For over a year, legislation has been stalled in both the U.S. House of Representatives and the Senate that would reform the governance of not-for-profit groups and improve governmental oversight of foundations and other nonprofit institutions.
Following a June hearing by the Senate Finance Committee -- notable for its attendance by eight senators, an unusually large number -- a "discussion draft" for new or revised legislation has been released to the public for comment. It can be found at http://finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf.
If the draft breaks the logjam, the results could impact not only how foundations function, but also how arts groups, such as theatre companies, dance troupes, and music groups, operate. Some proposals are basic: The Internal Revenue Service would have the power, for example, to examine the performance of nonprofit groups every five years and rule on whether they should even maintain their tax-exempt status.
The draft also marries certain elements of the two bills -- H.R. 7, the Charitable Giving Act, and S. 476, the Charity Aid, Recovery, and Empowerment Act, known as CARE -- that a joint House-Senate committee failed to reconcile. For example, the draft proposes to dramatically empower the IRS to oversee nonprofits closely by giving it millions of dollars in additional funding for staff and support. The goal, in part, is to ensure that administrative expenses cannot prevent charities from performing their benefactions to their constituents.
H.R. 7 and S. 476 took a different approach. Under current law, foundations must annually disburse 5% of their assets, a figure that may include rent, salaries, and research. Both bills would exclude such administrative expenses from that 5% figure, thus forcing charities to give more generously.
Aware of widespread industry opposition to tinkering with the 5% formula, the Finance Committee's discussion draft wields a stick: If a foundation's administrative costs top 10% of its overall expenses, the IRS would require additional filings; over 35%, even more filings in addition to those. But the discussion draft also wields a carrot: If a foundation disburses at least 12% of its assets a year, it would be exempt from excise taxes on the income from its investments. This dovetails with H.R. 7 and S. 476, which both proposed reducing that tax from 2% to 1%.
For organizations with over $250,000 in gross receipts, another discussion-draft proposal concerns the creation of "annual performance goals and measurements for meeting those goals" in order to "assist donors to better determine an organization's accomplishments and goals in deciding whether to donate...." And it proposes a list of standards and practices for boards of directors, including forcing all nonprofits to develop and publish a "conflict of interest policy."
Missing from the draft are some well-praised items found in both H.R. 7 and S. 476. Each bill would allow taxpayers using the standard deduction (non-itemizing) who contribute a minimum of $250 to a nonprofit organization to deduct up to $500 from their returns. (Joint filers would be able to take the deduction when they reach $500 in contributions, to a maximum of $1,000.) And each bill would allow charitable givers aged 70 and over to roll over money from IRA accounts directly to nonprofits without paying taxes on the withdrawn funds.
While H.R. 7 required the Treasury Department to conduct a study in 2006 on how the law itself affected charitable giving, S. 476 focused more closely on upgrading nonprofit governance, beginning with an $80 million IRS allocation to ramp up legal oversight and enforcement. The discussion draft treads lightly in these waters, but it does match up with S. 476's intention to create programs that would better notify the public on how to obtain nonprofit tax returns.
The overall drive to nonprofit reform began after the passage of the federal Sarbanes-Oxley Act, which Congress enacted in the wake of Enron and other accounting scandals. After revelations that a small number of charities, such as those handling the millions received after Sept. 11, 2001, had engaged in similar abuses and administrative waste, the drive quickly intensified.