Current Accountability and Governmental Issues in the News Part III

This article is an update to articles that appeared in our summer 2005 and fall 2004 issues regarding activities at the IRS, the Senate Finance Committee (SFC), and the SFC Roundtable on Charitable Governance. The SFC requested the Panel on the Nonprofit Sector (an independent national panel) to advise them and make recommendations for improving governance and accountability in the not-forprofit sector. The end result from this panel was the issuance of “A Final Report to Congress and the Nonprofit Sector” that was issued in June 2005.

Because of the complexity of the issues, the Panel continued to analyze additional areas. This resulted in the issuance of “A Supplement to the Final Report to Congress and the Nonprofit Sector” in April 2006. The supplement covers nine topics as follows:

International grant making

• Since the September 11 attacks, there is increased concern about assistance being diverted to terrorist activity.
• The recommendation is to follow the currently existing “Principles of International Charity.”

• There are long-term concerns about fraudulent solicitations and professional fundraisers whose efforts primarily benefit themselves, not a charity.
• The recommendation for Congress is to create a national uniform electronic filing system for solicitation registration and annual reporting.
• There are recommendations from various groups to revise the “Model Act Concerning the Solicitation of Funds for Charitable Purposes” to address current practices including the increased use of the Internet.

• The issue is whether trustee compensation is excessive when compared to other similar situations.
• The recommendation is to clarify that even if compensation is specified in a trust instrument, it is not determinative of whether the compensation is excessive.

• Regulations regarding prudent investments are out of date and don’t reflect modern portfolio theory in asset management.
• The recommendation is to revise regulations to reflect the modern prudent investor standards. However, Congress should not enact a federal standard that would be enforced by the IRS.

• Intense pressures have led to an increasing number of nonprofit hospitals and other entities converting their assets to forprofit status. The concern is the conversions can result in services in the for-profit entity being quite different than the nonprofit entity.
• No congressional action is recommended, but the IRS is urged to vigorously enforce existing current legal prohibitions against private inurement, etc.

Taxation on sales of donated property

• The IRS has noted instances of taxpayers over- estimating the value of their property which is donated to charities.
• The recommendation is to strengthen the requirements for qualified appraisals for the value of donated property. Income from sales of donated assets by not-for-profits should continue to be considered nontaxable.

Consumer credit counseling organizations

• There have been numerous reported instances of consumer credit counseling organizations (CCOs) abusing their nonprofit status. Some have preyed upon vulnerable individuals through deceptive and fraudulent practices.
• Recommendation is to remove current exemptions for tax-exempt CCOs and continuing to have the IRS vigorously enforce actions against CCOs that are not operating to further a charitable purpose.

Disclosure of unrelated business activities

• Concern is that some entities are understating their tax liability for “unrelated business income” and current reporting makes it difficult to monitor an organization’s business activities.
• It is recommended that the IRS should amend Form 990 to increase information regarding unrelated business activities.

Federal court equity powers and standing to sue

• The regulation of charitable fiduciaries is primarily a state, rather than a federal, function. It has been suggested by some that the U.S. Tax Court should be given the same power that states currently have.
• It is recommended that Congress not expand current law regarding charitable fiduciaries.

In addition, the Form 990 has been revised by the IRS. Please refer to a related article in this issue regarding changes to Form 990 and compensation reporting. We continue to recommend that all not-for-profit organizations have the following items in place:

• Ethics policy for all staff, board members, and volunteers
• Conflict of interest policy for all staff and board members
• Whistleblower policy
• Board approval of all executive compensation and documentation of comparability data or other justification
• Travel expense reimbursement policy for all staff, board members, and volunteers

In addition, we recommend that organizations very carefully review the Form 990 prior to filing to be sure all required information is reported clearly and accurately. We expect new legislation at some point; however, it will probably be enacted in more of a piecemeal manner than originally anticipated. As usual, we will work to keep you informed about new developments and advise you about appropriate action items for your organization.