack of knowledge of the laws in this area. Calling on the IRS to do more is not a recipe for success."

Small Charities

Willard L. Boyd, a law professor at the University of Iowa College of Law who chairs the Governor's Task Force on the Role of Nonprofit Organizations in Iowa, said he feared that adding new federal regulations could overwhelm small charities.

"Coming from a state where most nonprofits are small and fragilely financed, I don't want to crush them with regulation," Mr. Boyd said.

He added that rather than giving the IRS new responsibilities, Congress should first provide it with adequate resources to enforce the laws already on the books. "The IRS needs more staff in order to enforce the current rules and regulations," said Mr. Boyd, who is scheduled to testify at the hearing on Tuesday.

The IRS announced recently that it would hire 73 additional auditors to supplement the 300 people who now audit tax-exempt groups, the first significant staff expansion in a decade.

Senator Baucus said the committee will ask IRS Commissioner Mark Everson at the hearing whether the tax agency needs more resources. "But it is unlikely that just increasing the IRS resources will be sufficient," the senator added. "Changes to the law are needed."

However, Mr. Cohen said the additional resources the Senate committee is discussing are inadequate.

"The IRS needs significantly more resources than are included in this report," he said. "And we also need far more resources going to the state attorneys general."

The top charities regulator in New York agreed with that point. "If I had five more lawyers, that would make a big difference," said William Josephson, assistant attorney general in charge of the Charities Bureau. "That would cost $80,000 a year for each of them, which may seem like a trivial amount of money, but where else am I going to get it? And that's one of the things I'm going to tell the committee at the hearing."

'Public Benefit'

While acknowledging that "at one level, these proposals are sweeping" in the way they address issues such as conflicts of interest, excessive compensation, and tax-shelter abuses, Ms. Hill said that they also fail to deal with a more fundamental issue:

"The reason we have public charities as well as private foundations is to provide a public benefit. And the reason we have these sanctions is to bolster the idea that they're supposed to be providing that public benefit. But too often we're so focused on stopping the negative activity that we don't have a concept of what a public benefit is. Even if we take care of all the horrors, I'm still not sure anyone has figured out how to define a public benefit and make sure that these organizations are providing one."