On April 5, the Senate Finance Committee continued its examination of accountability, governance and oversight of the nonprofit sector in a hearing titled "Charities and Charitable Giving: Proposals for Reform." The hearing focused mostly on the valuation of non-cash contributions, excessive compensation, transparency and the sharing of information. Witnesses included Mark W. Everson, commissioner, Internal Revenue Service; George Yin, chief of staff, Joint Committee on Taxation (JCT); Leon Panetta, director, Panetta Institute for Public Policy; Mike Hatch, attorney general of Minnesota; Dr. Jane Gravelle, Congressional Research Service; Richard Johnson, attorney; David Kuo, White House Office of Faith-Based and Community Initiatives; Brian Gallagher, president, United Way; and Diana Aviv, Independent Sector. In addition to Chairman Charles Grassley (R-IA), senators in attendance for portions of the hearing included Sens. John Rockefeller (D-WV), Orrin Hatch (R-UT), James Jeffords (I-VT), Olympia Snowe (R-ME), Rick Santorum (R-PA), Blanche Lincoln (D-AR), Jim Bunning (R-KY), Ron Wyden (D-OR) and Charles Schumer (D-NY). The hearing centered mainly on the tax-exempt proposals included in the JCT report, "Options to Improve Tax Compliance and Reform Tax Expenditures"and the Senate Finance Committee staff discussion draft. The Independent Sector Panel on the Nonprofit Sector's interim reportwas also discussed in the last panel. Common themes included:

• The lack of effective enforcement vehicles available to the IRS to police tax-exempt organizations
• Perceived lax oversight exercised by governing boards of nonprofit organizations
• Concerns with respect to excessive compensation paid to executives of tax-exempt organizations
• Deficiencies in Form 990 reporting by tax-exempt organizations
• Perceived excess in travel, entertainment and other related expenses of tax-exempt organizations.

The nonprofit health care industry received specific criticism at the hearings. In opening remarks, Grassley expressed his intention to "move legislative reforms" in this area promptly to strengthen charitable governance and improve the tax gap. Rockefeller noted that the vast majority of foundations and charities do good work and encouraged the committee to find a way to fix the misuses without discouraging the formation and good work of charities. Santorum noted his serious concerns that a number of proposals in the JCT report and the staff discussion draft would impose too onerous a burden on small nonprofits. He encouraged the committee to push for enforcement of current laws before enacting new legislation. IRS Commissioner Mark Everson testified that tax compliance and enforcement by nonprofit organizations is one of his top four priorities at the IRS and encouraged the committee to continue its review of the sector. Everson called the abuses "increasingly present" and said that if Congress does not act to end the abuses soon, public support for charities will "wither." Everson attributed much of the growth of problems to "weak governance practices" and "a culture that has become more casual about compliance and less resistant to noncompliance." Everson, who said the IRS lacks adequate resources to effectively enforce current regulations, noted that while the nonprofit sector has evolved and grown over the years, tax law and regulation have changed much less. "Since 1969 there has been only limited review of the rules relating to tax-exempt status," he said, referring to the 1969 tax law changes affecting philanthropy. Among the most serious problems Everson highlighted is the growth of donor-advised funds and supporting organizations that allow taxpayers to make a deductible donation but delay shifting the money or other assets to the final charitable beneficiary. The testimony of George Yin focused on the JCT's proposal to limit the deduction for charitable gifts of property to basis value. Yin argued that the cost to the taxpayer of getting an appraisal or determining fair market value for a piece of property, coupled with the cost to the IRS of ensuring that the value is justified, outweighs the charitable benefit of gifts of property. He advocated that the proposed limitation would encourage charitable gifts of cash and publicly-traded securities, which have a tangible value. Under questioning, he stated that he does not believe that a change in valuation would result in a decrease in the overall level of charitable giving. Yin also briefly touched on the JCT proposals to require a five-year review of tax-exempt status and the creation of a termination tax, but was not questioned by the committee on those issues. Many senators voiced concerns that any changes regarding gifts of property could discourage legitimate charitable giving. "I do not accept the concerns about non-cash donations," Jeffords said. He said farmers, for example, should be permitted to donate land and take a full tax deduction for the value of the land. "The government has no problem taxing that land at its fair market value. It can't have it both ways." Schumer echoed Santorum's earlier concerns, noting that the $300 billion in tax revenue that goes uncollected each year due to tax avoidance and evasion could be collected with better enforcement of existing laws, not new legislation. He also noted that it will be unduly burdensome for many tax-exempt organizations under new, one-size-fits all-legislation, which will harm many smaller organizations that support or directly provide important social services. In response to these concerns, many charities are arguing for increased self-regulation. Leon Panetta, a member of the Panel on the Nonprofit Sectors' Citizen Advisory Committee, encouraged the committee to find the right balance between the need for new laws versus increased self-regulation and pushed for the creation of a National Council on Nonprofit Accreditation. Brian Gallagher of United Way echoed these concerns, discussing United Way's internal efforts to ensure good governance. He also suggested that tax-exempt organizations be asked to report annually concrete results that are tied directly to their missions. Minnesota Attorney General Hatch testified that self-regulation alone will not curb the abuses and lent his support to both the JCT and Senate Finance Committee staff draft proposals. He also encouraged the committee to eliminate the rebuttable presumption and instead shift the burden to prove reasonable compensation from the IRS to the charity. Independent Sector's Diana Aviv discussed the Panel's interim report and recommendations. The 72 page report provides suggested actions for the IRS, legislators and tax-exempt organizations. If enacted, the proposals would affect all charities, regardless of size. Among the suggested changes: charities with at least $2 million in total revenue and filing a Form 990 would be required to conduct a yearly financial audit; organizations with $500,000 to $2 million in total revenue would be required to have an independent public accountant review financial statements and suspension of tax-exempt status for charities with less than $25,000 if they fail to file an annual notice with the IRS for three consecutive years. Aviv implored the committee to allow the panel to complete its work before introducing legislation. She noted that panel was preparing a second phase to provide greater detail on recommendations and to seek input from nonprofits throughout the country. The Panel's recommendations were not questioned extensively by the committee even though the proposals have been questioned by some nonprofit leaders. A commentary in the Chronicle of Philanthropy by Pablo Eisenberg argued the recommendations were too weak and did not address the core accountability issues facing the sector, such as financial self-dealing activities. There has also been criticism leveled by the National Committee for Responsive Philanthropy, the Philanthropy Roundtable, and some conservatives that the panel's recommendations and process miss the mark. Some complained that the panel's proposals come at a time when many nonprofits are facing reduced funding and more costs for compliance and regulation. Additionally, the internal process of the panel has been shrouded in mystery. Organizations not directly involved with the panel's deliberations scrambled to get comments to the panel on its preliminary recommendations only to learn that the panel was already meeting to discuss the next phase. Charities not involved in the Panel's discussions have also pushed for increased self-regulation. The National Council on Responsive Philanthropy has put forth a number of proposals that have not been considered by the Finance Committee or the Nonprofit Panel:

• Sharply limiting or eliminating compensation for foundation trustees
• Eliminating any and all self-dealing and conflict of interest by foundations
• Raising private foundations' payout from 5 to 6 percent
• Increasing disclosure of corporate philanthropic grant making
• Disclosing grant making by public charities and donor-advised funds
• Reducing the private foundation excise tax -- but devoting the bulk of the remaining excise tax to public oversight and enforcement activities by IRS and state attorneys general.

The panel's seeming unwillingness to discuss any recommendations not specifically mentioned in the Finance Committee staff draft proposals has some nonprofits concerned. Rick Cohen of NCRP noted, "[F]oundations get off pretty much scot-free in the first phase, which seems completely inappropriate given the press coverage around foundation scandals of self-dealing, inappropriate expenses, foundation trustee fees, and insufficient levels of grant making." Additionally, Independent Sector has raised $3 million "taking on issues that have minimal bearing on the scandals that have undermined and continue to undermine the trust of Americans in the nonprofit sector." In a statement critiquing the Nonprofit Panel's performance and proposals, NCRP has issued an additional set of recommendations to the Senate Finance Committee to strengthen self-regulation. Overall, the witnesses' statements and the tone set by the committee suggest that proposed legislation will go farther than the panel's proposals. It also appears that the Senate Finance Committee's proposal may extend far beyond the proposals set forth in its discussion draft issued last summer and resemble the comprehensive proposals suggested by the JCT in January. In related news, the House Ways and Means Committee announced it will hold a hearing on the sector April 20. A full list of witnesses has yet to be released, but George Yin of the Joint Committee on Taxation, David Walker of the Government Accountability Office and Douglas Holtz-Eakin of the Congressional Budget Office will testify during the hearing. According to Ways and Means Committee Chairman Bill Thomas (R-CA), the hearing will, "examine the legal history of the tax-exempt sector; its size, scope and impact on the economy; the need for congressional oversight; IRS oversight of the sector; and what the IRS is doing to improve compliance with the law."