By Brad Wolverton
A coalition of nonprofit leaders today pledged to members of the U.S. Senate that charities and foundations would take steps to tighten their financial operations, and recommended changes in federal law they believed could prevent legal abuses in the nonprofit world. But the report steered clear of some of the most divisive issues in the nonprofit world, including whether nonprofit groups should be limited in how much they can pay their top executives and whether new rules are needed to crack down on fraudulent fund-raising solicitations.
The nonprofit coalition presented a report summarizing their recommendations in response to a request from members of the Senate Finance Committee, who last fall asked nonprofit leaders to offer their opinions about new rules the lawmakers are considering to deal with problems they see in nonprofit organizations.
Several dozen nonprofit officials crowded the Senate office building to show they support the ideas in the report, which was produced by a panel of 175 people put together by Independent Sector, a coalition of more than 600 charities and foundations. The breadth of the nonprofit panel's work drew praise from Sen. Charles R. Grassley, Republican of Iowa and the chairman of the Finance Committee, but he said the panel's proposals must be accompanied by "serious reforms" in the charitable area.
Senator Grassley said he intends to hold a hearing on nonprofit abuses in the spring, and then introduce broad legislation that would set new rules to clean up problems in the nonprofit world while adding tax incentives to stimulate charitable giving.
What Government Should Do
The nonprofit panel's report includes dozens of ideas for strengthening the governance and accountability of nonprofit organizations. One section of the report shows what charitable organizations need to do themselves to correct problems in the sector. It offers suggestions designed to prevent people from gaining improper financial benefits through their charitable work, ideas for improving the oversight of fiscal practices at nonprofit groups, and ways to prevent charities from participating in illegal tax shelters and other improper deals.
Another section of the report proposes new government rules that are needed to prevent further abuses. The panel recommends that the federal government should create a database of financial information about charities and foundations to help donors see more clearly how their money is being used by organizations. The panel also suggests that the federal government should use revenue from the excise tax private foundations pay on their investment earnings to help step up its oversight of nonprofit groups.
But some critics worry that because the report did not focus on three key areas where lawmakers believe abuse exists -- excessive compensation for nonprofit leaders, inflated tax write-offs for noncash donations, and improper fund-raising practices -- members of Congress will propose legislative changes before nonprofit leaders suggest ways to prevent potential problems in those areas.
Officials at Independent Sector -- who were asked by the Senate Finance Committee in October to organize a committee to recommend ways to strengthen governance, ethical conduct, and effective practices at nonprofit organizations, and to submit an initial report by February about what they found -- say they plan to more closely examine compensation issues, donations of products, services, and other noncash items, and solicitation guidelines in a report they plan to hand over in June. Those areas, Independent Sector officials say, were too complex and contentious to resolve in the five months they had to complete their initial work.
Noncash Gifts
Problems with donations of land and other noncash items are getting increasing government scrutiny. After Congress last fall passed new rules limiting the tax deduction donors can take for gifts of cars and intellectual property, the Joint Committee on Taxation last month issued a report urging lawmakers to sharply reduce the size of the deduction people can claim on their tax returns when they donate land.
Such a change would help the federal government raise about $2.5-billion over the next nine years, the Joint Committee on Taxation report said. The proposal would require donors to limit their deductions on the land and other items they donate to the portion they own outright. Now donors are allowed to write off the fair market value of their donation.
The Independent Sector panel has "deep reservations" about such a change, according to one of the most sharply worded sections of its report.
"The effect of this proposal could be to eliminate a significant source of contributions for charities," the report said. The panel intends to further study the issue of noncash contributions over the next few months.
Absent from the nonprofit panel's report was a discussion of a five-year review of tax-exempt groups.
In a discussion document it released last summer, the Senate Finance Committee suggested that every five years charities should be required to submit financial statements and other written documents to the Internal Revenue Service to show that they deserve to maintain their tax-exempt status. The Joint Committee on Taxation, whose ideas on how to adjust tax law often shape what becomes law, also advocated the five-year review in its report last month.
Many nonprofit groups oppose the idea, saying it would be too onerous. The nonprofit panel says it plans to further study ideas for periodically reviewing charities, including weighing the financial costs charities would take on in complying with the proposals with the benefits of putting the proposals in place.
Financial management remains one of the main themes of the nonprofit panel's work, as eight of the 24 sections in the report deal directly with financial issues, while many other sections also deal with financial matters.
Problems with donor-advised funds -- which aides to the Senate Finance Committee have repeatedly said need fixing -- get more attention than any problem in the nonprofit panel's report. Four full pages of the 72-page report are devoted to donor-advised funds, which allow people to donate money to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how the money in the account should be distributed.
The panel suggests six ways to help prevent financial impropriety with donor-advised funds, including suggesting that donor-advised funds be prohibited from making grants to some types of private foundations. The panel also thinks that organizations holding donor-advised funds that have long been inactive should be required to distribute money in the accounts.
Pushing Disclosure
Members of the Independent Sector panel strongly agreed that it was essential for nonprofit organizations to make themselves more transparent than they have been in the past, said Diana Aviv, president of Independent Sector. Ms. Aviv presented highlights from the panel's report today with Paul Brest, president of the William and Flora Hewlett Foundation, and M. Cass Wheeler, chief executive officer of the American Heart Association. The three officials have led the panel's work.
The panel said that nonprofit groups must do a better job than in the past of producing accurate, timely tax filings and they voiced strong support for electronic tax filing and for maintaining financial penalties now levied on groups that file their tax returns improperly. The report also suggests that Congress should provide money to create a federal database of financial information on nonprofit organizations. And the federal government should work more closely with states to pursue improper conduct in the nonprofit world, the report said.
Ms. Aviv said that more than 1,000 nonprofit organizations have participated in helping to produce the report, either by serving on the panel, listening to conference calls about the panel's work, or writing suggestions to Independent Sector to consider putting in the report. That broad participation has shown Ms. Aviv how important it is for charities and foundations to have a voice during an important time in the nonprofit world.
"The general process has confirmed for me that the charitable sector is willing to come together and set aside their differences to improve their own practices and not wait for legislation to happen," Ms. Aviv said. "They are a proactive community and they know they have a responsibility to help shape whatever happens in the sector."
To view the report, go to http://www.nonprofitpanel.org.