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Harvy Lipman

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Senate Committee Passes New Accountability Rules: Passage of Giving Incentives Now in Doubt

Reprinted from the Chronicle of Philanthropy, June 29, 2006

The Senate Finance Committee on Wednesday passed a series of measures designed to encourage greater accountability among donors and nonprofit groups.

Among the key elements: Donors who try to inflate the value of their charitable gifts would face tough new penalties, and small charities would be required to provide the Internal Revenue Service with far more information than they do now.

In pushing through those measures, Senator Charles E. Grassley, chairman of the Senate Finance Committee, also appears to have been trying to warn some charities and foundations that he is tired of their efforts to stall passage of legislation designed to stamp out abuses in the nonprofit world.

For more than a year, Senator Grassley has been trying to win enactment of legislation that would both encourage increased giving to charity and close what he sees as loopholes in federal tax law that allow unscrupulous people to benefit from their involvement with nonprofit organizations.

His legislation has stalled in the Senate, however, and run into even greater resistance in the House of Representatives, where supporters have been unable even to find a sponsor for similar legislation.

In an apparent effort to break the logjam, Senator Grassley persuaded the Senate Finance Committee to pass the accountability legislation by attaching it to a bill making changes in the telephone excise tax that was unanimously approved.

Several lobbyists, representatives of nonprofit groups, and Congressional aides said Mr. Grassley's action was designed not only to win passage of some key elements of his comprehensive charity bill, but also to send a message to the nonprofit world: If it does not become more active in supporting his effort to pass a comprehensive legislative package, it may end up with piecemeal legislation that puts in place new laws penalizing improper activity without any accompanying proposals to encourage more people to finance charitable activities.

The top priority for nonprofit groups is a change in tax law that would allow people who do not itemize deductions on their tax returns to take deductions for giving to charity. The senator has supported that change, but only if it is done in conjunction with legislation designed to stop abusive behavior by raising penalties and fines on errant donors and nonprofit groups. In addition, he wants to find a way to make sure the federal treasury doesn't lose out because of the extra tax breaks given to donors, and he has proposed increasing the excise taxes paid by foundations on their assets.

"The chairman is letting the charitable community know that unless there is action on the larger package, he will start moving on his own to pass the reforms he thinks are needed, without the other provisions," said Rick Grafmeyer, a Washington lawyer who lobbies Congress on behalf of several nonprofit groups.

"He feels this is one of the most important issues the committee should be dealing with, and his action today demonstrates that he will do whatever he perceives needs to be done to enact this legislation," said Luis Maldonado, director of government relations and public policy for the Council on Foundations.

Diana Aviv, president of Independent Sector—a Washington coalition that represents 550 charities and foundations—agreed. "He believes unethical people are taking advantage of the charitable tax laws, and he wants it to stop," she said.

Senator Grassley was not available for comment, and his aides would not discuss the strategy behind his decision to attach the provisions to the telephone bill. In a news release announcing the action, Mr. Grassley emphasized provisions that would double fines and penalties for nonprofit groups that engage in improper political activities.

He said he was particularly concerned by the way charities had been involved in the scandal involving Jack Abramoff, the Washington lobbyist who pled guilty to corruption charges and is cooperating with federal investigators looking into possible wrongdoing by lawmakers and others in the federal government.

"We've all heard a lot about inappropriate activity by nonprofit groups connected to Jack Abramoff," the senator said. "The problem is much bigger than Jack Abramoff. Some people are exploiting vagueness in the laws or a lack of enforcement to enrich themselves rather than serve the public. It's unseemly for tax-exempt groups to function this way. It's also unfair to the taxpayers who subsidize that behavior. That's why I continue to try to tighten the laws governing tax-exempt groups."

In addition to the increased penalties for political activity, the Senate Finance Committee also voted to:

  • Require nonprofit groups to file their informational tax returns electronically.
  • Force nonprofit groups that receive less than $25,000 annually in income to provide the Internal Revenue Service with basic information about their organizations every three years. Such groups are exempt from filing informational tax returns with the IRS.
  • Increase penalties for taxpayers who deliberately overvalue items donated to charity so they can get bigger tax write-offs than they deserve. In addition, the legislation would tighten the definition of who is qualified to appraise the value of donated items to avoid conflicts of interest and other problems.
  • Levy higher penalties on top officials at private foundations or charities who engage in illegal financial transactions with the organization, and stiffen the penalties for nonprofit officials who approve such transactions.
  • Allow the IRS to share with state regulatory officials more information about actions taken against nonprofit organizations in an attempt to improve enforcement of charity laws.
  • Abolish privacy rules that make it illegal for the IRS to tell the public when it has denied or revoked an organization's tax-exempt status, and allow the agency to make public documents in the organization's IRS file supporting that action.
While Senator Grassley has usually asked his staff to keep key players in the nonprofit world informed about proposed legislation, Wednesday's action was taken without much fanfare or public announcements. Ms. Aviv thinks that also was a deliberate strategy.

"I think Senator Grassley wants to work with all of us, but he's found that during an open, transparent process a group of naysayers in the nonprofit sector who don't want any reforms enacted have been able to chip away at the bill," she said. "They run to whoever they can influence in the Senate or the House and say, 'Don't pass this and don't pass that.' I think the reason nobody knew all the details of what moved today is that by doing it this quickly, he stops the naysayers from trying to stop it from happening."

Ms. Aviv and Mr. Maldonado both said they feared that by passing the accountability measures first, it was not likely that the giving incentives would also be passed. "This will dilute the likelihood that a package will be enacted," Mr. Maldonado said.

Harvy Lipman, The Chronicle of Philanthropy
© 2006, The Chronicle of Philanthropy. Reprinted with permission.

Harvy Lipman is director of special projects at the Chronicle of Philanthropy.