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38–087 2007

TAX-EXEMPT CHARITABLE ORGANIZATIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

JULY 24, 2007 

Serial No. 110–55 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

Janice Mays, Chief Counsel and Staff Director 

Brett Loper, Minority Staff Director 

SUBCOMMITTEE ON OVERSIGHT 

JOHN LEWIS, Georgia, Chairman 

JOHN S. TANNER, Tennessee 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

STEPHANIE TUBBS JONES, Ohio 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

JOSEPH CROWLEY, New York 

JIM RAMSTAD, Minnesota 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

iii 

C O N T E N T S 

Page 

Advisories of June 12, 2007 and July 9, 2007, announcing the hearing ............. 2 

WITNESSES 

Steven T. Miller, Commissioner, Tax Exempt and Government Entities Division, Internal Revenue Service ........................................................................... 10 

Stanley J. Czerwinski, Director, Intergovernmental Relations, Strategic 

Issues, Government Accountability Office ......................................................... 26 

Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, Government Accountability Office ............................................................ 47 

Diana Aviv, President and Chief Executive Officer, Independent Sector ........... 73 

Steve Gunderson, President and Chief Executive Officer, Council on Foundations ....................................................................................................................... 84

SUBMISSIONS FOR THE RECORD 

Alliance for Justice, statement ............................................................................... 114 

American Association of Museums, statement ...................................................... 116 

American Bankers Association, statement ............................................................ 118 

American Bar Association Section of Real Property, statement .......................... 120 

American Bar Association Section of Taxation, statement .................................. 128 

American Institute of Philanthropy, statement .................................................... 134 

American Society of Appraisers, statement ........................................................... 136 

American Society of Association Executives, statement ....................................... 137 

Association for Healthcare Philanthropy, statement ............................................ 139 

Association of Art Museum Directors, letter ......................................................... 142 

Association of Blind Citizens, statement ............................................................... 143 

Association of Fundraising Professionals, statement ........................................... 144 

Atlanta Union Mission, statement ......................................................................... 146 

Baton Rouge Area Foundation, statement ............................................................ 149 

Capital Region Community Foundation, statement ............................................. 150 

Chapman Trusts, statement ................................................................................... 151 

Community Foundation of Western Massachusetts, statement .......................... 157 

DLA Piper, statement ............................................................................................. 158 

Dr. John M. Templeton, Jr., statement ................................................................. 159 

Ewing Marion Kauffman Foundation, letter ......................................................... 161 

Food Donation Connection, statement ................................................................... 163 

Foundation For The Carolinas, statement ............................................................ 167 

Grantmakers Without Borders, statement ............................................................ 168 

Greenlining Institute, statement ............................................................................ 171 

High Museum of Art, statement ............................................................................. 174 

Independent Sector, statement ............................................................................... 174 

Karen D. Krei, statement ........................................................................................ 177 

Kenneth H. Ryesky, statement ............................................................................... 180 

Lester M. Salamon, statement ............................................................................... 185 

Lettie Pate Evans Foundation, letter ..................................................................... 194 

Marin Community Foundation, statement ............................................................ 197 

Nancy E. Tate, letter ............................................................................................... 202 

National Cattlemen’s Beef Association, statement ............................................... 203 

National Christian Foundation, statement ........................................................... 204 

National Committee for Responsive Philanthropy, statement ............................. 209 

National Committee on Planned Giving, statement ............................................. 213 

National Council of Nonprofit Associations, statement ........................................ 214 

National Multiple Sclerosis Society, statement .................................................... 215 

New York Community Trust, statement ............................................................... 216 

Ohio Grantmakers Forum, statement .................................................................... 220 

Ohio Osteopathic Foundation, letter ...................................................................... 221 

Page

iv 

PGA Tour, statement .............................................................................................. 222 

Putnam Scholarship Fund, statement ................................................................... 224 

Robert M. Hearin Support Foundation, statement ............................................... 225 

Rodrigues, Horii, and Choi, LLP, statement ......................................................... 229 

Samaritan’s Purse, statement ................................................................................ 232 

Schwab Charitable Fund, statement ...................................................................... 233 

Senator Byron Dorgan, statement .......................................................................... 235 

Goodwill Industries International, statement ....................................................... 236 

Stewart Mott Foundation, statement ..................................................................... 237 

Studio Museum in Harlem, statement ................................................................... 239 

The Meadows Foundation, letter ............................................................................ 239 

Una Chapman Cox Foundation, letter ................................................................... 242 

United Jewish Communities, statement ................................................................ 248 

Wisconsin Alumni Research Foundation, statement ............................................ 255 

Zimmerman-Lehman, statement ............................................................................ 262 

(1) 

TAX-EXEMPT CHARITABLE ORGANIZATIONS 

TUESDAY, JULY 24, 2007 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:05 a.m., in 

room 1100, Longworth House Office Building, Hon. John Lewis 

(Chairman of the Subcommittee) presiding. 

[The advisory of June 12, 2007 requesting written comments follows:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–5522 

June 12, 2007 

OV–4 

Lewis Announces Request for 

Written Comments on Provisions Relating to 

Tax-Exempt Organizations in the 

Pension Protection Act of 2006 

House Ways and Means Oversight Subcommittee Chairman John Lewis (D–GA) 

announced today that the Subcommittee is requesting written comments for the 

record on the provisions relating to tax-exempt organizations contained in the Pension Protection Act of 2006 (P.L. 109–280). 

BACKGROUND: 

On August 17, 2006, the Pension Protection Act of 2006 (Act) was enacted into 

law. The Act contains over thirty provisions relating to tax-exempt organizations, 

including charitable giving incentives and exempt organization reforms. Certain provisions were intended to improve accountability among donor advised funds and 

supporting organizations. Most of the provisions were never discussed on a bipartisan basis, nor the subject of Committee hearings, during the 109th Congress. 

The Subcommittee is interested in the tax-exempt community’s views on the impact of these recently-enacted provisions on charities and foundations. The Subcommittee is particularly interested in how these new rules affect, or will affect, 

charitable efforts and the difficulties that have arisen in implementing these provisions. Further, the Subcommittee requests comments on the provisions scheduled to 

expire on December 31, 2007. The deadline to submit written comments is 

Tuesday, July 31, 2007. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the request for written comments for which you would like to submit, and 

click on the link entitled, ‘‘Click here to provide a submission for the record.’’ Once 

you have followed the online instructions, completing all informational forms and 

clicking ‘‘submit’’ on the final page, an email will be sent to the address which you 

supply confirming your interest in providing a submission for the record. You MUST 

REPLY to the email and ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by close of business Tuesday, July 31, 2007. Finally, please note that due to the change in House 

mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House 

Office Buildings. For questions, or if you encounter technical problems, please call 

(202) 225–1721. 

3 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Submitters are advised that the Committee relies on electronic submissions for printing the official record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the submission is made. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

[The advisory of July 9, 2007 announcing the hearing follows:] 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–5522 

July 09, 2007 

OV–5 

Lewis Announces Overview Hearing on 

Tax-Exempt Charitable Organizations 

House Ways and Means Oversight Subcommittee Chairman John Lewis (D–GA) 

announced today that the Subcommittee will hold an overview hearing on tax-exempt organizations, which will focus on charities and foundations described in Internal Revenue Code section 501(c)(3). The hearing will take place on Tuesday, 

July 24, 2007, in the main Committee hearing room, 1100 Longworth House 

Office Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Invited witnesses will represent the Internal Revenue Service, the U.S. Government Accounting Office, the Independent 

Sector, and the Council on Foundations. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Subcommittee and for inclusion in the record of the hearing. 

4 

BACKGROUND: 

There are approximately 1.6 million tax-exempt organizations described in the 

twenty-eight categories listed in Internal Revenue Code section 501(c). Two-thirds, 

or more than one million, of these organizations are described in Internal Revenue 

Code section 501(c)(3). Currently, the assets of section 501(c)(3) organizations exceed 

$2.5 trillion. They have annual revenues of nearly $1.2 trillion and spend approximately $900 billion on program services. Section 501(c)(3) organizations continue to 

grow each year with more than 350,000 organizations granted tax-exempt status 

since 1997. 

Internal Revenue Code section 501(c)(3) describes organizations that are organized and operated exclusively for religious, charitable, scientific, educational, and 

certain other specified exempt purposes. These organizations include, among others, 

public charities and private foundations. They are eligible to receive tax-deductible 

contributions and are subject to operating restrictions, including a prohibition on engaging in political activities. 

There have been a number of recent legislative and administrative developments 

that relate to section 501(c)(3) organizations and may affect their operations. These 

developments include the enactment of the Pension Protection Act of 2006 (P.L. 

109–280), the release of the redesigned draft Form 990 (Return of Organization Exempt from Income Tax), and the activities of the Exempt Organizations Office of the 

IRS’s Tax Exempt and Government Entities Division. 

In announcing the hearing, Chairman Lewis stated: ‘‘The volunteers and organizations that make up the charitable community work day after day providing services to our communities that are critical to all Americans and 

essential to the well-being of our Country. The Congress and the public 

must continue to support this community. I look forward to beginning a 

dialogue about the important role charities play in American life. The Subcommittee will continue its review of tax-exempt issues throughout the 

110th Congress, including charities’ efforts to assist diverse communities 

and other specific areas of concern.’’ 

FOCUS OF THE HEARING: 

The Subcommittee will undertake a broad overview of section 501(c)(3) charitable 

organizations. The Subcommittee will review the overall state of this sector, including activities and measures for ensuring public accountability and good governance. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Written statements submitted to the Subcommittee pursuant 

to the June 12, 2007, Subcommittee Advisory, OV–4, soliciting comments on 

tax-exempt provisions contained in the Pension Protection Act of 2006 will 

be included in the submissions for the record on this hearing and do not 

need to be submitted again. Accordingly, only one statement in total is necessary for any individual or organization with respect to comments on the 

Pension Protection Act of 2006. Any person(s) and/or organization(s) wishing 

to submit for the record must follow the appropriate link on the hearing page 

of the Committee website and complete the informational forms. From the Committee homepage, http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the 

menu entitled, ‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp? 

congress=18). Select the request for written comments for which you would like to 

submit, and click on the link entitled, ‘‘Click here to provide a submission for the 

record.’’ Once you have followed the online instructions, completing all informational 

forms and clicking ‘‘submit’’ on the final page, an email will be sent to the address 

which you supply confirming your interest in providing a submission for the record. 

You MUST REPLY to the email and ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by 

close of business Tuesday, August 7, 2007. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–1721. 

5 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, but we reserve the right to format it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response to 

a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman LEWIS. Good morning. The hearing is now called to 

order. The Subcommittee on Oversight is holding its first hearing 

on tax-exempt organizations. Today, we will take a broad look at 

charities and foundations, and review the current state of the charitable sector. 

These organizations play such an important role in our country. 

Charities and foundations make up the very fiber of our communities. They know the deepest human needs of our friends and 

neighbors. They know the solutions that work. Often, at critical 

times, charities and foundations are the leaders that show the government the way to care for our citizens. We must listen and learn 

from you. Last year, these organizations spent over $1 trillion on directly 

serving those in need. These services touch every corner of life in 

our communities—education, the arts, and medical research. They 

also serve those who need our help the most by feeding the hungry, 

caring for the sick, and lifting up those who live in poverty, those 

who have been left out and left behind. 

The Government alone cannot address these important and 

unmet needs. We count on charities and foundations to fill this 

gap. The need for these programs creates a special tie between 

charities and the Government. As we move forward in this Congress, we must work together for the common good of our communities and our Nation. 

The question today is whether we can do more. Can we really do 

more with what we have? Can we touch more lives and uplift more 

people? We must strengthen the nonprofit sector so that we can deVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HR\OC\38087.XXX 38087
6 

liver more service to more Americans. They are counting on us. We 

must not fail them. We invite this sector to work with us toward 

this goal. 

I am pleased to recognize the distinguished Ranking Member, my 

dear friend from Minnesota, Mr. Ramstad, for his opening statement. 

Mr. RAMSTAD. I thank my friend, the distinguished Chairman, 

for yielding. He is both distinguished and a good friend. Thank you 

for yielding and for holding this important hearing, Mr. Chairman, 

to give our Members an overview of the tax-exempt charitable sector. 

I think it is helpful to review present law as well as the crucial 

work that charitable organizations are doing across America. This 

will certainly help us evaluate proposed legislation in this Congress. 

I am truly fortunate to represent a State with such an active and 

vibrant community of charitable organizations and foundations. 

Minnesota’s charities and our volunteers are feeding the hungry at 

record numbers; sheltering the homeless, also record numbers; and 

providing protection, hope, and opportunity to the most vulnerable 

Americans. 

Over the last 25 years, I have served on the boards of no fewer 

than 12 charitable organizations. I am proud to be a co-founder of 

the Greater Lake Country Food Bank, which is one of Minnesota’s 

largest independent food banks. My family and I still volunteer 

regularly at Sharing and Caring Hands in Minneapolis, as well as 

Interfaith Outreach and Community Partners in our home community of Wayzata. 

Recently, several of us helped launch a public/private partnership to end homelessness in Minnesota called Heading Home Minnesota. The governor was the leader of our group, and another example of good work being done by the charitable sector. I think 

Minnesota’s charitable organizations are truly a model for the Nation, and I am proud to be associated with them and grateful, certainly, for all they do. 

As I look out at the witness table, Mr. Chairman, and I am sure 

you have the same feeling, it is like old home week here in the 

Committee on Ways and Means room. I know you join me, and he 

will be introduced by our distinguished colleague Mr. Kind, but it 

is great to see Steve Gunderson back, who is now president and 

CEO of the Council on Foundations; also to see Steve Miller of the 

Internal Revenue Service (IRS), who has joined us on previous occasions, has always been responsive to our inquiries and helpful to 

the Subcommittee. 

It is just a good thing that these types of cases are more the exception than the norm, but where there are cases of fraud and 

abuse, they should be rooted out so the reputations of 99.9 percent 

of the charities in this country that do good work are not tarnished, 

and Americans can be sure their donations are put to good use. 

Finally, Mr. Chairman, it is also good to welcome Diana Aviv of 

the Independent Sector. Most of us on the Committee are familiar 

with the good work her organization does. I also want to welcome— 

not to exclude anybody, certainly—Stan Czerwinski of the GovernVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\38087.XXX 38087
7 

ment Accountability Office (GAO), who is testifying, I think, for the 

first time in several years. Welcome back to the Subcommittee. 

Mr. Chairman, just let me conclude by saying this. We know our 

charities do extremely important work across the country, and Congress should promote, should help facilitate, their good deeds. We 

need a vibrant charitable community in our country, and also, at 

the same time, must guard against those who would misuse their 

tax-exempt status and abuse the public trust. There are few things 

worse in the public arena then that type of abuse. So, we must protect the vast majority of charities that in good faith do work, perilous work, for our communities and help so many in need. 

I again, Mr. Chairman, thank you for holding this hearing today. 

I know we can work together in a bipartisan way to continue protecting the hardworking, honorable charities and the public’s trust 

in them because to do otherwise would fail the American people. 

So, I thank the Chair, and I yield back. 

[The prepared statement of Mr. Ramstad follows:] 

Prepared Statement of The Honorable Jim Ramstad 

Ranking Member, Subcommittee on Oversight 

I thank my friend for yielding and for holding this hearing to provide our Members with an overview of the tax exempt charitable sector. 

It’s helpful to review present law, as well as some of the crucial work charitable 

organizations do in our communities. This will help us evaluate proposed legislation 

this Congress. 

I am truly fortunate to represent a State with an active and vibrant community 

of charities and foundations. 

Minnesota’s charities and our volunteers are feeding the hungry, sheltering the 

homeless and providing protection, hope and opportunity to the most vulnerable 

Americans. 

Over the years, I have served on the boards of 12 charities. I am proud to be a 

co-founder of the Greater Lake Country Food Bank, Minnesota’s largest independent 

food bank. My family and I still volunteer regularly at Sharing and Caring Hands 

in Minneapolis, and I recently helped launch a public-private partnership to end 

homelessness in my State, called Heading Home Minnesota. 

Minnesota’s charitable organizations are truly a model for the Nation, and I’m 

proud to be associated with them and grateful for all they do. 

Mr. Chairman, as I look out at the witness table, it’s like old home week! I know 

you join me in welcoming our former colleague from Wisconsin, Steve Gunderson, 

who is now the President and CEO of the Council on Foundations. Steve, it’s great 

to see you again. 

I also welcome back Steve Miller of the IRS, who joined us on previous occasions 

and has always been responsive to inquiries from us and our staff. 

I also thank the Chairman for including Greg Kutz of GAO, who does great nonpartisan work for the Ways and Means Committee. Mr. Kutz will testify on an investigation GAO performed at my request on tax-exempt organizations that owe the 

Government nearly $1 billion in payroll and other taxes. 

For example, one entity owed more than $15 million in taxes, while its top official 

received more than $1 million in annual compensation and benefits and made several hundred thousand dollars in cash transactions at banks and casinos. Obviously 

the organization did not fail to pay taxes due to a cash flow problem. 

Fortunately, these types of cases are more the exception than the norm, but where 

there are cases of fraud and abuse, they should be rooted out so the reputations of 

countless charities that do good work are not tarnished and Americans can be sure 

their donations will be put to good use. 

Mr. Chairman, I also welcome Diana Aviv of the Independent Sector. Many of us 

are already familiar with Ms. Aviv and the good work of her organization. 

Finally, I would like to welcome Stan Czerwinski of GAO, who is testifying before 

the Committee for the first time in several years—welcome back, Stan. 

Mr. Chairman, we know our charities do extremely important work across America, and Congress should promote a vibrant charitable community. 

On the other hand, we must always guard against those who would misuse their 

tax-exempt status and abuse the public trust. 

8 

We must protect the vast majority of charities that in good faith work so tirelessly 

for our communities and help so many in need. That means we sometimes have to 

ask tough questions and consider legislation to ensure the public’s trust in our charitable community remains unblemished. This public trust in our charitable community has led to an estimated $295 billion 

of charitable giving in 2006. 

The American people deserve our thanks for their generosity, and charities deserve our gratitude for the countless acts of kindness they deliver every day. 

We will continue to protect those hardworking charities and the public’s trust in 

them. To do otherwise would fail the American people. 

I thank the Chair and I yield back. 

f 

Chairman LEWIS. Let me thank you, Mr. Ranking Member, for 

your fine opening statement. 

Would any other Members like to make an opening statement or 

have any opening remarks? At this time, Ms. Tubbs Jones is recognized for her opening statement. 

Ms. TUBBS JONES. Thank you, Mr. Chairman, Mr. Ramstad, 

Ranking Member. Good morning and thank you for hosting these 

hearings. My name is Stephanie Tubbs Jones, and I hail from the 

great city of Cleveland, the home of some of the oldest charitable 

foundations in the country, places like the Cleveland Foundation, 

the oldest and second-largest community-based foundation, with 

assets over $1.6 billion. 

I also am the home of the Gunn Foundation, and the home of 

several other, like Jewish Community Fund and Jewish Community Federation. That is why I am so happy that you have chosen 

today to host the hearings in and around tax-exempt organizations. 

At a time last year during the 109th Congress, I was worried that 

some people were moving to push tax-exempt organizations over or, 

as the kids say, kicking them under the bus. So, I am so pleased 

today that we have this opportunity. 

Other nonprofits in my congressional district work toward making sure that people have housing available, like the Cleveland 

History Network, Mount Pleasant NOW, and the list goes on. 

Finally, Mr. Chairman, I want to say that I am proud to have 

begun or started a new caucus in the Congress. I am co-chairing 

the Philanthropic Caucus with my colleague, Robin Hayes. As we 

move through these next months and years here at the Congress, 

we want to be able to focus in on issues that are important to philanthropic organizations. 

So, again, I would applaud you, Mr. Chairman, and you, Mr. 

Ranking Member, for the work you are doing in this area, and 

know that you have a stalwart Member ready to go to work on 

these issues. 

Thank you, Mr. Chairman. I yield back. 

Chairman LEWIS. Thank you, Ms. Tubbs Jones, for your fine 

statement. 

Now I am pleased to recognize my friend from the great State 

of Wisconsin, Mr. Kind, for a statement. 

Mr. KIND. Thank you, Mr. Chairman. I want to thank you for 

holding this important hearing. I would also like to thank our invited guests for your testimony here today on such a timely topic. 

I especially will be interested to get some feedback on the consequences and unintended consequences of the pension format that 

9 

I was heavily involved in just a couple years ago. I know some of 

you have some thoughts to share on that. 

Basically, I wanted to welcome a good friend of mine, my predecessor in this congressional district, Steve Gunderson, who is the 

current president and CEO of the Council on Foundations. Those 

who knew Steve and worked with Steve had great respect and admiration for the work that you did around here. That was equally 

true for the people that you represented back home. 

It is respect and admiration that you still garner, not only in this 

place here on Capitol Hill but especially back home in the Third 

Congressional District of western Wisconsin, and given the important work that you are doing right now at the Council on Foundations. 

I am especially excited in previous conversations to hear of the 

efforts now on what we can do with these organizations for rural 

economic development opportunities. I know you are planning a 

conference in August, coming up shortly, one that I have a scheduling conflict now about but I will get back to you on later, which 

could be very helpful in introducing some new ideas and some new 

concepts in a very underserved and underrepresented region of our 

country. 

So, Steve, I thank you. Welcome back to Capitol Hill. I look forward to hearing your testimony. 

Thank you, Mr. Chairman. 

Chairman LEWIS. Thank you very much, Mr. Kind, for your 

statement. 

Mr. Pascrell, my friend, my wonderful and great friend from the 

State of New Jersey. 

Mr. PASCRELL. Mr. Chairman, just very briefly, I am looking 

to see whether there is a balance between the private and public 

philanthropic organizations—easy for me to say—and what experiences the IRS is having. 

Finally, Mr. Chairman, I am interested to know: Basically, the 

Treasury Department asserted recently that nonprofits are a significant source of financing to terrorists and terrorist organizations. 

I think we need to take a look at this very carefully so that we do 

not paint with a wide brush, which we are apt to do in the Congress. I am very interested in that area. 

We have got a distinguished panel, so let’s get on with it. 

Chairman LEWIS. Thank you very much, Mr. Pascrell, for your 

statement. 

We are at that point now where we hear from our witnesses. I 

ask that each of you limit your testimony to 5 minutes. Without objection, your entire statement will be included in the record. I will 

have all of the witnesses give their statements and then the Members will ask questions of the panel. 

It is now my pleasure to introduce and present our first witness. 

Steve Miller is the Commissioner of the IRS Tax Exempt and Government Entities Division. Mr. Miller, welcome. 

10 

STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION, INTERNAL 

REVENUE SERVICE 

Mr. MILLER. Thank you, Mr. Chairman. Good morning, and 

thank you for the opportunity to appear. As you mentioned, my office at the IRS is responsible for charities and other tax-exempt entities. We cover a great deal of ground. We have more than one million 501(c)(3) organizations we are aware of, and they hold assets 

in excess of $2.5 trillion. 

I will begin with two observations. First, I believe the charitable 

sector deserves our respect and gratitude. It does wonderful things 

for society. There is no question. Second, I believe the vast majority 

of the charitable sector complies or attempts to comply with the tax 

law. 

While we have seen problems, and some are serious and some involve major charitable institutions, the problems don’t appear to be 

widespread. We are working to keep it that way. Our job at the 

Service is to maintain a balanced program for regulating the charitable sector. 

Such a program ensures that congressional intent is met. It helps 

maintain public confidence in the integrity of the sector. It prevents erosion of the tax base by ensuring that those who would 

prey upon innocent contributors and misuse the privilege of tax-exempt status are identified and are stopped from doing so. 

Our compliance program has three components. First is our determination letter program. We work individually with new organizations to ensure that they understand and comply with their responsibilities. The second component is a strong education and outreach program. In person and online, we help existing charities 

stay compliant and alert to their legal requirements. 

Finally, we have an increasingly robust examination program to 

follow up on how organizations are actually operating. We have 

changed the way we examine organizations, adding staff and office 

to allow us to react flexibly. Last year we examined more than 

7,000 returns, up 23 percent from 2003 and the most we have examined since the year 2000. 

Our determination and examination programs allow us to identify areas of concern. I have outlined those in detail in my written 

testimony, but I will touch on a few here. 

Our first concern is the overvaluation of charitable contributions, 

especially noncash donations. We pursue these cases, but decisions 

are difficult where the recovery is likely to be less than the significant cost to audit, appraise, and litigate. 

The second area of concern is with charities established to benefit the donor rather than the public. In these cases, a donor claims 

a deduction but maintains control over the contributed assets, and 

often uses them for personal gain. Certain donor-advised fund arrangements and certain supporting organizations may fall into this 

category. 

The third area involves the blurring of the line between the taxexempt and the commercial sectors. The line grows fainter as the 

tax-exempt sector grows larger, wealthier, and structurally more 

complex. Concerns in this area usually involve the movement of 

11 

commercial enterprise into the charitable sector, and difficulties in 

calculating and reporting the unrelated business income tax. 

The fourth area is excessive compensation. High compensation 

based on fair market value is fine. Excessive compensation is not. 

Finally, we have a concern over political activity. Charities cannot intervene in political campaigns, but in every election cycle we 

see reports of charities supporting or opposing particular candidates. 

How will we address needs and other problems into the future? 

Well, first we need to continue to strengthen our compliance programs. We are improving front-end compliance by upgrading our 

determination letter process. We continue to create innovative and 

interactive educational opportunities on the web. We have increased our enforcement presence in the community, with more examinations and taxpayer-to-IRS compliance contacts. 

Our second priority is to enhance transparency of the nonprofit 

sector by requiring better data and making that data more publicly 

available. Transparency is the linchpin of compliance, but when the 

structure and operations of charitable organizations are visible to 

all, the possibility of misuse and abuse is reduced. 

Our transparency initiatives include the wholesale redesign of 

the Form 990 and expanded electronic filing. We are also working 

with the sector to raise standards of governance and accountability, 

and we salute the sector’s leadership in the area, including that of 

the Council on Foundations and the Independent Sector. 

We appreciate the support the Subcommittee has given to us, 

and we appreciate your support of the 2008 budget, which contains 

a nice increase for my function as well as enhanced electronic filing. Thank you, and I will be prepared to take questions at a later 

time. 

[The prepared statement of Mr. Miller follows:] 

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Chairman LEWIS. Thank you very much, Mr. Commissioner, for 

your statement. 

Our next witness is from the Government Accountability Office, 

so, I am pleased to welcome the Director of the Strategic Issues, 

Mr. Stan Czerwinski. Welcome. 

STATEMENT OF STANLEY J. CZERWINSKI, DIRECTOR, INTERGOVERNMENTAL RELATIONS, STRATEGIC ISSUES, GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. CZERWINSKI. Thank you, Mr. Chairman and Members of 

the Subcommittee. We appreciate your holding this hearing, which 

as many of you noted in your opening statements, is on a very important topic. 

GAO has done a lot of work looking at nonprofits over the years. 

Typically, our work has been specialized, focusing on specific topics, 

programs, events, and issues, especially tax-related issues. For example, Greg Kutz, our Managing Director for Forensic Audits and 

Special Investigations, will be speaking next about a review that he 

and his team have just completed. 

Late last year our Comptroller General spoke at the independent 

sector conference. When he returned from that conference, he 

asked me and my team to do some background work to determine 

if the sector as a whole merited GAO’s attention. We have just 

completed our initial background review, and our answer to the 

Comptroller General is a resounding yes. 

We are pleased to share with you the initial results of our review 

today. Specifically, I would like to address three topics: one, the 

sector’s role in the economy; two, its partnership with the Federal 

Government to provide key services; and three, some issues that 

we believe need further scrutiny. 

As you know, the nonprofit sector is defined by its tax-exempt 

status. To qualify, organizations must not distribute the profits to 

the members, but instead must plow it back into the organization’s 

charitable purposes. Also, those purposes themselves are dictated 

by what is governed in law. 

My statement today will primarily focus on public charities 

known as 501(c)(3)s for the section of the code that governs them. 

Public charities make up about 60 percent of the 1.8 million organizations in the nonprofit sector as a whole. Also, as a whole, the 

nonprofit sector plays a key role in the U.S. economy. It represents 

about 11 to 12 percent of GDP. Nine percent of the nation’s civilian 

workforce is employed by nonprofits. The sector is growing also. 

The number of organizations has tripled in the last two decades. 

The data tell us a similar story about nonprofits’ role in delivering Federal services. However, it is important to note that the 

data are quite limited. What we have today is a result of a herculean effort from a small band of dedicated researchers. Elizabeth 

Boris, Marian Fremont-Smith, Alan Abramson, Lester Salamon, 

and Gene Steurle are the most noteworthy, and all provided input 

to our work. 

About $200 to $300 billion in Federal funds flow each year into 

nonprofits. That number is growing. For example, the researchers 

estimate that the dollars going into nonprofits has increased over 

200 percent for the last two decades. 

27 

If anything, we see this trend continuing as the Federal Government is increasingly faced with fiscal constraints and looks for 

partners to help them shoulder that burden. Nonprofits offer key 

advantages in doing so. They exist for the sole purpose of providing 

the service they were created for and dedicated to. They are typically very expert in the needs of their clientele, the geographic region, and they offer greater flexibility than their Government counterparts. 

In times of constrained Government resources, we increasingly 

look for ways to reform the way we do business and to look for additional partners. A good example of this is welfare reform. As you 

know, AFDC used to be a checkwriting service. It was an entitlement, and dollars were unlimited. AFDC underwent reform and 

was replaced by TANF, which is service-based and the funding levels limited. TANF provides such services as job training, job search, 

and child care. These services are pretty much provided by the 

nonprofit sector. 

As we increasingly rely on nonprofits, it is important to know 

about them, both to know how to help them and also which ones 

need further scrutiny. The primary source of information in the 

nonprofit sector and for oversight of it comes from IRS through its 

tax-exempt status. However, IRS lacks the capacity to do this job 

the way that we would need from a full policy perspective, and to 

be fair, it is not IRS’ central mission. As we know, their job is to 

collect taxes. 

As I pointed out, the definition of nonprofits hinges on the taxexempt status, but that hardly defines them. The role of the sector 

is far greater than that. They are important to the economy. They 

are key partners in the Federal Government. 

It is in our interest to ensure their vitality, their capacity, and 

their integrity. That begins with the attention provided today, the 

support that they need, and oversight. What the Subcommittee is 

doing today is a first step in the right direction. We look forward 

to helping you as you continue your agenda and your approach. 

That concludes my statement, Mr. Chairman. I will be glad to respond to questions you may have. 

[The prepared statement of Mr. Czerwinski follows:] 

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Chairman LEWIS. Thank you very much, Mr. Director, for your 

statement. 

Our next witness is from the Government Accountability Office. 

So, I am pleased to welcome Greg Kutz, Director of Forensic Audit 

and Special Investigations. Welcome. 

STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. KUTZ. Mr. Chairman and Members of the Subcommittee, 

thank you for the opportunity to discuss exempt organizations with 

tax problems. 

Over the last several years, I have testified that government contractors, Medicare physicians, and Combined Federal Campaign 

charities were abusing the Federal tax system. At the request of 

Ranking Member Ramstad, we have expanded our investigation of 

tax abuse to exempt organizations. My testimony has two parts: 

first, the magnitude of unpaid taxes, and second, examples of fraud 

and abuse. 

First, we found that 55,000 exempt organizations had $1 billion 

of unpaid Federal taxes. Charitable organizations accounted for 85 

percent of this amount. Most of the unpaid taxes relate to 1,500 organizations that each owed over $100,000. 

The amount of unpaid taxes I reported here is substantially understated because it encloses things such as nonfiling and underreporting of tax liability. We also found that more than 1,200 of 

those with unpaid Federal taxes received $14 billion of direct Federal grants. One thousand one hundred fifty of those were charitable organizations. 

To put a face on this issue, we investigated 25 of the exempt organizations with the most significant amount of unpaid taxes, including 23 charities. For all 25 cases, we found abusive and criminal activity related to the Federal tax system. All 25 cases had unpaid payroll taxes. Willful failure to remit payroll taxes to the IRS 

is a felony. 

The 25 case studies had $105 million of unpaid taxes, ranging 

from $300,000 to $30 million. The executives of these organizations 

have made careers out of failing to pay their Federal taxes. For example, rather than fulfill their role as trustees of payroll tax money 

and forward it to the IRS, these executives diverted the money for 

other expenses, including their own salaries. 

Based on our investigation of the lifestyles of the executives of 

these 25 cases, we found that many were doing very well. The 

posterboard which is on my right shows examples of the assets we 

identified, including multi-million-dollar homes and luxury vehicles. As you can also see on the board, the executive director of this 

nursing home was paid $1 million. 

These cases in our past investigations have shown that failure to 

pay Federal taxes isn’t the only problem that these individuals 

have. For the most part, we found that the individuals behind 

these case studies are fraudsters. This point is further supported 

by five investigative themes, which are shown on the second 

posterboard on my right. 

48 

First, we found substantial Federal payments. By not paying 

their payroll and other Federal taxes, our case studies benefited 

from tens of millions of dollars of Medicare and other Federal payments. 

Second, substantial other debt, including State and local taxes 

and individual income taxes for executives. 

Third, suspicious cash transactions, including cash withdrawals 

and gambling by executives. 

Fourth, numerous related party transactions, including millions 

of dollars of management fees paid by charities to entities affiliated 

with the executives or their relatives. 

Fifth, prior convictions, including assault, attempted bribery of 

an IRS official, and running an illegal gambling operation. 

In conclusion, the good news is that the vast majority of exempt 

organizations pay their Federal taxes. However, our work has 

shown that individuals behind thousands of these organizations 

have taken advantage of the opportunity to avoid paying at least 

$1 billion of Federal taxes. Case studies show the enrichment of a 

select few being bankrolled by the Federal Government and donors. 

Charities are supposed to be helping the poor rather than lining 

the pockets of these select few. 

I believe that the IRS should take more aggressive criminal and 

collection action against those that are abusing the current system. 

Mr. Chairman, this ends my statement. I look forward to your 

questions. 

[The prepared statement of Mr. Kutz follows:] 

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73 

Chairman LEWIS. Thank you very much, Mr. Director, for your 

statement. I am sure there will be a lot of questions. 

I am pleased to welcome the President and the Chief Executive 

Officer of the Independent Sector, Diana Aviv. Welcome. 

STATEMENT OF DIANA AVIV, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, INDEPENDENT SECTOR 

Ms. AVIV. Thank you, Chairman Lewis and Ranking Member 

Ramstad and Members of the Committee. Thank you for inviting 

me to testify. 

Independent Sector is a national nonpartisan organization with 

approximately 600 members who represent tens of thousands of 

public charities, private foundations, and corporate giving programs. America’s nonprofit community includes more than 1.5 million organizations, large and small, committed to improving lives. 

Its impact is a result of the talent and dedication of millions of volunteers, and a workforce of 11.7 million paid employees, 9 percent 

of the entire national workforce. 

Twenty percent of the sector’s funds are from voluntary contributions, 31 percent from government grants and contracts, and 38 

percent from fees for service. Together, charitable organizations 

spend nearly $1 trillion annually to serve communities here and 

abroad. 

These vital organizations face tremendous challenges. Corporate 

giving has declined, and Americans of modest means are finding it 

more difficult to give because of rising prices and difficult economic 

conditions in many regions. Additionally, organizations that rely on 

government grants and contracts, particularly those that serve the 

most vulnerable members of our society, have been hurt by funding 

cuts and changes in priorities. 

To provide some relief, Congress acted last year to allow older 

Americans to make charitable contributions from their Individual 

Retirement Arrangement (IRA) funds without suffering adverse tax 

consequences. This new incentive has already resulted in small and 

large contributions totaling millions of dollars to support counseling for at-risk youth, housing for homeless families, and much more. 

Many of you are cosponsoring legislation to expand and extend 

this provision, which is set to expire at the end of this year, and 

we are committed to working with you to ensure that legislation is 

enacted. 

Nonprofits are also facing human resource challenges. Many 

leaders are baby boomers who will be retiring, and there is a much 

smaller pool to replace them. There have also been some declines 

in the number of Americans who are able to volunteer. 

On another front, there have been a number of stories in recent 

years concerning troubling practices at some nonprofits. Many in 

our community were concerned about these stories, and we brought 

together leaders of charities and foundations to explore needed 

changes. 

At the urging of key leaders in Congress, we formalized our efforts in the national Panel on the Nonprofit Sector. The result constituted the most comprehensive review of governance, regulations, 

and operations of the charitable community in more than three 

decades. 

74 

The panel offered a strong, carefully integrated package of over 

130 recommendations for action that lawmakers, the IRS, and the 

sector itself could take to improve governance and accountability. 

We worked closely with congressional leaders, and are pleased that 

much of the panel’s work was reflected in the reforms passed last 

year with the Pension Protection Act (PPA) (P.L. 109–280). 

The panel has continued its work and this fall will release a set 

of 33 principles for good governance and effective practice to guide 

charitable organizations. The IRS has also drawn on the panel’s 

recommendations in implementing the Pension Act reforms and developing the draft Form 990 that was released last month. 

Our field is now providing feedback to improve that draft. The 

revised form will increase transparency and facilitate compliance, 

but its implementation will require significant educational efforts 

and adjustments in nonprofit accounting and recordkeeping practices. 

We have asked Congress to increase funding to the IRS. We also 

believe that the best way to improve enforcement and transparency 

is to require mandatory electronic filing of nonprofits’ information 

returns. 

There is another way Congress can help strengthen the operations of our charitable community. Many individuals create or 

come to work for charitable organizations with passion and commitment, but insufficient knowledge of the legal requirements and 

skills necessary for success. 

Like their counterparts in the small for-profit community, these 

leaders could benefit substantially from the planning services, financial and legal advice, and management training provided by the 

Small Business Administration. We stand ready to work with Congress to create a Small Nonprofit Administration to nurture and 

train leaders of charities in the skills necessary to ensure that we 

can all benefit from the vital services their organizations provide. 

Thank you, and I am pleased to answer any questions. 

[The prepared statement of Ms. Aviv follows:] 

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84 

Chairman LEWIS. Madam President, I thank you for your statement. I am sure there will be some questions. 

I am pleased to welcome the next witness, our friend, our former 

colleague. It is good to see you, the Honorable Mr. President, in 

your new role as head of the Council on Foundations. To Ron Kind, 

I am not so sure, Steve, whether Ron really introduced you when 

he made his opening statement, but you can get a second introduction. You haven’t forgot how we act here in the Congress on this 

Committee when a good, a dear friend returns. It is really good to 

see you. You are looking good. There is life after Congress. 

Mr. GUNDERSON. There is life after Congress. 

Chairman LEWIS. I believe it. Thank you. 

Mr. KIND. Thank you, Mr. Chairman. I did introduce and welcome Steve to the Committee before. It is a delight to have him 

back up here. I don’t know if I ever shared this with Steve, but as 

a new Member in my first term, getting to meet my colleagues 

around here, inevitably they asked, ‘‘What district are you representing? Who are you replacing?’’ When I told them it was Steve 

Gunderson’s seat, they had nothing but high praise for you. I can’t 

tell you how good that made me feel as a new Member of Congress, 

to hear the type of work you were doing. 

So, welcome back. Glad to have you today. 

STATEMENT OF STEVE GUNDERSON, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, COUNCIL ON FOUNDATIONS 

Mr. GUNDERSON. Well, thank you very much to you, Mr. 

Chairman; to my colleague, friend, and successor, Mr. Kind; to my 

friend on Northwest Airlines back and forth, Mr. Ramstad, way too 

many times; to Mr. Becerra, where we toiled on the old Education 

and Labor Committee; and to our distinguished co-chair of the 

Philanthropic Caucus. Thank you very much, Ms. Tubbs Jones, for 

doing that. I do feel like I am coming home, and I really appreciate 

the opportunity. 

The Council on Foundations is a membership organization of 

more than 2,000 grantmaking foundations and corporate giving 

programs worldwide. We promote responsible and effective philanthropy. We gather today at a unique time in American history. 

Thanks to the combination of demographics and personal resources, 

we are looking at the most significant generational transfer of 

wealth at any time in history. 

Whether we can use this moment to create new philanthropic resources committed to enhancing the public good depends on how 

well we—you the Congress and those of us in philanthropy—can 

partner to create the tools for a new generation of service. 

More than 71,000 grantmaking institutions contributed over $40 

billion in 2006. Collectively, these institutions hold approximately 

$550 billion in assets. That is a lot of money, but a word of caution: 

Philanthropy can never replace government’s role. 

However, foundations can and do play a vital role in strengthening and sustaining our communities. For example, in your home 

city, Atlanta, Mr. Chairman, the Arthur Blank Family Foundation 

holds that promise for every child ought to be the mantra of that 

city. The foundation awarded $23 million last year for students 

who attend Atlanta’s new schools at Carver, the Southeast’s first 

85 

small high school campus, and is helping children in some of Atlanta’s toughest neighborhoods get a fair start in life by funding early 

learning and family support programs. 

As much as philanthropy does, we can and should do more. The 

council is partnering with our members to act as a program leader 

for a coalition funding workforce investment; to conduct a national 

study to determine how we can better respond to national disasters; to hold a conference next month, creating an agenda for philanthropy in rural America; to grow philanthropy’s role in addressing the social challenges facing our neighbors in Latin America and 

the Caribbean region. 

Our growth depends upon our ability to earn and maintain the 

public trust. Our growth and our service also depend upon policymakers becoming our partners in creating the environment and encouraging that growth. There are times when legislation and regulation are appropriate and necessary, but we must be partners in 

this effort in ways that achieve the proper balance, both in the environment we create and in the regulations we impose. 

The council will continue steps toward effective, credible self-regulation. We have established standards for every sector of our 

membership. We have significantly enhanced our ethical review 

process. We take self-regulation seriously. 

Last year’s Pension Protection Act includes the first-ever regulation of donor-advised funds, and substantially increases regulations 

of supporting organizations. The council supported many of those 

provisions. However, in a couple of those areas, we believe the legislation might have gone too far or it might have had unintended 

consequences. 

We were disappointed by the last-minute exclusion of donor-advised funds, supporting organizations, and private foundations as 

eligible recipients of charitable distribution from IRAs. We ask the 

Congress to extend the IRA rollover benefit, but we also ask that 

you allow donors to freely choose where they will direct those 

funds. 

This morning I want to underscore that donor-advised funds democratize philanthropy, giving ordinary citizens the chance to become philanthropists. Six donors from Mr. Ramstad’s area, the 

Minneapolis Foundation, recently recommended grants of $16,000 

from their donor-advised fund to support ending homelessness. 

We at the council want to fix certain provisions of the Pension 

Protection Act, but we also want a positive agenda, not only expanding the IRA rollover with appropriate fixes, but we want to 

provide program-related investments by private foundations to facilitate urban and rural economic development, to extend the PPA’s 

incentives for gifts of qualified conservation property, and to make 

tribal governments qualified recipients of charitable contributions 

of food by businesses. 

Mr. Chairman, this is all about partnerships. We seek your help 

to create the environment encouraging the growth of philanthropy 

in order that we might all better partner in serving the common 

good. 

Thank you very much. 

[The prepared statement of Mr. Gunderson follows:] 

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Chairman LEWIS. Thank you very much, Mr. Gunderson. 

Mr. Miller, in your written statement, you discuss compliance in 

the sector. Is the charitable sector generally compliant with the tax 

law? 

Mr. MILLER. I think that is a fair statement, Mr. Chairman. 

Chairman LEWIS. Will you go further to say that it is very compliant? 

Mr. MILLER. I believe that probably remains correct. As we try 

to quantify the level of compliance, the only comment I would make 

is we have not yet done a national research program to truly baseline the level of compliance here, but in our view and in our findings throughout our examination process, I would hazard that very 

compliant remains correct. 

Chairman LEWIS. Mr. Czerwinski, your testimony indicates that 

the number of charities has grown 30 percent in the past 6 years. 

Has there been a 30-percent increase in the number of employees 

and volunteers? 

Mr. CZERWINSKI. That is a very good question, Mr. Chairman, 

because we don’t have precise data on these. What it points out is 

the limitation of the understanding that we have of this sector. Obviously, those numbers have grown, and that is one of the things 

at GAO that we would like to be able to do, is to try to get a more 

precise handle on that. 

Chairman LEWIS. Why has Government been increasingly 

partnering with nonprofit organizations? Do you think this trend 

will continue in the future? If so, why? 

Mr. CZERWINSKI. Oh, absolutely, Mr. Chairman. 

Chairman LEWIS. This is local, county, State, and Federal; government at all levels. 

Mr. CZERWINSKI. Yes, Mr. Chairman. What we see is a delivery mechanism that more and more involves all levels of Government and other players such as nonprofits. As the Federal Government is facing a fiscal condition of deficit, it looks for more partners to help with that burden, and nonprofits have proven themselves to be very effective players in that. 

So, this is a trend that we have seen going on for the last number of years, and it will probably increase and accelerate. 

Chairman LEWIS. Ms. Aviv, your testimony states that it would 

take nine million employees to replace the service performed by 

volunteers. Has this been increasing over the past few years? What 

challenges are charities facing in finding volunteers? 

Ms. AVIV. Mr. Lewis, I think what I was trying to convey in my 

testimony is that there are the equivalent of—the number of volunteers there are the equivalent of nine million professionals. I think 

the charitable sector depends on both the work of full-time professionals, part-time professionals, and volunteers. It was just one 

way to quantify what the value was and how many volunteers we 

depend on. 

What we have seen, though, in numbers that are of concern to 

us is that the number of volunteers volunteering in charitable organizations is going down. In 2004, it was 64.5 million, in 2005, 65.4, 

and 2006 61.2. While we see that from time to time the number 

of volunteers may increase in response to a crisis, the overall numbers are going down. We are a little concerned about that. 

98 

Chairman LEWIS. Mr. Gunderson, I applaud the work of foundations. I have seen the good work in places all across America, but 

especially in my city of Atlanta. I know the foundation you mentioned, the Arthur Blank Foundation. They help create unbelievable opportunities for children, for young people, to get an education. 

How do your members determine the needs of a community? 

Mr. GUNDERSON. Very carefully and very strategically. In most 

cases, especially at our community foundations, they would have 

boards. Their boards, first of all, are chosen from the community, 

so they seek to represent and reflect the community that they 

serve. 

Many foundations, including our private foundations and even 

many of our corporate giving programs, have created their own advisory committees that will allow them to better hear from the 

community, especially the areas in which they choose to serve. 

For example, some foundations will fund just education. Some 

will fund health care. Some will fund recreation or the environment. They try to specialize and bring in those kind of resources 

in ways that best reflects the needs of the community they seek to 

serve in conjunction with the mission of their foundation. 

Chairman LEWIS. Mr. Kutz, let me ask you, do you have any 

idea what is the best way to promote self-regulation? Is this a 

question that they should be responding to in the private sector? 

Mr. KUTZ. I wouldn’t have any opinion on that, no. 

Chairman LEWIS. Thank you. Let me now yield to the Ranking 

Member for questions. 

Mr. RAMSTAD. Well, thank you, Mr. Chairman. I want to thank 

all the witnesses again. 

Mr. Kutz, I must say I was blown away when I first learned 

about the 55,000 exempt organizations that are delinquent in taxes 

and owe nearly $1 billion. Then you say in your testimony that 

those numbers are understated. At the same time, you conclude, 

which I think speaks well for the sector, for nonprofits generally, 

that the vast majority of exempt organizations pay their taxes, to 

quote you. 

First of all, how many tax-exempt organizations are there in this 

country? 

Mr. KUTZ. I believe in the database of active ones for IRS, there 

was 1.8 million. 

Mr. RAMSTAD. 1.8 million. So, of the 1.8 million, 55,000 exempt 

organizations are delinquent? 

Mr. KUTZ. That’s correct. 

Mr. RAMSTAD. Well, you also state that more aggressive action 

is needed by the IRS. You alluded to the need for some criminal 

investigations. Do you think any changes in law, in Federal law, 

are also necessary? 

Mr. KUTZ. No. I think the more aggressive criminal action is 

necessary on the payroll tax cases. We have referred several hundred of those over the last 5 years to the IRS related to government 

contractors, Medicare providers, et cetera. We do believe some aggressive action, making some examples of those people. 

On the collections side, I also think that with these types of people, who are real fraudsters—these aren’t your average American 

99 

taxpayers—more aggressive seizures and levying of asset sources 

should be done. 

Mr. RAMSTAD. So, it is not different from any other problems. 

A few bad apples, unfortunately. Well, I think it is important to 

point out the vast majority of exempt organizations pay their taxes, 

are contributing a great deal to this country, to the people in need 

in this country, as has been pointed out, as we all know. 

So, I just hope that the headlines coming out of this hearing 

don’t just concentrate on the bad apples because that would diminish the good work that is being done, but at the same time, I also 

think your recommendations that the IRS needs to take more aggressive action against the bad apples is well taken. 

Let me ask you, Mr. Miller, do you have a mechanism in place 

to identify officials at exempt organizations who aren’t paying their 

taxes? Are there some actions taken against them or for those executives otherwise abusing the Federal tax system? Why aren’t you 

being more aggressive and taking action against these bad apples? 

Mr. MILLER. Well, if I understand the question, Mr. Ramstad, 

we generally don’t, as a part of our determination letter process up 

front, do tax checks on key individuals. That would be fairly burdensome on the organization and fairly burdensome on the Service, 

and would slow down an otherwise already pretty slow process of 

pushing through determination letter requests. 

On the enforcement side, when these organizations do get into 

trouble, I think it is important to say that exempt organizations, 

in terms of collection, in terms of most employment tax issues, are 

remarkably similar to the balance of our taxpaying public. That is, 

there are some bad apples out there. They go into the collection 

queue, and they are treated like other taxpayers at that point. 

So, some do sit in the queue too long, and that is a function of 

resources. 

Mr. RAMSTAD. But whatever percent 55,000 is of 1.8 million is 

about proportionate to the broader—— 

Mr. MILLER. I don’t think I can say that. I think I could look 

at—I have got to get back to you on that if I am correct on that, 

but our sense is that the exempt organizations’ function, that those 

organizations are roughly equivalent in terms of getting into problems as other small businesses, or large business, for that matter. 

Mr. RAMSTAD. Well, let me conclude before my time runs out. 

I want to get back to Mr. Kutz for one question. 

In your written testimony, you indicated that 1,200 of the delinquent tax-exempt organizations received over $14 billion in Federal 

grants. I would like to see this money going to those that pay their 

taxes. That just doesn’t make sense. 

Can’t the granting agencies—isn’t there some way to identify applicants that have a Federal tax debt before issuing the grants? 

Mr. KUTZ. It is a self-reporting process. There is a form that is 

filled out. It is SF–424. It has a box that says, ‘‘Do you have other 

Federal debt?’’ Five of our 25 case studies said no on the box. Even 

if they had said yes, I am not sure there is a mechanism for the 

agency, such as the Department of Health and Human Services 

(HHS), for example, to validate that. So, right now it is a trust but 

do not verify system, and so people, grantees, who have significant 

tax problems get Federal dollars. 

100 

Mr. RAMSTAD. Again, I thank the panel. I yield back. 

Chairman LEWIS. Thank you. Now turning to Mr. Pascrell for 

questions. 

Mr. PASCRELL. Thank you, Mr. Chairman. I would like to associate myself with your questions and the Ranking Member. I think 

they go to the heart of much of what we are going to be talking 

about today. 

Mr. Gunderson, if you would, the Treasury Department asserted 

recently that nonprofits are a significant force of financing terrorists and their organizations. Do you agree with that assessment, 

and what is the COF’s view of the Treasury Department’s voluntary anti-terrorist financing guidelines? 

Mr. GUNDERSON. Thank you for the question because this is 

an area of great concern for us, especially at a time in which international grantmaking is rising because of the concerns about people all over the globe. 

Out of hundreds of thousands of U.S. charities and billions of dollars given in grants in material aid each year—listen to this—only 

six U.S. charities are alleged to have intentionally supported terrorists. Thus far, Treasury has not identified a single case of inadvertent diversion of funds from a legitimate U.S. charity to a terrorist organization. 

The principle difficulty that we and our sector has with the 

Treasury guidelines is that they call on charities to collect a prodigious amount of information about their grantees, much more 

than legally is required, and there is simply no evidence that legal 

charities or legal foundations are in any way engaged in funding 

terrorist actions. 

As a result of that, we have asked as a part of a coalition that 

Treasury withdraw those guidelines in order that we might sit 

down and work together to try to resolve the concerns that they 

may have and that we have about appropriate administration in 

this area. 

Mr. PASCRELL. So, we painted with a wide brush about certain 

organizations, particularly in terms of international events. Yet 

there has not been a single example? Why, then, does the Treasury 

point to certain organizations if they are not willing to come forward with specific examples? 

Mr. GUNDERSON. That might be a question we have to ask 

Treasury because it is one we are also trying to find out. The Council on Foundations leads this coalition trying to work with Treasury. We have had numerous meetings. They will admit we have 

had meetings. We continue to offer them various suggestions for remedial action. Thus far, they haven’t responded to any of that. 

As you may or may not know, and I will share for the record, 

we have recently submitted a letter to the Senate, Senator 

Lieberman’s Committee, asking that they take some action on our 

behalf to try to stop what we believe has been the nonresponsiveness of Treasury on this whole area. 

Mr. PASCRELL. What are the six organizations? 

Mr. GUNDERSON. I would have to provide those for the record. 

They were six domestic Muslim charity organizations. 

Mr. PASCRELL. There is no examples or proof that you know of, 

anyway, that any of these six are engaged in very specific activities 

101 

which are contrary to the constitution and contrary to this U.S. 

Government? 

Mr. GUNDERSON. No. If I understand, part of the issue has 

been that when you make international grants in certain areas, 

they automatically become suspect, certain regions of the country. 

Mr. PASCRELL. Right. 

Mr. GUNDERSON. Nobody supports the abuse if there is direct 

funding. We don’t believe that is the case. Now, we are not saying 

that there hasn’t been a violation. We are saying the American 

charitable sector is not engaged in this. 

Mr. PASCRELL. What are the key indicators, Mr. Gunderson, to 

measure diversity in philanthropy, and how can we use these indicators to hold foundations more accountable to all communities? 

Mr. GUNDERSON. You should know, Congressman, that we 

have made the increase in diversity a major focus of my leadership 

of the Council on Foundations. I think I can speak for Diana. The 

two of us jointly are making this a major initiative in the nonprofit 

sector. 

Our board has just approved a major initiative that will include 

not only the hiring of a director of diversity and inclusive practices—the person has already been hired and will be on board as 

of August—we have approved an agenda which includes a philanthropy corps, emerging philanthropic leaders fellowship program, 

an education program, even an international area, and research in 

this area. 

What are the indicators? I would suggest that you need to look 

at a series of them. You need to look at the diversity on our boards. 

The diversity on our staffs. You need to look at diversity in 

grantmaking, but of course, the metrics you use for that are not 

easily defined. We are certainly working with Greenlining and 

other organizations to try to determine what is the appropriate 

metrics to use in this area. 

Mr. PASCRELL. Thank you. Thank you, Mr. Chairman. 

Chairman LEWIS. I thank Mr. Pascrell for his questioning. 

Now, Ms. Tubbs Jones is recognized for her questioning. 

Ms. TUBBS JONES. Thank you. Thank you, Mr. Chairman. We 

only have a few minutes, so I am going to ask everybody that I ask 

questions to be short, like when I was in court as a prosecutor. 

I am going to start with Mr. Kutz. Mr. Kutz, I am a former district attorney and a former judge. Looking at these numbers you 

threw at us—55,000 exempt organizations—it would have made a 

great TV ad for me as prosecutor until you told me that that’s only 

55,000 out of 1.8 million organizations. I am not a good mathematician, but it comes up to about 3 percent. 

So, don’t you think it would have been as good in your report and 

summary to tell us that there are 1.8 million exempt organizations 

before you threw out this 55,000 that you prosecuted? All due respect to you doing that, but don’t you think that would have been 

a good thing for you to do for Members of Congress? 

Mr. KUTZ. We have done that in the past when we have done 

government contractors. The problem here was that denominator of 

1.8 million. A lot of those entities don’t have any tax responsibility. 

So, we had a hard time determining whether it was 3 percent, 2 

percent, or 5 percent, but I think that is a good point, and it is sevVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00105 Fmt 6602 Sfmt 6602 E:\HR\OC\38087.XXX 38087
102 

eral percent, but it is very similar to government contractors, Medicare physicians, and other things that we have looked at. 

Ms. TUBBS JONES. Right, but the point being that you are 

Managing Director of Forensic Audits and Special Investigations. 

As a forensic auditor, it is your job to be able to get the numbers 

running. Right? 

Mr. KUTZ. Correct. 

Ms. TUBBS JONES. Thank you. 

Let me go to you, Mr. Miller. Can you tell me it was the IRS’ 

recommendation that nonprofits not be able to receive tax exemption from donor-advised funds? 

Mr. MILLER. I am not sure that is an IRS recommendation. 

Ms. TUBBS JONES. It is the law. Maybe it wasn’t an IRS recommendation, but what do you think about it? 

Mr. MILLER. I think, generally, donor-advised funds are permitted to be 501(c)(3) organizations. I would agree—— 

Ms. TUBBS JONES. It is not that they would not be permitted 

to be 501(c)(3) organizations. It is the fact that the money that 

comes from donor-advised funds is not permitted to be given as a 

charitable contribution. 

Mr. MILLER. Under the IRA rollover, you cannot give—they are 

excluded from the IRA rollover rules. Is that—— 

Ms. TUBBS JONES. Yes. That is what I meant. 

Mr. MILLER. Yes. I got you, ma’am. I can’t speak to why that 

is. I would say that there probably was some concern on the Hill 

and otherwise about what was happening in some of the areas with 

supporting organizations and donor-advised funds. 

I would also note that, actually, that particular delineation, the 

difference between donor-advised funds and supporting organizations, existed pre-Pension Protection Act when we had a different 

rule for the Katrina and New York victims as well, I believe. 

So, I can’t speak—really, Congress spoke to that. It was not a 

Treasury-inspired rule. 

Ms. TUBBS JONES. You know Congress doesn’t speak to anything until we have an opinion from the Treasury or the IRS, or 

we have a hearing and we get all this background information, and 

somebody says to us this is what we ought to do. 

So, what I am asking you, Mr. Miller, is as we think about rethinking that decision, are you willing to try and take a look at 

whatever you have oversight of and give us some good advice and 

counsel as to how we can get additional dollars into charitable organizations in a much smoother process than currently exists with 

the IRA rollovers, et cetera, et cetera? 

Mr. MILLER. Absolutely. 

Ms. TUBBS JONES. Thank you very much. I think I am—oh, I 

got time. I got time. Okay. 

How would you suggest, Ms. Aviv, that we work on increasing 

philanthropy in the United States? The statistics say that back in 

the day, people had lots of money and they gave to a lot of organizations. That seems to be diminishing. I am almost out of time. 

Give me some suggestions of what we could do. 

Ms. AVIV. Well, one very quick way that we have been talking 

about is to expand and extend the IRA rollover so as to enable people not only to—— 

103 

Ms. TUBBS JONES. I already made that point. Come up with 

something else. 

Ms. AVIV. One of the other issues that I raised in my testimony 

related to these and the Small Nonprofit Administration. One of 

the reasons that we see that charities don’t fare well in response 

to the GAO study is not only because there is bad intent but also 

because there is ignorance or people simply don’t know or are unaware of what they are supposed to do. 

So, to the extent to which we can educate people to understand 

how to run their operations, how to fundraise, how to do all of the 

things to make them more effective, I think that we will be able 

to increase philanthropy and nonprofit organizations. 

Ms. TUBBS JONES. Thank you. For the record, Mr. Chairman, 

I just want to be clear that I think that we ought to prosecute 

those who abuse the process. I don’t want anybody to think that 

I am not supporting that. I just know that when we do that, it has 

an impact on the other organizations that are doing a great job. 

I thank you, Mr. Chairman, for the opportunity. 

Chairman LEWIS. I thank the gentlelady for her questioning. 

I now turn to Mr. Becerra for questioning. 

Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for 

your testimony and getting to see many of you again. 

Let me first say I think the work that many of our charitable organizations do is just phenomenal, and I hope that we do everything here in the Congress to incent the establishment of other 

charitable organizations that will continue to do that good work, 

and that we continue to have organizations that will abide by the 

tax rules and hopefully help make sure that they understand, and 

especially the smaller organizations, which may not have the sophistication to get out there and make sure that they are on top 

of every single change in the tax laws. I hope that you will help 

us make sure that the Congress is constructive in that regard. 

Having said all that, I would like to now focus on just a couple 

of issues of concern I have with regard to the charitable work that 

some of these organizations do. I would like to first find out, having 

experienced some of this myself, and Ms. Aviv and I have gone 

through this a bit with the Smithsonian Institution, if you can tell 

me whether or not there is anything in current law that restricts 

what a 501(c)(3) tax-exempt charitable organization can do with regard to employee compensation. 

Mr. MILLER. Perhaps I can start, sir. 

Mr. BECERRA. Mr. Miller, also, as Ms. Tubbs Jones said, if you 

could just try to be straight to the point. Otherwise I will run out 

of time. 

Mr. MILLER. That is difficult, but I will try. 

Mr. BECERRA. I will probe. If I need more, I will probe. 

Mr. MILLER. For public charities, there is Section 4958, which 

states very specifically that compensation, high compensation, is 

fine. Over fair market value compensation is not, and gives rise to 

an excise tax and potential revocation. 

Mr. BECERRA. Fair market value is some—— 

Mr. MILLER. Similar compensation to other like compensations. 

Mr. BECERRA. In similar organizations? 

104 

Mr. MILLER. Similar organizations, for-profit or nonprofit, however. 

Ms. AVIV. Congressman, what most large nonprofits do—smaller 

ones, it is maybe harder for them to do—is to hire outside consultants to take a look at similar organizations, like size, region, budget, work, and so on, try and do it within the sector even though 

they have the right to do it outside of the sector, and then compare 

to see that it is reasonable. 

Mr. BECERRA. Understood. What about for private foundations? 

Is there any restriction? 

Mr. MILLER. A similar rule would apply. 

Mr. BECERRA. Would apply? 

Mr. MILLER. A different statutory basis, but a similar rule. 

Mr. BECERRA. So, in either case, public charities or private 

foundations, there is this reasonableness test that is used? 

Mr. MILLER. Yes. 

Mr. BECERRA. Okay. Thank you. What about with regard to expenditures by the organization? 

Mr. MILLER. I am not sure where you are going with that one, 

Congressman, so—— 

Mr. BECERRA. I see a great-looking BMW in that photograph 

down there. 

Mr. MILLER. If it is being provided as compensation or it is 

being provided to someone and would be treated as compensation, 

it would go into the matrix of determining whether that was reasonable. 

Mr. BECERRA. But what if it is being used by the charity to 

dole out food to the poor? 

Mr. MILLER. That becomes a more difficult sort of test. 

Mr. BECERRA. So, how do you decide if a BMW should be a vehicle that is used to dole out food to the poor? 

Ms. AVIV. Congressman, we think that the responsibility of 

boards is immense. If boards aren’t minding the store, we have a 

serious problem. In a case where a board is allowing for a BMW 

or a car of that nature or a car that is very expensive to be used 

when that money can be used in a different way, I don’t think that 

that board is fulfilling fiduciary responsibility. 

Mr. BECERRA. Other than the laws that require fiduciary responsibility to be assumed by the board members, is there anything 

else that can be done under law to try to prevent that type of activity? 

Ms. AVIV. When it comes to the area of compensation, we have 

argued and—— 

Mr. BECERRA. Not compensation, but just in the utilization of 

tax-exempt dollars for carrying out the purpose of the charity in 

terms of expenditures. How can we make sure we have got a grip 

on that? 

Mr. MILLER. If I could jump in, Congressman, two things. One, 

I agree 100 percent with Diana in terms of we need to ensure that 

the boards are managing appropriately and are accountable. Part 

of that is making sure that sort of expenditure, which is an obnoxious type of expenditure, shows up somewhere for the public to 

take a look at. So, that can be a reaction. 

Mr. BECERRA. Some form of transparency. 

105 

Mr. MILLER. Correct. 

Mr. BECERRA. Maybe some type of audit team. Maybe a periodic audit team might help. 

Let me ask one last question. How do you decide what is charitable? Helping the poor? Helping children? Housing for disadvantaged people? Opera? Is there any way that we track what is being 

given charitably to different types of entities? 

Ms. AVIV. Congressman, there are a lot of stats—and I will be 

happy to provide them to you—on the tracking of what is given to 

charities. In fact, we have seen a change in individual donations 

over the last few years in which, in the last year, the reports that 

we have are that the funding going to low-income organizations 

from individuals is much lower than the funding going to arts and 

culture institutions and higher education institutions. 

So, when we see even the money being flat or slightly going up, 

that doesn’t tell the full story until we look beneath the surface to 

see. One of the reasons why organizations serving low-income people are so concerned is partly because of individual donations not 

coming in their direction, and partly for concerns that other government priorities are not allowing public funds to flow to them so 

that the needs of their constituents or their members are rising, 

and there isn’t the funding to support them. 

Mr. BECERRA. Thank you. Mr. Chairman, I will conclude by 

saying I hope that as we continue to do hearings on this, we will 

explore what Ms. Aviv has just pointed out a little bit further. I 

do believe that while we want to support charitable giving, that we 

want to make sure that it really is serving a public purpose. I 

thank all of you for your testimony. 

I yield back, Mr. Chairman. 

Chairman LEWIS. I thank the gentleman for his questions. 

I turn to Mr. Neal for questions. 

Mr. NEAL. Thank you very much, Mr. Chairman. 

I don’t know if you are familiar with the series that the Boston 

Globe did a couple of years ago about what was happening with 

some of these old-line families and what they were doing with the 

money. In fact, they had given little if any of it away. Upon further 

examination, they were paying themselves some pretty good salaries. 

What was striking about it is that frequently those are the people that preach sacrifice and hard work for the rest of us. The series, as you know, highlighted not only the fact that they were paying themselves pretty good salaries, they were paying other family 

members pretty good salaries. In fact, it gave new meaning to the 

term ‘‘the leisure class.’’ 

Mr. Miller, what is the overall compliance rate by tax-exempt entities as being made comparable to taxpayers? 

Mr. MILLER. We don’t have—as I mentioned in a discussion earlier with the Chairman, we don’t at the current time have a baseline, a compliance baseline. Part of the 2008 budget, in fact, is to 

fund the beginning of exempt organizations research program to 

try to get that baseline. So, it is a hard thing for me to give you 

a precise answer to. 

106 

Mr. NEAL. So, it is hard to suggest that we should create more 

oversight without overburdening the majority of charities that do 

the right thing? 

Mr. MILLER. I think we need to be careful in those areas we 

choose to act in. 

Mr. NEAL. What type of feedback have you received on the Form 

990? 

Mr. MILLER. The new form has received a world of feedback, 

and I expect that to continue, much of it positive. All of it, so far, 

in my mind is constructive. Even though individuals have differing 

ideas as to what we should put into the hospital schedule, for example, or onto the summary first page they have been very constructive in their comments. 

So, it is all positive to date, including a discussion we had late 

last week with the Independent Sector. I expect those discussions 

to continue with the Council on Foundations as well. 

Mr. NEAL. How many of you read that Boston Globe series? 

Would you like to comment on it, Ms. Aviv? 

Ms. AVIV. Sure. I think that the Boston Globe series was a 

wakeup call to the charitable sector of our responsibility to take a 

look at existing law and see whether existing law covered those 

kinds of practices, and whether this was an issue of inadequate 

oversight and enforcement or whether in fact there were gaps in 

the law that would allow unscrupulous individuals to come into our 

sector and take advantage of the charitable sector’s tax-exempt status to enrich themselves. 

As a result of that work, Independent Sector convened a group 

of 24 leaders, including the Council on Foundations, to come together to think about these issues. We worked closely with Congress to take a look at what needed to be done. The leadership on 

the Senate side invited us to—encouraged us to form a panel on 

the nonpublic sector. We came up with over 130 recommendations 

of how to engage in better oversight that both Congress, the IRS, 

and the sector itself should do to deal with this. 

We took those issues very seriously, and notwithstanding the fact 

that it was only a small number of people, since we depend on the 

public trust to do our work, if in fact the public believes that this 

is the kind of thing that is allowed and going on, it undermines the 

integrity of all organizations. For that reason, we saw this as we 

are each other’s keepers, and we were quite public about it. 

Mr. NEAL. A small number of people but a lot of money. 

Ms. AVIV. A lot of money and a lot of concern because if that 

is what the public is reading about the charitable sector and not 

about our good works, that won’t help us raise the kinds of funds 

we need to serve the needs we have. 

Mr. NEAL. Mr. Gunderson, you seem very anxious to answer as 

well. 

Mr. GUNDERSON. It is probably my worst nightmare in this 

job. There are 71,000 foundations in America. There are probably 

ten that you and I can name that have been the focus of expose ́s 

in the Boston Globe, the Washington Post, the L.A. Times, et 

cetera. Those ten right now are defining the public trust, the credibility, and frankly, the regulation of our sector. 

107 

What we have to do, as I said in my testimony, is find that balance. The organizations that were exposed in the Boston Globe, it 

would be easy for me to come here and tell you they are not members of the Council of Foundations. They are not. That doesn’t solve 

the problem. 

The general public reading that says, they are a foundation. 

They created the problems that led to not only the panel, they led 

to the recommendations that you passed in the Pension Protection 

Act. We need to find that balance to get at the intentional abuse 

of the public trust while finding the balance that doesn’t thwart the 

70,000-plus foundations who are engaged in what is a noble effort 

of enhancing the common good. 

How do we find that balance? It has to be a partnership on both 

sides of this dais. 

Mr. NEAL. Thank you, but Ms. Aviv, she mentioned—she said, 

look. This has been unscrupulous behavior. Are you suggesting that 

unscrupulous behavior could go on for decades? 

Mr. GUNDERSON. That it has gone on for decades? 

Mr. NEAL. Yes. 

Mr. GUNDERSON. It has, and unfortunately, I think it will. The 

reality is it is no different in the nonprofit sector than all of society. 

There are always people who try to get around the law. 

What we have at the Council on Foundations, in order to become 

a member of the council, you have to sign a code of ethics statement to become a member. That gives us a carte blanche ability 

to go in and investigate. We have done so. We investigate any 

charge, anybody—the press, an anonymous complaint, a Member of 

Congress. Anybody can file a complaint against a member foundation. 

We will investigate that charge to see whether there is cause. If 

there is cause, in our own internal ethics procedures, we will then 

turn that over to a formal ethics process and sanctions process 

within the council. So, we go beyond the law to deal with what we 

call immoral, inappropriate conduct. 

For example, the Getty. The Getty didn’t necessarily violate the 

law, but by gosh, what they did was certainly inappropriate. We 

put them on censure—excuse me, on probation—at the Council on 

Foundations until they cleaned up their act. They cleaned up the 

governance that Diana was talking about earlier. 

So, we take this public trust very seriously. 

Ms. AVIV. Congressman, can I just add one point on that? The 

Panel on the Nonprofit Sector is about to come up with 33 recommendations of how we can better regulate ourselves. We had an 

experience—Congressman Becerra knows this experience very 

well—with the Smithsonian, where when the issues were raised 

publicly about the Smithsonian, the governance committee took 

those 33 draft principles and looked at their own practices relative 

to the set of standards that we had. 

At the same time, they had an independent review committee 

looking at some of the practices. The governance committee, looking at the 33 principles and the gaps between their own practices 

and those principles, then came up with a series of recommendations of how they need to change. 

108 

Those recommendations were virtually identical to what the 

independent review committee did, which suggests to us that if organizations move forward and embrace a broad set of principles 

supported by the sector as a whole, we may not need additional 

legal oversight, Federal oversight, of the kind—or additional laws 

to get there because we can get there ourselves. It is up to us, 

though, to step up and do that. 

Mr. NEAL. I thought the Globe series was most enlightening, 

and I must tell you, it raised eyebrows across much of the Northeast. 

Thank you, Mr. Chairman. 

Chairman LEWIS. Thank you for your questioning. 

It is my understanding that, Mr. Becerra, you may have a question, and Mr. Pascrell. Okay. Mr. Pascrell? 

Mr. PASCRELL. Thank you, Mr. Chairman. 

Mr. Kutz, I don’t want you to get the opinion today from the 

questions that any of us are not interested in examining not necessarily lifestyles but certainly the records of chief executives who 

draw down a tremendous amount of dollars to themselves. You 

have investigated many areas, and knowing your other backgrounds and other committees, I know you have done a great job. 

None of us are minimizing what you are doing, although we 

would all conclude, I think, that this is a very small reflection of 

what is going on out there in philanthropy throughout the United 

States. Would you agree with me? 

Mr. KUTZ. Yes. I would agree with that. 

Mr. PASCRELL. Mr. Gunderson, the current IRA rollover—and 

you explained to us what that means in and of itself—but that incentive certainly does not prohibit donors from making distributions to community foundations. They just can’t make the distributions to donor-advised funds or supporting organizations. 

How am I doing so far? 

Mr. GUNDERSON. You are absolutely correct. 

Mr. PASCRELL. What makes the donor-advised funds and supporting organizations so essential that we should remove that particular limitation? 

Mr. GUNDERSON. That is really a great question because the 

initial question is, why wouldn’t they just give to the community 

foundation? 

Mr. PASCRELL. Right. 

Mr. GUNDERSON. Every donor has an interest. They have a 

passion—education, children, health care, the parks, recreation, et 

cetera. Through a donor-advised fund, you are able to advise your 

funds without setting up your own private foundation and having 

all of the rules, regulations, legal work, and the costs of administering that foundation. 

So, there is a real—it is that perfect blend. It is what I call democratizing philanthropy. It allows people with a little bit of 

money—most community foundations in America will take a donoradvised fund of $10,000. Some will go less than that. So, people can 

give to this that don’t have super-wealth, but they can target the 

direction of it. 

They can’t have total control. Once it is given, they have lost that 

control. That is why we have the charitable incentive at that point 

109 

in time, but they can say, this is the focus, rather than just saying, 

here is the money. Use however you wish. 

Obviously, a donor has a passion. This is that vehicle to meet the 

passion, but to also increase philanthropy. 

Mr. PASCRELL. So, you would not remove the limitation? 

Mr. GUNDERSON. Oh, I absolutely would. 

Mr. PASCRELL. You would? 

Mr. GUNDERSON. I plead with you to remove it. Let me tell you 

why. We are at that unique moment in time where over the next 

10 to 20 years, we are going to see a significant transfer of wealth. 

There is a study by the Nebraska Community Foundation. 

Mr. PASCRELL. Yes. You mentioned that in your presentation. 

I want you to define what you mean by that transfer of wealth. 

Mr. GUNDERSON. Transfer of wealth? It is literally the transfer 

of whatever our assets are. We now have the World War II generation and the baby boom generation both beginning to transfer their 

wealth. As Mr. Kind can tell you, we come from rural America. In 

my home county, the average transfer of wealth is only $48,000. 

That is what the projection is. It is not rich. It is not a lot. 

That times every citizen in the 25- to 30,000 people living in that 

county becomes real money. If we could just get them to say 5 percent of that transfer of the value of my farm or my home when I 

die will go to the community foundation, imagine the resources 

that we could capture to use over and over again for the public 

good. 

That is what we are talking about here. The Nebraska Community Foundation did a study in Nebraska that in 25 percent of the 

counties in Nebraska, the maximum transfer of wealth will occur 

in the next 6 years. That is because of the aging population in 

rural America. We will either capture some of this transfer of 

wealth today or we will lose it. 

It is our only opportunity, that window of opportunity. That is 

why I get so passionate and urgent about it. It is sort of like a now 

or never kind of thing. 

Mr. PASCRELL. I think—I am sorry. 

Mr. GUNDERSON. Go ahead. 

Mr. PASCRELL. I think we could have a panel and discussion 

and a hearing just on the transfer of wealth—its ramifications, how 

the tax structure over the past 30 years has changed in terms of 

taxing income and assets. Certainly the poor and the middle class 

are not in as good a position as they were 30 years ago percentagewise. A very dangerous situation, but interesting, and will have implications on charitable organizations throughout the United States 

of America. 

Mr. GUNDERSON. I really want to work with you on this, Congressman, because the experts—and I am not one—suggest that if 

you are going to start a private foundation, you really ought to 

have at least $5 million to make it efficient and all those kinds of 

things. I don’t know if that is right or wrong. That is what other 

people say. 

A donor-advised fund, $10,000. Just look at the difference. If you 

want ordinary people to have the chance to give something to philanthropy, you have got to open up the donor-advised fund as that 

giving opportunity. 

110 

Mr. PASCRELL. Thank you. 

Chairman LEWIS. Thank you. Mr. Becerra? 

Mr. BECERRA. Thank you, Mr. Chairman. 

Mr. Miller, let me ask a few questions about the efforts of the 

IRS to obtain compliance by the charitable organizations. I know 

that your budget request submitted to the Congress by the President increased your funding, not just IRS’ funding the funding in 

particular for purposes of compliance and enforcement on the charitable organizations side, by a pretty good amount, and that a good 

portion of those dollars would be allocated to the examination program and determinations program. 

Can you give me a sense of how the determination program when 

this entity is first applying for this tax-exempt status helps ensure 

that we actually do have a not-for-profit that will be formed that 

really will conduct a public purpose? 

Mr. MILLER. Absolutely, Congressman. We receive about 55,000 

new organizations into us annually, about 86,000 pieces of work 

into the determination stream but 55,000. The vast majority are 

501(c)(3) organizations. 

Again, for the vast majority of those organizations, it is the only 

time we will ever have a real one-on-one conversation with them. 

That is our chance to educate and get them on the right path. 

That—— 

Mr. BECERRA. But if it is a family foundation, as my friend 

from Massachusetts pointed out, where we have seen some problems, what are your folks looking for in assessing these family 

foundations and at that determination stage? 

Mr. MILLER. They would be looking to see how it was operated 

or how it was proposed to be operated and how it was organized. 

Mr. BECERRA. Do they have to state at that point what their 

compensation package will look like for employees? 

Mr. MILLER. In some detail, not in great detail. They have to 

set forth their proposed budgets for 3 years, and they have to give 

us enough information that we can see that there is not an immediate problem. 

Part of that is explaining to them what the rules are. With respect to a family foundation, there is a wide array of rules. The private foundation regime is much more restrictive in what you are 

permitted to do than the public charity. 

Mr. BECERRA. Now, under the examinations program, your testimony says that in fiscal year 2006, you conducted 7,079 examinations of returns by tax-exempt charitable organizations. That includes the public charities and the private foundations? 

Mr. MILLER. That includes both—that includes our examination 

program out of our Exempt Organizations function. It does not include, however, our new compliance contact program, which is 

about 5,000 more organizations. 

Mr. BECERRA. Let’s stick to this for just a second. I want to 

make sure. Seven thousand seventy-nine tax returns of what universe? Is that the 71,000 foundations that Mr. Gunderson mentioned, or is it the 1.8 million tax-exempt organizations which I 

think were identified? 

111 

Mr. MILLER. It is of the 1.8, but quite frankly, it is actually of— 

the Internal Revenue Service—and where you are going is coverage, I suppose. 

Mr. BECERRA. Yes. 

Mr. MILLER. Our coverage rate is half a percent or something 

like that. It is not enough. 

Mr. BECERRA. So, one-half of 1 percent of all the tax-exempt 

charitable organizations might find themselves examined, having 

their tax returns examined? 

Mr. MILLER. Right. 

Mr. BECERRA. How does that compare to the taxpayer auditing 

side? 

Mr. MILLER. On the for-profit side, it will depend on the particular type of return. Individuals are higher, but not by much. 

Large corporations much higher. It will really vary. It is on the low 

end. Let’s put it that way. 

Mr. BECERRA. Is the money you have and the resources you 

have sufficient to provide the deterrence that we need to make sure 

that more of these organizations are doing the good work that 

would make Ms. Aviv and Mr. Gunderson proud? 

Mr. MILLER. I think we are getting there, Congressman. You 

mentioned at the beginning the 2008 budget. The 2008 budget 

gives 6.3 percent to the IRS generally. My function, Tax Exempt 

and Government Entities, gets a 7.3-percent increase. Actually, Exempt Organizations gets 9.7 percent. 

It would be hard for us to take much more than that in a given 

year, but we are building up the number of people we have. 

Mr. BECERRA. I hope you will continue to give us ideas on how 

to make this work better because we are not interested in going 

after or causing heartburn for those organizations that are doing 

tremendous work out there. Obviously, when you do this in an objective manner and in a random manner, in some cases, you catch 

the good folks and hopefully they are able to survive an audit without too much hurt. 

I think it is necessary for us to uphold the good name of charitable giving, and for us to be able to then do the best job of weeding out the bad apples as quickly as possible. 

Ms. AVIV. Congressman, that is one of the reasons why we are 

recommending and the panel is recommending having mandatory 

electronic filing. The IRS is able to do electronic filing of certain organizations, but need the legal authority to do it all. 

Since we believe that with transparency and the fact that people 

will be much clearer about how they have to fill out those forms, 

in addition to reforming the 990 forms themselves, also having 

mandatory electronic filing will go a long way to solving the problems. 

Mr. BECERRA. Mr. Miller, do you know if the IRS takes a position with regard to mandatory filing? 

Mr. MILLER. We actually—another piece of the 2008 budget is 

to increase our ability to require additional people to file electronically. 

Mr. BECERRA. So, would IRS support that recommendation? 

Mr. MILLER. Absolutely. 

112 

Mr. BECERRA. Does GAO have any problems? Do they see the 

value in that mandatory electronic filing? 

Mr. KUTZ. I think it would add to the wealth of knowledge that 

we need. 

Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for 

your testimony. 

Chairman LEWIS. Thank you. 

I will now yield to the Ranking Member, Mr. Ramstad. 

Mr. RAMSTAD. Well, thank you, Mr. Chairman. I just want to 

make three brief observations by way of concluding here. 

First of all, we simply can’t overstate the monumental contributions of tax-exempt charitable organizations. As has been said repeatedly here today, the Government can’t take care of all the people in need. The charitable sector is essential. I know I speak for 

every Member of this Subcommittee, and the full Committee as 

well, when we say we appreciate the incredibly important contributions that the tax-exempt charitable sector makes. 

Second, I want to state categorically that I believe, as again has 

been testified to here today, that the vast majority of exempt organizations are upstanding, are full of integrity. 

Thirdly, I want to thank publicly the Council on Foundations, 

certainly the Minnesota Council on Foundations as well as the 

Council on Nonprofits, because those organizations really set the 

tone for the philanthropic community and you do it exceedingly 

well. 

So, again, I thank all the witnesses. I think this has been a very 

good hearing today. I yield back the balance of my time. 

Chairman LEWIS. Thank you very much, Mr. Ramstad. I want 

to join in also thanking each and every one of you for being here, 

for your contribution. 

Before we close, I want to ask Ms. Aviv and Mr. Gunderson 

whether the foundation community and the Independent Sector 

have they the ability to respond in a timely manner when many 

of your boards of your different organizations and groups meet 

quarterly? 

When you have a crisis like Katrina or some other major crisis, 

how do you get together and say, we have to do something in New 

Orleans, we have to do something in Atlanta, or something in New 

York or California. What happens? 

Ms. AVIV. Congressman, Mr. Chairman, in addition to the three 

or four board meetings that most nonprofit organizations have a 

year, and some have less because they don’t need them because of 

the nature of their business, most nonprofit organizations have 

many, many more meetings. 

In the case of Independent Sector, we have many committees 

that convene all the time. When there is a crisis, we have the ability—and particularly with technology—to convene a large number 

of people or a targeted group of people to come together to address 

issues. 

The big change that those groups have sometimes is that they 

don’t have enough resources. They have plenty of ideas, but they 

don’t necessarily have the capacity to implement all of the ideas. 

That is where the concerns about government funding—since it is 

easily over 30 percent of the sector’s funding—why the concerns 

113 

about declining government funding or declining individual donations is of concern to the sector. 

I don’t believe at this point the convening capacity and the responsiveness is the problem. It is more the resources that are available. 

Chairman LEWIS. Mr. Gunderson? 

Mr. GUNDERSON. Mr. Chairman, we have looked very carefully 

at philanthropy’s response to Katrina because to be honest with 

you, while it was well-meaning, it was probably as chaotic as the 

Government we all criticized. We want to figure out how we can 

do that better. We have held some major forums at the council on 

this issue. We are now doing, as I mentioned in my testimony, a 

feasibility study to do one or two, probably two, things. 

The first thing that we have learned is that what we really need 

to do when a disaster like Katrina occurs, we need to be able to 

get some of the best experts in our sector on the ground instantly 

to do an assessment from philanthropy’s perspective to figure out 

what is the Red Cross doing? What is the Salvation Army doing? 

What is the Office of Emergency Preparedness doing? What does 

philanthropy need to do that they are not doing? So, that they can 

report back to our sector. So we are in the process of looking at 

how we create that philanthropic team that comes in and does that 

assessment and reports to us where and how that money should go. 

The second thing we are looking at is that we have normally had 

this mindset—and I am certainly guilty of this, being new to this 

field—that we said, the charitable sector will do the immediate rescue and relief. They will go in and respond instantly. Philanthropy 

comes in and does the long-term rebuilding. 

You know what we learned in Katrina? There is a middle ground 

that nobody was doing. For example, if you look into the Gulf area, 

in many cases, in order to qualify for government funding, they 

need funding in order to do the planning, the planning grants, to 

submit the grant request to the Government. 

They don’t have that. Nobody funds that. The Salvation Army 

doesn’t fund that. The Red Cross doesn’t fund that. So, all of a sudden, we have learned through this that philanthropy needs to come 

in up front much earlier than we thought we did in this process. 

The third thing we are looking at is whether or not we ought to 

capitalize a fund that would be a national disaster relief fund so 

that if there is a tornado or a hurricane or a bombing or whatever 

that disaster might be, there would be some money ready available 

where this team of our experts who went in could then immediately 

access some of that money rather than going back to a community 

foundation or a family foundation or an independent foundation 

and starting to raise that money. That money would already be 

there. 

We hope by October of this year to have done our feasibility 

study on this so that we will be able to take recommendations to 

our board to come up with some new strategies for philanthropy to 

better respond. 

Ms. AVIV. Mr. Chairman, there was one other issue in relation 

to Katrina. I recall testifying a couple of years ago on lessons 

learned immediately after Katrina in the Senate Finance Committee. There was an opportunity to look at earthquakes, CaliforVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00117 Fmt 6602 Sfmt 6602 E:\HR\OC\38087.XXX 38087
114 

nia’s earthquakes or similar disaster, floods, all different kinds, the 

tsunami and this. 

What was striking about the experience is that because of what 

Steve was talking about, the lack of time and resources to fund lessons learned and translate them into how to prevent some of the 

terrible aspects of what are natural disasters from occurring again, 

we don’t do that. 

The second part was that the relationships that need to be built 

in advance of disasters—and we know where the disaster areas are 

more or less likely to strike—there need to be much stronger relationships between local government officials, national charities and 

local charities, and charities and these national organizations, so 

that in planning, by the time it is chaotic when the disaster hits, 

all of their thinking has already gone into the plan so that the limited resources can be more efficiently used. 

Chairman LEWIS. Again, I want to thank each and every one of 

you for being here. Your testimony has been very helpful to Members of the Committee. 

Is there any other business to come before the Committee? 

[No response.] 

Chairman LEWIS. There being no further business, the hearing 

is adjourned. Thank you very much. I want to thank each member 

of the staff and all who were involved. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

[Submissions for the Record follow:] 

Statement of Alliance for Justice 

Alliance for Justice (AFJ) is pleased to accept this opportunity to submit comments on the affect of the Pension Protection Act of 2006 on the tax-exempt community. We limit our comments specifically to the provisions of the Act concerning expenditure responsibility requirements for Donor Advised Funds (‘‘DAFs’’). 

About Alliance for Justice 

Alliance for Justice is a national association of environmental, civil rights, mental 

health, women’s, children’s and consumer advocacy organizations. These organizations and their members support legislative and regulatory measures that promote 

political participation, judicial independence, and greater access to the justice system. 

AFJ’s Nonprofit Advocacy Project and Foundation Advocacy Initiative work to increase nonprofit (including foundation) involvement in the policymaking process. 

AFJ supports nonprofit advocacy through plain-language guides to the laws governing nonprofit advocacy, workshops for nonprofit organizations, and individualized 

technical assistance. It also monitors legislative activity related to nonprofit advocacy, provides information to the charitable community and lobbies to ensure nonprofits’ continued presence in the policymaking arena. 

The Value of Donor Advised Funds 

As Congress has recognized in its recent passage of the Pension Protection Act, 

DAFs have become a valuable tool for donors and the charitable community. DAFs 

are a means to devote the greatest possible portion of charitable resources to the 

best possible charitable purposes. DAFs provide a way to contribute more freely to 

charity, and they prevent unnecessary waste of the resources once donated. According to the Council on Foundations, DAFs made more than $1.05 billion in grants 

in 2005 (COF comments submitted to the IRS on April 9, 2007 in response to IRS 

Notice 2007–21). Many of these grants went to small organizations and programs 

that otherwise would not have been funded. 

While it was appropriate for Congress to establish legitimate safeguards to prevent abuse of DAFs—or any other type—of tax-exempt organization, it is also important to protect the important role that DAFs play in ensuring the most efficient use 

of charitable resources. This is especially important since, as mentioned in the Advisory soliciting these comments, ‘‘[m]ost of the provisions [in the PPA related to taxVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00118 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
115 

1There are exceptions allowing tax-free distributions to the DAF’s sponsoring organization, to 

other DAFs, or to charities other than certain types of supporting organizations or charities controlled by the donor or the donor’s advisor. 

exempt organizations] were never discussed on a bipartisan basis, nor the subject 

of Committee hearings, during the 109th Congress.’’ 

Expenditure Responsibility and DAFs 

AFJ believes that the requirements of ‘‘expenditure responsibility’’ on certain distributions from DAFs imposed by the PPA are different from the restrictions that 

apply only to private foundations. Making such a distinction does not impede Congress’ goal (as stated in the Advisory) of improving accountability among DAFs. 

Section 4966 of the IRC, added by section 1231 of the PPA, imposes a 20% tax 

on certain distributions of DAFs. All distributions to individuals fall within the 

scope of such ‘‘taxable distributions,’’ and most other distributions1 from DAFs will 

likewise be taxed unless the DAF restricts the use of the funds to charitable purposes and exercises ‘‘expenditure responsibility’’ in accordance with IRC section 

4945(h). 

Section 4945(h) states that: . . . expenditure responsibility . . . means that the 

private foundation is responsible to exert all reasonable efforts and to establish adequate procedures— 

(1) to see that the grant is spent solely for the purposes for which made, 

(2) to obtain full and complete reports from the grantee on how the funds are 

spent, and 

(3) to make full and detailed reports with respect to such expenditures to the Secretary. 

Prior to the PPA, only private foundations were required to make grants under 

the expenditure responsibility requirements of section 4945(h). Due to concern over 

the more limited control of private foundations, private foundations are subject to 

greater restrictions than are public charities, including how their funds can be 

spent. Federal tax law imposes a tax on certain private foundation expenditures, including those for lobbying and carrying on, directly or indirectly, voter registration 

drives. However, no such restrictions on grantmaking apply to public charities. In 

contrast to private foundations, public charities may earmark funds for lobbying. 

See, for example, IRC section 501(h) (permitting limited lobbying expenditures by 

charities). Likewise, charities may conduct voter registration activities. See, for example, IRC section 4945(f) (permitting grants to certain charities to conduct voter 

registration activities). 

The restrictions on private foundation expenditures were written into the expenditure responsibility regulations to prevent the use of foundation funds for prohibited 

purposes. Treasury Regulation § 53.4945–5(b)(3) describes four criteria for private 

foundations to exercise expenditure responsibility: 

(i) To repay any portion of the amount granted which is not used for the purposes 

of the grant, 

(ii) To submit full and complete annual reports on the matter in which the funds 

are spent and the progress made in accomplishing the purposes of the grant 

(iii) To maintain records of receipts and expenditures and to make its books and 

records available to the grantor at reasonable times, and 

(iv) Not to use any of the funds— 

a. To carry on propaganda, or otherwise to attempt, to influence legislation (within the meaning of section 4945(d)(1)), 

b. To influence the outcome of any specific public election, or to carry on, directly 

or indirectly, any voter registration drive. . . . 

The first three prongs correspond with the statutory definition, and the fourth 

prong prohibits the use of funds for certain purposes, such as lobbying and voter 

registration activity. When the Joint Committee on Taxation described expenditure 

responsibility, it referred to the first three prongs only (see pages 348–349 of the 

Technical Explanation of H.R. 4, The ‘‘Pension Protection Act of 2006,’’ as Passed 

by the House on July 28, 2006, and as considered by the Senate on August 3, 2006, 

JCX–38–06, Aug. 3, 2006 (‘‘JCT Report’’)). These prohibitions included in the fourth 

prong should not be applied to DAFs, as they exceed the fundamental purpose of 

expenditure responsibility. The expenditure responsibility requirements of section 

4945(h) can be met without adding on the prohibitions in the fourth prong of the 

regulatory requirements. 

Appropriate Expenditure Responsibility Requirements for DAFs 

The statute should be amended to clarify that while DAFs must exercise expenditure responsibility, their grants need not prohibit use of the funds for legitimate lobVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00119 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
116 

bying or voter registration activities. Based on the limited legislative history provided in the JCT report, we believe expenditure responsibility was imposed on DAFs 

to make sure grants from DAFs were spent as intended, not to prohibit or restrict 

how the funds can be spent. 

In adding an expenditure responsibility requirement for certain DAF distributions, the PPA only referenced IRC section 4945(h)—the requirement that grant 

funds must be spent solely for purposes for which the grant was made. The PPA 

does not reference the restrictions of 4945(d) nor the Treasury regulations for expenditure responsibility by private foundations that incorporated those restrictions. 

Our fear is DAFs and their advisors who are familiar with (or who discover) the 

requirements of expenditure responsibility in the private foundation context will 

simply apply the private foundation version of the regulations without further guidance. If so, DAFs would feel obliged to make grants that are subject to the terms 

required by Treas. Reg. section 53.4945–5(b)(3)(iv), prohibiting use of the funds for 

lobbying or voter registration activities. This would needlessly restrict the use of 

funds for legitimate charitable purposes. 

Already, there has been uncertainty on this point. At the January 2007 meeting 

of the American Bar Association Tax section’s Committee on Exempt Organizations, 

a panel including IRS EO Division Senior Tax Law Specialist Robert Fontenrose 

and IRS Assistant Chief Counsel Catherine Livingston was asked ‘‘whether expenditure responsibility for donor-advised funds will look any different than it does for 

private foundations?’’ with the questioner noting ‘‘that the reg[ulations]s for private 

foundations include a lot of prohibitions that may or may not apply in the donoradvised fund context.’’ (from transcript in Exempt Organization Tax Journal, vol. 12, 

no. 1, January/February 2007, at 35). 

Similarly, an explanation of the PPA produced by the Council on Foundations offers the following response to the question of what ‘‘expenditure responsibility’’ in 

the context of the PPA: 

While the Council will be seeking guidance as to what expenditure responsibility 

means for public charities, the regulations for private foundations provide some 

guidance. Charities that make grants from donor-advised funds to non-charities or 

affected supporting organizations for lobbying, nonpartisan voter registration activity or for regranting should consult with counsel as to how expenditure responsibility should be handled in those situations. 

Council on Foundations, ‘‘Taxable Distributions from Donor-Advised Funds,’’ 

available at www.cof.org. 

For these reasons, we urge Congress to amend the PPA for purposes of clarifying 

that the PPA-mandated expenditure responsibility as applied to DAFs does not require DAFs to impose the IRC 4945(d) restrictions on grantees. 

Thank you for you consideration of this request. We would be happy to provide 

any additional information or respond to any questions you may have about this 

issue. 

f 

Statement of American Association of Museums 

On behalf of the nation’s museum community, American Association of Museums 

(AAM), representing more than 2,700 museums of every type and 16,900 individuals 

and organizations professionally associated with museums, would like to thank you 

for the charitable incentives in Pension Reform Act, particularly the IRA rollover 

provision, and for some of the reforms in that legislation, such as the reforms of the 

appraisal process. 

With respect to the IRA rollover provision, we strongly encourage you to extend 

and make permanent this provision, as noted in Independent Sector’s recent testimony before the Committee and proposed in H.R. 1419. Along with the rest of the 

charitable community, museums’ ability to maintain and expand their services to 

the public has already benefited substantially from this provision due to expire in 

December 2007. For example, an early AAM survey of museums, covering the period 

from August 2006 enactment to the end of 2006, revealed that about half of survey 

respondents had received rollover gifts, from $1,250 to several gifts of the maximum 

of $100,000, and that museum staff expressed concern about the need for more time 

for donor education and decisions about major gifts. 

We must, however, raise some significant concerns on behalf of the museum community about the fractional interest provisions in the Act. We know you have received a letter from the Association of Art Museum Directors (AAMD) noting problems in this area. AAM wants you to know that we completely share those concerns, 

117 

not just on behalf of the nation’s art museums but on behalf of collecting museums 

of all types. 

In brief, here are some of our chief concerns, many of which relate to creating new 

disincentives to donors to give, which is a key matter since about 80% of the collections of American museums that collect have come from donations: 

1. The discouraging effect on donors of the growing disparity between market 

value and their subsequent fractional deductions. As you know, the Act replaces full 

market value deduction for each fractional gift with the lesser of full market or the 

market value at the time of the original fractional gift. Since virtually all museumquality objects appreciate in value over time, the value of subsequent deductions 

now decreases over time compared to market value, with each subsequent fractional 

gift showing a greater disparity. This clearly discourages donors, especially those for 

whom the value of the gift very greatly exceeds their income in a given year, who 

are thus not good candidates for an outright gift of 100% interest. 

2. The discouraging effect on donors of requiring that the gift be completed within 

10 years. Under prior law, while museums had, and usually exercised, the right to 

hold and exhibit the object, a donor could keep the object in his or her home for 

a least part of a given year until death. The new law, especially where collectors 

had recently acquired the object, or collection of objects, discourages donors from 

making a commitment in the near term to a museum, thus eliminating both the 

short-term access to the object(s) by the public and the likelihood of longer-term 

100% possession by the museum. 

3. The danger to certain kinds of objects of mandating movement without exceptions. There are valid reasons for making exceptions—for allowing the museum to 

waive its right to take possession in some cases until it has 100% ownership—as 

was already decided in a 1988 court case, Winocour v. Commissioner. For example, 

if an object is extremely large and heavy, as is the case with much modern sculpture, the costs and difficulty of transportation are very great, and where an object 

is extremely fragile, as is the case with some art and other objects, it is not in the 

public interest to move it any more than is absolutely necessary. Similarly, when 

new collecting museums arise, or museums are renovated, they will, of course, frequently seek to acquire or continue to acquire collection objects before the museum 

building is built or renovated—before they can house or display the new objects, 

since museum buildings frequently take quite a number of years to design and 

build—so that when they open or reopen, they will have objects to show. 

It is also important to bear in mind that while the above concerns most broadly 

affect the art museum community, the new law, if not adjusted, creates problems 

for other types of museums as well. 

For example, museums that focus on history and culture, including the history 

and culture of ethnically specific groups, frequently find that the key objects they 

need for their collections belong to private collectors. Given the limited or nonexistent funding for collection acquisitions at most museums, donations are critical 

in many cases, and when the objects are mostly acquired by the collector, and when 

the museum itself is expanding or under construction, as is often the case with the 

new ethnically specific museums, discouraging fractional gifts can be very damaging. 

And in the case of natural history museums, often the key educational as well 

as scientific value of objects is in fact that they are part of a collection of related 

objects. Where the law tends to discourage fractional gifts, modest-income donors 

will be discouraged from donating an intact collection and have an incentive to 

break it up, destroying its educational value. 

Changes to the fractional interest provisions of the law as expressed in the Pension Protection Act could address areas of legitimate Congressional concern without 

the unintended consequence of discouraging generous donors and endangering cultural objects in the cases noted above. On behalf of the whole American museum 

community, we join with AAMD in urging your consideration of such changes and 

would be happy to meet with you and your staff to discuss them. 

In closing, AAM sincerely thanks you and Ranking Member Ramstad for your 

leadership as principal sponsor and co-sponsor of H.R. 1524, the artist’s deduction 

bill, which would have a very positive effect on generating new donations of works 

to museums, and looks forward to working with you on the fractional gift and IRA 

rollover issues. 

f 

118 

1See, e.g., Technical Advice Memorandum 200709072, March 2, 2007; Technical Advice Memorandum 20070903, March 2, 2007; and Technical Advice Memorandum 200717036, April 27, 

2007. 2 I.R.C. sec. 511(a)(2)(A). 

3 12 U.S.C. sec. 1767 provides that ‘‘Federal credit unions organized hereunder, their property, 

their franchises, capital, reserves, surpluses, and other funds, and their income shall be exempt 

from all taxation, now or hereafter imposed by the United States or by any State, Territorial, 

or local taxing authority. . . .’’ 

Statement of American Bankers Association 

The American Bankers Association appreciates having this opportunity to submit 

written comments for the record of the Subcommittee on Oversight’s July 24, 2007, 

hearing on tax-exempt organizations. 

The American Bankers Association, on behalf of the more than two million men 

and women who work in the nation’s banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its 

membership—which includes community, regional, and money center banks and 

holding companies, as well as savings associations, trust companies, and savings 

banks—makes ABA the largest banking trade association in the country. 

As the Subcommittee on Oversight (the ‘‘Subcommittee’’) undertakes its examination of tax-exempt issues this year, the ABA would like to take this opportunity to 

encourage the Subcommittee to review the Internal Revenue Service’s (‘‘IRS’’) regulation of issues relating to tax-exempt credit unions. In particular, we urge the Subcommittee to: focus on the IRS’s activities relating to the application of the unrelated business income tax (‘‘UBIT’’) to credit unions, and encourage the IRS to revise 

its tax-exempt group return regulations to require credit unions to file individual 

Form 990s. 

Application of UBIT to State-Chartered Credit Unions 

State-chartered credit unions are subject to tax on income earned from trade or 

business activities that are not substantially related to the functions constituting 

the basis for their tax exemption. Credit unions are self-help financial cooperatives 

established for the purpose of promoting thrift and providing low cost credit to their 

members—especially to persons with low and moderate incomes—through mutual 

and nonprofit operations. When these organizations offer services to non-members, 

or undertake activities that stray beyond the exempt purposes for which they were 

formed, the income from such activities should be subject to taxation. In such cases, 

they are directly competing with other small businesses in the communities in 

which they operate. 

Over the past year, the IRS has issued a series of technical advice memorandums 

(‘‘TAMs’’) which essentially hold that UBIT applies to various activities undertaken 

by state-chartered credit unions including, among others, income from insurance 

sales (e.g., credit life, disability life, health, group life, and accidental death and dismemberment), sale of car warranties, and ATM fees for non-member services.1

The ABA is pleased that the IRS has been focusing on this important issue, because we believe that the ability of credit unions to conduct business activities unrelated to their core purpose without paying taxes on the income from such activities 

creates an overwhelming competitive disadvantage for the banks that operate in the 

same communities. However, we believe that the application of UBIT to state-chartered credit unions is not an issue that should be determined on a piecemeal basis 

through a series of TAMs alone. While TAMs help IRS personnel resolve complex 

issues, they generally are not be relied upon as guidance or cited as precedent by 

taxpayers other than the specific taxpayer for whom the TAM was issued. 

The application of UBIT to credit unions is an issue that would be more properly 

addressed in generally applicable binding IRS guidance, such as regulations or a 

revenue ruling that provides clear notice to the credit union industry of the IRS’s 

interpretation of the law. We urge the Subcommittee, as it continues to examine 

issues relating to the IRS’s regulation of the tax-exempt sector, to encourage the 

IRS to place a high priority on the issuance of binding guidance on the application 

of UBIT to tax-exempt credit unions. 

Equally important, under current interpretations federal credit unions have been 

held to be exempt from UBIT.2 Although this exemption is based upon a broad reading of the tax exemption provided under the Federal Credit Union Act (12 U.S.C. 

sec. 1767),3 there is no tax (or other) policy reason for such a significant distinction 

for federal credit unions. When Federal credit unions operate unrelated businesses, 

the same detrimental competitive effects that result from state credit union unrelated activities apply—competing taxable banks and other businesses in their communities are adversely affected by their operation of such businesses—and the FedVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00122 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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4 I.R.C. § 6033. 

5 I.R.C. § 6033(a)(2). 

6 I,R.C. § 6033(a)(2)(C)(vi). 

7Study of Present-Law Taxpayer Confidentiality and Disclosure Provisions as Required by 

section 3802 of the Internal Revenue Service Restructuring and Reform Act 1998, Joint Committee on Taxation, JCS–1–00, January 28, 2000, p. 6. 8 Rev. Rul. 60–364, 1960–2 C.B. 382. 

9Treas. Reg. § 1,6033–2(d) 

eral revenue is diminished by applying this exemption to business activities beyond 

the purpose of the credit union charter. We believe it is wrong for the broad tax 

exemption provided to federal credit unions also to encompass all income earned 

from businesses that are unrelated to their exempt purpose, and we encourage the 

Ways and Means Committee to pursue legislation to amend Code section 511(a)(2) 

to subject federal credit unions to UBIT. 

Form 990 Filing Requirements for Credit Unions 

Tax-exempt organizations generally are required to file annual information returns (Form 990) with the IRS.4 The annual information return must contain the 

organization’s gross income, receipts, disbursements, compensation, and other information required by the IRS in order to review the organization’s activities and operations during the previous taxable year,5 and to review whether the organization 

continues to meet the statutory requirements for exemption. Only a very limited 

number of organizations are statutorily exempted from this annual information filing requirement. These include churches,6 religious orders, fraternal beneficiary societies, and small organizations with annual receipts less than $5,000. 

Information returns filed by tax exempt organizations on Form 990 serve important public purposes beyond simply enabling the IRS to enforce the tax laws. As the 

Joint Committee on Taxation has noted:7

[t]he public has a legitimate interest in access to information of tax-exempt 

organizations. This public interest derives from the tax benefits accorded 

under Federal law to such organizations, as well as the nature and purposes of such organizations. The public has an interest in ensuring that taxexempt organizations are complying with applicable laws and that the 

funds of such organizations (whether or not solicited from the general public) are being used for the exempt purposes of the organization. 

Congress also recognized the importance of transparent financial records for all 

companies by passing the Sarbanes-Oxley Act of 2002. Many credit unions are profitable, retail financial service organizations whose activities are indistinguishable 

from taxpaying banks. Vital information, such as their sources of income, expenses, 

amounts of compensation paid to executives, and activities, should be subject to public disclosure, both to ensure that they are operating effectively and with integrity 

and for the efficient administration of the tax laws. Moreover, without adequate information, credit union members cannot understand their organization’s exposures 

and risks and cannot exercise effective oversight and control over the board of directors and management. 

Despite these recognized benefits from public disclosure requirements, a majority 

of state-chartered credit unions do not file individual Form 9nineties. The IRS ruled 

in 19608 that state credit unions were permitted to take advantage of the group return rules set forth in Treasury regulations.9 These rules permit central or parent 

organizations to file one group return providing aggregated financial information for 

the parent and any local organizations subject to its general supervision or control. 

In the state credit union context, this means that the state regulatory authority that 

supervises credit unions within a state may apply for a group exemption ruling and 

file one group return that aggregates information from all of the state credit unions 

under its control or supervision. 

At a November 3, 2005, hearing of the House Ways and Means Committee, Steven 

T. Miller, Commissioner, Tax-Exempt and government Entities Division, testified 

that the IRS received 1360 individual Forms 990 from state chartered credit unions 

in 2003, the last year for which data is available. Mr. Miller also testified that as 

of 2003, 34 state credit union associations filed group returns, and that 21 of the 

34 group returns covered more than two thousand organizations. 

Millions of members of state credit unions do not have access to information on 

how their organizations are being operated, because such information cannot be 

accessed from group returns which contain only aggregate data. IRS officials have 

acknowledged that this is a problem but have so far not corrected the problem. 

Therefore, we urge the Subcommittee to look into this matter as part of its examinaVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00123 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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tion of tax-exempt organization issues and to request that the IRS amend its group 

return regulations to prohibit state credit unions from filing group returns. 

Again, we deeply appreciate you allowing us to comment on this issue and share 

the concerns of our Members. If you have further questions, please do not hesitate 

to contact me. 

f 

Statement of American Bar Association Section of Real Property 

These comments (the ‘‘comments’’) are submitted on behalf of the American Bar 

Association section of Real Property, Probate and Trust Law. They have not been 

approved by the House of Delegates or the Board of Governors of the American Bar 

Association and should not be construed as representing the position of the American Bar Association. 

The comments were prepared by members of the Charitable Planning and Organizations Group (the ‘‘Group’’) of the Probate and Trust Division of the Real Property, 

Probate and Trust Law section of the American Bar Association. Principal responsibility was exercised by Carol G. Kroch of Wilmington Trust Co., Group Chair-Elect, 

Mary Lee Turk of McDermott Will & Emery, Group Vice Chair-Elect, Christopher 

R. Hoyt of University of Missouri (Kansas City) School of Law, David J. Dietrich 

of Dietrich & Associates, P.C., and Jarrett T. Bostwick of Handler, Thayer, & 

Duggan, L.L.C. Linda B. Hirschson of Greenberg Traurig LLP reviewed the comments on behalf of the section’s Committee on Governmental Submissions. 

Although members of the Group who participated in preparing the comments 

have clients who are affected by the Federal tax principles addressed, or have advised clients on the application of such principles, no such member or the firm or 

organization to which such member belongs has been engaged by a client to make 

a governmental submission with respect to, or otherwise influence the development 

or outcome of, the specific subject matter of the comments. 

EXECUTIVE SUMMARY 

These comments respond to the June 12, 2007 Advisory of the Subcommittee on 

Oversight of the Committee on Ways and Means of the United States House of Representatives requesting written comments on the provisions of The Pension Protection Act of 2006, Pub. L. No. 109–280, 120 Stat. 780 (2006) (the ‘‘PPA’’) relating to 

tax-exempt organizations. 

These comments make the following points: (1) the PPA provisions allowing charitable IRA rollovers for individuals over age 701⁄2 are valuable to the charitable sector and should be extended permanently and expanded to allow gifts to DAFs, SOs 

and private foundations; (2) the PPA provisions requiring an S corporation shareholder to reduce the basis of his or her stock only by the shareholder’s pro rata 

share of the adjusted basis of the property donated by the S corporation appropriately treats S corporation shareholders the same as partners and should be extended permanently; and Congress should also clarify the permitted deduction when 

the basis of an S corporation shareholder’s stock is less than the shareholder’s pro 

rata share of the charitable contribution; (3) the PPA provisions increasing the percentage limitations for qualified conservation contributions should be made permanent and the definition of gross income for purposes of determining whether a farmer or rancher qualifies for the 100% limitation should be clarified and broadened; 

(4) an overly broad and unclear definition in the PPA of a donor advised fund 

(‘‘DAF’’) should be clarified as it has caused significant administrative costs and confusion for charities administering both DAFs and other charitable funds; (5) the 

PPA provisions applying the excess business holdings rule to DAFs and supporting 

organizations (‘‘SOs’’) have unnecessarily curtailed charitable gifts by owners of 

closely held businesses; (6) section 1218 of the PPA has not only reduced the income 

tax incentives to make gifts of fractional interests in tangible personal property, but 

has also created estate and gift tax liability for fractional contributions of appreciated property that should be eliminated; (7) the PPA provisions addressing contributions to certain SOs may have a chilling effect on a charity’s access to funds; 

(8) the PPA may go too far in its application of the excess benefit rules to DAFs 

and SOs, resulting in an inconsistent application of such rules and a departure from 

normal commercial practices; and (9) we welcome the PPA’s endorsement of minimum distribution rules for SOs and believe that minimum distribution rules similar to those currently in effect, when coupled with increased disclosure, may provide 

a compromise between the Treasury Department’s need to monitor SOs with the 

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charitable sector’s need for sources of support; however we suggest that Congress 

reconsider the necessity for and effectiveness of minimum distribution rules based 

on a percentage of an SO’s income or assets. 

DISCUSSION 

I. PROVISIONS SCHEDULED TO EXPIRE ON DECEMBER 31, 2007 

As a preliminary comment, we note that it would provide stability and certainty 

to the tax law to extend permanently all three provisions discussed below. 

A. Charitable IRA Rollover. Section 1201 of the PPA permitted individuals over 

age 701⁄2 to make lifetime charitable gifts of up to $100,000 per year in 2006 and 

2007 directly from an IRA to a public charity (other than a supporting organization 

or a donor advised fund). 

1. Importance to Charities. This provision was an important legislative change 

sought by the nation’s charities and should be extended permanently. Further, we 

suggest that Congress consider permitting donors to make gifts from their IRAs to 

DAFs, SOs and private foundations. If the law is made permanent, IRA administrators and charities will likely take steps to cure the technical problems they have 

encountered in implementing the current legislation. 

2. Problem In the Year That an IRA Owner Attains Age 701⁄2. If the law is extended to future years, the age for eligibility should be more closely coordinated 

with applicable retirement plan distribution rules. Currently the charitable IRA distribution rules discriminate against people born in the months of May and June. 

For example, a person who was born on June 27 will attain age 701⁄2 on December 

27. All distributions that are made at any time during that year can be applied toward satisfying the minimum distribution requirement to avoid the 50% penalty tax 

for insufficient distributions from an IRA, but only distributions made on or after 

December 27 qualify for the charitable IRA exclusion. The legislation should be 

changed for 2007 and for future years to conform the charitable exclusion with the 

minimum distribution requirements. Thus, if the eligible age remains 701⁄2, then all 

distributions should qualify for the charitable exclusion if made ‘‘within the calendar 

year that the individual for whose benefit the plan is maintained has attained age 

701⁄2.’’ This change would simplify the administration of this provision and ensure 

that innocent parties are not caught in a tax trap. If, however, future legislation 

lowers the eligible age to 591⁄2 (as is proposed for deferred gifts in H.R. 1419 and 

S. 819, ‘‘The Public Good IRA Rollover Act of 2007’’), then requiring qualifying IRA 

distributions to be made on or after the date the donor turns 591⁄2 is appropriate 

as it would mirror the 10% early distribution penalty provision of I.R.C. Sec. 72(t). 

B. Charitable Gifts of Appreciated Property by S Corps. Section 1203 of the 

PPA permitted charitable gifts of appreciated property made by S corporations to 

have similar tax consequences to comparable charitable gifts made by partnerships 

and limited liability companies (‘‘LLCs’’), but only for gifts made in 2006 and 2007. 

In the past, the shareholders of an S corporation had to reduce their basis in their 

stock by the full deduction for the appreciated value of the property, whereas the 

basis in the ownership interest of a partnership or an LLC was reduced by only the 

cost basis, consistent with partnership tax theory. Partnership tax treatment for 

both forms of enterprise is important. It is especially significant for an S corporation, since a shareholder’s basis in his or her stock is typically lower than that of 

a comparable partnership or LLC ownership interest. Whereas partnership tax law 

permits partners and LLC members to increase their tax basis by their share of the 

business’ debts, S corporation shareholders cannot increase their basis by their 

share of the corporation’s liabilities. 

Many shareholders with a low basis in their stock are under the impression that 

I.R.C. Sec. 1366(d)(1) prohibits them from claiming a charitable income tax deduction that exceeds the basis of their stock, which discourages charitable gifts from 

S corporations. In his letter of June 28, 2007 to Treasury Secretary Paulson, Senator Richard Lugar stated that ‘‘the intent was that the full benefit of the deduction 

be conferred upon those shareholders.’’ We recommend that the PPA basis reduction 

rule be made permanent and that Congress clarify the amount of the deduction permitted S corporation shareholders whose basis in their stock is less than their pro 

rata share of the amount of the charitable contribution otherwise deductible. 

C. Charitable Gifts of Conservation Easements. The PPA and I.R.S. Notice 

2007–50, ‘‘Guidance Regarding Deductions by Individuals with Qualified Conservation Contributions,’’ expand and clarify the availability of qualified conservation contributions. However, several significant questions require clarification. 

1. Make the Law Permanent. We believe the expanded deduction limitations of 

50% under I.R.C. Sec. 170(b)(1)(E)(i) and 100% under I.R.C. Sec. 170(b)(1)(E)(iv) for 

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qualified farmers and ranchers should be made permanent. The grant of a perpetual 

conservation easement by a farmer or rancher is likely his or her most significant 

financial transaction short of outright sale; yet the law ‘‘sunsets’’ on December 31, 

2007. Many conservation easements take the form of perpetual ‘‘management plans’’ 

for agricultural land owners and can take significant amounts of time to negotiate 

because of their perpetual duration. Although the provision does not sunset until 

December 31, 2007, as a practical matter, it will be difficult for donors who have 

not already commenced negotiations even to donate a conservation easement in 

2007. 

2. The Definition of Gross Income Does Not Conform to the Calculation of Gross 

Income From Farming Otherwise Used in the Tax Code The definition of gross income under I.R.C. Sec. 170(b)(1)(E) remains ambiguous. I.R.C. Sec. 170(b)(1)(E)(v) 

provides that an individual is a qualified farmer or rancher if the individual’s gross 

income from the trade or business of farming (within the meaning of I.R.C. Sec. 

2032A(e)(5)) in the taxable year of the contribution is greater than 50% of the individual’s total gross income for the taxable year of contribution. I.R.C. Sec. 

2032A(e)(5), however, does not define gross income from the trade or business of 

farming; rather it provides a definition of ‘‘farming purposes’’ for purposes of alternate valuation under the estate tax. The agricultural activities listed in I.R.C. Sec. 

2032A(e)(5) are significantly narrower than the broad definition of farming used 

throughout the Internal Revenue Code to define income and deductions in calculating gross income from farming. See I.R.C. Sec. 61 and the Farmer’s Tax Guide 

(IRS Publication 225). We suggest that the taxpayer’s ‘‘gross income from the trade 

or business of farming’’ for purposes of I.R.C. Sec. 170(b)(1)(E)(v) should be the same 

as gross income from farming for income tax purposes generally, as shown on Form 

1040, Schedule F, line 11 or line 51, with the addition of gross income (not gain) 

from forestry and from sales of livestock and other farm products reported on Form 

4797. 

3. Other Traditional Agricultural Income Sources Should Comprise Gross Income.We recommend that rental income and income from caring for another’s livestock, farm program payments, the sale of livestock, conservation reserve program 

payments, hunting and fishing and the sale of farm products not held primarily for 

sale should constitute ‘‘gross income from the trade or business of farming’’ under 

I.R.C. Sec. 170(b)(1)(E)(v). Many agricultural operations have established corporations or LLCs to hold real estate separate from the active operations conducted by 

a distinct corporation or LLC that owns the livestock, equipment and machinery, 

with a rental agreement between the two business organizations. Excluding such 

rental income from the definition of gross income from farming under I.R.C. Sec. 

170(b)(1)(E)(v) effectively removes significant tracts of agricultural farming and 

ranching real estate from qualification for the expanded 100% deduction limitation 

even though the property is actually used for farming. 

4. Reconsider Deduction Limitations for Easements Donated by Non-Publicly 

Traded C Corporations. Although I.R.C. Sec. 170(b)(2)(A) limits a charitable contribution deduction by a C corporation to 10% of taxable income, under new I.R.C. 

Sec. 170(b)(2)(B)(i) the deduction limitation for a gift of a qualified conservation 

easement is expanded to 100% of taxable income (reduced by other allowable charitable deductions) for certain C corporations. The higher limit is available to a nonpublicly traded corporation that is a qualified farmer or rancher, and which donates 

an easement restricting the property to agricultural or livestock production. We note 

that if the C corporation fails to meet the gross income test for a qualified farmer 

or rancher, it loses the expanded limitation, whereas if an individual donor fails to 

meet the definition of a farmer or rancher, an enhanced deduction limitation of 50% 

of adjusted gross income (rather than 30%) is still available. If Congress wishes to 

encourage contributions of conservation easements by nonpublicly traded C corporations, it could consider adopting a similar enhanced deduction limitation for gifts of 

conservation easements by C corporations that do not qualify as farmers or ranchers. 

II. DONOR ADVISED FUNDS 

A. Burdens on Charities that Administer DAFs and Also Engage in Other 

Charitable Activities. The PPA generated substantial administrative and compliance costs to charities that administer both DAFs and other charitable funds, especially geographic and religious community foundations. They, like virtually all nonprofit organizations, use ‘‘fund accounting.’’ They record each restricted gift in a separate fund. Many charities have gone through the extensive and arduous task of examining each and every fund agreement to determine whether it is a DAF or not. 

Their problem has been exacerbated by the absence of guidance for ambiguous situations. The definition of a DAF is so broad that it could potentially include every 

123 

restricted gift where there is any continuing donor involvement. For example, one 

would normally not think that an endowed chair at a university foundation is a 

DAF. If, however, the assets are invested by an investment firm where the donor’s 

son is employed, is the endowed chair a DAF? A DAF exists when a donor or related 

party advises either with respect to distributions or investments. I.R.C. Sec. 

4966(d)(2)(A)(iii). 

We suggest that Congress amend the PPA provisions to appropriately narrow the 

definition of a DAF or clarify when certain common kinds of funds, such as those 

with restricted charitable purposes, are excluded from the definition of a DAF. We 

also urge Treasury to exempt from the definition of a DAF a fund that is advised 

by a distribution Committee that is not directly or indirectly controlled by the donor 

or the donor’s appointee, as is authorized by I.R.C. Sec. 4966(d)(2)(C). We further 

suggest that funds established by local governments and publicly supported charities at community foundations be excluded from the definition of a DAF. These entities should be able to recommend charitable grants from such funds with the same 

freedom as if they had directly made the disbursements themselves. 

B. Repeal of Penalty if Additional Language Missing in Acknowledgment 

to Donor. The PPA amended I.R.C. Sec. 170 to deny a charitable income tax deduction for a contribution to a DAF unless the charity’s acknowledgment to the donor 

specifically states that the sponsoring organization ‘‘has exclusive legal control over 

the assets contributed.’’ I.R.C. Sec. 170(f)(18). Until this provision was enacted, the 

law governing every charity’s written acknowledgment to every donor had a uniform 

standard. I.R.C. Sec. 170(f)(8). The new DAF provision needlessly complicates the 

law and the punishment is excessive. Every completed charitable gift requires a 

transfer of legal control, including a gift to a DAF. Furthermore, the definition of 

a DAF is so broad (see above) that both the donor and the charity might not realize 

that a simple restricted gift agreement fell within the definition of a DAF. A donor 

should not lose a tax deduction solely because the charity’s receipt did not contain 

this statement. We recommend repeal of this provision, or in the alternative, the 

imposition of a reasonable fine on the charity (the party responsible for issuing the 

statement) similar to the penalty for a charity’s failure to send a donor a written 

acknowledgment of any kind: $10 per contribution, capped at $5,000. I.R.C. Secs. 

6115 and 6714. 

C. The Excess Business Holdings Rules Have Curtailed Gifts of Closely 

Held Business Interests to Both DAFs and SOs. This subject is addressed in 

Par. IV C. below. 

D. The Penalty for an Excess Benefit Transaction With a DAF Applies 

Even to the Portion of the Reasonable Value of Services Rendered. The PPA 

classified the entire amount of any grant, loan, compensation, or similar payment 

from a DAF to a donor or related party as an ‘‘excess benefit payment’’, whereas 

normally only the excess over the value of services is subject to that tax. Compare 

I.R.C. Sec. 4958(c)(2) and (c)(1), and I.R.C. Sec. 4941(d)(2)(E). We question why reasonable compensation is not permitted when both public charities and private foundations can make such payments to disqualified persons. If a financial institution 

seeks to establish a DAF, or if a donor recommends an investment firm where a 

family member is employed, an exemption seems appropriate if the investment 

firm’s fees are reasonable and comparable to fees that it charges other customers. 

This issue is addressed in greater detail in Par. IV D. below. 

III. GIFTS OF FRACTIONAL INTERESTS IN TANGIBLE PERSONAL PROPERTY 

Section 1218 of the PPA made significant changes to the income, estate, and gift 

tax consequences of donations of fractional interests in tangible personal property 

to charitable institutions (‘‘fractional contributions’’). 

A. Overview of Changes. Under prior law, a fractional contribution was deductible for Federal income tax purposes, if the donee 1) received an undivided portion 

of the donor’s entire interest in the property gifted, I.R.C. Sec. 170(f)(3)(B)(ii); and 

2) had the right to possession, dominion, and control of the property proportionate 

to its ownership interest. Treas. Reg. § 1.170A–7(b)(1)(i); Winokur v. Commissioner, 

90 TC 733 (1988). Like other charitable gifts of tangible personal property, a fractional contribution was valued for income, estate, and gift tax purposes at its full 

fair market value at the time of the gift. For estate and gift tax purposes, fractional 

contributions were deductible at the full fair market value, I.R.C. Secs. 2055 and 

2522, and for income tax purposes they were deductible at the full fair market value 

of the gift, if the use of the property by the donee charity was related to its charitable purpose, I.R.C. Sec. 170(e)(1)(B), subject to the applicable percentage of conVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00127 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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tribution base limitations. I.R.C. Sec. 170(b). We are aware that in some circumstances donors took advantage of these rules, but we are concerned that the 

PPA has not only reduced the income tax incentives to make valid fractional contributions, but has established estate and gift tax penalties on fractional contributions of appreciated property. 

The PPA established a new regime for fractional contributions, providing: (i) 

unique valuation rules for income, estate, and gift tax purposes; (ii) deadlines for 

donating the remaining fractional interest in the property, enforced by recapture 

and penalty provisions; (iii) a new requirement that the donee charity have substantial possession of the donated property, also enforced by recapture and penalty provisions; (iv) unrelated use recapture rules more onerous and punitive than those the 

PPA introduced for non-fractional contributions; and (v) narrow ownership requirements for donors to obtain deductibility. 

B. New Valuation Rules. In our view, the most serious change is caused by the 

new valuation rules. New I.R.C. Secs. 170(o)(2), 2055(g), and 2522(e)(2) limit the 

charitable deduction for subsequent fractional contributions to the lesser of the fair 

market value of the property at the time of the initial fractional contribution or at 

the time of the additional contribution. Thus, the donor is denied an income, estate, 

or gift tax deduction for the value of any appreciation of the property since the time 

of the initial fractional contribution. The denial of the income tax deduction in these 

circumstances may be a disincentive to some taxpayers, and it is not clear why the 

deduction should be limited if the gift otherwise meets the requirements for fractional contributions. However, the most severe consequences arise under the estate 

and gift tax, as shown by the following example: 

In 2007, D contributes an undivided one-half interest in a painting with a fair market value of $2 million to an art museum providing for the museum to have possession of the painting for 6 months each year. D’s income tax deduction, based on 

fair market value, is $1 million. A similar gift tax deduction applies, so that no gift 

tax is due on the fractional contribution. In 2015, when the painting has appreciated 

in value to $4 million, D makes the final fractional contribution of the painting to 

the museum. Under the new PPA limitations, D’s income tax deduction is only $1 

million, even though the value of the subsequent fractional contribution is double 

that amount. More seriously, however, D has made a charitable gift of $2 million, 

but is entitled to a gift tax deduction of only $1 million. Under the 2007 gift tax 

rates of 45%, D has an actual cost (either a reduction of D’s applicable exclusion 

amount, a gift tax liability or a combination of both) of approximately $450,000 for 

making a gift to charity! Similarly, if D died in 2015 and made a testamentary fractional contribution, the value of the appreciation since the initial fractional contribution would be includable in D’s estate. 

Denying an income tax deduction for the appreciation in value of tangible personal property since the initial fractional contribution reduces an offset against taxable income. Denying a gift or estate tax deduction for the appreciation results in 

a tax on a gift to a charity, which is not only punitive in nature but is an unprecedented departure from the general transfer tax approach to charitable gifts. If Congress did not intend such a draconian result, we suggest it be eliminated by the repeal of new I.R.C. Secs. 2055(g) and 2522(e)(2). 

C. Deadline for Contributions of Remaining Interest. The PPA requires a 

donor to give the remaining fractional interest in the donated property before the 

earlier of 10 years after the date of the initial fractional contribution (‘‘the 10 year 

period’’) or the date of the donor’s death. If this requirement is not met, the income 

and gift tax deductions for the initial fractional contribution will be recaptured and 

subject to interest and a 10 percent penalty. I.R.C. Sec. 170(o) and 2522(e). As a 

technical matter, if a donor dies before the end of the 10 year period, and makes 

a final fractional testamentary contribution, such gift will not have been made BEFORE the donor’s death. We suggest amending this provision to require the gift to 

be made on or before the earlier of the end of the 10 year period or the donor’s 

death. As a substantive matter, the 10 year requirement may cause some donors 

not to make gifts, depriving charitable institutions and therefore the public of the 

opportunity to use and enjoy works of art and other property. We suggest amending 

the provisions to require that either a gift or a binding pledge be made within the 

required time period. 

Under the new PPA provisions, the consequences for missing the deadline are severe. The full income and gift tax charitable deduction claimed for the initial fractional contribution is recaptured with interest and the resulting income tax is increased by a 10% penalty. We believe that the time when interest starts to run 

should be clarified. In our view, interest should not start to run until the event that 

triggers the recapture. Otherwise, the results can, at least in certain circumstances, 

125 

seem unduly harsh. A gift made the day before the expiration of the 10 year period 

does not result in any recapture of the initial deduction, but a gift made the day 

after the expiration of the 10 year period results not only in recapture of the initial 

deduction but also a charge of 10 years of interest on the amount of the deduction— 

even though the charity ends up receiving 100% interest in the property. We comment on the gift tax recapture rules in general in paragraph E below. 

D. Substantial Physical Possession and Related Use Requirements. I.R.C. 

Secs. 170(o)(3)(A)(ii) and 2522(e)(3)(A)(ii), added by the PPA, require a charity to 

have ‘‘substantial physical possession of the property’’ and to have ‘‘used the property in a use which is related to [its] purpose or function’’ for 10 years after the 

initial fractional contribution or the donor’s death, if earlier. If either of these requirements is not met, the same recapture rule described above applies. It would 

be helpful to clarify the meaning of ‘‘substantial physical possession,’’ particularly 

in light of the severe consequences of noncompliance. In addition, we suggest that 

there be exceptions, for example, if a painting has deteriorated and would be damaged by transporting it between the donor and the donee, or if the museum temporarily does not have exhibit space for the painting. Again, we suggest that interest 

should run only from the time of failure to meet the substantial use requirement, 

not from the time of the original gift. 

We question why the new related use rules for fractional contributions are more 

rigid and punitive than the new related use rules, also imposed by the PPA, for gifts 

of a donor’s entire interest in tangible personal property. The new rules in I.R.C. 

Sec. 170(e)(7) provide that if a donee disposes of donated tangible personal property 

within three years of the date of the donation, the donor must recapture the difference between the amount of the income tax deduction taken by the donor and 

the donor’s cost basis in the property, unless the donee certifies that the use of the 

property by the donee was related to the donee’s charitable purpose or that the intended use of the property has become impossible or infeasible. I.R.C. Sec. 

170(e)(7)(D). The result of the different related use rules is that if a donor makes 

a fractional contribution and 2 years later the donee disposes of the property, the 

donor is subjected to a full recapture of the income and gift tax deduction, plus penalty and interest, while the donor of a 100% interest in the same situation must 

only recapture the amount of the deduction above cost basis but only if the donee 

does not certify to the related use or impossibility of use. 

If Congress wishes to reconcile the related use requirements applicable to full 

gifts of tangible personal property and fractional contributions, the amount subject 

to recapture for income tax purposes under I.R.C. Sec. 170(o) could be limited to the 

difference between fair market value and cost basis at the time of the gift without 

interest or penalties. If the interest charge is retained for recapture due to change 

in use of fractional contributions, we recommend clarifying that interest runs only 

from the time of the change in use. 

E. Gift Tax Recapture. We suggest that the new recapture rules for fractional 

contributions not be applied for gift tax purposes. We are concerned that the gift 

tax recapture rules inappropriately penalize a donor for making a gift to charity. 

Unlike the recapture of an income tax deduction which simply restores taxable income to the donor, the recapture of the gift tax results in an out of pocket cost on 

a transfer to charity. This harsh result is at variance with the gift tax regime, which 

does not otherwise impose gift tax on charitable transfers. 

F. Narrow Ownership Requirements. New I.R.C. Secs. 170(o)(1)(A) and 

2522(e)(1)(A) generally deny income and gift tax deductions for fractional contributions unless all interests in the property are held by the donor or the donor and 

the donee immediately before the contribution. This requirement may prohibit any 

fractional gift of community property. We recommend clarifying the application of 

this provision to gifts of community property. We also recommend, as allowed by 

new I.R.C. Secs. 170(o)(1)(B) and 2522(e)(1)(B), that the Secretary of the Treasury 

adopt regulations that provide an exception to the new ownership requirements 

where all persons who hold an interest in the property make proportional fractional 

contributions. 

IV. SUPPORTING ORGANIZATIONS 

A. General Observations. Prior law provided Treasury the means to combat the 

abuses intended to be addressed by the PPA with regard to SOs. The new legal regime results in severe restrictions on a charity’s access to working capital and 

sources of funding through the imposition of penalties and sanctions on private 

foundations, SOs, and supported organizations. The following comments focus on 

four key provisions of the PPA. 

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B. Contributions to Supporting Organizations. 

1. Prohibited Contributors. Section 1241(b) of the PPA places substantial limitations on receipt of funds by Type I and Type III SOs from ‘‘prohibited contributors’’ 

(i.e., individuals or entities who alone or with other specified persons maintain direct or indirect control over an SO’s supported organization). Contributions from 

such contributors will result in immediate disqualification of the SO’s tax-exempt 

status and its reclassification as a private foundation. 

This limitation negatively impacts the tax-exempt community because it arbitrarily prohibits donors and charities from using SOs in traditional planning situations. For example, donors and charities use SOs for creditor protection purposes, 

particularly Type III SOs, the assets of which are considered separate and apart 

from those of its supported organization(s) for legal and creditor purposes. Maintaining the integrity of gifts separate and apart from the general assets and liabilities 

of charities that have higher risk profiles, such as hospitals, universities, churches, 

or other service-based organizations, continues to be a fundamental goal in providing for the longevity of such organizations. 

Congress should consider instead addressing this issue through disclosure of the 

relationship between the donor and the supported organization by the SO and a 

demonstration on the part of the SO that it is in fact distributing its funds to or 

for the benefit of the specific supported organization to meet the SO’s attentiveness 

requirements. This can be done through disclosure on the SO’s Federal Form 990. 

Further, Treasury has a means to police this issue via the attentiveness test provisions of I.R.C. Sec. 509(a)(3) and the Treasury Regulations thereunder. 

2. Private Foundations. Under section 1244 of the PPA, private foundations are 

penalized for certain contributions made to Type III SOs and, in certain circumstances, to Type I and Type II SOs, due to the fact that such grants no longer 

qualify toward a private foundation’s minimum distribution requirements under 

I.R.C. Sec. 4942. Such grants will not qualify if made to (a) non-functionally integrated Type III SOs or (b) Type I, Type II or functionally integrated Type III SOs 

if (i) a disqualified person of the private foundation directly or indirectly controls 

the SO or a supported organization of the SO, or (ii) such grant is a distribution 

determined by regulation to be ‘‘inappropriate.’’ Additionally, Section 1244(b) of the 

PPA imposes expenditure responsibility requirements on any private foundation 

that makes a grant to any of the above-referenced SOs. As a result, SOs and the 

charities they support will likely see funds from private foundations substantially 

reduced, since the ‘‘cost’’ of such a private foundation’s grant is increased by its not 

counting toward the private foundation’s minimum distribution requirements under 

I.R.C. Sec. 4942 and because such grants will be subject to expenditure responsibility. Further, private foundations may be reluctant to make grants to SOs until 

Treasury issues regulations clarifying what distributions are ‘‘inappropriate.’’ Instead of penalizing private foundations, Congress should consider addressing this 

issue by revising the minimum distribution requirements for SOs to provide that in 

a year in which an SO receives a grant from a private foundation, a portion of that 

grant should be included as part of the base amount against which the SO’s minimum distribution requirement is calculated. 

C. Excess Business Holdings. Section 1243(a) of the PPA amends the excess 

business holdings rules under I.R.C. Sec. 4943 by adding a new subparagraph (f), 

which requires certain SOs which receive gifts of closely held business interests to 

comply with the excess business holdings rules normally applicable to private foundations, unless Treasury has provided an exemption to an SO with business holdings on the basis that such business holdings are consistent with the SO’s exempt 

purposes. Non-functionally integrated Type III SOs and Type II SOs that receive 

contributions from persons or entities which maintain direct or indirect control over 

one or more of the SO’s supported organizations are subject to this new regime; 

Type I SOs are not. Further, under this regime, a 2% de minimis holdings threshold 

is allowed as a statutory safe harbor before the excess business holdings rules would 

be triggered. 

Under the PPA, private businessowners have lost an important way to protect the 

family business from a forced sale on the owner’s death. Additionally, businessowners are no longer able to use their closely held business interests as a means 

to fund their lifetime charitable goals. Further, taxpayers cannot reasonably proceed 

with charitable gifts with the hope that Treasury will provide an exemption based 

on a determination that the SO’s ownership of the business interest is consistent 

with the SO’s tax-exempt purpose, as there is insufficient guidance as to what 

Treasury would consider to be ‘‘consistent’’ in this context to warrant an exemption 

being granted. 

127 

We suggest that Congress consider instead using the existing attentiveness test 

and control test regulations to address this problem. Under such tests, Treasury can 

assess whether an SO is attentive to its supported organizations or subject to the 

indirect control of the donor. If Treasury concludes that the SO is not attentive or 

is subject to too much donor control, Treasury can reclassify the SO as a private 

foundation. As reclassified, the SO would be subject to the excess business holdings 

provisions of Chapter 42. Lapham v. Commissioner, T.C. Memo 2002–293, is a clear 

example of Treasury using these rules effectively to combat an abusive situation. 

Thus, Treasury could continue to use prior law to address the problem. It could also 

require gifts of business interests to be more fully disclosed in the first and subsequent years, and then analyze such gifts on an ongoing basis under the ‘‘attentiveness test.’’ 

D. Excess Benefit Transactions. Section 1242 of the PPA provided for sweeping 

reforms to all three types of SOs with regard to any direct or indirect compensation 

or other arrangement which violates the excess benefit transaction rules of I.R.C. 

Sec. 4958. Thus, under new I.R.C. Sec. 4958(c)(3), any loan, grant, compensation, 

financial arrangement, or other similar payment between an SO and a ‘‘specified 

person’’ or any loan to a disqualified person will be deemed an excess benefit transaction and subject to the sanctions provided under I.R.C. Sec. 4958. A specified person includes substantial contributors (individuals who have donated more than 

$5,000 to the SO if the amount is more than 2% of the bequests received by the 

SO through the close of the taxable year), a member of such person’s family, or a 

35% controlled entity. 

Compensatory arrangements in the non-profit sector must be ‘‘reasonable’’ in 

order to be respected under state and Federal law. Indeed, even the strict self-dealing rules applicable to private foundations exempt payment of reasonable compensation to disqualified persons. I.R.C. Sec. 4941(d)(2)(E). A strict ban on compensating 

individuals performing services in official capacities for SOs appears to be an unreasonable departure from normal industry compensation standards of the non-profit 

sector, and the breadth of the provision may cause unintended results. For example, 

an employee of a tax-exempt organization who is also a director of an SO that supports such tax-exempt organization would technically be considered a disqualified 

person to both organizations, requiring the supported organization to carry out burdensome compliance and reporting to avoid the imposition of the excess benefit 

transaction penalties. While combating abusive transactions in which SOs make 

loans, grants, or other financial arrangements with ‘‘insiders’’ is appropriate, prohibiting even reasonable compensation for officers, directors, or employees of SOs, regardless of their status, we believe is inappropriate. 

E. Minimum Distribution Requirements. Section 1241(d) of the PPA requires 

Treasury to promulgate regulations modifying the distribution requirements for 

non-functionally integrated Type III SOs. Currently, non-functionally integrated 

Type III SOs are required to distribute ‘‘substantially all’’ of their net income each 

year, which typically has meant a distribution of 85% of an SO’s net income. Under 

the regulations, Treasury is to establish a distribution regime under which SOs 

would be required to make a distribution of a percentage of their income or assets, 

so long as such distribution constitutes a ‘‘significant amount.’’ 

The current law already requires non-functionally integrated SOs to distribute 

substantially all of their net income each year to one or more of each such SO’s supported organizations. Therefore, a minimum distribution requirement currently exists. The current methodology also ensures that the SO’s distribution pattern clearly 

reflects the market conditions in which the SO is operating. Consequently, donors 

and charities can manage and maintain budgets and ensure that spending patterns 

are in line with the current and future support expected from the SO. 

In addition, there is no guarantee that requiring a distribution standard based on 

a percentage of assets, like the requirement imposed on private foundations, would 

result in greater distributions to supported organizations and increased attentiveness. For example, an SO which holds a closely held business interest worth 

$1,000,000 that generates $200,000 in income would, under the current test, be required to distribute $175,000 (i.e., 85% of $200,000), versus $50,000 under the 5% 

of assets test. We suggest that Congress consider using prior laws (i.e., the attentiveness test) to address this issue. An increase in attentiveness test audits would 

provide a significant deterrent to the manipulation of income and cash flow distributions from SOs. It would also present the opportunity for Treasury to analyze the 

nature of the relationships between the various asset holdings of the SO in light 

of the Lapham decision (discussed above) to determine if the SO’s public charity status should be revoked and the entity reclassified as a private foundation, triggering 

application of all of the excise tax provisions applicable to private foundations. 

128 

1The Pension Protection Act of 2006, Pub. L. No. 109–280, 120 Stat. 780 (2006). 

2 References to a ‘‘section’’ are to a section of the Internal Revenue Code of 1986, as amended 

(the ‘‘Code’’), unless otherwise indicated, and references to regulations are to the Treasury Regulations. 3 An Advance Notice of Proposed Rulemaking (REG 155929–06) issued on August 1, 2007 details several factors the Treasury Department and the Internal Revenue Service (the ‘‘Service’’) 

anticipate including in proposed regulations, and requests public comment by October 31, 2007. 

The PPA provisions impose substantial excise taxes and penalties to address perceived abuses involving SOs. However, Treasury already had the statutory means 

to address the problems intended to be corrected by these new laws, and in fact did 

so with success when the circumstances warranted action. The new legal regime results in unintended negative consequences on the non-profit community by restricting access to working capital, decreasing sources of funding, and penalizing private 

foundations, SOs, and supported organizations with automatic sanctions, potential 

reclassification of tax-exempt status, and increased compliance requirements. 

CONCLUSION 

We welcome the review by the Subcommittee on Oversight of the impact on charities of the significant changes made by the PPA. We appreciate your consideration 

of our comments. 

f 

Statement of the American Bar Association Section of Taxation 

These comments (‘‘Comments’’) are submitted on behalf of the American Bar Association section of Taxation (‘‘Tax section’’) and have not been approved by the House 

of Delegates or Board of Governors of the American Bar Association. Accordingly, 

they should not be construed as representing the position of the American Bar Association. 

Executive Summary 

The Pension Protection Act of 20061 (the ‘‘PPA’’) contained numerous provisions 

affecting tax-exempt organizations described in section 501(c)(3).2 On June 12, 2007, 

the Subcommittee on Oversight of the Ways and Means Committee of the United 

States House of Representatives issued an Advisory, inviting comments on those 

provisions of the PPA, including on how these provisions may affect charitable efforts and the difficulties that have arisen in implementing these provisions. We welcome the Oversight Subcommittee’s consideration of these issues and their impact 

on donor advised funds, supporting organizations, their donors and the organizations they support. 

In reaction to reports of abuses by a few organizations, the PPA imposed a great 

many new restrictions and penalties on donor advised funds and supporting organizations. Most of those reported abuses violated pre-PPA Code provisions, which suggests that at least certain of the PPA’s changes may not have been necessary. The 

PPA places significant new compliance burdens on donor advised funds, supporting 

organizations, their donors, and the organizations they support. These provisions 

are discouraging many well-accepted and commendable charitable activities. The 

PPA also places significant additional demands on the Service’s limited enforcement 

resources. We welcome the Oversight Subcommittee’s consideration of the need for 

balance between correcting abuses and placing additional burdens on legitimate, 

nonabusive charitable activities, and commend the Oversight Subcommittee to do so 

in a transparent manner through public hearings and open comments. 

Our most significant Comments can be summarized as follows: 

1. The PPA imposes new automatic excess benefit transaction rules on donor advised funds and supporting organizations that are more stringent than the selfdealing rules applicable to private foundations, add undue complexity to the 

tax laws, and are uncertain in their treatment of section 501(c)(3) organizations as disqualified persons. 

2. The PPA makes it more difficult for charitable trusts to qualify as Type III 

supporting organizations and may adversely affect a significant number of nonabusive charitable trusts. 

3. The PPA’s new rules distinguishing functionally integrated from non-functionally integrated Type III supporting organizations are a source of significant 

complexity and should be reconsidered. At a minimum, the effective date of 

these rules should be postponed until the Treasury Department issues final 

regulations clarifying the scope of these rules.3

129 

4 Comm. on IRS Notice 2006–109, ABA Tax Sec. Comments in response to IRS Notice 2006– 

109 on the application of the Pension Protection Act of 2006 to donor advised funds and supporting organizations, (June 4, 2007). 5 Notice 2006–109, 2006–51 I.R.B. 1121 

6 Comm. on IRS Notice 2007–21, ABA Tax Sec. Comments in response to IRS Notice 2007– 

21 on Treasury Study on donor advised funds and supporting organizations, (August 1, 2007). 7 Notice 2007–21, 2007–9 I.R.B. 611. 

8The term ‘‘public charity’’ is not defined in the Code and is used here to mean those taxexempt organizations described in section 501(c)(3) other than private foundations. section 4958 

also applies to organizations described in section 501(c)(4) and their disqualified persons. 9The PPA also adds new sections 4966 and 4967, which impose penalties on other donor advised fund activities. 

4. The PPA’s treatment of charitable contributions of undivided interests in tangible personal property is punitive and affects a great many nonabusive situations. 

5. The PPA’s change in the treatment of S corporation charitable deductions is 

consistent with longstanding tax policy favoring charitable contributions of appreciated property, promotes parity in the tax treatment of S corporations and 

partnerships, and should be made permanent. 

6. The goal of the PPA’s provision requiring the public disclosure of section 

501(c)(3) organizations’ Forms 990–T could be achieved more simply by expanding the disclosure of unrelated business activity on Form 990. 

7. A technical correction appears necessary to ensure that the penalty abatement 

provisions apply to new sections 4966 and 4967; and 

8. The PPA’s changes to section 512(b)(13) should be made permanent in order 

to put tax-exempt organizations on parity with taxable entities. 

Comments 

In light of the breadth of the PPA’s provisions affecting tax-exempt organizations, 

these Comments focus on those areas that present the most significant concerns. 

The Tax section’s views on the PPA also are reflected in comments4 to the Service 

dated June 4, 2007 in response to Notice 2006–109,5 and comments6 to the Service 

dated July 31, 2007 in response to Notice 2007–21.7 As requested by the Notices, 

those submissions commented only on the provisions of the PPA that affect supporting organizations and donor advised funds and include recommendations for 

regulations and other guidance. 

1. The Automatic Excess Benefit Transaction Rules Applicable to Supporting Organizations and Donor Advised Funds 

Background. Private foundations defined in section 509(a) have long been subject to an excise tax under section 4941 that penalizes ‘‘self-dealing’’ transactions 

with ‘‘disqualified persons.’’ section 4941 generally prohibits financial transactions 

between a private foundation and a disqualified person, but contains several exceptions, including one in section 4941(d)(2)(E) that allows a private foundation to pay 

reasonable compensation to a disqualified person for services provided to the private 

foundation. 

Since September 14, 1995, transactions between public charities8 and their disqualified persons have been subject to an excise tax found in section 4958, often 

called the ‘‘intermediate sanctions’’ excise tax. Prior to the PPA, section 4958 did 

not prohibit financial transactions between a public charity and a disqualified person, but instead subjected them to an arm’s length reasonableness standard. section 

4958 penalized only ‘‘excess benefit transactions’’ in which a disqualified person received an excessive economic benefit. Prior to the PPA, supporting organizations and 

donor advised funds, which are classified as public charities, were subject to the intermediate sanctions restrictions of section 4958 rather than the private foundation 

self-dealing restrictions of section 4941. 

Comment on Automatic Excess Benefit Transactions. The PPA effectively 

establishes a third excise tax on transactions between a charity and its disqualified 

persons. It does so by creating a new type of automatic excess benefit transaction 

in section 4958(c)(2) and (3) that applies exclusively to supporting organizations and 

donor advised funds.9 Section 4958(c)(2) applies to donor advised funds and imposes 

the section 4958 excise tax automatically on any ‘‘grant, loan, compensation, or 

other similar payments’’ by donor advised funds to donors, advisors, and certain related persons. The Joint Committee Report states that ‘‘other similar payments’’ inVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00133 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
130 

10Staff of the Joint Committee on Taxation, Technical Explanation of H.R. 4, The ‘‘Pension 

Protection Act of 2006,’’ as Passed by the House on July 28, 2006, and as Considered by the 

Senate on August 3, 2006, at 467 (2006) (the ‘‘Joint Committee Report’’). 11 Reg. §§ 53.4946–1(a)(8) and 53.4958–3(d)(1). 

clude expense reimbursements but not sales or leases.10 Section 4958(c)(3)(A)(i)(I) 

creates comparable automatic excess benefit transaction rules for payments by supporting organizations to their substantial contributors and certain related parties. 

section 4958(c)(3)(A)(i)(II) creates a third, broader category of automatic excess benefit transaction for a loan by a supporting organization to any ‘‘disqualified person,’’ 

not just substantial contributors and related parties. 

The PPA thus establishes new rules for supporting organizations and donor advised funds that are more stringent than those that apply under either the private 

foundation self-dealing rules or the general section 4958 intermediate sanctions 

rules (both of which allow the payment of reasonable compensation and expense reimbursements to disqualified persons). It is not clear why supporting organizations 

and donor advised funds should be subject to a more stringent rule. Implicit in this 

change must be the view that payments of compensation or expense reimbursements to disqualified persons by supporting organizations or donor advised funds 

are more likely to result in abuse than similar payments by private foundations. 

However, we are not aware of any substantial evidence to that effect. 

The PPA also reverses the priorities of section 4941 by prohibiting the payment 

of compensation but allowing sales and leases. Congress previously had determined 

in enacting section 4941 that sales and leases were more susceptible to abuse than 

compensation for services, but the PPA takes a contradictory approach. The rules 

under section 4941 already were subject to much criticism for their complexity, and 

by prohibiting the payment of all compensation by supporting organizations and 

donor advised funds the PPA effectively creates more traps for the unwary. 

We encourage the Oversight Subcommittee to consider whether it would be more 

appropriate to apply either the private foundation self-dealing model or the public 

charity intermediate sanctions model, in lieu of these new restrictions which add 

further complexity to the Code. If the Oversight Subcommittee concludes that a 

more restrictive penalty tax regime on donor advised funds and supporting organizations is appropriate, we respectfully submit that a less complex approach would 

be to subject donor advised funds and supporting organizations to the self-dealing 

rules of section 4941, much as the PPA has subjected them to other private foundation provisions in sections 4943 and 4945. 

Comment on Failure to Exclude All section 501(c)(3) Organizations. The 

PPA also may establish more restrictive rules for transactions between section 

501(c)(3) organizations. Prior to the PPA, transactions between section 501(c)(3) organizations were excluded from the scope of both the private foundation self-dealing 

excise tax and the intermediate sanctions excise tax, regardless of whether they 

were private foundations or public charities. This exclusion was accomplished in the 

regulations by excepting all section 501(c)(3) organizations from the definition of 

‘‘disqualified person.’’11 The PPA’s automatic excess benefit rule for loans by supporting organizations to disqualified persons in section 4958(c)(3)(A)(i)(II), however, 

creates by statute a limited exclusion that applies only to public charities described 

in section 509(a)(1), (2) and (4). This express statutory provision may foreclose the 

Treasury Department from expanding that exclusion by regulation to allow a supporting organization to make a loan to another supporting organization or to a private foundation that is a disqualified person, even though the transaction is between two section 501(c)(3) organizations. If this result is what Congress intended, 

it represents a material departure from the pre-PPA policy of excluding all transactions between section 501(c)(3) organizations from the application of the self-dealing and intermediate sanctions excise taxes. 

The limited statutory exclusion in section 4958(c)(3)(A)(i)(II) also clouds the Treasury Department’s regulatory authority with respect to the other automatic excess 

benefit transaction rules in section 4958(c)(2) and (c)(3)(A)(i)(I). Although neither of 

these latter provisions contains the same limited statutory exclusion, the language 

in closely related section 4958(c)(3)(A)(i)(II) may cast doubt on the Treasury Department’s regulatory authority to extend the pre-PPA exclusion for all section 501(c)(3) 

organizations to the new automatic excess benefit transaction rules. The Treasury 

Department could view the limited statutory authority for loans to disqualified persons as an indication of Congressional intent toward automatic excess benefit transactions more generally. 

The policy reflected in the private foundation self-dealing rules of excluding all 

section 501(c)(3) organizations from self-dealing penalties has withstood the test of 

131 

12 Joint Committee Report at 362. The Advance Notice of Proposed Rulemaking (REG 155929– 

06) issued on August 1, 2007 addresses this charitable trust issue only preliminarily and requests further comment. 13The breadth of PPA section 1241(c) is discussed at pages 62–66 of the Tax Section’s June 

4, 2007, comments to the Service. Those comments recommend steps that the Service and the 

Treasury can take to ameliorate the overbreadth of PPA section 1241(c). 14 I.R.C. §§ 4942(g)(4)(A)(i), 4943(f)(3)(A), 4945(d)(4)(A)(ii) & 170(f)(18)(A)(ii); PPA § 1241(d). 

The Tax section’s June 4, 2007, comments to the Service, at 51–56, discuss these provisions and 

make recommendations regarding the definitional issues the Service and the Treasury face with 

respect to functionally integrated Type III supporting organizations. 

time. A more restrictive approach under the automatic excess benefit transaction 

rules creates further complexity and more traps for the unwary. Accordingly, we respectfully suggest that the Oversight Subcommittee reconsider this aspect of the 

PPA. 

2. The Treatment of Perpetual Charitable Trusts as Supporting Organizations 

Background. Prior to the PPA, a trust described in section 501(c)(3) could qualify 

as a Type III supporting organization under section 509(a)(3) if it met the ‘‘responsiveness test’’ and the ‘‘integral part’’ test in Treasury Regulation section 1.509(a)- 

4(i)(2) and (3). Under Treasury Regulation section 1.509(a)-4(i)(2)(ii) a trust could 

meet the responsiveness test if it was a charitable trust under state law, named 

each supported organization in its governing instrument, and was subject to a state 

law that gave the beneficiary organization(s) the power to enforce the trust and 

compel an accounting. PPA section 1241(c) overruled this regulation. The Joint 

Committee Report states as follows: 

In general, under [this] provision, a Type III supporting organization that is organized as a trust must, in addition to present law requirements, establish to the satisfaction of the Secretary, that it has a close and continuous relationship with the 

supported organization such that the trust is responsive to the needs or demands 

of the supported organization.12

We understand that the PPA included this provision in response to reported 

abuses of donors’ ‘‘parking’’ assets in a charitable trust and retaining effective control of them due to a failure of oversight by the supported organization. Such abusive ‘‘parking’’ of assets is designed to avoid dedicating the assets to charitable purposes and use. However, this PPA provision is very broad in scope and affects a significant number of charitable trusts where there is no hint of abuse. For example, 

it is not uncommon for a donor to create a separate trust with a bank or other independent trustee to serve as an external endowment for a named charity. Donors do 

so for a number of reasons, including concerns that future officers of the charity will 

not honor the donor’s intent, that the endowment should be protected from the 

charity’s creditors, that the charity might otherwise make imprudent invasions of 

principal, or that the charity lacks investment expertise. Having a trust serve as 

an external endowment avoids these concerns and serves legitimate charitable purposes. The establishment of such trusts stands in sharp contrast to the abuses at 

which the provision is aimed; yet, the PPA provision applies to them as well. 

Comment. We assume that Congress did not intend the PPA to have the effect 

of revoking the supporting organization status of the significant number of nonabusive charitable trusts described above. However, there is no assurance that the 

Treasury Department’s regulations will adequately constrain the scope of PPA section 1241(c) to avoid the unnecessary conversion of many nonabusive charitable 

trusts into private foundations.13 Accordingly, we respectfully suggest that the Oversight Subcommittee reconsider the scope of PPA section 1241(c) to ensure that it 

clearly reflects its intent and is not applied more broadly than intended. 

3. Non-Functionally Integrated Type III Supporting Organizations 

Background. The PPA imposes new restrictions directed at Type III supporting 

organizations that do not qualify as ‘‘functionally integrated’’ under section 

4939(f)(5)(B), including rules that (1) deny qualified distribution treatment for 

grants to them by private foundations, (2) impose excess business holdings rules, (3) 

require private foundations that make grants to them to exercise expenditure responsibility, (4) disqualify them from administering donor advised funds eligible to 

receive deductible charitable contributions, and (5) impose new payout requirements 

to be set by the Treasury Department.14

Under these new provisions, non-functionally integrated Type III supporting organizations are treated more harshly than private foundations. A grant from one private foundation to another private foundation can be a qualifying distribution that 

132 

15Memorandum from Acting Director, EO Rulings and Agreements, Feb. 22, 2007. 16The Advance Notice of Proposed Rulemaking (REG 155929–06) issued on August 1, 2007 

(‘‘ANPRM’’) makes several constructive proposals regarding functionally and non-functionally integrated supporting organizations, but does not address all of the concerns with PPA’s new restrictions and leaves many questions unanswered. The ANPRM requests comments by October 

31, 2007, and only after that date will proposed regulations be issued. The ANPRM states that 

new rules will not be effective until temporary or final regulations are issued; in the interim, 

exempt organizations will be forced to continue to grapple with the PPA’s statutory restrictions 

and penalties without definitive guidance. 17Presumably the use of the word ‘‘before’’ in the statute does not require a donor to foresee 

the date of his death, so that a bequest of the remaining interest would avoid recapture if the 

donor dies within 10 years. 

counts against the grantor’s minimum distribution requirement if the grantee serves 

as a conduit for the grant under the ‘‘out of corpus’’ rules of section 4942(g)(3). However, no such flexibility is allowed for grants by private foundations to non-functionally integrated Type III supporting organizations. 

Comment. The PPA’s rules creating the new categories of functionally integrated 

and non-functionally integrated Type III supporting organizations are a source of 

significant complexity and have resulted in significant confusion. The statutory definitions are ambiguous, and the Service has suspended issuing determination letters 

on whether a Type III supporting organization is functionally integrated.15 It has 

been reported that many private foundations are simply refusing to make grants to 

any Type III supporting organization as a result of these new rules. The punitive 

denial of the ‘‘out of corpus’’ rules for grants to non-functionally integrated Type III 

supporting organizations has added to private foundations’ concerns. The reaction 

of private foundations is creating problems for all Type III supporting organizations. 

Given the many unanswered questions, we encourage the Oversight Subcommittee 

to reconsider these rules. If Congress decides to retain these rules, the Oversight 

Subcommittee should monitor how the Treasury Department carries out its broad 

regulatory authority to ensure that these provisions do in fact address the reported 

abuses that led to their enactment. Finally, the effective date of these rules should 

be postponed until the Treasury Department issues final guidance clarifying the 

scope of these rules.16

4. Gifts of Partial Interests in Tangible Personal Property 

Background. The PPA made several changes to the rules governing deductions 

for charitable contributions of tangible personal property. The changes that have 

caused the most concern involve new valuation and recapture rules for gifts of undivided interests in tangible personal property under sections 170(o), 2055(g) and 

2522(e). Where a donor contributes an undivided interest in tangible personal property to charity, these new PPA rules: (1) limit the donor’s deduction for any subsequent gift of an undivided interest in the same property for income, gift and estate 

tax purposes by basing the subsequent deduction on the lesser of the property’s fair 

market value at the time of the initial gift or its fair market value at the time of 

the subsequent gift; (2) require the recapture of both income tax and gift tax deductions, plus interest, if either (i) the donor does not contribute all of the remaining 

interest in the property before17 the earlier of the donor’s death or 10 years after 

the initial contribution or (ii) the donee charity does not have substantial physical 

possession of the property and does not use the property for a tax-exempt purpose 

during the period it has partial ownership; and (3) impose a 10 percent addition to 

both income and gift tax attributable to such recapture. 

Comment. Gifts of undivided interests are a valuable and legitimate way that 

many museums acquire works of art. We question whether the reported abuses of 

such gifts justify the PPA’s attempts to discourage them. Moreover, the PPA’s valuation and recapture rules do not simply discourage such gifts, but in fact punish 

them harshly. For example, assume that a donor contributes a 50 percent undivided 

interest in a painting worth $1 million to a museum on July 1, 2007, and gives the 

remaining 50 percent to the same museum 10 years later on June 30, 2017, at a 

time when the value of the painting has appreciated to $2 million. Under the PPA, 

the donor’s income tax deduction for the second gift is limited to $500,000 instead 

of $1 million. Limiting the donor’s gift tax deduction to $500,000 forces the donor 

to pay out of pocket $200,000 of gift tax just to make the subsequent charitable contribution within the timeframe prescribed by the PPA (assuming a 40 percent effective gift tax rate in 2017). The subsequent gift may well cost the donor more in gift 

tax than the donor will save in income tax. 

The recapture rules pile on yet more penalties. The first recapture rule, based on 

a donor’s failure to contribute the remaining undivided interest within the time perVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00136 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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18The second recapture rule presents separate issues, including its inconsistency with the 

PPA’s other related-use recapture rule for tangible personal property in section 170(e)(7). 19See Rev. Rul. 1996–11, 1996–1 C.B. 140. 20Differences in the computation of basis for S corporation stock and partnership interests 

also affect the amount of the charitable contribution that an owner can deduct, but such differences are beyond the scope of these Comments to the PPA. 

mitted, would be triggered by a donor who forgets to amend his will and then dies 

before making a subsequent gift. That donor would be penalized by recapture for 

mere inadvertence. Recapture of the income tax, along with interest and an addition 

to tax, is itself a penalty. Requiring gift tax recapture as well, plus interest and addition to tax, compounds the penalty. The second recapture rule, based on a donee 

charity’s not having substantial physical possession of the property and not putting 

the property to a related tax-exempt use, again is excessively punitive by requiring 

recapture of the gift tax as well as the income tax.18 Because donors do not view 

the gift tax charitable deduction as an affirmative benefit, any gift tax recapture is 

particularly punitive and would discourage the making of such charitable gifts. 

5. S Corporation Charitable Deductions 

Background. Charitable deductions of an S corporation pass through to its 

shareholders under section 1366(a)(1)(A). Prior to the PPA, when an S corporation 

contributed appreciated long-term capital gain property to charity, the shareholders 

were required to reduce the basis of their stock in the S corporation by their proportionate share of the property’s fair market value under section 1367(a)(2)(B). This 

pre-PPA rule contrasted with the partnership rule where partners are required to 

reduce their basis in their partnership interests only by their proportionate share 

of a contributed asset’s basis.19

The partnership approach is consistent with the general policy of section 170 of 

encouraging charitable contributions of appreciated property by allowing taxpayers 

to claim a deduction for the property’s full fair market value. The prior S corporation rule had the effect of depriving shareholders of the advantage of a fair market 

value charitable deduction afforded other kinds of assets because the larger basis 

reduction increased the shareholders’ gain or reduced the shareholders’ loss upon 

a later disposition of the S corporation stock. It also discouraged gifts of highly appreciated property, such as conservation easements, because shareholders often had 

insufficient basis to absorb the deduction. PPA section 1203(a), which expires at the 

end of 2007, added flush language at the end of section 1367(a)(2) that effectively 

establishes parity between S corporations and partnerships for this aspect of entitylevel charitable contributions of appreciated property.20 This temporary PPA change 

allows S corporation shareholders the same advantage for entity-level charitable 

contributions that individual donors have. 

Comment. Because this PPA change (a) is consistent with the longstanding tax 

policy of allowing charitable deductions for the full fair market value of appreciated 

property and (b) establishes parity in the treatment of entity-level charitable contributions by S corporations and partnerships, it should be made permanent. 

6. Public Disclosure of Form 990–T 

Background. Prior to the PPA, no taxpayer had been required to publicly disclose Federal income tax returns. Consistent with this policy, tax-exempt organizations were not required to publicly disclose their tax returns (Form 990–T), although 

they were subject to public disclosure requirements with respect to their information 

returns (Form 990). The PPA added section 6104(d)(1)(A)(ii) to require section 

501(c)(3) organizations, but not other tax-exempt organizations, to disclose their 

Forms 990–T in addition to their Forms 990. 

Comment. The PPA’s provision requiring the public disclosure of Form 990–T 

raises several concerns. It treats tax-exempt organizations less favorably than forprofit businesses, which are not required to disclose their tax returns. It treats section 501(c)(3) organizations less favorably than other tax-exempt organizations. It 

forces churches, which do not file Form 990 but do file Form 990–T, to disclose information about their operations for the first time, a mandated disclosure that implicates First Amendment concerns. It has the potential for turning away private joint 

venture partners and co-investors who prefer not to subject their activities to public 

disclosure. Its effectiveness is open to question because it often can be readily avoided by transferring an unrelated business to a taxable subsidiary corporation. Finally, because the Form 990–T is also used for purposes other than reporting unrelated business activity, such as claiming refunds of withholding and excise taxes, 

134 

21 Interim guidance was provided in Notice 2007–45, 2007–22 I.R.B. 1320, which states that 

a Form 990–T filed solely to claim a refund of telephone excise tax does not have to be made 

available for public inspection, but otherwise a Form 990–T must be disclosed ‘‘in its entirety.’’ 22 Joint Committee Report at 349–50. 

information with no bearing on unrelated business activity may be disclosed.21 An 

alternative approach would largely avoid these concerns, while achieving the disclosure Congress seeks. Instead of subjecting the Form 990–T to disclosure, additional 

disclosure of unrelated business activity could be required on the Form 990. The 

Form 990 already requires some disclosure of unrelated business activity, and that 

disclosure could be expanded. 

7. Extending Abatement Rules to sections 4966 and 4967 

Background. Excise taxes imposed on private foundations and public charities 

under Chapter 42 of the Code are generally subject to the Service’s authority to 

abate them under sections 4961–4963, except for the first-tier excise tax on selfdealing of section 4941(a) and the excise tax on tax-shelter transactions of section 

4965. The PPA did not extend the Service’s abatement authority to the new excise 

taxes imposed on donor advised funds under sections 4966 and 4967. This failure 

may have been an oversight because the excise taxes under 4966 and 4967 are included in the definition of ‘‘first tier taxes’’ in section 4963(a) but are omitted from 

the list of ‘‘qualified first tier taxes’’ eligible for abatement in section 4962(b). Moreover, the Joint Committee Report states that the excise taxes under sections 4966 

and 4967 ‘‘are subject to abatement under generally applicable present law rules.’’22

The excise taxes under sections 4966 and 4967 are complementary to the excise tax 

under section 4958, which is subject to abatement. 

Comment. There appears to be no reason to exclude the excise taxes under sections 4966 and 4967 from the possibility of abatement. A technical amendment 

should be enacted to ensure eligibility for abatement. 

8. Payments to Controlling Exempt Organizations 

Background. PPA section 1205(a) amended section 512(b)(13) to provide that, for 

certain payments received or accrued in 2006 and 2007, tax-exempt organizations 

would not be subject to unrelated business income tax on interest, rents, royalties 

and annuities received from certain related organizations to the extent that such 

payments reflected an arm’s-length, fair market value standard. This change conforms the treatment of tax-exempt organizations with the treatment of taxable enterprises, making both subject to an arm’s-length standard under section 482. The 

earlier rule, which caused tax-exempt organizations to be subject to unrelated business income tax automatically on such payments, encouraged tax-exempt organizations to favor transactions with unrelated parties instead of related entities. 

Comment. Consistent with prior comments of the Tax section, the substantive 

changes to section 512(b)(13) made by the PPA should be made permanent. Inflated 

pricing in related-party transactions would remain taxable (with a penalty), while 

arm’s-length dealings could continue. This approach would place tax-exempt organizations on the same footing as taxable entities and would no longer penalize transactions between tax-exempt organizations and their related organizations. 

f 

Statement of American Institute of Philanthropy 

Thank you for holding hearings on the IRS’s proposal to improve the Form 990 

and other ways to reform the nonprofit sector. Many of the changes, if put into effect, will greatly enhance the public’s access to important information that was previously not required to be broken-out or disclosed. We appreciate that the new 

schedules are designed to increase the accounting and reporting burdens of only 

those charities with more complex financial transactions, and do not force smaller 

charities with simpler operations to complete additional forms. 

With that said, we at the American Institute of Philanthropy (AIP) were shocked 

by one glaring change to the Form 990 that will significantly reduce charities’ accountability to the public, and deny donors of the information they need to understand how their contributions to charity are being used. The current version of the 

Form 990 requires charities that divide the expenses related to joint educational/ 

fundraising campaigns (Joint Costs) among program, management & general, and 

fundraising expense, to provide a breakout of what dollar amounts are being allocated to each function. The new Form 990, if adopted, would allow charities to conveniently disguise as program expense what many donors would consider fundraising activities. This would leave the public at a great disadvantage, taking away 

135 

the one reporting requirement that shows donors what portion of their contributions 

are being used to fund more solicitations, rather than the bona-fide programs they 

are intending to support. 

The public is being bombarded with an ever-increasing amount of phone and mail 

solicitations from charities. As a nationally prominent charity watchdog organization, we are flooded with questions from both the public and the media, who want 

to understand how charities are using donors’ hard-earned dollars. Many people are 

outraged to learn that charities are allowed to claim large portions of solicitation 

costs as program service expenses. Charities may claim that such activities are educating the public. You would not know this based on the complaints we frequently 

receive from donors who are fed up with the constant barrage of phone calls and 

mail they receive from charities requesting contributions. Based on AIP’s more than 

fifteen years of experience reviewing such mail and phone appeals, we think it 

would be obvious to almost anyone that the primary purpose of solicitations is to 

raise funds, with the educational component being largely incidental in most cases. 

Under current rules, a charity that includes an ‘‘action step’’ in their phone or 

mail solicitations such as ‘‘don’t drink and drive,’’ or ‘‘buckle your seatbelt,’’ can 

claim that they are ‘‘educating’’ the public, and can therefore report much of the expense of these appeals as a program. Such ‘‘action steps,’’ often relayed to potential 

donors through professional fundraisers hired by charities to broadly solicit the public for money, are typically messages of information that is common knowledge. Professional telemarketers, on average, keep two-thirds of the money they raise before 

the charity receives anything. What this means is that someone donating $50 to 

charity through a professional fund raiser may have just paid $30 to be solicited 

and ‘‘learn’’ that they should buckle their seatbelt. This is not what most donors 

would consider to be a charitable program, and the public should not be excluded 

from knowing how much of a charity’s reported program expense is part of its solicitation activities. 

The reporting requirements for joint costs should be expanded not eliminated, so 

donors know what they are really paying for. Even when following the joint cost reporting requirements of AICPA SOP 98–2, charities are given wide latitude in how 

they account for and allocate these expenses. In considering changes to Form 990, 

the IRS should consider adding an additional requirement in which charities would 

disclose their five most expensive solicitation campaigns, including a breakout of 

each campaign’s program, management & general and fundraising expenses, including the method used for allocation. The nonprofit should also provide a good description of the program being conducted in conjunction with each solicitation that cites 

specifically what is being accomplished and why the recipient of the solicitation has 

a use or need for the information. 

At the very least, the current disclosure requirements for joint cost reporting on 

the Form 990 should remain intact. While a break-out of Joint Costs may continue 

to be required in a charity’s audit under AICPA standards, this is not enough. There 

are numerous examples of charities incorrectly reporting or omitting important information from their tax forms, audits, and other reports. The Joint Cost reporting 

on Form 990 serves to provide information that may be cross-checked with a 

charity’s audit, state filings, and other data, for consistency and correctness. Such 

reporting can prevent a charity from claiming that failing to attach a required 

schedule or omitting important information from their reports was simply an oversight. 

In summary, AIP encourages all donors to charity to ask what percentage of their 

donation is being spent on programs that are not a part of a group’s solicitation efforts. If the new IRS form eliminates the disclosure of Joint Cost solicitation allocations, the public will no longer be able to have this very basic question answered 

by referring to the Form 990. It will also open the floodgates for unscrupulous fund 

raisers to aggressively solicit, knowing that most of the donating public will not be 

able to determine that they are only funding fundraising. 

I thank you for taking the time to review our concerns, and encourage you to contact me if I can be helpful in providing additional insight into how Form 990 information may improve the oversight of nonprofit organizations and better assist donors and recipients of charity services. These proposed Form 990 changes, if adopted, will have sweeping and long-lasting effects within the nonprofit sector, and it 

is important that they result in more accountability to the public, not less. 

Sincerely, 

Daniel Borochoff 

f 

President 

136 

1Title XII, Subtitle B, Part 1, sections 1213, 1214, 1216, 1218 and 1219 of H.R. 4 (P.L. 109– 

280). 2 According to a recent IRS study covering tax year 2003 returns, six million individual taxpayers reported 14.3 million noncash donations valued at $36.9 billion on Form 8283. These 

noncash contributions included public and closely held stock; real estate; land and fade easements; intellectual property; art and collectibles; cars; household items; other investments; and 

so forth. 

Statement of American Society of Appraisers 

The undersigned professional appraisal organizations, representing more than 

30,000 professional appraisers in the U.S., greatly appreciate the Committee’s invitation to comment on provisions in the Pension Protection Act (PPA or Act) relating 

to tax-exempt organizations. Our comments are limited to those sections of the Act 

which make far-reaching changes to the manner in which tax-related valuations are 

performed, including those involving appraisals of non-cash charitable contributions.1

Hundreds of provisions of the Tax Code require Individual and Business taxpayers to report the fair market value of tangible and intangible property for a variety of Income, Estate and Gift tax purposes. One of those purposes involves the 

valuation of noncash donations to tax-exempt organizations. Each year, eligible 

charities receive about $36 billion in non-cash property whose fair market value 

must be determined and reported to IRS to substantiate taxpayers’ claims to charitable deductions.2 The reliability and integrity of tax-related appraisals in general, 

and valuations of non-cash contributions in particular, have long been a source of 

concern to IRS, to the tax writing Committees and to the public. 

Our organizations have been active participants for a number of years in the Congressional debate over how to address these concerns, culminating in the valuation 

reforms of the Pension Protection Act. With one important exception, we strongly 

support these reform provisions as appropriate, necessary and cost-effective remedies for discredited IRS valuation policies which permitted anyone to appraise the 

value of tangible and intangible property for tax purposes—whether or not they had 

any valuation education, skills or training; and which allowed the use of any approaches to determining fair market value whether or not they were generally accepted by valuation professionals. 

The exception to our strong support involves the fact that the new law’s most important appraisal reform provisions—requiring meaningful definitions of the terms 

‘‘Qualified Appraiser’’ and ‘‘Qualified Appraisal’’—are limited to valuations of noncash charitable contributions and do not apply to the many other Tax Code sections 

which require taxpayers to report the fair market value of property. These narrowly 

applied provisions involve (1) redefining the term ‘‘Qualified Appraiser’’ by requiring 

individuals performing tax-related valuations to have demonstrable and meaningful 

valuation-specific education, training and experience; and (2) redefining the term 

‘‘Qualified Appraisal’’ by requiring adherence to generally accepted valuation standards in reaching determinations of fair market value. Although the other key features of the reforms (i.e., tightening the tolerances giving rise to findings of substantial and gross valuation misstatements and the addition of new sanctions that can 

be applied against appraisers) are significant and appropriately apply to all tax-related appraisals, we believe the provisions requiring appraiser competency and adherence to generally accepted valuation standards are the lynchpin of the Act’s remedies and should apply, as well, to all Tax Code valuations. 

Unless this imbalance is remedied, the otherwise excellent tax-related appraisal 

reforms established by Congress in the Pension Act will have the unintended effect 

of creating two separate and unequal systems for taxpayer valuations—a fully reformed system which applies only to section 170 appraisals relating to charitable 

contributions; and, a continuation of two of the most ineffective aspects of the old 

system, for all other tax purposes. 

We are writing, therefore, to respectfully urge the Oversight Subcommittee to correct this major imbalance by applying the Act’s appraiser competency and generally 

accepted appraisal standards requirements to all valuations required by the Tax 

Code, not just those involving noncash contributions. 

We would be very pleased to work with the Subcommittee to address this issue. 

If you have any questions or would like to contact our organizations, please call or 

contact the government relations representative of the American Society of Appraisers, Peter Barash, or the Appraisal Institute’s government affairs representative, 

Bill Garber. 

f 

137 

Statement of American Society of Association Executives 

I am President and chief executive officer of the American Society of Association 

Executives (‘‘ASAE’’), a tax-exempt organization that is recognized as exempt from 

Federal income tax under section 501(c)(6) of the Internal Revenue Code 1986 (the 

‘‘Code’’) and that represents roughly 22,000 members, the majority of whom are the 

chief executive officers or senior staff professionals of trade, professional or philanthropic organizations. 

I am writing to you about a couple of relatively minor provisions in the recently 

enacted Pension Protection Act of 2006 (P.L. 109–280, the ‘‘Act’’), that, if left unchanged, could have a major unintended impact on many associations’ ability to support and be supported by their related foundations. A close review of new Code section 4958(c)(3) indicates that a technical correction may be necessary to clarify an 

area of ambiguity. Likewise, a change made to Code section 509(f)(2)(A) might have 

the same effect. 

First: new Code section 4958(c)(3) provides in two separate subsections (sections 

4958(c)(3)(A)(i)(II) and 4958(c)(3)(C)(ii)) an exception to the general rule imposing 

automatic excess benefit treatment of loans paid by supporting organizations to disqualified persons and of grants, loans, compensation, or other similar payment paid 

by supporting organizations to substantial contributors. The exception in each of 

those subsections is for ‘‘an organization described in paragraph (1), (2), or (4) of 

section 509(a).’’ 

The exception language could be interpreted as not including section 501(c)(4), (5), 

and (6) organizations that are considered to be section 509(a)(2) organizations by 

virtue of the flush language of section 509(a). This clearly was not the intent of Congress and such an interpretation would present a nonsensical result in practical application. Specifically, a publicly supported section 501(c)(6) organization, for example, could qualify as a supported organization under section 509(a), and yet could 

be effectively prohibited from receiving a loan, grant, compensation or other similar 

payment from a section 501(c)(3) supporting organization even though that supporting organization is obligated by its very charter to act in support of the supported organization’s charitable, educational and other qualifying purposes. 

Second: IRC section 509(f)(2)(A), added by the PPA, prohibits an organization 

from qualifying for section 509(a)(3) ‘‘Type I’’ or ‘‘Type III’’ status if it accepts a gift 

from a person who directly or indirectly controls the organization being supported. 

Section 509(f)(2)(B)(i), like section 4958(c)(3), provides an exception to the ‘‘controlling person’’ restriction for ‘‘an organization described in paragraph (1), (2), or 

(4) of section 509(a).’’ And, as with section 4958(c)(3), a credible and logical interpretation of the language would be that all organizations that are treated as section 

509(a)(2) organizations by virtue of the flush language of section 509(a) are included 

as part of the exception provided. 

But, given the lack of total clarity with regard to these changes, we believe it 

would be advisable to approve a technical correction to revise the language of the 

affected subsections slightly. A draft of such slight revisions (in ‘‘blackline’’ format) 

is set forth on the attached pages, with the proposed new language italicized and 

bolded. This proposed revision takes language directly from section 509(a) and gives 

effect to the clear intent of Congress with regard to the affected subsections. 

For a more detailed review of this issue, please see the attached analysis documents. 

Proposed Technical Correction #1 

(b) Certain Transactions Treated as Excess Benefit Transactions.—Section 

4958(c), as amended by this Act, is amended by redesignating paragraph (3) as 

paragraph (4) and by inserting after paragraph (2) the following new paragraph: 

‘‘(3) Special rules for supporting organizations.— 

‘‘(A) In General.—In the case of any organization described in section 

509(a)(3)— 

‘‘(i) the term ‘excess benefit transaction’ includes— 

‘‘(I) any grant, loan, compensation, or other similar payment provided by 

such organization to a person described in subparagraph (B), and 

‘‘(II) any loan provided by such organization to a disqualified person 

(other than an organization described in paragraph (1), (2), or (4) of section 509(a), 

including an organization described in section 501(c)(4), (5), or (6) which 

138 

would be described in paragraph (2) if it were an organization described in 

section 501(c)(3)), and 

‘‘(ii) the term ‘excess benefit’ includes, with respect to any transaction described in clause (i), the amount of any such grant loan, compensation, or other 

similar payment. 

‘‘(B) Person described.—A person is described in this subparagraph if such 

person is— 

‘‘(i) a substantial contributor to such organization, 

‘‘(ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or 

‘‘(iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘persons described in clause (i) or (ii) of section 4958(c)(3)(B)’ for ‘persons 

described in subparagraph (A) or (B) of paragraph (1)’ in subparagraph (A)(i) thereof). 

‘‘(C) Substantial contributor.—For purposes of this paragraph— 

‘‘(i) In general.—The term ‘substantial contributor’ means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the organization, if such amount is more than 2 percent of the total contributions and bequests received by the organization before the close of the taxable year of the organization in which the contribution or bequest is received by the organization from 

such person. In the case of a trust, such term also means the creator of the trust. 

Rules similar to the rules of subparagraphs (B) and (c) of section 507(d)(2) shall 

apply for purposes of this subparagraph. 

‘‘(ii) Exception.—Such term shall not include any organization described in 

paragraph (1), (2), or (4) of section 509(a), and such term shall not include any 

organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization described in section 

501(c)(3)),.’’ 

Proposed Technical Correction #2 

Internal Revenue Code 

SUBTITLE A—INCOME TAXES (Sections 1 to 1564) 

CHAPTER 1—Normal taxes and surtaxes (Sections 1 to 1400 . . . 

SUBCHAPTER F—Exempt Organizations (Sections 501 t . . . 

PART II—Private Foundations (Sections 507 t . . . 

Sec. 509. Private Foundation Defined 

509(f) Requirements For Suppo . . . 

509(f)(2) Organizations Cont . . . 

Sec. 509(f)509(f)(2) Organizations Controlled By Donors 

509(f)(2)(A) In General 

For purposes of subsection (a)(3)(B), an organization shall not be considered to be— 

509(f)(2)(A)(i) operated, supervised, or controlled by any organization described in 

paragraph (1) or (2) of subsection (a), or 

509(f)(2)(A)(ii) operated in connection with any organization described in paragraph 

(1) or (2) of subsection (a), if such organization accepts any gift or contribution from 

any person described in subparagraph (B). 

509(f)(2)(B) Person Described 

A person is described in this subparagraph if, with respect to a supported organization of an organization described in subparagraph (A), such person is— 

509(f)(2)(B)(i) a person (other than an organization described in paragraph (1), (2), 

or (4) of section 509(a), including an organization described in section 

501(c)(4), (5), or (6) which would be desribed in paragraph 2 if it were an 

organization described in section 501(c)(3),) who directly or indirectly controls, 

either alone or together with persons described in clauses (ii) and (iii), the governing 

body of such supported organization, 

509(f)(2)(B)(ii) a member of the family (determined under section 4958(f)(4)) of an 

individual described in clause (i), or 

139 

509(f)(2)(B)(iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting ‘‘persons described in clause (i) or (ii) of section 509(f)(2)(B)’’ for ‘‘persons 

described in subparagraph (A) or (B) of paragraph (1)’’ in subparagraph (A)(i) thereof). 

f 

Statement of Association for Healthcare Philanthropy 

The Association for Healthcare Philanthropy (AHP) is pleased to present its comments for the written record for the hearing on tax-exempt charitable organizations. 

AHP is an association of professional development executives who are responsible 

for the management of foundations and development departments of nonprofit 

health care providers throughout the United States. A critical part of their mission 

is supporting local health care programs through philanthropic fundraising that directly benefits the institution in which they work. These nonprofit medical facilities 

approach and have come to rely on the generosity of grateful patients who they have 

served to help underwrite wellness programs, mobile health vans, mammography 

screenings, hearing and eye exams, hospital facility improvements, essential equipment upgrades and health care services for the uninsured. 

Established in 1967, AHP is a not-for-profit organization whose 4,500+ members 

manage philanthropic programs of foundations and development departments in 

2,200 of the nation’s not-for-profit, charitable health care providers. In 2006, this 

philanthropic support reached $7.9 billion according to AHP’s most recent giving 

survey report. As a practical matter, most, if not all, of health care providers routinely factor into their budgets an expected level of philanthropic support. 

AHP represents highly skilled fund raisers in health care philanthropy. Many 

hold the Certified Fund Raising Executive (CFRE) or the Fellow Association for 

Healthcare Philanthropy (FAHP) designation, which recognize professionalism in 

the field by documenting experience and testing knowledge in health care resource 

development. More than 60% of AHP members have been in the field of fundraising 

for 11 or more years, with 39% having been in the field for 16+ years. Our members 

believe in transparency and accountability in their work and follow the AHP Statement of Professional Standards and Conduct and its companion Donor Bill of 

Rights, copies of which are included with the letter. In addition, in 2006 AHP 

launched the AHP Performance Benchmarking Service. One of the goals of this program is to provide consistent reporting of fundraising dollars that AHP member organizations generate. 

AHP members are an integral part of their health care institutions and are a critical component in attracting needed dollars to support community benefit programs. 

With that in mind, AHP is a supporting organization of the Catholic Health Association’s Guide for Planning and Reporting Community Benefit. 

As the Oversight Subcommittee reviews 501(c)(3) tax-exempt health care organizations, AHP would like to share with you a number of critically important challenges facing the not-for-profit health care community and some steps AHP is taking to meet these challenges. It is important to understand the environment that 

health care fund raisers are currently working within to fully grasp the importance 

of their tax-exempt status and the need for transparency and accountability. 

These challenges are fairly complex, but they fall into three main categories: longterm cultural trends, financial challenges, and regulatory concerns. 

First, the long-term trend that permeates a whole range of issues confronting the 

health care community is the sense of entitlement that has developed over the years 

with regard to health care delivery. This development in our society creates many 

stumbling blocks for health care philanthropy—particularly for hospitals, medicals 

centers, long-term care facilities and hospices. 

Patients believe that they have a right to the highest quality of care; that the US 

has the best health care in the world; that it is far too expensive; and that third 

parties such as insurance companies are making decisions about health care unrelated to the delivery of good care—decisions that should be made by physicians and 

nurses. For philanthropy, it raises the question— why donate to such a system? 

In addition, few Americans are aware of the differences between for-profit and 

not-for-profit health care providers or the fact that only 12 to 14 percent of providers 

are in a for-profit delivery system. Fewer still know that only about one-third of hospitals in the United States have a positive bottom line, while another third are barely keeping their heads above water and the rest are deep in red ink and financially 

in trouble. 

Second, the financial challenges to nonprofit health care providers are many. 

Some are linked to the fact that many hospitals have postponed capital spending 

140 

and underinvested in their infrastructure. They need to address deteriorating facilities, but fully 85 percent of hospital chief financial officers say it is going to be more 

difficult for their organizations to fund capital expenditures in future years. 

At the same time, technology’s promise, particularly in health care delivery, has 

created enormous stresses on finances relative to providing quality health care and 

using cutting-edge technology in providing that care. Expensive technological initiatives need to be undertaken to maintain effectiveness, while operating margins that 

already are thin threaten to become thinner, placing more responsibility on philanthropy to fill in the gap. 

Similarly, the burden of meeting the health care needs of the uninsured, including 

non-citizens, weighs heaviest on the nonprofit sector, even as revenues from Medicare and Medicaid decline. 

Third, on the regulatory scene, the Health Insurance Portability and Accountability Act, or HIPAA, is severely impacting efforts of fundraisers. It is making philanthropic activities more costly and less efficient while increasing the cost of compliance because hospitals, nursing homes, clinics and hospices must upgrade computer 

systems, train staff and pay for legal advice. AHP fully supports HIPAA. Unfortunately, a lack of understanding on the role of institutionally related development offices in a health care organization has led the Federal government to enact that portion of the rule that restricts philanthropic efforts. 

In fact, 4 years after HIPAA went into effect, the Federal government in a recent 

letter to AHP, conceded there were practically no examples of any violations ‘‘in the 

context of fundraising efforts.’’ Complaints of violations of the HIPAA rule have 

been received by the agency’s Office of Civil Rights with practically none involving 

fundraising. 

Yet in a 2007 AHP survey, 56% of respondents who contact past patients report 

that HIPAA has had a negative effect in their ability to run a successful grateful 

patient program. 

AHP has a lot of educating to do. Health care providers need more information 

about HIPAA compliance. government officials and legislators need a better understanding of philanthropy. 

With that in mind, AHP wants to take the opportunity to educate legislators, the 

media and the public with regard to nonprofit health care providers and their taxexempt status. AHP fully supports legislation that stems tax-avoidance scams and 

that shines more light on compensation packages of nonprofit executives. However, 

there is a real danger that an all too common problem will arise: unintended consequences. With the challenges facing health care delivery and the definite need for 

philanthropic support, it is crucial that the role of the development office and its 

operation is understood fully so as not to thwart fundraising efforts and erode the 

pubic trust of nonprofit health care providers. 

As I mentioned earlier, AHP supports clearly defined terms for data reporting 

across the board for fundraising entities. Evidence of this is our successful launch 

of the AHP Performance Benchmarking Service. At its launch, 41 of our AHP members in 18 states and two Canadian provinces have become part of this new fundraising system designed to better meet corporate compliance and transparency requirements, and to ensure that dollars donated by grateful patients or their families 

are accounted for and spent effectively. 

The AHP Performance Benchmarking Service, is a unique, integrated database of 

business practices and performance metrics for raising philanthropic health care 

fundraising to new levels of performance. Participating organizations are in Alabama, Arizona, California, Florida, Georgia, Illinois, Maryland, Michigan, Minnesota, Nebraska, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee, Virginia, Washington, Wisconsin, Ontario and Saskatchewan. Philanthropic fundraising, now more than ever, is vital to sustain and grow the nonprofit health care 

sector’s ability to deliver first class services to patients and communities. AHP’s Performance Benchmarking Service advances this effort by transforming basic financial 

and program data into useful information that enables hospital chief executive officers and boards of directors to integrate philanthropy into their overall strategic 

planning for their health care organizations. 

AHP members have as their missions to serve their communities. According to 

AHP’s Report on Giving 2006, health care institutions in the U.S. raised $7.9 billion 

through philanthropy, a 11.5% increase over 2005. Those dollars are being used for 

health care construction and renovation, equipment purchases, community benefit 

programs, charitable care, research and training, general operation, among others. 

In 2005, the largest expense item for institutions was construction and renovation, 

accounting for 23.9%. In 2006, that expense rose to 31.8%. Each year AHP members 

provide data that demonstrate where their philanthropic dollars are being used by 

141 

their health care organization in order to support their missions—to serve their 

communities. 

In summary Mr. Chairman and Members of the Subcommittee, AHP members 

feel that every dollar donated is critical, and we are taking all necessary steps to 

ensure we achieve the most efficient return on the philanthropic investments of 

grateful donors and their families. 

Enc.: AHP Statement of Professional Standards and Conduct 

Donor Bill of Rights 

Association for Healthcare Philanthropy 

Statement of Professional Standards and Conduct 

All members shall comply with the Association’s Statement of Professional Standards and Conduct: 

Association for Healthcare Philanthropy members represent to the public, by personal 

example and conduct, both their employer and their profession. They have, therefore, a 

duty to faithfully adhere to the highest standards and conduct in: 

I. Their promotion of the merits of their institutions and of excellence in health 

care generally, providing community leadership in cooperation with health, educational, 

cultural, and other organizations; 

II. Their words and actions, embodying respect for truth, honesty, fairness, free 

inquiry, and the opinions of others, treating all withequality and dignity; 

III. Their respect for all individuals without regard to race, color, sex, creed, ethnic or national identity, handicap, or age; 

IV. Their commitment to strive to increase professional and personal skills for improved service to their donors and institutions, to encourage and actively participate 

in career development for themselves and others whose roles include support for resource development functions, and to share freely their knowledge and experience 

with others as appropriate; 

V. Their continuing effort and energy to pursue new ideas and modifications to 

improve conditions for, and benefits to, donors and their institution; 

VI. Their avoidance of activities that might damage the reputation of any donor, 

their institution, any other resource development professional or the profession as 

a whole, or themselves, and to give full credit for the ideas, words, or images originated by others; 

VII. Their respect for the rights of privacy of others and the confidentiality of 

informationgained in the pursuit of their professionalduties; 

VIII. Their acceptance of a compensation method freely agreed upon and based 

on their institution’s usual and customary compensation guidelines which have been 

established and approved for general institutional use while always remembering 

that: 

a. any compensation agreement should fully reflect the standards ofprofessional 

conduct; and, 

b. antitrust laws in the United Statesprohibit limitation on compensation methods. 

IX. Their respect for the law and professional ethics as a standard of personal conduct, with full adherence to the policies and procedures of their institution; 

X. Their pledge to adhere to this Statement of Professional Standards and Conduct, and to encourage others to join them in observance of its guidelines. 

A Donor Bill of Rights 

Philanthropy is based on voluntary action for the common good. It is a tradition 

of giving and sharing that is primary to the quality of life. To assure that philanthropy merits the respect and trust of the general public, and that donors and prospective donors can have full confidence in the not-for-profit organizations and 

causes they are asked to support, we declare that all donors have these rights: 

142 

I. To be informed of the 

organization’s mission, of the way 

the organization intends to use 

donated resources, and of its 

capacity to use donations 

effectively for their intended 

purposes. 

VI. To be assured that information 

about their donations is handled 

with respect and with 

confidentiality to the extent 

provided by law. 

II. To be informed of the identity of 

those serving on the 

organization’s governing board, 

and to expect the board to 

exercise prudent judgment in its 

stewardship responsibilities. 

VII. To expect that all relationships 

with individuals representing 

organizations of interest to the 

donor will be professional in 

nature. 

III. To have access to the 

organization’s most recent 

financial statements. 

VIII. To be informed whether those 

seeking donations are 

volunteers, employees of the 

organization or hired solicitors. 

IV. To be assured their gifts will be 

used for the purposes for which 

they were given. 

IX. To have the opportunity for their 

names to be deleted from 

mailing lists that an 

organization may intend to 

share. 

V. To receive appropriate 

acknowledgment and recognition. 

X. To feel free to ask questions 

when making a donation and to 

receive prompt, truthful and 

forthright answers. 

DEVELOPED BY 

American Association of Fund Raising Counsel (AAFRC) 

Association for Healthcare Philanthropy (AHP) 

Council for Advancement and Support of Education (CASE) 

National Society of Fund Raising Executives (NSFRE) 

ENDORSED BY 

(in formation) 

Independent Sector 

National Catholic Development Conference (NCDC) 

National Committee on Planned Giving (NCPG) 

National Council for Resource Development (NCRD) 

United Way of America 

f 

Association of Art Museum Directors 

New York, New York 10022 

July 27, 2007 

House Ways and Means Oversight Subcommittee 

Congressman John Lewis, Chairman 

1136 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Lewis: 

We would like to thank you for the opportunity to comment on the charitable provisions that were contained in the Pension Protection Act of 2006 (‘‘PPA’’). The Association of Art Museum Directors, founded in 1916, represents over 170 art museums 

in the US. We address our comments to you on behalf of our members, most of 

whom receive fractional gifts and view the ability to do so as an important tool to 

make the best art available to the American public. 

143 

As you may be aware, many of the provisions included in the PPA have had a 

significant impact on charitable donations to the nation’s art museums. In particular, the new restrictions imposed on fractional gifts have resulted in a pronounced reduction in donations of artwork to museums across the country. The loss 

of important works represented by most fractional gifts will have a lasting negative 

impact on the public’s ability to view and appreciate invaluable works of art, most 

of which museums could not afford to purchase. 

Section 1218 of the PPA tightened the requirements necessary for a taxpayer to 

receive an income tax deduction for the donation of qualified fractional gifts of tangible personal property to a museum. In most cases, these new rules also limited 

or reduced the available deduction for the donation of a fractional gift. These 

changes were made to address perceived abuses surrounding the deductions, particularly in cases where the donated artwork was not in the possession of the acquiring museums. While the changes were drafted to allow fractional gifts to continue to be made, they have effectively ended donations of fractional gifts to museums for several reasons. 

First, the reduction in the available income tax deductions received during the life 

of a fractional gift has made the donation of appreciating artwork financially imprudent. 

Second, the necessity to complete the gift in a 10-year period is a serious impediment to donors making substantial gifts. Third, the imposition of these changes on 

fractional gifts entered in to before passage of the PPA has impacted existing contracts for gifts raising questions of both fairness and the imposition of retroactive 

taxes. Fourth, the potentially unusual results created by modifying estate and gift 

tax rules applicable to fractional gifts has made planning for these donations practically impossible. While some of the above problems could be corrected through 

technical corrections, such as the estate and gift tax area, other changes will need 

substantive changes in law. 

Already, museums are experiencing a cessation in fractional gift donations. The 

following are just a few examples that illustrate the problem: 

• A West Coast contemporary art museum that was negotiating with a donor for 

his collection of 40 contemporary works has been informed by the donor that 

he would not be making the fractional gifts as a result of the law changes. 

• An East Coast museum had a donor withdraw his offer for 13 contemporary 

drawings by well-known artists because of the new restrictions. 

• A Santa Fe museum had a potential donor of a Tribal Folk Art collection worth 

approximately $2 million withdraw an offer to give the collection to the museum 

• A Washington, DC museum had an offer to donate a 30% fraction on a collection of 20 prints and drawings withdrawn after the legislation was passed. A 

Kentucky museum had received five important works as fractional gifts from 

a collection of 60 pieces of 20th century American Art. Since the passage of the 

new law the remaining works have not been offered to the museum as had been 

promised before passage of the PPA. 

We look forward to working with you and your Subcommittee to ensure that the 

overwhelming benefits that the American public derives from their museums’ diverse and growing collections are enhanced by administrable and rational tax policy. 

While there may have been a need to correct potential abuses, we believe that the 

changes made in PPA went far beyond addressing these concerns and have had an 

unnecessary detrimental impact on our Nation’s art museums. 

Sincerely, 

Gail Andrews 

f 

President 

Statement of Association of Blind Citizens, Holbrook, Massachusetts 

As you review how the Internal Revenue Code affects charitable giving, I am writing to provide the Committee with some information regarding the impact of 

changes made in 2004 as part of the American Jobs Creation Act to the Federal Tax 

Code regarding deductible vehicle donations. These changes have significantly reduced the number and value of vehicles being donated to the Association of Blind 

Citizens (ABC). For years before the law changed, ABC found vehicle donations to 

be an important and stable revenue stream. The moneys we received were used to 

provide critical services to the blind and visually impaired community. As unrestricted funds, these donations were utilized to support direct services and general 

operating expenses. 

144 

The 2004 changes have seriously impacted our work and, I am sure, the services 

provided by many other charities across the United States. In 2004, ABC received 

3,823 vehicle donations. In 2006, ABC received 1,302 vehicle donations—a 65% decrease in volume following the change in the Tax Code. ABC’s agent, Helping Hands 

of America, does not accept cars that are not running, which has enabled ABC to 

receive higher quality donations. The practice of not accepting vehicles that do not 

run, a practice we continue today, helps to curtail abuse of the Tax Code because 

a car that cannot be on the road could not represent an accurate fair market value 

tax deduction. 

As you know, before tax year 2005, a taxpayer could deduct the fair market value 

(FMV) of vehicles donated to charity. Under what was then section 170 of Title 26 

of the US Code, a donor could claim the FMV as determined by well-established 

used car pricing guides up to $5,000. I believe that donors who donated cars in 

working order were more likely to follow the law and claim the appropriate FMV. 

The donor was able to use a standard published guide such as the Kelly Blue Book 

to help them to compare options regarding their vehicle disposition. 

Under the new section 170, deductions over $500 are limited to the actual proceeds from the sale of the vehicle, regardless of its appraised value. This means that 

a taxpayer with a newer-model car in good condition has no real idea what deduction will be allowed until the vehicle is sold. So donors must risk getting far less 

credit for the donation than it is actually worth. And they must wait days, weeks 

or months—sometimes into the next tax year—to learn the result. In our experience, 

donors with late model cars are not willing to take this risk. 

Clearly, these changes that took effect in 2005 has caused a significant drop in 

the volume of donations. We did not make any changes in our marketing program 

from 2004 to 2006. In 2004, the average age of ABC’s vehicle donation was 10–12 

years; in 2006, the average age of vehicle donations was 12–14 years old. 

I believe that potential donors are deterred from making a vehicle donation because they do not have a standard guide to obtain approximate tax deduction information. If the donor is not able to determine approximate FMV, he/she is not able 

to compare the tax deduction value to the options of privately selling the vehicle 

or trade value which is being offered by an automobile dealer. I have spoken to 

many donors who told me that the dealer was giving them a bad trade deal and 

they were happy that they could make the donation knowing proceeds were going 

to a good cause in addition to receiving a tax deduction. 

The change in the tax law has resulted in fewer donations, especially of highervalue cars which are also the transactions least subject to abuse. This lost revenue 

has been difficult to replace, so we have had to reduce staff and the direct services 

we provide to the blind and visually impaired. It’s hard to believe that’s really what 

Congress really intended. 

Please consider the issues that I have briefly discussed above as the Subcommittee reviews policy toward tax-exempt organizations. I fully respect and understand the need to curb abuse of the Tax Code. However, I believe that changes 

aimed at reducing abuses must be carefully balanced against the benefits to charities that Congress meant to encourage when it originally approved tax deductions 

for vehicle donations. 

Thank you for your time and consideration of this vital matter. I look forward to 

working with you and am available to provide any additional information that you 

may need. 

f 

Statement of Association of Fundraising Professionals 

On behalf of the Association of Fundraising Professionals (AFP), I am writing to 

provide comments regarding the provisions relating to tax-exempt organizations in 

the Pension Protection Act of 2006. As an organization that represents individuals 

responsible for generating philanthropic resources, AFP has first-hand knowledge 

and understanding of charitable giving. We hope that our thoughts and perspective 

will prove helpful to you as you review this legislation. 

Background 

AFP represents nearly 28,000 members in more than 190 chapters throughout the 

world, working to advance philanthropy through advocacy, research, education and 

certification programs. AFP members work for a wide variety of charities, from large 

multi-national institutions to small, grassroots organizations, engaged in countless 

missions and causes including education, healthcare, research, the environment and 

social services, to name a few. In 1960, four forward-thinking and prominent fund 

145 

raisers met with the goal of creating an association, now AFP, that would promote 

good stewardship, donor trust, and ethical and effective fundraising. 

AFP members are required annually to sign our Code of Ethical Principles and 

Standards of Professional Practice, which were first developed in 1964. A copy of 

the Code is attached. AFP instituted a credentialing process in 1981—the CFRE, or 

Certified Fund Raising Executive designation—to aid in identifying for the giving 

public fund raisers who possess the demonstrated knowledge and skills necessary 

to perform their duties in an effective, conscientious, ethical, and professional manner. This was followed in 1990 by the ACFRE for advanced fund raisers. We also 

have a strong ethics enforcement policy that can result in the revocation of credentials and expulsion of members who engage in prohibited behavior. 

This background is cited to emphasize the importance that AFP and its members 

place on ethical fundraising. Much of our work is spent educating and training our 

members and the public in ethical fundraising practices while working with Federal 

and state regulators to improve regulation and to identify wrongdoers who don’t belong in the charitable sector. 

In addition, since its founding, AFP has championed donor rights. AFP was the 

driving force behind the creation of the Donor Bill of Rights and provides information to potential donors about how to select, evaluate, and give wisely to charities. 

AFP encourages all donors and nonprofit volunteers to investigate and become engaged with charities of their choice before making financial commitments. A copy 

of the Donor Bill of Rights is attached. 

The IRA Rollover 

The charitable giving provisions in the Pension Protection Act are helping our Nation’s charities to thrive. In particular, the IRA Rollover provision is a powerful incentive, allowing donors to transfer funds directly and tax-free from an IRA to a 

charitable organization. This provision encourages potential donors to draw upon a 

new source of assets in support of charitable organizations that serve the public 

good. 

Under the current provision, a donor who has reached the age of 701⁄2 is allowed 

to exclude from his or her income any IRA funds up to $100,000 that are withdrawn 

and transferred to a charity when filing a tax return for the year of the transfer. 

Tax incentives such as the IRA Rollover provision play a vital role in encouraging 

donors to make gifts, especially as the contribution amounts become larger. In fact, 

in just the past 10 months, the IRA Rollover provision has brought in over $69 million in new gifts for the charitable sector according to a recent National Committee 

on Planned Giving survey. It is worth noting that the survey, while instructive, is 

not comprehensive and does not cover the entire charitable sector. It merely represents a fraction of the positive impacts of the IRA Rollover provision. 

In fact, it is estimated that there is more than $2.7 trillion in retirement funds 

like IRAs. The individuals and communities served by the nation’s charitable sector 

can benefit from the IRA Rollover provision because it encourages a significant 

amount of new contributions from individuals who would no longer have to pay tax 

on a charitable gift of IRA funds. These contributions support programs for those 

less financially well off through important services, such as those provided by 

health, education, social service, and cultural organizations. 

Unfortunately, the IRA Rollover provision is scheduled to sunset at the end of 

2007. It is imperative that Congress make this provision permanent for the nation’s 

charities. 

Equally important, to make the provision even more effective, Congress should 

not only make the IRA Rollover permanent, but it should also enhance the provision 

by removing the $100,000 cap on gifts from IRA accounts, and by lowering the age 

threshold for all such gifts from 701⁄2 to 591⁄2. 

Many in the charitable sector believe that this single provision alone will have 

the greatest demonstrable positive impact for all charities of any changes to Federal 

gift tax proposals. 

Charitable Reforms 

A few other charitable reforms were contained in the Pension Protection Act of 

2006. Although they were mostly commonsense reforms that likely will not burden 

our Nation’s charities, we are concerned about a potential slippery slope that might 

result in the enactment of unduly burdensome charitable reforms that would deter 

charities from fulfilling their altruistic missions. 

Over the past few years, we have witnessed the introduction of proposed charitable reforms that sought to raise revenue from the charitable sector. For instance, 

it has been proposed that new ‘‘user fees’’ be imposed on the sector together with 

the drastic modification or complete elimination of deductions for charitable conVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00149 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
146 

tributions of property—so called noncash contributions. Another proposal would 

have established a floor on deductions for both taxpayers who claim the standard 

deduction and those taxpayers who itemize their deductions, which essentially 

would impose a tax on deductions. Such proposals turn the concept of tax exemption 

on its head. 

It also is worth noting that empirical data indicates that there is NOT widespread 

abuse among the charitable sector and that the new proposals are unnecessary. Reports collected by the FBI, the Federal Trade Commission, State Attorneys General 

and even watchdog groups like the Better Business Bureau show that reports of 

charity fraud are less than 1 percent of all complaints of fraud. 

Moreover, the IRS already has the statutory authority, rules, regulations and enforcement mechanisms to effectively police the charitable sector. Existing laws are 

fully sufficient to address the abuses which may be occurring in the sector. A recent 

study found that of the 94 abuses cited by the Senate Finance Committee during 

its June 2004 hearing on charity oversight, 92 of those abuses could have been addressed by current laws, regulations and reporting requirements. However, the IRS 

has never been given the Congressional budget appropriations necessary to engage 

in the reasonable level of enforcement activity necessary to fulfill its statutory mandates. 

AFP does not oppose demonstrably necessary nonprofit sector regulations. Legitimate fund raisers understand the need for regulation, and AFP has strongly supported appropriate and defensible initiatives on both the Federal and state levels 

that have increased regulation of charities and fundraising. 

But in every case, the regulations that AFP has supported have been balanced 

with the charitable sector’s need to raise funds for the critical programs it provides. 

AFP is concerned that some proposed reforms, like unprecedented user fees and 

floors for itemized deductions, will prove extremely burdensome to many charities, 

resulting in the loss of funds, while doing little to accomplish their stated goal of 

curbing abuses. 

Conclusion 

AFP appreciates the opportunity to provide comments to the House Ways and 

Means Subcommittee on Oversight. 

I appreciate the opportunity to share AFP’s views with you. I look forward to 

working with you and the Subcommittee on issues related to the tax-exempt sector. 

Thank you for your time and consideration. 

f 

Statement of Atlanta Union Mission, Atlanta, Georgia 

The Association of Gospel Rescue Missions (AGRM) represents 294 rescue missions in the United States that provide critical services to homeless and poor individuals who face the greatest challenges. Founded in 1913, AGRM’s member missions offer emergency food and shelter, youth and family services, prison and jail 

outreach, medical care, rehabilitation, and specialized programs for the mentally ill, 

the elderly, the urban poor, and street youth. 

Combined member ministries of the AGRM comprise one of the largest non-profit 

organizations in the United States. Last year, AGRM missions served more than 41 

million meals, provided 15 million nights of lodging, distributed more than 27 million pieces of clothing and 1.1 million furniture items, and provided 142,000 individuals with the educational programs necessary to achieve productive living. 

Recently, the Congress passed and the President signed the Pension Protection 

Act of 2006 (PPA). Included in this law are a series of charitable tax reforms designed to encourage greater charitable giving. We hope that these charitable tax reforms accomplish their intended purpose of increasing the resources charities have 

to serve and promote the common good. 

Unfortunately, one provision (Section 1216), of the PPA, if wrongly implemented, 

has the potential to severely hinder the charitable sector. Specifically it could cripple the ability of the member missions of AGRM from carrying out our important 

mission. The provision benignly states: 

‘‘Limitation of deduction for charitable contributions of clothing and household 

goods’’ 

‘‘In General—In the case of an individual, partnership, or corporation, no deduction shall be allowed under subsection (a) for any contribution of clothing or a 

household item unless such clothing or household item is in good used condition or 

better.’’ 

147 

Our concern is addressed later in this testimony and is rooted in the original proposal set forth by the Senate. 

Thrift Shops Providing Clothing & Household Goods to the Poor 

One of the primary charges of rescue missions in America is to clothe the homeless and the poor. To this end, 132 rescue missions operate approximately 200 thrift 

stores around the United States. Each year, Americans contribute an estimated 

$277 million in clothing and household goods to our missions. The contributions are 

critical to the ability of our member missions to provide necessary clothing and 

other items for clients who participate in both our emergency and long-term rehabilitation programs. While these contributions provide our missions some revenue, 

of equal importance, the operation of thrift stores provide the poor, specifically the 

working poor, with the opportunity to clothe themselves and furnish their homes at 

an affordable cost. Moreover, the operations of thrift stores provide AGRM member 

missions an opportunity to integrate residential recovery programs with real experience, thereby providing vocational training for clients and customers. We do so by 

maintaining the dignity and pride of our customers. 

We are proud of the merchandise we provide to the poor and homeless and we 

want the poor and homeless to be proud of the merchandise they obtain from our 

missions and thrift stores. 

Atlanta Union Mission 

For example, Mr. Chairman, the Atlanta Union Mission, located in Atlanta, Georgia, runs six thrift stores throughout the Metro Atlanta region. Proceeds from the 

thrift store operations are used to help fund the Mission’s programs of emergency 

services and recovery. The ministry also makes vocational training available to men 

in recovery at the Mission’s Northeast Georgia Campus (The Potter’s House), and 

it employs qualified recovery program graduates. The Mission also donates a significant amount of merchandise to needy families in the community. Opened in 1938, 

the Mission serves as many as 1,070 individuals each day with residential recovery 

programs, emergency shelter, and transitional housing. 

Through its thrift stores, the Mission reaches more than 200,000 customers each 

year. Last year, the Mission distributed free of charge, 44,600 pieces of clothing and 

household goods to clients or persons in need from the community. These were all 

items that had been donated to the Mission. Another 1.15 million items that were 

donated to the Mission were used to stock and replenish the thrift stores. 

With the help of clients, volunteers and about 15 paid staffers, the Mission is able 

to process and distribute these donations. In addition, the Mission currently operates seven trucks, 5 days a week. This translates to approximately 1,820 truckloads 

of gifts-in-kind picked up by the Mission each year. 

If section 1216 were to be interpreted or implemented in a draconian fashion as 

originally described and envisioned in Senate legislation, the Mission would have to 

quadruple the number of paid staff, clients, and volunteers working in its thrift 

stores in order to handle the volume of paperwork associated with itemizing and 

documenting each item donated. The truckdrivers would no longer be able to complete the 7–10 daily pick-ups they currently make. As the truckdrivers do not work 

in the thrift stores, they are not best suited to assessing the condition or value of 

donated items. As great or greater would be the impact upon the ability of staff at 

the Mission’s thrift stores. For example, it is very common for large donations to 

be delivered to the Mission on Saturdays. In the larger stores, a dozen people or 

more would be required to process the volume of donations. This is not something 

that the Mission can afford to do. Alternatively, the Mission would be forced to close 

down its six thrift stores in the Atlanta region: 

• Athens Thrift Center 

• Comerce Thrift Center 

• Cumming Thrift Center 

• Gainesville Thrift Center 

• Snellville Thrift Center 

• Winder Thrift Center 

Union Gospel Mission Twin Cities and the Marie Sandvik Center, Inc. 

In Minnesota, the Union Gospel Mission Twin Cities and the Marie Sandvik Center, Inc, provide a wide variety of services to the homeless. Both missions are dedicated to providing clothing and other items necessary to meet the basic human 

needs of the men, women and children that reach out to the missions. While neither 

the Marie Sandvik Center nor the Union Gospel Mission have a thrift store, they 

are representative of all of our member missions who rely heavily on donated clothVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00151 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
148 

1 Because it is not possible to determine if a donated item will be sold or given away in the 

future by the charity, there would be no assurances that a sales record would be available to 

the donor at point of intake. Our member missions do not barcode the millions ofm donated 

items for tracking through our system. 

ing and household goods to meet the needs of individuals who participate in programs at the Mission as well as for the homeless and needy who come to the Mission for help. Thousands of donations of gifts in kind are received each year by these 

missions. Neither the Marie Sandvik Center nor Union Gospel Mission sell these 

items—they give them away because they believe good, decent clothing is an important component of building self-confidence for these people who have been through 

great struggles. 

If section 1216 were to be interpreted or implemented in a radical manner, the 

Union Gospel Mission, the Marie Sandvik Center, and all of our member missions 

who accept donations of clothing and household goods would find their ability to 

function effectively severely compromised. For example, the Union Gospel Mission 

receives donations of approximately 80,000 pounds of clothing and goods each year. 

The Union Gospel Mission would have to add multiple staff persons or take current 

full-time staff away from their direct work with clients in order to properly process 

the volume of clothing and goods donated to the Mission. 

AGRM Supports section 1216 But Remains Concerned About Overregulation 

AGRM supports the language of section 1216 because we believe that it clarifies 

the current practice of requiring the taxpayer to accurately and honestly report 

charitable donations. AGRM is concerned, however, that if the IRS interprets and 

implements the provision in the most draconian sense it could shift the responsibility from the donor to the donee charitable organization to evaluate and appraise 

the donation of clothing and household goods. 

This provision, as originally proposed in S. 2020, the Tax Relief Act of 2005, would 

have required the Secretary of the Treasury to annually publish an itemized list of 

clothing and household goods and assign an amount representing the fair market 

value of each item in good used condition. Every conceivable item would have had 

to be assigned a value, from shoes, socks and pantyhose to jeans, sweaters, and 

suits to hats, scarves, and bandanas. And, the burden of assessing or valuing each 

article of clothing or household good donation would have fallen on our rescue mission clients, staff, and volunteers. Imagine the amount of time it would take a truck 

driver who is picking up a contribution of clothing and goods from a donor’s home. 

In order to comply with the provision, the truckdriver would have to sort through 

each item, making the judgment of whether or not the item was in good used condition so that he could properly credit the donor for the contribution. If a used coffeepot were included in the donation, for example, should the truckdriver ask the contributor if he may make a pot of coffee to determine if the coffeepot works? Similarly, consider the burden that would be placed on a staff person or volunteer who 

receives donations at a mission. Imagine the backlog that would develop as the mission staff examine and evaluate each and every item while the donor waits for the 

process to be completed. The mission or any nonprofit in a similar situation would 

quickly be overwhelmed, potentially discouraging donors from donating items to the 

missions. 

This proposed change presented serious concerns for AGRM, including: 

1. The potential personnel hours and paperwork involved in complying with this 

proposal would have been extensive, and would have required itemizing, defining, and determining the condition of each donation at point and time of intake. Most of our members would not have the resources to meet this requirement and would be forced to close their thrift store operation. 

2. Alternatively, a donor who disagreed with the Treasury’s valuation list or our 

member’s assessed value could have asked for a receipt for the value of the sale 

at a later date. It would not have been feasible for our thrift stores to provide 

documentation of sales amounts to the donor of donated items. Such a burden 

would be crippling to our organization.1

3. The Secretary would be required to establish values of donated items which 

may or may not be accurate. A vase from a dollar store has a very different 

value than a crystal or silver vase from Dillard’s or Macy’s. 

4. If enacted, this provision would have placed nonprofit organizations in the unreasonable and uncomfortable position of being the evaluator between the taxpayer and the taxing entity. 

149 

To shift the overwhelming evaluation and appraisal process as well as the extraordinarily complicated accounting process would have tragic consequences. Not 

only would staff costs increase dramatically, but our missions would be forced to 

take staff away from hands-on work of meeting the critical needs of our clients. As 

a result, our ability to transform the lives of the hurting would be greatly diminished. Additionally, it would cripple our revenue streams, it would cripple our practical training programs, and it would cripple the poor and working poor who rely 

on thrift stores for everyday clothing and household goods. 

Rightfully, rationally, and thankfully, the provision enacted into law in the Pension Protection Act leaves the responsibility to fairly and accurately report the value 

of a charitable donation of clothing and household goods, in good used condition or 

better, on the donor. AGRM is fully supportive of this provision and urges the Committee to ensure that the provision is implemented and interpreted as written. 

AGRM supports Congress’s efforts to encourage charitable giving. Overwhelmingly, our member missions rely on the generosity of their communities to provide 

them with clothing and household goods and with monetary donations to carry out 

vital services such as education, counseling, job training, and addiction treatment. 

We appreciate the need for accurate accounting practices, but we urge the Committee to ensure that the laws they pass are not arbitrary and ensure that they will 

not add hours of paperwork, increase accounting costs, or worse, discourage charitable giving. 

f 

Baton Rouge Area Foundation 

Baton Rouge, Louisiana 70802 

July 27, 2007 

Committee on Ways & Means 

Subcommittee on Oversight 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington D.C. 20515 

Dear Committee Members, 

I am writing this letter to supplement the letter my colleagues and I drafted in 

response to your request for comments regarding the impact of certain provisions 

of the recently enacted Pension Protection Act of 2006 (PPA). In addition to recognizing that the PPA has many beneficial provisions which promote charitable giving, we outlined our concerns and advised you to discontinue the provisions which 

hinder legitimate philanthropic initiatives. Because we would like you to amend the 

PPA provisions which unfairly penalize donor advised funds, I would like to provide 

additional examples demonstrating the good that donor advised funds have done 

over the past 2 years. Donor advised funds offer a unique way for individuals to donate to charitable causes, and thus increasing philanthropy overall. 

After Hurricanes Katrina and Rita, the Baton Rouge Area Foundation’s activities 

shifted, and our main focus became aiding those who had been affected by two of 

the three largest natural disasters in our country’s history. We were overwhelmed 

yet very grateful for the support we received from people across the United States. 

In total, we received over $45 million in donations designated for hurricane relief 

efforts. Various community foundations and national charities made significant donations to help us aid hurricane victims. Without the support of donor advised 

funds, the Foundation would not have been able to fund as many programs devoted 

to hurricane relief efforts. In this instance, donor advised funds helped over 99 charitable organizations which in turn provided aid to individuals affected by Hurricanes 

Katrina and Rita. Our local knowledge and strong relationships with Louisiana nonprofits helped ensure donors that their money would be devoted to the cause they 

wished to support. 

It makes no difference whether donors choose to establish a donor advised fund 

at a national charity or at a community foundation. Both institutions provide effective means to support philanthropic endeavors. Donors benefit greatly when they 

can choose from various mechanisms to donate to charities because no two donors 

are exactly alike. Each form of organized giving has a different objective and fulfills 

different needs. 

Donor advised funds have created an efficient way for donors to plan their giving. 

Donor advised funds established at national as well as those established at community foundations advance philanthropy by connecting donors with charities whose 

needs match the donors’ philanthropic interests. Such efficiency in giving was clear 

150 

1 Note that a 501(c)(3) organization (or other qualified organization) that can make scholarship 

grants to individual students from a fund it holds on its own is prohibited by the Act from making similar award decisions regarding a fund that it establishes with a community foundation. 

Treating the two situations differently makes no logical sense. 2The Act provides another exception for funds that make distributions to only one organization. However, this exception is unavailable in many situations, such as: (1) where the fund provides support for charitable causes other than scholarships, and distributions are therefore 

when donors wanted to help South Louisiana residents who were impacted by Hurricanes Katrina and Rita. Institutions that manage donor advised funds were able 

to move funds efficiently and got money to those organizations serving impacted individuals quickly. 

Without the use of donor advised funds, we would not have been able to provide 

such great support to South Louisiana’s recovery efforts. In addition to the countless 

recipients of aid, the Foundation’s administration and Board of Directors are indebted to those institutions that maintain donor advised funds. These donors directed massive amounts of funds, affection, and good will to hurricane affected 

areas. We remain grateful for the donors’ belief in us and know that we could not 

have helped so many South Louisiana residents without the support from donor advised funds. 

Sincerely, 

John G. Davies 

f 

President 

Statement of Capital Region Community Foundation 

The Subcommittee has requested comments regarding the impact of the Pension 

Protection Act of 2006 (the Act) upon charitable foundations. The Capital Region 

Community Foundation, located in Lansing, Michigan, has been adversely affected 

by one particular portion of the Act, dealing with scholarship funds, in a manner 

that seems to be an unintended consequence of the Act’s provisions. Other community foundations around the nation have been similarly affected, and the wording 

of the current statute will in the long run discourage the establishment of scholarship funds that would otherwise assist thousands of deserving students obtain a college education. 

The problem lies in the way in which the Act affects scholarship funds that are 

established by sponsoring organizations or associations. These include service clubs 

(Rotary, Kiwanis, Lions, and so forth.), high school alumni groups, professional associations, and other civic organizations that are not 501(c)(3) entities. They also include 501(c)(3) organizations such as educational foundations associated with local 

schools, as well as school districts themselves. Tens of thousands of such organizations around the country have established scholarship funds designed to assist students from local high schools attend college. The awards are often modest, but the 

members and supporters of these organizations are quite proud of the financial assistance they are able to render to local students, especially since these scholarship 

awards are often based in large part upon financial need. 

Many of these organizations have utilized their local community foundations, 

which are public charities, as the vehicles for holding and managing these scholarship funds. This arrangement allows individual donors to receive tax deductions for 

their gifts, and the funds can be professionally invested, benefiting from the safeguards associated with community foundation management. Prior to the enactment 

of the Act, sponsoring organizations that utilized a community foundation to hold 

and invest the funds could still handle the administration of their own scholarship 

programs, including the review of applications and the selection of award recipients. 

The ability of a sponsoring organization to make the award selections is understandably a source of pride for its members and supporters, and has served to encourage 

ongoing donations to such scholarship funds by many individuals. 

Unfortunately, under the provisions of the Act such scholarship funds now fall 

under the definition of ‘‘donor advised funds,’’ and donor advised funds are precluded under the Act from making grants to individuals, whether such grants are 

made directly to an individual, or to a college or university on the individual’s behalf.1 Although the Act provides an exception to this rule, the primary way that 

such scholarship funds can fall within that exception is for the sponsoring organization to give up its ability to select the scholarship recipients. Instead, the community foundation must appoint an independent advisory Committee to make those selection decisions.2

151 

made to various charitable organizations; and (2) where the sponsoring group is informally organized, such as an alumni group for a local high school, and therefore has no bank account, financial officer, and so forth. In addition, channeling scholarship moneys through the sponsoring organization is often less secure than having the community foundation—with its substantial internal controls—handle the moneys and issue scholarship checks directly from the fund. 3Where the sponsoring organization is a 501(c)(3) organization (or other qualified organization), the community foundation should be permitted to assume that the decisionmaking process 

is carried out appropriately. In other cases, the community foundation can exercise due diligence 

to ensure that the selection process complies with the necessary requirements. ISee attached schedule of Chapman Trust beneficiaries. 

2Pub. L. No. 109–280, 120 Stat. 780 (2006). 

Each Chapman Trust is a state law charitable trust, exempt from taxation under IRC 

§ 501(c)(3) and qualifying as public charity under I.R.C. § 509(a)(3)(iii). 

This results in two adverse consequences. First, the community foundation must 

assume full responsibility for administering the scholarship program, including the 

recruitment and appointment of advisory committee members unrelated to the sponsoring organization, coordination of the committee’s meetings, and the handling of 

all paperwork associated with the committee’s work. As a result of incurring this 

additional burden, the foundation usually has to charge a higher administrative fee, 

which naturally reduces the amount available for scholarships. 

Second, and more importantly, this arrangement reduces the sponsoring organization’s involvement in the scholarship selection process, and diminishes its members’ 

interest in contributing to a scholarship over which the organization has lost control. Although the Act permits the sponsoring organization to have some representation on the advisory Committee, such limited participation understandably reduces 

the organization’s membership’s sense of satisfaction and level of support for ‘‘their’’ 

scholarship fund. When one considers the large number of such scholarship funds 

across the nation, the cumulative negative impact of such loss of support is quite 

significant. 

I would propose that the Act be amended to allow sponsoring organizations to 

make scholarship award decisions relating to funds they have established with community foundations, provided that the grants are awarded in an objective and nondiscriminatory basis, as the Act requires.3 This would restore to these organizations 

the incentive to continue funding the tens of thousands of scholarships that they 

support each year, reduce the administrative burden on community foundations, 

and increase the number of scholarship dollars available to deserving students nationwide. 

f 

Statement of Chapman Trusts 

The Chapman Trusts are a group of 12 trusts supporting 18 charitable, medical 

and educational organizations in Oklahoma, Arkansas and Texas.1 The trusts are 

managed by independent fiduciaries and have provided consistent and responsive 

support to their charitable beneficiaries since 1949. Because each of the twelve 

trusts is a type III supporting organization, the following comments are confined to 

those provisions of the Pension Protection Act2 (the ‘‘PPA’’) affecting type III supporting organizations.3

Introduction 

Unlike type I and type II supporting organizations, whose governing boards are 

controlled by or overlapping with those of the supported organizations, type III supporting organizations have governing boards that are independent of those of their 

supported public charities.1 In order to demonstrate that a type III nevertheless has 

a sufficiently close relationship with its supported organizations to justify its public 

charity status, existing Treasury Regulations have required such organizations to 

meet two tests: a ‘‘responsiveness test’’ and an ‘‘integral part test.’’ The responsiveness test requires that the supporting organization be responsive to the needs and 

desires of its supported organizations, while the integral part test requires that the 

support actually provided by the supporting organization is substantial and needed 

by the supported organizations to conduct their charitable programs. Together, 

these two tests ensure that, despite having independent management, the supporting organization is operating closely with the supported public charities in much 

the same way as a controlled subsidiary would. 

We agree with the distinguished panelists at the Subcommittee’s hearing on July 

24, including Steven T. Miller, Commissioner of the Tax Exempt and government 

Entities Division of the Internal Revenue Service, and Steve Gundersen, President 

and chief executive officer of the Council on Foundations, that in general the chariVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00155 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
152 

4See Charity Oversight and Reform: Keeping Bad Things from Happening to Good Charities: 

Hearing Before the Senate Committee on Finance, 108th Cong., Staff Discussion Draft at 2, 

at http://finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf 

table sector is very compliant with the tax laws. We also acknowledge that there 

are those in every sector, including our own, that will use whatever means are 

available to enrich themselves, and that in recent years some have used type III 

supporting organizations for improper personal gain. However, as was pointed out 

numerous times during the Subcommittee’s hearing, the charitable sector is a vital 

part of American society, and charitable organizations—including type III supporting organizations—play an important role in healing the sick, educating our 

young, caring for the aged and at-risk youth, and countless other important tasks 

that the government alone cannot accomplish. 

Several provisions of the PPA were aimed at supporting organizations generally 

and type III supporting organizations specifically. It is no secret that some on the 

Hill would solve the problem of abuse within the type III community by eliminating 

all type III supporting organizations,4 and many of the PPA provisions appear to 

reflect this radical approach. For example, without attempting to delineate between 

abusive and essential supporting organizations, the PPA jeopardized the private 

foundation funding for all type III supporting organizations (and in some cases all 

supporting organizations) by placing harsh penalties on private foundations that 

fund certain type III supporting organizations. Similarly, without any evidence of 

the extent or nature of the abuse of supporting organizations save a few anecdotal 

media reports, the PPA included sweeping prohibitions on compensation of substantial contributors to all supporting organizations, as well as reimbursement of expenses they incur, that extend far beyond the restrictions placed even on private 

foundations. Other provisions appear to have been hastily inserted, without much 

idea as to how they would apply in practice, leading potentially to many unintended 

consequences. And yet other provisions delegate to Treasury vast discretion to subject all type III supporting organizations to restrictive operating and payout requirements that would inhibit the ability of good organizations to provide support tailored to the needs and desires of their supported public charities. 

We submit that this is no way to strengthen and improve the charitable sector. 

Instead, Congress should undo the misguided PPA supporting organization provisions and direct the IRS to embark on a comprehensive program of enforcement of 

the current regulatory standards. This would eliminate abusive supporting organizations that are indirectly controlled by or providing private benefits to their donors 

as well as organizations that do not have a close relationship of responsiveness and 

dependence with their supported organizations. In addition to weeding out abusive 

entities without uprooting effective organizations, such a targeted effort would provide Congress with information about the nature and extent of actual supporting 

organization abuses so that, with input from compliant and constructive type Ills 

and their supported public charities, Congress could enact an effective package of 

legislative reforms that would not eliminate good organizations along with the bad. 

Although piecemeal amendment of the PPA’s supporting organization provisions 

cannot make up for the lack of information or absence of collaboration in the lead 

up to their passage, it would nonetheless alleviate some of the difficulties these provisions have caused or may cause for numerous supporting organizations that daily 

contribute to the education, health and welfare of our communities. Following are 

specific comments on some supporting organization provisions of the PPA offered in 

response to your request for information regarding how the PPA’s new rules affect 

charitable organizations and the difficulties arising in implementing PPA provisions. 

Responsiveness 

Two of the new provisions in the PPA are aimed at strengthening the responsiveness test in existing Treasury Regulations in order to ensure that an appropriately 

close relationship exists between the supporting and supported organizations. In 

current Treasury regulations, there are two alternative methods to satisfy the responsiveness test. The first alternative generally requires either that at least one 

officer or board member of the supporting organization be appointed by or be one 

of the supported public charity’s officers or governing board or that the officers or 

board members of the supporting organization maintain a ‘‘close and continuous’’ relationship with the officers or board members of the supported organizations. In addition, by reason of the relationship between the supporting and supported organizations’ leaders, the supported organization must have a ‘‘significant voice’’ in the investment policies of the supporting organization, the timing and manner of making 

grants, the selection of grant recipients of the supporting organization, and otherVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00156 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
153 

5Treas. Reg. § 1.509(a)–4(i)(2)(ii). 

6Treas. Reg. § 1.509(a)–4(i)(2)(iii). State trust law varies by state. However, in Oklahoma, 

trustees have a duty of loyalty to invest and manage the trust assets solely in the interest of 

the beneficiaries, and a duty of impartiality to invest and manage the trust assets of multiple 

beneficiaries impartially. Okla. Stat. tit. 60, §§ 175.65,175.66. In addition, private inurement to 

employees, officers, directors and members of the governing board is prohibited. Okla. Stat. tit. 

60, § 301.8. 7PPA, § 1241(b), 120 Stat. at 1102; Staff of the Joint Committee on Taxation, 109th Cong., 

Technical Explanation of H.R. 4, the ‘‘Pension Protection Act of 2006,’’ As passed by the House 

wise directing the use of the income or assets of the supporting organization.5 The 

second alternative, sometimes known as the ‘‘trust option,’’ allows type III supporting organizations that are state law charitable trusts to meet the responsiveness 

test if (i) the trust is a charitable trust under state law; (ii) each beneficiary is 

named specifically in its governing instrument; and (iii) each beneficiary has the 

power to enforce the trust and compel an accounting under state law.6 Many type 

III supporting organizations have been created as state law charitable trusts in conformity with this regulation. 

The first of modification of the responsiveness test was the addition of new Code 

section 509(0(1)(A), which requires supporting organizations to provide certain information specified by the Treasury Secretary to each supported organization, such as 

the supporting organization’s governing documents, its annual Forms 990 and 990– 

T, and an annual report detailing the support provided to its supported organizations as well as a projection of support to be provided in the next year.7 The provision of additional information about the supporting organization’s finances and activities will enable the supported organizations to better monitor and supervise the 

supporting organization and increase the ability of supported organizations to make 

meaningful recommendations and requests of the supporting organization, and we 

fully support this new requirement. In fact, since inception the Chapman Trusts 

have provided the named beneficiaries annually with copies of the Trusts’ Forms 

990 and statements of trust activity, including all trust income and disbursements 

(trustee fees, consulting fees, and so forth.) and current trust asset values. Failure 

to provide such information would be a factor in determining whether the supporting organization meets the responsiveness test, allowing the IRS to deny type 

III supporting organization status to abusive organizations that do not maintain the 

intended close and responsive relationship with their supported organizations. 

The second attempted modification of the responsiveness test fails for lack of clarity and attention to the application of the rules to type Ills organized as trusts. section 1241(c) of the PPA provides that for purposes of satisfying the requirements 

for type III supporting organization status a trust shall not be considered to be operated in connection with a supported organization ‘‘solely because (1) it is a charitable trust under state law, (2) the supported organization . . . is a named beneficiary of such trust, and (3) the supported organization . . . has the power to enforce the trust and compel an accounting.’’ 8 The meaning of this provision is far 

from clear. Standing alone it appears to be merely an accurate statement of the existing regulations: solely meeting the trust option of the responsiveness test has 

never been sufficient to establish an ‘‘operated in connection with’’ relationship with 

a supported organization, because the integral part test must also be met. In its 

technical explanation, the Joint Committee on Taxation indicates that this provision 

of the PPA means that type III supporting organizations organized as trusts ‘‘must, 

in addition to present law requirements, establish to the satisfaction of the Secretary that it has a close and continuous relationship with the supported organization such that the trust is responsive to the needs or demands of the supported organization.’’ 9 We certainly affirm the value of a close relationship between the 

trustees of a supporting organization and the leadership of its supported organizations. We have long maintained very close working relationships with the board and 

officers of each of our supported public charities, and we believe this to be necessary 

in order for us to fulfill our fiduciary duties under state trust law to these beneficiary organizations. 

We have heard that in some instances a type III trust has claimed it met the responsiveness test under the trust option while failing to ever inform its supported 

organizations of its existence. This is clearly improper, and it is difficult to see how 

such an organization could meet the integral part test, which must also be satisfied 

before an organization can qualify as a type III supporting organization under current regulations. As noted above, we fully support the addition of new Code section 

509(f)(1)(A), which gives the IRS an additional tool to use to shut down these abusive supporting organizations. 

However, simply applying the other current alternative, the ‘‘close and continuous 

relationship’’ option, to all type III charitable trusts, as the IRS seems poised to 

154 

10See Advanced Notice of Proposed Rulemaking, Payout Requirements for Type III Supporting Organizations That Are Not Functionally Integrated, 72 Fed. Reg. 42,335, at 42,339 

(Aug. 2, 2007). 11Panel on the Nonprofit Sector, Strengthening Transparency Governance Accountability of 

Charitable Organizations: A Final Report to Congress and the Nonprofit Sector 45–46 (2005). 12PPA, § 1241(d), 120 Stat. at 1103; JCT Technical Explanation, supra note 7, at 360. A nonfunctionally integrated type III supporting organizations is defined as a ‘‘type III supporting organization which is not required under regulations established by the Secretary to make payments to supported organizations due to the activities of the organization related to performing 

the functions of, or carrying out the purposes of, such supported organization.’’ I.R.C. 

§ 4943(f)(5)(B). 13Treas. Reg. § 1.509(a)–4(d). 14Treas. Reg. § 1.509(a)–4(d)(4). 

do,10 will not be appropriate in many type III trust situations. For example where 

an independent institutional trustee holds the assets of the supporting organization, 

it may be quite responsive to the needs and desires of the supported organization 

with respect to the timing and manner of distributions even without a relationship 

at the board level. Similarly, large institutional trustees typically neither seek nor 

accept advice from supported organizations regarding their investment policies and 

practices, but in other respects are very responsive to the needs and desires of the 

type III trust’s supported organizations. Even the Panel on the Nonprofit Sector, a 

group which lacked sufficient representation of type III supporting organizations, 

recognized (and twice specifically noted) the need to adapt any application of the 

existing close and continuous relationship option to type III trusts.11

Section 1241(c) of the PPA, as drafted, is ambiguous and does not give type III 

supporting organizations or the Treasury sufficient direction. We suggest that Congress repeal section 1241(c) of the PPA and instead direct Treasury to require that 

the trust option of the responsiveness test in current Treasury Regulations be 

amended to require the supporting organization’s trustees or, in the case of independent institutional trustees, appropriate trustee employees or representatives to 

maintain a close and continuous relationship with the officers, directors or trustees 

of each supported organization and that, subject to state law fiduciary duties, the 

trustees of the supporting organization give each supported organization the opportunity to have a significant voice in determining the recipients of, timing of, and 

manner of making the organization’s grants. 

Minimum Payout 

Section 1241(d) of the PPA directs Treasury to promulgate new regulations requiring non-functionally integrated type III supporting organizations to pay out annually a percentage of assets or income for the use of the supported organization to 

ensure a significant amount is paid to such organization.12 Although it may be easiest for Treasury to simply apply the highest payout rate justifiable under current 

law—the 5% of asset value nonoperating private foundation payout requirement— 

such an approach ignores the significant difference between effective supporting organizations and private foundations. Perhaps the most significant feature of a supporting organization differentiating it from a private foundation is its close affiliation with its supported charities rather than with its donors. Private foundations 

and donor-advised funds are donor-focused vehicles, providing flexible mechanisms 

for donors to meet various philanthropic goals by funding any number of charitable 

organizations in any given year. They are not required to designate specific beneficiary organizations, and therefore have the ability to pick and choose from a potentially unlimited pool of beneficiary organizations each year. The amount of support 

they provide to particular organizations can vary widely from year to year according 

to the shifting priorities of the foundation’s management; often private foundation 

funding is given only for a single project or for a few years. 

Supporting organizations, by contrast, are intended to be charity-focused entities, 

whether they are created by the supported charities themselves or by interested 

benefactors. A large measure of donor discretion is forfeited when the supporting organization relationship is created, binding the supporting organization to its designated supported public charities, often in perpetuity and excluding the donor from 

even an indirect control relationship.13 In the case of type III supporting organizations, the supported public charities must be specifically named in their organizing 

documents—thus ensuring an ongoing relationship between a supporting organization and specific supported organizations.14 Although, the type III relationship has 

been identified as the ‘‘loosest’’ of the three supporting organization relationships, 

it is still much closer than the typical relationship between a private foundation (or 

even a donor advised fund) and its grantees. Unlike the typical private foundation, 

155 

16Treas. Reg. § 1.170A–9(c)(2)(v)(b). 17The regulations require a private operating foundation to spend ‘‘substantially all’’ (defined 

as 85%) of the lesser of its adjusted net income or the general private foundation 5% payout 

requirements; 85% of 5% is 4.25%. Treas. Reg. § 53.4942(b)-1(a)(1)(ii),—1(c). A private operating 

foundation must also meet an endowment test, a support test, or an asset test. If it opts to qualify under the ‘‘endowment test,’’ it must normally spend at least two-thirds of the normal private 

foundation 5% payout (i.e., 31⁄3%) on the direct conduct of its charitable activities, regardless 

of its adjusted net income. Treas. Reg. § 53.4942(b)–2(b)(1). However, if it instead meets the support test or the asset test, it need never spend more than 85% of its adjusted net income for 

the year. 

a supporting organization acts as an integral part of its designated supported organizations, consistently providing functional or financial support over the long term. 

This consistent, long-term support provided by a supporting organization is a significant advantage to its supported public charities. When beneficiaries have a reliable, sustainable source of support they are able to focus more time and energy on 

fulfilling their charitable mission instead of constant fundraising. In addition, a 

long-term relationship of support with a supporting organization, like having a permanent endowment, allows beneficiaries to conduct long-term research and initiate 

programs on which their service populations can rely without fear of interruption. 

Many public charities prefer predictable, sustainable and increasing distributions 

from a dedicated supporting organization rather than short-lived—even if large— 

distributions from private foundations and the uncertainty of hand-to-mouth fundraising. 

Because type III supporting organizations are relied upon by their supported organizations as a source of long-term support for their charitable programs—much as 

an endowment would be—any fixed payout requirement should be set so as to preserve the supporting organization’s ability to continue to provide comparable levels 

of support in the future. The benefits of a permanent endowment are not a novel 

discovery; they are age-old and well-documented. Like a permanent endowment, a 

supporting organization can provide beneficiaries with a reliable source of support 

that ensures financial stability and security even in fluctuating market conditions. 

Historically, inflation has averaged approximately 3 percent per annum. For a permanent endowment to maintain its inflation-adjusted value, the principal must be 

permitted to grow by that much each year. At least one empirical study has demonstrated that a 5 percent annual distribution rate exposes the portfolio to a high 

probability of failing to meet that objective.15

The key to preserving a supporting organization’s ability to provide consistent 

support for its supported organizations and their charitable activities is to select a 

minimum percentage payout rate that is sustainable—thus assuring undiminished 

purchasing power of the long-term support to the supported organizations. Some 

have suggested that a rate of between 4 to 4.25 percent would strike an appropriate 

balance between Congress’s stated goal of ‘‘ensuring that a significant amount is 

paid’’ out annually and the desire of many non-functionally integrated supporting 

organizations and their supported organizations to maintain undiminished support 

in perpetuity. Indeed, where there are payout requirements in the Code supporting 

the operation of charitable programs, they are set at rates lower than the 5 percent 

minimum payout rate for private foundations. For example, some medical research 

organizations are required to pay out 3.5 percent annually, and even this requirement applies only if less than half of their assets are used directly and continuously 

in their medical research activities.16 Similarly, private operating foundations are 

required to pay out a maximum of 4.25 percent annually, and even less in any year 

in which their adjusted net income falls below 5 percent.17 These payout rates allow 

the organizations to support their current operations at a level commensurate with 

their assets without precluding increases in principal sufficient to support future operations in the face of inflation. Payout rates for supporting organizations should 

similarly enable them to provide funding for the charitable programs of the supported organizations both now and in the future. 

In addition, because most public charity beneficiaries of supporting organizations 

prefer predictable, sustainable, and increasing distributions rather than distributions that may vary widely from year to year, the regulations creating a new annual 

minimum distribution amount should allow for the value of the supporting organization’s assets to be calculated as an average over the prior 3 or 5 years, rather than 

over the prior year, as is the case for private foundations. Using the average fair 

market value for the immediately preceding twelve or twenty quarters would 

smooth the effects of market volatility—thereby moderating the year-to-year variance in supporting organization required distributions. 

This could be accomplished by providing two different methods for calculating the 

annual minimum distribution amount. The first method could simply multiply the 

156 

applicable percentage by the fair market value of assets at the immediately preceding fiscal year-end. The second method could multiply the applicable percentage 

by the average fair market value of assets over the immediately preceding twelve 

or twenty quarters. The first method provides a simple straightforward calculation 

formula that would lessen the burden of compliance and enforcement. Although a 

bit more difficult to calculate, the second method creates an important hedge for the 

supported beneficiaries against sudden downward shifts in the market. A smoothing 

mechanism similar to the one proposed would protect similarly situated beneficiaries, their employees, and the persons and communities they serve from large 

drops in annual funding due to a plunge in financial markets. For example, if there 

were a large drop in the value of the supporting organization’s assets in 1 year, and 

the asset values recovered during the following year or two, the required distributions to supported organizations would remain relatively stable, decreasing only 

moderately, if at all, after the downturn and increasing moderately during the upswing. Using an average asset value over 3 to 5 years to calculate the minimum 

distribution amount thus makes it easier for the beneficiaries to project future distributions and plan accordingly—thereby increasing financial stability for the beneficiary organizations.18

Although some have questioned the wisdom of perpetual existence of supporting 

organizations, perpetual support from a supporting organization can provide a 

transformative base from which the supported beneficiaries can advance their charitable purposes. With the assurance of annual distributions to sustain vital programs 

and operations, a supported beneficiary can gradually evolve from a paycheck-topaycheck operation with a good idea to become a regional or national leader in its 

philanthropic endeavors because it has the economic wherewithal to implement its 

vision. Often private foundations will provide seed money for an innovative philanthropic project but do not want to provide ongoing grants to carry on operations. 

Instead, private foundation funders will move on after a few years, funding the next 

organization with the next good idea. A supporting organization, however, is designed to operate hand-in-hand with the supported charities, providing sustaining 

support while protecting the corpus so that the charitable operations of the supported organizations can continue indefinitely. 

Thank you for providing exempt organizations with an opportunity to comment 

on the hardships and uncertainties created by the PPA. It is unfortunate that the 

provisions were never discussed in a bipartisan manner nor made the subject of 

Committee hearings where they could be debated and commented on by those within the sector. If you should have any questions regarding the above, please feel free 

to contact me at (918) 582–5201. 

CHAPMAN CHARITABLE TRUSTS 

2005 & 2006 DISTRIBUTIONS 

ARKANSAS 2006 2005

John Brown University $3,370,292.45 $2,871,868.28 

Arkansas Total $3,370,292.45 2,871,868.28 

OKLAHOMA—Tulsa 

The University of Tulsa $25,461,323.39 23,317,041.17 

St. John Medical Center 9,522,975.14 6,274,307.40 

Tulsa Area United Way 1,439,000.00 630,000.00 

Holland Hall 2,538,289.00 2,054,362.50 

Tulsa Psychiatric Center 750,470.00 684,439.04 

Well Baby Clinic (PPOAEO) 235,000.00 234,521.00 

Family & Children’s Services 205,000.00 205,000.00 

Tulsa Community Foundation 200,000.00 300,000.00 

(for McFarlin Pediatric Healthcare Fund) 

Tula Foundation for Healthcare Services (Bedlam Clinic) 310,000.00 300,000.00 

St. Simeon’s Episcopal Home 67,703.00 61 341.92 

Oklahoma—Tulsa Total $40,729,760.53 34,361,013.03 

OKLAHOMA—Oklahoma City 

Oklahoma Medical Research Foundation $11,123,031.90 10,197,223.96 

The Episcopal Diocese of Oklahoma 748,415.00 683 032.04 

Oklahoma—Oklahoma City Total $11,871,446.90 110,880,256.00 

TEXAS 

Trinity University $14,865,632.31 13,681,844.45 

Presbyterian Children’s Homes and Services 752,501.00 684,250.84 

St. Mary’s Hall 374,648.33 359,393.36 

157 

Southwest Foundation for Biomedical Research 187,324.16 129,696.68 

Southern Methodist University (fbo McFarlin Auditorium) 208 525.00 191,243.33 

Texas Total $16,388,630.00 15,046,428.33 

GRAND TOTAL $72,360,129.88 62,859,565.64 

f 

Statement of Community Foundation of Western Massachusetts 

These comments are submitted on behalf of the Community Foundation of Western Massachusetts, an administrator of scholarship funds for students from the 

western Massachusetts region it serves. They are directed at the provisions of The 

Pension Protection Act of 2006 (P.L. 109–280) which prohibited scholarship grants 

from donor advised funds unless certain procedures are followed which completely 

remove control of the award process from the donors. 

For community foundations such as ours, with dozens of such funds, these provisions make their administration so awkward and burdensome as to reduce our incentive to accept them, and they reduce substantially the always tenuous incentive 

of donors and their families to create them. The big picture is that donors are not 

required to be generous, their generosity is good for our society, the use of an income tax deduction is a substantially leveraged investment by the government in 

encouraging that generosity, and the administration of that deduction should not be 

constructed in such a way as to be counterproductive. Crafted supposedly to prevent 

a few abuses, the provisions of the Act hardly qualify by this standard. 

The Community Foundation of Western Massachusetts helps 1,000 students from 

the Pioneer Valley go to college each year with $2 million from 100 scholarship 

funds. Forty-one of these were classified as donor advised funds under the Act and 

required extensive consultations with their donors in order to make the changes required to comply with it. The donors to seventeen of them opted out, and many, unfortunately, will never be heard from again. The award process for the remaining 

twenty-four went from being personalized, often family centered opportunities for 

pioneering community engagement to impersonal, assembly line selection forced 

marches dictated by the tyranny of a majority selected by us. One can conceive of 

many relatively non-conventional students who should be given educational opportunities but would be chosen only by a persistent few who wish to champion their 

cause. Diversified decisionmaking is essential. 

Prior to these provisions, we had in place what we thought were adequate safeguards against private inurement and self-dealing, and we know of no abuses that 

would have been prevented by these changes. 

As these provisions are reconsidered, we make several drafting suggestions respecting the scholarship fund exception to the prohibition of grants to individuals 

from donor advised funds: 

Oversight Subcommittee, House Ways and Means Committee, July 30, 2007, Page 

Two 

1. The definition of ‘‘donors’’ who must not control the scholarship selection process should be clarified: 

• to eliminate pre-occupation with de minimus problems. A $1,000 per year 

minimum donation, indexed yearly, could easily allow most donors to participate without sacrificing material safeguards against abuse; 

• to exclude donors who advise only as to the amount to be distributed each 

year, and not as to the recipients (the law appears to include both); 

• to exclude deceased donors so that descendants are not excluded from participating as advisors; 

• to exclude the members of donor organizations, particularly non-profits (e.g. 

the Latino Scholarship Association). 

2. In addition, the burden of preventing abuse should be shifted from administering organizations to offending donors by the use of a safe haven. If, for 

example, donors who participate in the scholarship selection process provide 

written certifications that neither they nor members of their families or others 

appointed by them receive any benefits, direct or indirect, from the awards 

made, the administering organization should be relieved of responsibility for 

false certifications, and such donors should be allowed to participate in the 

same way they did prior to the passage of the Act. Increasing the penalties for 

such false certifications, then, with appropriate enforcement activity, could provide the same level of safeguard against abuse without discouraging the overVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00161 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
158 

whelming number of generously well-intentioned donors from achieving their 

charitable goals that benefit all of us. 

In short, strengthening the processes available before the passage of the Act could 

greatly reduce the incidence of abuse while still preserving the same incentives to 

be generous in ways that are highly beneficial. As the Oversight Subcommittee reviews the trail left by the Pension Protection Act of 2006, we hope these simple 

correctives can be considered. 

f 

Statement of DLA Piper 

On behalf of various exempt organizations, I appreciate this opportunity to submit 

comments on issues pertaining to the impact of the exempt organization provisions 

in the Pension Protection Act of 2006 (‘‘PPA’’). These comments relate specifically 

to section 4958(c)(3) of the Internal Revenue Code as added by section 1242 of the 

PPA (the ‘‘excess benefit transaction’’ provision). 

Prior to the enactment of section 1242 of the PPA, the Code provided that supporting organizations may not pay compensation to so-called ‘‘disqualified persons’’ 

that is excessive or unreasonable. Under this approach, Congress recognized that 

supporting organizations should be permitted to hire the best qualified service providers to support their activities, and that as long as the compensation for those 

services is within acceptable guidelines, it should not matter who the service provider is. This is especially true in the case of Type I supporting organizations which 

are controlled by the public charities which they support and are therefore protected 

from potential overreaching by those who create and fund them. 

Under section 1242, however, arrangements between supporting organizations 

and disqualified persons that are within previously acceptable guidelines, including 

arrangements that had been subject to prior approval by the IRS, are no longer permitted. 

The PPA provision simply goes too far. As the Tax section of the American Bar 

Association stated in a letter to the Chairs and Ranking members of the tax writing 

Committees dated February 3, 2006 commenting on some of the pending charitable 

provisions that were later incorporated in the PPA, specifically with respect to this 

section ‘‘. . . we believe that the bill should not address operations of Type I and II 

supporting organizations. We support the recommendations of the Panel on the 

Nonprofit Sector to prohibit payment of grants, loans, and compensation by Type 

III supporting organizations to or for the benefit of a donor or related party. We do 

not support the bill’s much broader prohibition applicable to Type I and Type II organizations, which are controlled by the public charities that they support. The existing intermediate sanctions law already imposes excise taxes on improper transactions involving Type I and Type II supporting organizations. We submit that S. 

2020 [the then pending Senate vehicle for charitable reforms] should not go beyond 

existing law with respect to such organizations.’’ 

In fact, the PPA provision actually imposes a more stringent restriction on supporting organizations than exists for private foundations, which would continue to 

have an exception from the disqualification rules for reasonable and necessary expenses. There is no sound basis for allowing private foundations the flexibility to 

hire the most qualified service providers, while denying that right to supporting organizations that are controlled by public charities. 

For these reasons, I respectfully submit that Congress modify the PPA provisions 

by limiting its application to Type III supporting organizations as follows: 

Proposed amendment to section 1242 (‘‘Excess Benefit Transactions’’) of 

H.R. 4, the Pension Protection Act of 2006. 

On page 891 of H.R. 4, the Pension Protection Act of 2006, in section 1242 (excess 

benefit transactions involving supporting organizations) in part (b) (which adds a 

new section (3) to Code section 4958(c) of the Code captioned ‘‘Special Rules for Supporting Organizations’’, rewrite subsection (A) of new section (3) to read as follows: 

‘‘(A) IN GENERAL.— In the case of any type III supporting organization (as defined in section 4943(f)(5)(A)) which is not a functionally integrated type III supporting organization (as defined in section 4943(f)(5)(B))—’’ 

f 

159 

John Templeton Foundation 

West Conshohocken, Pa 19428 

August 6, 2007 

Congressman John Lewis, Chairman 

Subcommittee on Oversight, Committee on Ways and Means 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Lewis: 

On behalf of the John Templeton Foundation, please accept my sincere appreciation for the opportunity to offer written comments in regard to the provisions relating to tax-exempt organizations found in the Pension Protection Act of 2006 ( P.L. 

109–280). 

I am the Chairman of the Board of trustees of the John Templeton Foundation; 

a private, family foundation located outside Philadelphia, Pennsylvania. We have 

actively been following the charitable reform dialog of the Senate and House over 

the last few years and embrace the spirit of accountability and transparency behind 

the overall effort. However, we are concerned that many of the recently enacted provisions may have the effect of treating a perceived symptom rather than a real part 

of the problem, working to improve enforcement of the laws that are currently in 

place. 

Although we believe that there are a number of areas in the Pension Protection 

Act of 2006 ( 2006 PPA) that deserve additional consideration, we would respectfully 

offer comment in three areas: Private Foundation Excise Taxes, Tax on Net Investment Income and Grants from Private Foundations to Supporting Organizations. 

Private Foundation Excise Taxes 

Currently, Code sections 4941 to 4945 impose taxes on private foundations who 

engage in acts of self dealing with ‘‘disqualified persons’’, who fail to distribute a 

minimum amount of their assets each year as Qualifying Distributions, who have 

‘‘excess business holdings’’, who maintain investments that are considered to jeopardize the foundation’s charitable purpose and who have expenses that are construed as ‘‘taxable expenditures’’. With these sections as a part of the existing Internal Revenue Code, we are concerned that the new provisions serve a purely revenue 

raising function rather than enhancing the enforcement of current policy. 

In addition, the Internal Revenue Service does not have the ability of abating the 

initial tax imposed on disqualified persons as a part of a self-dealing transaction due 

to reasonable cause. This is not consistent with the imposition of other excise taxes. 

We believe that if additional excise taxes are imposed on disqualified persons with 

respect to self-dealing transactions that the Internal Revenue Service should have 

the discretion to waive these penalties for cause as with other excise taxes. We feel 

that if a Foundation Manager has followed the rebuttable presumption procedures 

found in section 4958 of the Internal Revenue Code when entering into a transaction that involves payment of compensation to a disqualified person that the manager should not be subject to penalty. 

Taxation of Charitable Use Assets 

Code section 4940 imposes an excise tax on the net investment income of a private 

foundation. At present, this definition does not include capital gain or loss from the 

disposition of property used to further an exempt purpose. The 2006 PPA would 

allow for the inclusion of the gains and losses from charitable use property in the 

calculation of excise tax with the only exception being the deferral of tax in a like 

kind exchange. This appears to be inherently contrary to the intention and purpose 

of charitable legislation dating back to the initial granting of tax exempt status in 

the late 1800’s. 

We have seen over the history of the charitable community the way in which it 

has been able to respond to the needs of the citizens of the United States in a timely 

and impactful manner. We have certainly seen this in the wake of Hurricanes 

Katrina, Rita and Wilma. The charitable community works hand in hand with the 

government in so many areas to provide the resources, training and education needed to impact humanity. Further taxation of charitable use assets only limits the 

ability of the charitable community to focus on the work identified in its mission 

with no corresponding result other than the generation of revenue. 

We believe that the charitable community has an important role in America and 

do not want to see a trend like that of countries like France who do not encourage 

philanthropy or work it into the fiber of their legislation. In addition, in an environment where we work to reduce administrative expense and costs through cost effecVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00163 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
160 

tive fiscal management tools and policies directed by governing by-laws and charter 

as well as the Internal Revenue Code, it appears that many of these provisions will 

only add to the operational burdens and non-charitable expenditures of private foundations not make them more efficient. 

The budget of the Internal Revenue Service’s Exempt Organization division, 

which is responsible for the oversight and enforcement of the charitable community, 

is approximately $ 50 million dollars annually. Initially, it was the intention of Congress that the excise taxes on the books prior to the 2006 PPA fund this division 

of the IRS. Prior to the modification of the excise taxes in the 2006 PPA, the excise 

tax on private foundations brought in eight times the annual budget of the Exempt 

Organization division. Therefore, we do not understand the revenue component behind the taxation of charitable use assets as its funds will not be directed to the 

charitable community. Although we recognize that the tax moneys raised are not 

specifically matched with those from whom they are collected, it does appear contradictory to the intent and purpose of the Charitable sector. 

Grants from Private Foundations to Supporting Organizations 

Both the Senate Bill, section 345, and House Bill, section 1244, attempt to narrow 

a private foundation’s ability to make qualifying distributions in accordance with 

section 4945 of the Internal Revenue Code to supporting organizations. We recognize that the House’s bill further defines the restriction to Type III supporting organizations that are not functionally integrated and Type I, Type II and Type III functionally integrated organizations where a disqualified person of the private foundation directly or indirectly controls the supporting organization. 

We have searched our resources and do not understand the motivation behind 

these changes and cannot identify any specific abuses that support a legislative 

change of this magnitude. Over the past 2 years, we have worked with a Type I 

supporting organization and have found it to be administered with an extremely 

high level of responsibility and fiscal management. It enables academics, scientists 

and researchers whose work falls within the mission of the Foundation and whom 

we are interested in supporting to conduct their studies and work as a collaborative 

network outside the direct influence of the Foundation. As an organization, we are 

working to bring together the scientific and religious communities to have measurable impacts on Humanity in areas like Spirituality and Health, Cosmology, Character Development, Enterprise Based Solutions to Poverty, Genius Research and 

Free Enterprise. It is imperative that we have the ability to encourage and support 

collaboration, which we believe is the backbone to modern philanthropy, by allowing 

these scientists and religious leaders to come together in an environment that is 

free from ‘‘perceived’’ bias. Provisions such as the restriction of grants by private 

foundations to supporting organizations constrain the ability of organizations to promote research that could bring about positive change and new learning. We respectfully believe that this is not the intention of Congress and strongly support reconsideration of these provisions. 

Again, we thank you for the opportunity to share our thoughts with the Committee and for our voice to be heard. We are proud to be members of the charitable 

community and believe that it is a community whose members embody integrity and 

responsible stewardship as each entity recognizes the duties and honor that come 

with the oversight and use of charitable assets. We believe that the sensational accounts that are represented in the media with regards to the charitable community 

represent a very small minority of the sector and not the norm. If you require any 

additional information with regard to our comments, we would be pleased to be responsive and to work with you, your staff and Committee. 

Sincerely, 

Dr. John M. Templeton, Jr. 

f 

Chairman, Board of Trustees 

161 

1 Except as otherwise noted, section references to the IRC are to the Internal Revenue Code 

1986, as amended. 2The PPA prevents private foundations from treating as qualifying distributions payments 

they make to Type III supporting organizations (unless functionally integrated) or to any supporting organization in which a disqualified person with respect to private foundation grantors 

controls the supporting organization or its supported organization. In addition, the PPA further 

penalizes such payments if the grantor fails to exercise expenditure responsibility. 3Determination letters from the IRS prior to the PPA generally acknowledge whether an organization is a public charity under IRC § 509(a)(3), but such letters offer no guidance as to whether the supporting organization is considered a type I, II, III functionally integrated, or III nonfunctionally integrated. These distinctions are crucial under the PPA, and the burden is ultimately on private foundations to spend the time and incur the expense of making these distinctions or deciding to rely on the grantee’s assessment (which itself involves time and money). 

Ewing Marion Kauffman Foudation 

Kansas City, Missouri 

August 6, 2007 

Hon. John Lewis, Chairman 

Subcommittee on Oversight, Committee on Ways and Means 

United States House of Representatives 

1102 Longworth House Office Building 

Washington, D.C. 20525 

Dear Chairman Lewis: 

I submit this letter as the General Counsel and Secretary of the Ewing Marion 

Kauffman Foundation, a private foundation in Kansas City, Missouri with a philanthropic mission focused on entrepreneurship, math and science education, and the 

Kansas City region. 

This letter is in response to the Subcommittee’s request for comments regarding 

the Pension Protection Act of 2006, P.L. 109–280 (‘‘PPA’’). More specifically, these 

comments address two aspects of the PPA—those that altered how private foundations may interact with supporting organizations and that imposed a new tax on 

capital gains from sale of property used in charitable activity. 

Private Foundations and Supporting Organizations 

Until the PPA, the Internal Revenue Code (‘‘IRC’’) 1 allowed private foundations 

to treat supporting organizations under § 509(a)(3) in the same manner as other 

public charities. This allowed private foundations to rely on determinations by the 

Internal Revenue Service for purposes of making qualifying distributions under IRC 

§ 4942 and for presumptions that grants to supporting organizations were not taxable expenditures under IRC § 4945. The PPA changed those rules and, in doing so, 

imposed unnecessary risks and burdens on those private foundations still willing to 

make grants to supporting organizations. 

We have three fundamental concerns about this provision of the PPA. First, it imposes administrative burdens on the financial and time resources of supporting organizations and foundations still willing to interact with supporting organizations, 

but the diversion of resources does not seem to carry a corresponding benefit. Second, it presumes that exercising expenditure responsibility is not adequate when 

private foundations deal with certain types of supporting organizations, which presumption is contrary to longstanding policy and practical experience.2 Third, it potentially forces private foundations to choose between (a) making payments to fulfill 

existing commitments to supporting organizations and risk excise taxes or (b) not 

making those payments and risk breaching obligations to the supporting organizations and the loss of the corresponding programmatic opportunities. 

In order to make payments to supporting organizations, even on commitments 

that predate the PPA, private foundations that still want to interact with supporting organizations must undertake additional due diligence not previously contemplated.3 If the supporting organization is a type III, that due diligence can be 

extensive, intrusive for all involved (the foundation, supporting organization, and 

the supported organization), costly, and time consuming. There does not seem to be 

a corresponding benefit, and there is a certain irony in the reality created by the 

PPA that it is easier for a private foundation using expenditure responsibility to 

make legitimate, charitable grants to General Electric, Time Warner or the Trump 

Organization than it is to a supporting organization declared by the IRS to be charitable. Under the PPA, even exercising expenditure responsibility under IRC § 4945 

for grants to some supporting organizations is not enough for the grant to be a 

qualifying distribution. 

The operating presumption under this provision of the PPA appears to be that 

162 

4The paucity of hearings prior to passage of the PPA forces an unusual degree of speculation, 

including about the extent to which current laws and regulations are not adequate to address 

the problems that might exist with the use and operation of supporting organizations. 

supporting organizations are rife with and inherent tools for abuse.4 While I do not 

suggest that abuse has not existed, the PPA seems to have gone to extremes in assuming that all such organizations are abused and that private foundations are the 

primary abusers, particularly if there is overlap of disqualified persons among the 

foundation and the supporting organization. 

Our experience with supporting organizations is quite different. We have seen 

first hand how universities can effectively use supporting organizations as a legitimate vehicle to expand and supplement their educational missions. However, we 

also have now experienced how the PPA forces these organizations to redirect 

money and time from their charitable and educational activities to convincing private foundation grantors that they are in compliance with the PPA. This can even 

involve expense associated with engaging extra legal and accounting services. This 

is not an effective or productive use of charitable resources, which the foundation 

also spends directly to undertake its own analyses to ensure compliance with the 

PPA or indirectly through the supporting organization’s efforts to do so. Any benefit 

derived from these aspects of the PPA seems to be far outweighed by the burdens 

imposed. 

This provision of the PPA also appears to apply to any payments by private foundations, including subsequent payments on grant commitments made prior to any 

discussions of the PPA much less its enactment. This has the potential of imposing 

an ex post facto burden on foundations of choosing between complying with the law, 

thereby risking breach of contract, or accepting consequences for knowingly deciding 

not to comply. I am not aware that any supporting organization grantee has been 

forced to sue a private foundation to enforce a pre-PPA commitment, but the scenario is plausible. At a minimum, the law should not apply to payments made pursuant to written agreements in effect on the effective date of the law. 

If the need for reform in the relationship between private foundations and supporting organizations was so dire, requiring expenditure responsibility may have 

been an adequate step. If the prevailing belief is that more is necessary, expenditure 

responsibility coupled with pass-through requirements would have been a more 

measured response than that presented in the PPA. Even those steps, however, 

would not necessarily have reduced abuses of supporting organizations by individuals not connected with private foundations. 

Taxation of Charitable Use Assets 

The PPA also expanded the definition of ‘‘net investment income’’ under IRC 

§ 4940 to impose a new tax on private foundations when they sell property that they 

used in charitable activity, unless there is a certain like-kind exchange. Taxing 

gains from the sale of charitable use property has arguably breached a sacrosanct 

policy that respected charitable activity by treating such gains differently from investment gains. Whether this is a one-time breach or a slippery slope is unclear. 

The fact that the breach has occurred at all is significant, particularly because the 

breach seems on the surface to have been motivated solely by the desire to raise 

revenues without a clear policy rationale. In fact, many have questioned the policy 

rationale for having imposed the tax before the PPA, particularly when the revenue 

raised has not been used for the intended purpose of funding sector-based activity; 

increasing the tax base is a change in the wrong direction. 

Even without considering the policy implications, the new tax denies the use of 

these dollars for charitable purposes and imposes an additional layer of strategic 

complexity on those evaluating whether to sell or purchase charitable use property. 

The policy threat raised by taxing income from the sale of charitable assets used 

in charitable activities is far more dangerous. 

These two components of the PPA are complex and they appear intended to address complicated issues. Unfortunately, they are also unduly burdensome in imposing monetary and time demands that seem disconnected from the problems Congress may have been seeking to address and, in the process, they imposed their own 

problems for the charitable and philanthropic sectors. 

Mr. Chairman, we applaud the Subcommittee’s willingness to hold hearings and 

solicit comments on the efficacy of the PPA, and we are pleased to submit these 

comments for the Subcommittee’s consideration. 

Respectfully, 

John E. Tyler III 

f 

General Counsel and Secretary 

163 

Statement of Food Donation Connection 

These comments call attention to a technical correction needed to the charitable 

giving incentives created by recent tax legislation found in H.R. 4, the Pension Protection Act of 2006, section 1202— ‘‘Extension of Modification of Charitable Deduction for Contributions of Food Inventory’’. This correction would bring the provision 

in line with the original intent of Congress to encourage food donations by all business entities. 

Food Donation Connection (FDC) coordinates the donation of wholesome prepared 

food from restaurants and other food service organizations to local non-profit agencies that help people in need. Federal Tax Code (IRC Section 170(e)(3)) has provided 

an incentive for C corporations to donate their food inventory since 1986. Since its 

founding in 1992, FDC has been involved in the effort to pass charitable giving incentives for food donations for all business entities and is currently working with 

several restaurant companies that have agreed to donate food if this issue is resolved. FDC has coordinated the donation of over 110 million pounds of prepared 

food for companies like Yum! Brands (Pizza Hut, KFC, Taco Bell, Long John Silver’s, A&W) and Darden Restaurants (Red Lobster, Olive Garden, Smokey Bones). 

We currently coordinate donations from 7,000 restaurants to 3,500 non-profit agencies nationwide. 

In our discussion with Yum! Brands franchisees about the charitable giving incentives contained in H.R. 4 (Pension Protection Act of 2006, which extended the provision of H.R. 3768 (KETRA) to December 31, 2007) we discovered an issue in the 

Tax Code that negate the tax savings for S corporations that donate food. Individual 

S corporation shareholders may not be able to take the deduction for the donation 

of food inventory, depending on their basis in the corporation. In working with S 

corporations we have learned the following: 

• S corporation income is distributed to each shareholder based on each shareholder’s ownership percentage and therefore the deductibility of the deduction 

depends on each shareholder having sufficient basis (i.e. ‘at risk’ IRS rule) in 

the company to permit deduction at the individual level. 

• S corporations make ongoing distributions to shareholders rather than retain 

excess funds in the company and therefore S corporation shareholders have no 

basis (i.e. distributions reduce basis). 

• As a result, S corporation shareholders do not believe they are entitled to a tax 

deduction and do not benefit from recent tax law changes and are therefore not 

motivated to donate. 

Under this current situation, the shareholder basis rule trumps the intention of 

Congress to extend the special rule for certain contributions of food inventory to S 

corporations (H.R. 4 extension of H.R. 3768 Sec.305, which modified IRC section 

170(e)(3)). 

To remedy this situation, a technical correction could be made to the language of 

H.R. 4, the Pension Protection Act of 2006. The following wording would be added 

to H.R. 4 section 1202: 

(c) In General—section 170(e)(3)(C) of the Internal Revenue Code 1986 (relating 

to special rule for certain contributions of inventory and other property) is amended 

by redesignating (iv) as (v) and inserting after (iii) the following new paragraph: 

(iv) S corporation BASIS LIMITATION—In the case of food contributions from S 

corporations, limitations on individual shareholder’s deductions due to shareholder 

basis (section 1366(d)(1)) on stock and debt do not apply. However, shareholder’s 

basis continues to be adjusted consistent with section 1367(a).’ 

The immediate impact of this change would mean that over 721 restaurants in 

26 states would be eligible for this deduction for donating food, and therefore willing 

to donate. See the list below for additional details. 

It is the intent of Congress to address the needs of Americans by providing valuable resources to charitable organizations. This technical correction would fulfill the 

original intent of the legislation by allowing S corporations to take advantage of this 

charitable deduction for contributions of food inventory. 

164 

Thank you for considering these comments. 

Subchapter S Corporation Shareholder Basis Example 

The following example of how an S corporation treats income distributions and 

deductions is provided by Rage, Inc, a 100 restaurant Pizza Hut franchise. 

Average annual profit per restaurant $65,000 

Shareholder Basis at the beginning of the year $0 

Shareholder Basis at the end of the year $65,000 (same as profit) 

Dividend distribution at end of year $65,000 

Taxable Income to Shareholders $65,000 

Shareholder basis after Dividend Distribution returns to $0 

If a restaurant donates wholesome food that results in a deduction of $1,000 they 

are faced with two alternatives: 

1. If the dividend (profit) distribution remains $65,000 this creates an actual divi- dend distribution of $64,000 and would trigger a $1,000 capital gain to the shareholder. 

2. The dividend distribution to the shareholder is reduced to $64,000. 

Both alternatives lack the incentive to donate food that is intended by Congress 

for all business entities. 

For S corporation shareholders to receive the intended incentive for donating food the deduction must be basis neutral and exempt from the ‘at 

risk’ IRS rules. 

Yum! Brand Franchisees Willing to Donate with S Corp Basis Cost Resolution 

The passage of H.R. 4 has roused the interest of many Yum! Brands franchisees 

to donate food. A number of franchised operators of Pizza Hut, KFC and Long John 

Silver’s restaurants that have told Food Donation Connection they would start a 

Harvest food donation program if the issue with S corporation basis costs can be 

corrected. 

The following chart lists the number of new restaurants and the pounds of food 

donations that can be projected from these restaurants. The poundage projections 

are based on averages from Yum! Brands operated restaurants. These donations include cooked prepared pizza, breadsticks, chicken, fish, mashed potatoes, vegetables, 

biscuits and other items that have been properly saved, packaged and chilled or frozen. The saved food would be picked up on a regular basis by local food banks and 

hunger relief agencies and used in the local community. 

Yum! Brands has been donating surplus food from its restaurants since 1992. In 

2006, over 1,800 local hunger relief agencies received about 11.5 million pounds of 

prepared food from 4,100 Yum! Brands restaurants. This food has been a tremendous help for these agencies, as donated food frees up their limited resources for 

other needs. 

The list of 721 restaurants represents a broad spectrum of communities across 26 

states and 140 congressional districts. These restaurants are operated by 15 different franchised groups. Since the Yum! Brands system is over 75% franchised, resolution of the S corporation tax deduction issue will result in many more opportunities to encourage donation of wholesome prepared food. 

State District Represenative 

# 

Resturants 

Lbs per 

Year 

AL 05 Robert E. (Bud) Cramer Jr. 2 10,350 

AZ 01 Rick Renzi 6 17,197 

AZ 03 John B. Shadegg 2 5,732 

AZ 07 Raul M. Grijalva 11 31,529 

AZ 08 Gabrielle Giffords 14 40,127 

CA 24 Elton Gallegly 1 5,175 

CA 26 David Dreier 2 10,350 

CA 27 Brad Sherman 5 25,875 

CA 28 Howard L. Berman 4 20,700 

CA 29 Adam B. Schiff 2 10,350 

CA 30 Henry A. Waxman 4 20,700 

CA 31 Xavier Becerra 2 10,350 

CA 32 Hilda L. Solis 2 16,511 

165 

State District Represenative 

# 

Resturants 

Lbs per 

Year 

CA 33 Diane E. Watson 4 20,700 

CA 35 Maxine Waters 1 5,175 

CA 36 Jane Harman 1 5,175 

CA 38 Grace F. Napolitano 4 16,861 

CA 46 Dana Rohrabacher 1 1,336 

CO 03 John T. Salazar 4 20,700 

CO 05 Doug Lamborn 1 5,175 

DC Delegate Eleanor Holmes Norton 1 5,175 

FL 03 Corrine Brown 1 5,175 

FL 05 Ginny Brown-Waite 5 14,331 

FL 07 John L. Mica 3 15,525 

FL 08 Ric Keller 2 10,350 

FL 12 Adam H. Putnam 1 5,175 

FL 13 Vern Buchanan 2 10,350 

FL 15 Dave Weldon 6 31,050 

FL 16 Tim Mahoney 13 15,525 

FL 17 Kendrick B. Meek 5 25,875 

FL 18 Ileana Ros-Lehtinen 4 20,700 

FL 20 Debbie Wasserman Schultz 2 10,350 

FL 21 Lincoln Diaz-Balart 2 10,350 

FL 22 Ron Klein 5 25,875 

FL 23 Alcee L. Hastings 2 10,350 

FL 24 Tom Feeney 5 25,875 

FL 25 Mario Diaz-Balart 1 5,175 

GA 09 Nathan Deal 4 11,465 

GA 10 Paul Broun 2 5,732 

IA 05 Steve King 8 22,930 

IL 12 Jerry F. Costello 1 2,866 

IL 15 Timothy V. Johnson 3 8,599 

IL 19 John Shimkus 4 11,465 

IN 01 Peter J. Visclosky 2 5,732 

IN 02 Joe Donnelly 4 11,465 

IN 03 Mark E. Souder 1 2,866 

IN 04 Steve Buyer 1 2,866 

IN 05 Dan Burton 5 16,640 

IN 08 Brad Ellsworth 2 5,732 

IN 09 Baron Hill 1 2,866 

KY 01 Ed Whitfield 2 5,732 

KY 02 Ron Lewis 2 5,732 

KY 04 Geoff Davis 3 8,599 

KY 05 Harold Rogers 7 20,064 

LA 01 Bobby Jindal 6 31,050 

LA 02 William J. Jefferson 8 41,401 

LA 03 Charlie Melancon 1 5,175 

LA 06 Richard H. Baker 9 46,576 

MD 01 Wayne T. Gilchrest 5 23,567 

MD 02 C. A. Dutch Ruppersberger 4 20,700 

MD 03 John Sabanes 3 15,525 

MD 04 Albert Russell Wynn 1 5,175 

MD 05 Steny H. Hoyer 7 36,226 

MD 07 Elijah E. Cummings 1 5,175 

MI 01 Bart Stupak 9 25,796 

MI 02 Peter Hoekstra 2 5,732 

MI 03 Vernon J. Ehlers 16 45,860 

MI 04 Dave Camp 3 8,599 

MI 05 Dale E. Kildee 1 2,866 

MI 06 Fred Upton 7 20,064 

MI 07 Tim Walberg 8 22,930 

MI 10 Candice S. Miller 2 5,732 

MS 01 Roger F. Wicker 11 56,926 

MS 02 Bennie G. Thompson 10 51,751 

MS 03 Charles ‘‘Chip’’ Pickering 10 51,751 

MS 04 Gene Taylor 19 98,326 

166 

State District Represenative 

# 

Resturants 

Lbs per 

Year 

NC 01 G. K. Butterfield 2 5,732 

NC 02 Bob Etheridge 7 31,608 

NC 04 David E. Price 25 106,846 

NC 05 Virginia Foxx 14 53,980 

NC 06 Howard Coble 9 46,576 

NC 10 Patrick T. McHenry 5 14,331 

NC 11 Heath Shuler 23 65,924 

NC 12 Melvin L. Watt 5 25,875 

NC 13 Brad Miller 29 122,371 

NE 01 Jeff Fortenberry 11 31,529 

NE 02 Lee Terry 14 40,127 

NE 03 Adrian M.Smith 12 34,395 

NJ 05 Scott Garrett 5 25,875 

NJ 06 Frank Pallone Jr. 1 5,175 

NJ 07 Mike Ferguson 3 15,525 

NJ 09 Steven R. Rothman 6 31,050 

NJ 10 Donald M. Payne 5 25,875 

NJ 11 Rodney P. Frelinghuysen 4 20,700 

NJ 12 Rush D. Holt 1 5,175 

NJ 13 Albio Sires 8 41,401 

NY 07 Joseph Crowley 1 5,175 

NY 13 Vito Fossella 3 15,525 

NY 16 Jose ́ E. Serrano 8 41,401 

NY 17 Eliot L. Engel 3 15,525 

NY 18 Nita M. Lowey 2 10,350 

NY 20 Kirsten Gillibrand 1 2,866 

NY 23 John M. McHugh 16 52,786 

NY 24 Michael Arcuri 7 36,226 

NY 25 James T. Walsh 8 41,401 

OH 02 Jean Schmidt 2 5,732 

OH 08 John A. Boehner 1 2,866 

OH 10 Dennis J. Kucinich 11 56,926 

OH 11 Stephanie Tubbs Jones 16 82,801 

OH 13 Sherrod Brown 10 51,751 

OH 14 Steven C. LaTourette 7 36,226 

OH 16 Ralph Regula 2 10,350 

OH 17 Tim Ryan 2 10,350 

PA 01 Robert A. Brady 1 5,175 

PA 05 John E. Peterson 2 5,732 

PA 06 Jim Gerlach 11 5,175 

PA 09 Bill Shuster 1 5,175 

PA 10 Christopher Carney 2 5,732 

PA 13 Allyson Y. Schwartz 1 5,175 

PA 16 Joseph R. Pitts 4 20,700 

PA 17 Tim Holden 4 20,700 

PA 19 Todd Russell Platts 8 41,401 

SC 01 Henry E. Brown Jr. 12 34,395 

SC 02 Joe Wilson 14 40,127 

SC 03 J. Gresham Barrett 3 8,599 

SC 04 Bob Inglis 6 17,197 

SC 05 John M. Spratt Jr. 6 17,197 

SC 06 James E. Clyburn 5 14,331 

TN 04 Lincoln Davis 1 2,866 

TN 07 Marsha Blackburn 4 20,700 

TN 08 John S. Tanner 1 5,175 

VA 01 Jo Ann Davis 3 8,599 

VA 02 Thelma D. Drake 2 5,732 

VA 05 Virgil H. Goode Jr. 3 10,908 

VA 06 Bob Goodlatte 2 5,732 

VA 07 Eric Cantor 1 2,866 

VA 09 Rick Boucher 13 37,261 

WI 03 Ron Kind 7 20,064 

WI 07 David R. Obey 1 2,866 

167 

State District Represenative 

# 

Resturants 

Lbs per 

Year 

WV 03 Nick J. Rahall II 6 17,197 

Totals 721 2,930,650 

Supplemental Sheet to H.R. 4 Technical Tax Comments 

Food Donation Connection (FDC) administers the Harvest Program to coordinate 

the distribution of excess food from restaurants and other food service organizations 

to qualified local non-profit organizations that help people in need. FDC has coordinated prepared food donation programs since 1992 involving the donation of over 

110 million pounds of quality surplus food. We currently coordinate donations from 

7,000 restaurants to 3,500 non-profit agencies nationwide. 

f 

Statement of Foundation For The Carolinas, Charlotte, North Carolina 

Foundation For The Carolinas (‘‘FFTC’’) is a community foundation located in 

Charlotte, North Carolina. It ranks in the top thirty of grants, gifts and assets for 

community foundations in the United States and has approximately 1,700 total 

funds, including hundreds of donor advised funds (‘‘DAF’s’’) and seven supporting 

organizations. We are writing in response to your request for comments on the charitable provisions of the Pension Protection Act (‘‘PPA’’) as part of the hearings held 

on June 24, 2007. 

1. Definition of Donor Advised Funds: With regard to the new statutory definition 

of a DAF we suggest providing specific and detailed examples in regulations of when 

a particular fund is or is not a DAF. Because of the sheer number of DAF’s examples will help in the classification of a particular fund. For example, if a particular 

fund specifies four permissible donees (e.g. four universities) and the donor may 

specify the percentages allocated between the respective schools does this meet the 

donor advisory part of the test since the legislation identified a specific exclusion 

for one permissible donee? We also urge Congress to make certain other changes 

applicable to DAF’s including clarifying the ability of sponsoring organizations to 

purchase goods and services on the open market using DAF assets and excluding 

funds created by public charities and governmental entities from the definition of 

DAF’s. 

2. Excess Business Holdings and DAFs: We urge Congress to repeal the application of the excess business holdings rules to DAF’s. We believe that the other 

changes made by the PPA and applicable to DAF’s will prevent the abuses that have 

occurred in the past. We do not believe that there is any reason to believe that business holdings that are given to a DAF are subject to any more abuses than if they 

were given to a public charity. If repeal is not a viable alternative perhaps Congress 

could adopt provisions that allow for the sale or payout of illiquid assets over some 

reasonable period of time or a phase-in of the rules to allow for an orderly transition. 

3. Payment of Grants from DAFs to Type III SOs: With regard to the treatment 

of distributions from DAFs to Type III supporting organizations and certain supporting organizations as taxable distributions the new requirements put an unreasonable burden on DAF’s and supporting organizations. We agree that the provision 

stating that a grantor, acting in good faith, may rely on a written representation 

signed by an officer, director or trustee of the grantee that the grantee is a Type 

I or Type II supporting organization provided that the representation describes how 

the grantee officers, directors, or trustees are selected and references any provisions 

and governing documents that establish a Type I or a Type II relationship between 

the grantee and its supporting organization. However, the grantor should not have 

the burden of ‘‘collecting and reviewing copies of governing documents of the grantee 

(and, if relevant, of the supporting organization (s)). 

4. Supporting Organizations. Like many large community foundations FFTC currently has four Type III supporting organizations for which it is the supported organization. These Type III’s are typically broadly supported community based organizations which have been formed to benefit, for example, the arts or a particular 

faith-based community. If a Board member of the Type III wants to make a gift 

from a non-operating private foundation he controls to the Type III, section 4942 

(g) would deny qualifying distribution treatment to the private foundation. This is 

not the type of abuse the statute is designed to prevent and this type of distribution 

168 

should not be denied treatment as a qualifying distribution. In FFTC’s situation, 

Board members are giving in response to a fundraising campaign for a particular 

focus area of the Type III supporting organization; they are not ‘‘controlling’’ members of the Board, families or sole donors. How can nonprofits conduct normal fundraising strategies under these regulations? For the same reasons if the gift was 

made from a DAF instead of a private foundation to the Type III the gift should 

not be treated as a ‘‘taxable distribution’’ under section 4966. Perhaps there should 

be some broad exception for Type III’s that support community foundations because 

of the lack of the potential for abuse; or an exception for Type IIIs that are created 

to support community based causes and not controlled by one or more specific donors or families. 

5. Disaster Relief Funds. IRS Notice 2006–109 dealt with, among other things, disaster relief funds established by employers at community foundations or other public charities to provide disaster relief grants to employees and their family members 

who are victims of a natural disaster (e.g., Katrina). We believe that similar regulations should be issued to apply to hardship funds established by employers for their 

employees. Such funds are designed to provide similar relief to employees suffering 

real hardship. We believe all the regulations mentioned in the Notice are reasonable 

and are already being followed by FFTC. However, hardship funds should be specifically mentioned as well to avoid any confusion about whether or not they meet the 

definition of a DAF. 

6. IRA Charitable Rollover. We strongly support H.R. 1419 and S.819 which would 

allow donors to qualify for the favorable IRA charitable rollover rules when making 

gifts to DAF’s, supporting organizations and private foundations. We also support 

extending these provisions beyond 2007 and to gifts over $100,000. 

7. Other Concerns. We also urge Congress to make certain adjustments to the 

PPA in order to address some situations in which the PPA is hampering community 

philanthropy. These include: 

• Clarifying that the designation in a gift instrument of scholarship Committee 

members by title or position does not constitute an appointment by the donor of persons holding those positions. 

• Providing for abatement of first-tier taxes for the new penalty provisions of PPA 

on the same basis as for existing penalty taxes. 

• Temporarily suspending the penalties for making grants to certain supporting 

organizations until the IRS can reliably identify those organizations. 

Thank you for your consideration of our comments. 

f 

Grantmakers Without Borders 

August 31, 2007 

Hon. John Lewis, Chairman 

Subcommittee on Oversight 

Committee on Ways and Means 

U.S. House of Representatives 

343 Cannon House Office Building 

Washington, DC 20515 

Dear Congressman Lewis: 

This statement is submitted on behalf of Grantmakers Without Borders (‘‘Gw/oB’’) 

in response to the House Subcommittee on Oversight’s request for written comments 

on provisions relating to tax-exempt organizations in the Pension Protection Act of 

2006. In addition, Gw/oB would like to specifically respond to Congressman 

Pascrell’s comments regarding charities and terrorism during the July 24, 2007 

hearing. 

Bckground 

Gw/oB is a philanthropic network dedicated to international social change philanthropy in the developing world. Gw/oB’s membership, currently numbering 150 

grantmaking entities, includes private foundations, grantmaking public charities, 

individual donors with a significant commitment to international philanthropy, and 

philanthropic support organizations. Gw/oB’s members make lifesaving grants to 

international grassroots organizations that target the root of economic, environmental, and social inequalities within their local communities. Grants range from 

support to children affected by HIV/AIDS, to reforestation projects in Brazil, to relief for victims of natural disasters. 

169 

1 A good-faith determination by a grantor organization that a grantee organization is the 

equivalent of a 501(c)(3) public charity. The grantor should collect the same information the IRS 

would require if it were to make its own determination of the grantee organization. 2 Additional oversight procedures exercised by a grantor to guarantee that its funds are used 

for a charitable purpose. Expenditure Responsibility typically requires five steps: a pre-grant inquiry whereby the grantor determines the grantee organization to be capable of achieving the 

charitable purpose of the grant, a written grant agreement signed by the grantee that details 

the purpose of the grant and commits the grantee to only spend the funds on that purpose, one 

or more reports from the grantee detailing the use of the funds, a separate account maintained 

by the grantee that exclusively houses charitable funds, and the grantor organization, when a 

private foundations, must notify the IRS on Form 990–PF that an expenditure responsibility 

grant was made during the tax year. 

II. Pension Protection Act 

The diversity of Gw/oB’s membership makes it impractical for these comments to 

reflect every impact felt by its membership due to the Pension Protection Act. However, two recurring matters deserve mentioning. 

A. IRA Charitable Rollover 

The Individual Retirement Account (‘‘IRA’’) Charitable Rollover provision within 

the Pension Protection Act eliminates the tax that formerly discouraged transfers 

from IRAs to charities. Consequently, many individuals have chosen to donate their 

annual minimum distributions to public charities, resulting in millions in charitable 

donations. Unfortunately, this valuable provision expires at the end of 2007. 

Gw/oB has joined Independent Sector, the National Committee on Planned Giving, and many other charities in advocating for the Public Good IRA Rollover Act 

of 2007. This Bill would make the IRA Charitable Rollover permanent, remove the 

dollar limit on donations per year, and provide IRA owners a planned giving option 

beginning at age 591⁄2. Furthermore, the Public Good IRA Rollover Act includes private foundations as eligible to receive donations, thereby allowing a greater number 

of worthy nonprofits to enjoy the benefits of the IRA Charitable Rollover. 

B. Donor Advised Funds 

The Pension Protection Act makes significant changes to the operation and management of donor advised funds (‘‘DAF’’s). Recognizing the growing popularity of 

DAFs, Congress responded with needed regulations to offset the potential for abuse. 

As a result, DAFs now have a statutory definition—a fund that is owned and controlled by a sponsoring organization, separately identified with reference to the 

donor, and subject to the recommendations of the donor in relation to the fund’s investments and distributions—limits are placed on who can receive distributions, and 

new requirements are in place on the management of those distributions by the 

sponsoring organization. 

Within the legislative history of the Pension Protection Act, some lawmakers 

sought to limit the use of DAFs for international grantmaking. Gw/oB finds this proposal deeply disturbing. It unnecessarily and unfairly targets international philanthropy at a time when global U.S. philanthropic engagement is as crucial as ever. 

We hope the following comments make the case for the enormous value of DAFs 

to international grantmaking and giving. 

Furthermore, many of Gw/oB’s members are finding some regulations within the 

Pension Protection Act difficult to apply. Here we attempt to describe some of those 

challenges. 

1. Present Important Advantages to International Grantmaking and Giving 

Often, the advantages of DAFs make them an attractive choice for international 

grantmaking and giving. Although Gw/oB understands and respects the underlying 

reasons behind recent legislative changes to the operation and organization of DAFs, 

we urge that these advantages be preserved. 

a. The Advantages of Donor Advised Funds to Grantmaking Organizations 

International grantmaking, for a variety of reasons, is more complex than domestic grantmaking. Consequently, many organizations that wish to make lawful and 

effective international grants do not have the capacity or expertise to do so. DAFs 

provide a valuable mechanism whereby organizations that lack this necessary capacity and expertise may rely on a qualified sponsoring organization to provide the 

solutions to important international grantmaking challenges. 

Federal tax law requires organizations that give international grants to practice 

501(c)(3) equivalency determination1, expenditure responsibility2, or a degree of due 

diligence that guarantees the funds are used for a charitable purpose. Organizations 

that make few international grants, have a small a staff, or are new to international 

grantmaking often turn to a DAF to manage the legal obligations inherit to interVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00173 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
170 

3See fn 1 

4See fn 2 

5http://www.treas.gov/tigta/auditreports/2007reports/200710082fr.pdf 

national grants. In addition, the world of international grantmaking is incredibly diverse. Literally, a world of funding opportunities is possible. DAFs provide a means 

whereby organizations new to international grantmaking can learn more about this 

diverse world, thus acquiring the expertise necessary to make effective international 

grants. 

DAFs often act as a valuable learning tool for grantmaking organizations. By contributing a DAF to a qualified sponsoring organization, the grantmaking organization is able to see what capacity and expertise is needed so that it can eventually 

make its own international grants. 

b. The Advantages of Donor Advised Funds to Individual Donors 

Critics of DAFs argue that contributions should be ineligible as charitable deductions. They reason that the retention of advisory privileges declassifies contributions 

as completed gifts. If accepted, this argument will undermine a core advantage to 

DAFs in the context of international giving. 

Most charitable contributions are given for altruistic reasons, but the promise of 

a charitable deduction is often an underlying incentive for many individual donors. 

Since Federal tax law disqualifies most overseas contributions by individuals as 

charitable deductions, DAFs are a valuable alternative that provides the benefits 

and incentives of a charitable deduction while preserving the possibility that a donor’s funds will support a foreign organization. Of course sponsoring organizations 

must protect against donors that abuse their advisory privileges. However, preventing donor abuse by making contributions ineligible as charitable deductions 

throws the baby out with the bath water and will, in the long run, stem the flow 

of U.S. charitable dollars to Haiti, Afghanistan, and elsewhere in the Third World 

where charitable resources are so desperately needed. 

2. The Pension Protection Act Significantly Changes The Due Diligence Required For 

Those Public Foundations That Give International Grants From Their DAFs. 

When a public foundation gives an international grant with its general funds, 

Federal tax law requires the public foundation to ensure the grant is used exclusively for its charitable purpose through sufficient ‘‘discretion and control.’’ Public 

foundations are afforded a fair amount of autonomy in determining what that ‘‘discretion and control’’ will look like. Under the Pension Protection Act, when a public 

foundation makes an international grant with a DAF, the public foundation must 

apply due diligence methods traditionally reserved for private foundations: equivalency determination3 or expenditure responsibility.4 Consequently, international 

grants made with a DAF are not easily incorporated into a public foundation’s grant 

portfolio. In addition, it is unclear how expenditure responsibility should be applied 

by a public foundation. Gw/oB is waiting for further clarification on this issue. 

3. The Pension Protection Act Includes Fundraisers As Disqualified Persons With 

DAFs 

The Pension Protection Act expands the list of disqualified persons, automatically 

instituting an excess benefit transaction tax on any ineligible distribution. However, 

one category of disqualified persons includes those that wish to be reimbursed for 

fundraising costs for the DAF. The fact is that not all DAFs are set up by wealthy 

individuals; there are those that are set up by individuals with modest financial 

means who raise funding from the public at large and then channel those funds 

overseas through a DAF. In cases such as these, it is quite reasonable to expect reimbursement for out-of-pocket expenses incurred by necessity in raising funding for 

the DAF. While excessive fundraising costs, as elsewhere in the non-profit sector, 

are to be strongly discouraged, completely forbidding reimbursement for reasonable 

fundraising costs associated with DAFs will jeopardize the existence of an important 

subset of DAFs. 

III. Charities and Terrorism 

During the July 24, 2007 hearing on tax-exempt organizations, Congressman 

Pascrell questioned the repeated accusations by the Department of the Treasury 

that ‘‘charities are a significant source of terrorist funding.’’ He specifically referenced a recent Treasury Inspector General Report released on May 21, 20075 and 

noted that the Department of the Treasury seems to be ‘‘painting the sector with 

a wide brush.’’ Gw/oB applauds Congressman Pascrell for his comments and hopes 

each Committee Member will read the June 8, 2007 letter that was sent to the Department of the Treasury by a coalition of nonprofit organizations, including 

171 

6http://www.internationaldonors.org/advocacy/TIGTALetter_Paulson.pdf 7http://www.treas.gov/press/releases/docs/tocc.pdf—Letter released by Gw/oB opposing the 

‘‘Anti-Terrorist Financing Guidelines’’ http://www.internationaldonors.org/news/gwob_letter_ 

122206.pdf 8http://www.treas.gov/offices/enforcement/ofac/policy/charity_risk_matrix.pdf—Letter released 

by Gw/oB opposing the ‘‘Risk Matrix for the Charitable Sector’’ http://www. 

internationaldonors.org/advocacy/GwoB_Treasury_Letter-Risk_Matrix.pdf 

Gw/oB, opposing the conclusions of the referenced Treasury Inspector General Report.6

Every day, Gw/oB works to counter these overbroad and unsubstantiated statements by the Department of the Treasury. Unfortunately, the Department of the 

Treasury’s statements have inflicted real, ongoing harm on nonprofit organizations, 

particularly international grantmakers, and caused a loss of public confidence in the 

charitable sector as a whole. 

Furthermore, the ‘‘tools’’ being released by the Department of the Treasury, such 

a the ‘‘Anti-Terrorist Financing Guidelines’’7 and the ‘‘Risk Matrix for the Charitable Sector,’’8 are doing little to fight terrorism and, in fact, chill important philanthropic aid that often acts as a counter balance to terrorism influences within vulnerable communities. To further frustrate things, these tools exist within a legal 

framework of draconian penalties that easily intimidate the highly risk adverse 

charitable sector. 

The U.S. charitable community takes the issue of terrorism very seriously and the 

1.8 million 501(c)(3) organizations, including 71,000 foundations, that exist in the 

U.S. work tirelessly to ensure that their charitable services or funding are used for 

the intended charitable purpose. As noted by Steve Gunderson, the President and 

CEO of Council on Foundations, within his testimony: 

[i]in fact, we have seen no evidence to indicate that U.S. charities are a major 

source of terrorist support. Out of hundreds of thousands of U.S. charities and billions of dollars given out in grants and material aid each year, only six U.S. charities are alleged to have intentionally supported terrorists. Thus far, Treasury has 

not identified a single case of inadvertent diversion of funds from a legitimate U.S. 

charity to a terrorist organization. . . . An even larger issue is that, by exaggerating 

the extent to which U.S. charities serve as a source of terrorist funding, Treasury 

is fueling an environment in which wary donors may refrain from making charitable 

contributions. 

Gw/oB’s hope is that a system can be put in place that supports the charitable 

work of those organizations acting lawfully and provides the necessary due process 

to those organizations suspected of having links to terrorism. 

IV. Conclusion 

Gw/oB thanks you for this opportunity to submit comments regarding the Pension 

Protection Act and the Department of the Treasury’s counter terrorism measures. 

In summary, Gw/oB would like: 

§ the IRA Charitable Rollover to be permanent and expanded to include private 

foundations, 

§ Congress and the IRS to resist any legal changes to the operation and management of DAFs that unnecessarily impedes their use for charitable giving to the 

Third World, and 

§ the House Ways and Means Committee to further explore Congressman 

Pascrell’s questioning regarding charities and terrorism (the Department of the 

Treasury needs to be held accountable for its counter terrorism measures that affect 

that charitable sector). 

If you have any further questions, please feel free to contact our Advocacy Coordinator at the Washington, D.C. office, Vanessa Dick. 

Sincerely, 

John Harvey 

f 

Executive Director 

Statement of Greenlining Institute 

The Greenlining Institute is a multi-ethnic advocacy and public policy center that 

focuses on issues of philanthropy to underserved communities and the economic empowerment of our nation’s minorities. Our members include the three largest African-American churches in California, the Hispanic Chamber of Commerce, the Black 

172 

1 Video: Leadership in Philanthropy, Part 1.The Greenlining Institute, March 2007.Available 

at:http://youtube.com/watch?v=j49Wn7wgFO0 2 Cohen, Rick. ‘‘Moral Court for Charity.’’ Non-Profit Quarterly 11 May 2007 3 Ibid. 

4Many foundations dismissed Greenlining’s reports due to flaws in the methodology.Greenlining made numerous requests to foundations requesting input and feedback on developing the methodology. 5 Cohen, Rick. ‘‘Moral Court for Charity.’’ Non-Profit Quarterly 11 May 2007 

Business Association, the Latino Issues Forum and the Mabuhay Alliance of San 

Diego. 

We applaud you for announcing the Overview Hearing on Tax-Exempt Charitable 

Organizations.We are submitting our views as they relate to charitable giving foundations. 

Greenlining recognizes that foundations have made considerable contributions to 

our Nation’s great democracy.In the past, especially during the sixties, foundations 

led efforts to address civil rights through strategic grantmaking that introduced minority leaders to the public policy process in an attempt to directly benefit communities of color.Unfortunately, rather than evolving and growing, many of these efforts have subsided and foundations as a whole appear to be withdrawing from their 

commitment to justice and equality. 

Foundations Accused of Redlining Minority Communities 

‘‘There is not a study out there that says that we are appropriately serving minority 

communities on a percentage basis.’’ Steve Gunderson, President, National Council 

on Foundations1

According to the Honorable Steve Gunderson, President of the National Council 

on Foundations, no study exists that demonstrates foundations are adequately serving minority communities.On the contrary, there is considerable evidence to suggest 

that foundations are severely short-changing communities of color.Greenlining has 

compared this short-changing to the redlining practices of banks, insurance companies, and other corporations. 

Over one third of the nation is minority and an estimated two thirds of the poor, 

particularly the underserved poor are minorities.Low-levels of philanthropic giving 

to the poor weakens the ability of the hundreds of thousands of low income organizations serving the poor to effectively serve the poor. 

Below are some statistics to consider. 

• Grantmaking to Ethnic/Racial Minorities: According to the Foundation Center, 

grantmaking for minorities has declined as a proportion of grants awarded by 

the largest foundations.Even though grant giving as a whole has increased, 

grants to minority communities have decreased.The numbers provided by the 

Foundation Center are controversial and might be understated since they only 

capture very large foundations, leaving out a sample of about 79,000 foundations.2

• Grantmaking to the Poor:According to Rick Cohen, former President of the National Committee for Responsible Philanthropy, grant dollars to the poor from 

large foundations dropped between 2004 and 2005.According to Rick Cohen, 

‘‘The proportion of foundation grant dollars (from generally larger foundations) 

targeted to economically disadvantaged population groups was 16.7% in 2002, 

20.3% in 2004, but only 15.7% in 2005.’’3

• Empowering Minority Organizations to Better Serve Their Constituents. 

Greenlining launched its efforts to hold philanthropic foundations more accountable to diverse non-profit organizations with the release of our Fairness in Philanthropy report.This report found that the top 50 foundations in the country 

invested only 3% of the dollars in minority-led organizations.Greenlining followed in 2006 with a second report entitled Investing in a Diverse Democracy 

which found that only 3.6% of dollars are invested in minority-led organizations.4

• Why is Corporate America More Diverse than the Foundation Sector? According 

to available data, corporate boards are slightly more diverse than foundation 

boards.For example,only 6.7% of foundation board members are African-American compared to 9.1% of Fortune 500 board members and 10% of Fortune 100 

boards.5

• Hiring Practices of Large Foundations:Available statistics by the Council on 

Foundations show disproportionately few positions held by minorities at major 

foundations, especially among top executives.These statistics themselves are 

controversial since they are taken from a self selected sample of foundations. 

173 

6 A summary of A.B. 624 is attached. 

7We raised this particularly in the context of some foundations contending that to give more 

to underserved minorities might displace the amount they give to American icons such as the 

opera, symphony, and ballet. 

• Foundation Endowments Might Be Causing More Harm than Good. Recent investigative articles by the Los Angeles Times point to disturbing facts that foundation endowments might cause considerable harm on minority communities.Foundations that exclude minorities in their grantmaking and hiring 

practices are perhaps causing more harm than good to underserved communities by their tax-exempt existence. 

Overall, the available research indicates that communities of color receive a very 

small portion of philanthropic dollars in our country.As you know, this debate is not 

new.Unfortunately foundations are still making only limited efforts to seriously address this issue. 

Government Efforts to Hold Foundation’s Accountable 

The Chairs of the Legislative Latino, Asian and Black Caucuses in California 

have been national leaders on efforts to hold foundations accountable to communities of color. 

• State Hearings Hosted By California Minority Caucuses. Joe Coto, Chair of the 

Latino Caucus, Alberto Torrico, Chair of the Asian/Pacific Islander Caucus, and 

Mervyn Dymally, Chair of the Black Caucus, held a hearing on April 24, 2006 

to discuss foundation diversity practices.Unfortunately, only a very small number of foundation leaders chose to participate in this important discussion.The 

hearing revealed that some corporate foundations are outperforming private 

foundations in reaching the poor and underserved. • A.B. 624, Proposed Transparency Legislation. The heads of the Latino Caucus 

and Black caucus introduced A.B. 624, legislation that would require foundations with greater than $250 million in assets to report key racial and ethnic 

data to the state’s attorney general.The legislation is currently on a 2-year cycle 

to allow foundations to come up with a better alternative.6

Recommended Questions at Hearing 

Given the half trillion dollars sitting in the endowments of 80,000 grantmaking 

institutions, we hope you will ask questions to see how that money is reaching the 

constituencies you represent.Specifically, we recommend the following questions: 

1. What is the Council of Foundations doing to ensure that minority communities 

are receiving their fair share of philanthropic dollars?More importantly, how will 

Congress know that these efforts are leading to tangible success? 

2. In exchange for their tax exemption, what diversity data should Congress require from large foundations? 

3. What regulations or legislation is necessary to ensure that all communities are 

appropriately served by philanthropy? 

4. What incentives can we give foundations to ensure that they are more responsive to community concerns? 

5. What are the key indicators to measure diversity in philanthropy and how can 

we use these indicators to hold foundations more accountable to all communities. 

Other Pertinent Issues to Explore 

Two issues that have not yet been explored but are being raised informally and 

often quietly to avoid potential foundation retaliation are: 

1. Whether foundations should count their administrative expenses as part of 

their grants when these expenses often equal 20 percent of grant dollars particularly when foundation staff and boards are not sufficiently diverse; and 

2. Whether foundations are informally conspiring to restrict their grant giving to 

5 percent of assets when their annual returns are generally in double digits.A 2- 

percent increase in grant giving from 5 to 7 percent of assets would increase foundation giving by approximately 15 billion a year, a sum greater than the total cash 

philanthropy of all corporations in America.7

We hope you will consider our viewpoints that are shared by hundreds of minority 

community leaders throughout the country.Please consider us as a resource on this 

topic as it moves forward.Thank you once again for your leadership and commitment to justice, equality, and civil rights on behalf of the country’s 110 million minorities. 

f 

174 

Statement of High Museum of Art 

Thank you for the opportunity to comment on the effect of the charitable provisions in the Pension Protection Act of 2006 (‘‘PPA’’). My observations pertain to the 

new restrictions imposed on fractional gifts of works of art to museums. Since the 

passage of the PPA, no fractional gifts have been donated to the High Museum of 

Art. Based on informal discussions with colleagues in art museums across the country, this situation is now commonplace. Donations of fractional gifts to museums 

have all but disappeared. 

Museums have felt the loss of fractional gifts even more keenly because many of 

these potential gifts are the most highly prized works in private collections and are 

works that museums generally cannot afford to purchase themselves. The impact of 

this loss is significant for museums since the American public may never have the 

pleasure of seeing these works.zzzzzzzzzz 

Prior to the enactment of the Pension Protection Act, the High Museum of Art 

has been the recipient of over $1 million partial ownership interest in 37 works of 

art valued at over $2.2 million. Some of the gifts are entire collections, for example 

we have received a photography collection made up of 15 works and a ceramics collection made up of 18 pieces. One of our most beloved works, a painting by the wellknown American Impressionist painter Mary Cassatt, came to the museum as a 

fractional gift. On the other hand, two collectors who have been contemplating the 

donation of entire collections—one a significant 19th and 20th century American 

paintings and sculpture and the other a collection of posters and prints by ToulouseLautrec—have declined to give as a result of the changes to the law. 

The inability to take the current fair-market value deduction for each fraction 

given has made the donation of artworks that will appreciate in value financially 

imprudent. Add to that the significant negative impact on existing contracts for fractional gifts and you begin to see the devastating affect the new law has had on the 

ability to continue to grow museum collections. 

Finally, the provision in the new law which requires donors to complete their gift 

within 10 years is a serious impediment to future gifts. Donors of valuable works 

of art may need more than 10 years to take full advantage of the tax deduction and 

may also wish to enjoy their art in their own homes for a longer period of time. This 

is particularly true of older donors who have owned works for years and for whom 

the works are an important part of their home, their identity and their environment. This change in the law means that people will not donate fractional gifts until 

much later in their life. In the museum community we have a saying: ‘‘a gift delayed 

is often a gift denied.’’ Anything can happen to the work while the donor waits for 

the appropriate time to make the first fractional donation. We have seen this all 

too often. 

It is also important to remember, that once a donor gives the first fraction of a 

work, the museum will eventually own the work and it will be available to the public; should that take an additional decade or two before a highly valuable work 

comes forever into the public domain does not seem to be unreasonable from a public policy standpoint, given what the American public will ultimately gain from the 

gift. 

Thank your for your interest in this matter, and please do not hesitate to contact 

if you have questions. 

f 

Statement of Independent Sector 

These comments are submitted by Independent Sector in response to the Oversight Subcommittee’s Advisory OV–4, requesting written comments on provisions relating to tax-exempt organizations in the Pension Protection Act of 2006 (P.L. 109– 

280). 

Independent Sector is a nonpartisan membership organization, organized as a 

501(c)(3) public charity, that brings the nonprofit community together to make a 

greater difference in improving people’s lives. Our coalition of approximately 600 

charities, foundations, and corporate philanthropy programs advocates for public 

policies that advance the common good; strengthens the effectiveness of organizations; and connects nonprofit leaders so they can develop ideas and take action. 

As you know, Diana Aviv, President and chief executive officer of Independent 

Sector, testified before your Oversight Subcommittee hearing on Tuesday, July 24, 

2007, on tax-exempt charitable organizations. In addition to providing the Subcommittee with an overview of our Nation’s charitable community, she discussed the 

events leading up to passage of the charitable provisions in the Pension Protection 

175 

Act of 2006 (PPA). Rather than repeating those comments here, I refer you to that 

testimony. 

Enacted in August 2006, the Pension Protection Act contains an important package of reforms intended to strengthen the work of the charitable sector by deterring 

potential abuse of tax-exempt organizations and creating additional safeguards to 

ensure that donated funds are used for charitable purposes. The law also includes 

critical charitable tax giving incentives to help generate needed new resources for 

the sector. With the recommendations of the Panel on the Nonprofit Sector in hand, 

Independent Sector and many other charitable organizations worked extensively 

with Congress in drafting this package of charitable reforms and incentives. Accordingly, we strongly support the charitable incentives and many of those reforms. 

However, Independent Sector also believes that some changes are needed to a few 

of the reforms in the Pension Protection Act. Our comments in this submission will 

focus on the charitable giving incentives and the limited areas where we believe the 

reforms have presented problems and can be refined. 

Charitable Giving Incentives 

The Pension Protection Act included several important charitable giving incentives, including an enhanced tax deduction for gifts of property for conservation purposes, an enhanced deduction to corporations for contributions of food and book inventory, and a giving incentive commonly known as the IRA Charitable Rollover. 

All of these provisions are scheduled to expire at the end of 2007. We urge the Committee to include them in any tax packages being considered. 

One of these incentives, we feel, should also be enhanced. Independent Sector has 

long supported the IRA Charitable Rollover incentive because we believe that it generates significant, new and badly needed resources to support the work of charities 

across the sector. An important first step, the limited version of the IRA Charitable 

Rollover included in the Pension Protection Act, permits Individual Retirement Account owners starting at age 701⁄2 to make tax-free charitable gifts totaling up to 

$100,000 per year from their IRAs directly to charities (except private foundations, 

donor advised funds, and supporting organizations). 

Even the limited version of the IRA Charitable Rollover has enabled Americans 

to make millions of dollars of new or increased contributions to the nonprofits—including hospitals, museums, educational institutions, and religious organizations— 

that benefit people every day. Thousands of older Americans have accumulated adequate funds in their IRAs to meet their retirement needs, and they are using this 

incentive to give something back to their communities. The incentive is particularly 

helpful for older Americans who do not itemize their tax deductions and would not 

otherwise receive any tax benefit for their charitable contributions. In addition, the 

pattern of giving has demonstrated that the incentive has very wide appeal. According to voluntary surveys conducted by the National Committee on Planned Giving 

and the higher education community, the most common IRA Rollover gift has been 

$5,000, with the majority of gifts between $1,000 and $10,000. 

We strongly support efforts to extend and expand this valuable charitable giving 

incentive before it expires at the end of 2007. In the House, the ‘‘Public Good IRA 

Rollover Act of 2007’’ was introduced earlier this year on a bipartisan basis by Representatives Earl Pomeroy (D–ND) and Wally Herger (R–CA). This legislation will 

extend the current IRA Charitable Rollover by making it permanent and expand its 

reach by making all charities eligible to receive IRA Rollover donations. The measure also provides IRA owners with the opportunity, starting at age 591⁄2, to use several planned giving annuity options currently in the Internal Revenue Code, and removes the present $100,000 limit on donations per year. This legislation has been 

endorsed by nearly 900 nonprofits from every state in the country. 

Charitable Reforms 

As discussed in Diana Aviv’s testimony before the Subcommittee on July 24, Independent Sector continues to support the vast majority of reforms enacted in the Pension Protection Act. The issues we raise here for your consideration relate primarily 

to clarifications of the legislative language. 

A. The definition of donor advised fund should be clarified to exclude 

funds created by a public charity or governmental entity. 

Independent Sector strongly supported the inclusion of a definition of donor advised funds in the Pension Protection Act. Indeed, the Panel on the Nonprofit Sector 

specifically recommended that the term ‘‘donor advised fund’’ be statutorily defined 

in Federal law. The goal of this definition is to address potential abuses of these 

funds, now widely employed as philanthropic vehicles by a broad range of donors, 

176 

without discouraging the use of such funds. The definition of ‘‘donor advised fund’’ 

incorporated in the Pension Protection Act has included a few ambiguities that have 

created confusion about whether certain types of funds established within public 

charities are subject to the new rules. 

The Act’s definition specifically excludes a charitable fund or account that makes 

distributions only to a single identified organization or governmental entity (Section 

4966(d)(2)(B)(i)). However, this definition does not explicitly exempt a fund established by a public charity or governmental entity that may make distributions to 

other organizations. Here are two examples of how such a fund could work. A public 

charity establishes a disaster relief fund at a community foundation to raise and 

grant funds for disaster relief. All of the advisors for the fund are appointed by the 

public charity. The advisory Committee for the fund recommends grants to several 

local disaster relief organizations. In another, a state governmental entity may establish a fund at a community foundation to raise and grant funds for economic revitalization projects for economically depressed neighborhoods in the area. All of the 

advisors for the fund are appointed by the governmental entity. The advisory Committee for the fund recommends grants to several local organizations. The current 

definition of a donor advised fund could impede these kinds of efforts. Accordingly, 

we propose that the Act’s definition of donor advised fund be clarified to exempt 

funds established by public charities or governmental entities to make distributions 

to other organizations where the public charity or governmental entity appoints all 

of the advisors. 

B. Clarifying that sponsoring organizations of donor advised funds 

should be able to purchase, at or below market value, goods and services necessary to fulfill their charitable purposes with advised fund 

assets. 

The Pension Protection Act creates penalties for sponsoring organizations and 

managers of donor advised funds if a sponsoring organization makes a ‘‘distribution’’ 

from fund assets to individuals and to certain organizations for a non-charitable 

purpose. However, the legislation does not define the term ‘‘distribution,’’ and two 

questions arise. There is uncertainty about whether a donor advised fund is permitted to make payments for the purchase of goods or services, at or below fair market value, for legitimate charitable activity. Likewise, it is unclear whether the prohibition of distributions to individuals applies to otherwise legitimate purchases 

from individuals or businesses that operate as sole proprietorships. We propose that 

the statute be modified to address both of these questions by clarifying that sponsoring organizations and/or managers of donor advised funds are permitted to make 

such payments from fund assets to business entities and to individuals for goods or 

services from a business organized as a sole proprietorship. 

C. Clarifying that a donor in creating a scholarship fund can designate 

public officials and/or leaders of the public charity where the scholarship will be used as members of the scholarship selection Committee. 

As noted above, the Pension Protection Act prohibits grants to individuals, including scholarships, from donor advised funds. The Act provides an exception for grants 

to individuals for travel, study or other similar purposes, provided that (1) the donor’s or donor advisor’s advisory privileges are performed exclusively in such person’s capacity as a member of a committee appointed by the sponsoring organization, (2) no combination of a donor or donor advisor or persons related to such persons control such committee, and (3) all grants from such fund are awarded on an 

objective and nondiscriminatory basis pursuant to a procedure designed in advance 

and approved by the sponsoring organization’s board. 

Unfortunately, the statutory definition and scholarship exception are proving 

problematic for donor created scholarship funds where the donor designates that the 

scholarship selection Committee include certain public officials and/or leaders of the 

public charity where the scholarships are to be used. Under section 4966 of the Pension Protection Act, such scholarship funds could fall within the definition of ‘‘donor 

advised fund’’ but would not qualify for the statutory exception permitting scholarship grants to individuals due to the donor’s role in designating members of the 

scholarship selection Committee. Accordingly, we ask Congress to clarify the scholarship exception to section 4966 to permit a donor, in creating a scholarship fund, 

to designate that the members of the selection Committee include the holders of 

identified public offices and/or leaders of the public charity where the scholarships 

are to be used. 

177 

D. Providing for abatement of first-tier taxes for the new penalty provisions of the Pension Protection Act on the same basis as for existing 

penalty taxes. 

The Act established excise taxes on taxable distributions with respect to donor advised funds but failed to extend the abatement provisions of section 4962. That section gives the Secretary authority to refrain from assessing excise taxes if it is established that a taxable event was due to reasonable cause and not willful neglect 

and the event was corrected within a specified period. The types of events to which 

this abatement provision applies include failure to distribute income of a private 

foundation, the making of political expenditures, and certain excess benefit transactions. 

Independent Sector views the offenses prohibited in the Pension Protection Act as 

equivalent to those that are subject to abatement under section 4962, and recommends that the statute be amended to provide that relief. Indeed, the goal of the 

prohibitions is to correct behavior in this highly technical area of the law. Since the 

excess benefit transactions provisions in the Act, in particular, are essentially strict 

liability penalties, there is the likelihood that inadvertent behavior or actions could 

run afoul of the new, higher standards. The abatement language in section 4962 

was intended to provide relief for these types of cases where inappropriate action 

can be corrected. We therefore recommend that the Code be amended to extend the 

abatement provisions of section 4962 to the new penalties enacted with the Pension 

Protection Act. 

E. Temporarily suspending the penalties for making grants to certain 

supporting organizations until the Internal Revenue Service can reliably identify those organizations. 

The Pension Protection Act requires private non-operating foundations and sponsoring organizations of donor advised funds to exercise expenditure responsibility 

with respect to grants to Type III supporting organizations that are not ‘‘functionally integrated’’ with their supported organizations. Unfortunately, there is currently no way for funders to know with certainty whether many proposed grantees 

are Type III supporting organizations, much less whether they are ‘‘functionally integrated.’’ There is still serious doubt that the IRS EO Master File can be relied 

upon to provide accurate information about the status of a supporting organization. 

The predictable effect is that funders affected by these rules are delaying or suspending grants. Moreover, the Internal Revenue Service is only now developing regulations to provide guidance to determine whether a supporting organization is 

‘‘functionally integrated.’’ We ask Congress to modify the effective date for these provisions so that they take effect upon the issuance of IRS regulations on the definition of ‘‘functionally integrated’’ and to clarify what documentation will be required 

from a supporting organization to satisfy this classification. 

Treasury Department Study on Donor Advised Funds 

A final matter related to the Pension Protection Act on which we would like to 

comment is the study on donor advised funds by the Department of the Treasury 

that is due to be released in August. Section 1226 of that Act requires the Secretary 

to report on a series of questions related to charitable deductions, the advisability 

of requiring such funds to make distributions, and the retention of donor rights and 

privileges. Independent Sector is very interested in working with Congress to interpret the forthcoming study and to address concerns and proposals that the Secretary 

may raise. We therefore urge the Committee to treat the Treasury study as a continuation of the dialog on further reforms to donor advised funds and similar entities, and to convene all interested parties for a full hearing of the issues presented. 

We would be pleased to discuss any of the above or related issues with the staff 

of the Committee at any time. Thank you for your consideration of these important 

matters. 

f 

Statement of Karen D. Krei, Piedmont Community Foundation, Middleburg, 

Virginia 

Dear Committee Members, 

PPA Act of 2006 has impacted the small community foundation world. The questions and comments listed below refer mostly to the IMPACT on Donor Advised 

Funds (DAF) and the importance of donor advised funds to the community foundaVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00181 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
178 

tion. The questions were posed by the IRS when gathering input for Congressional 

study. 

Respectfully, 

Karen Krei 

Executive Directo 

1. What are the effects or the expected effects of the PPA provisions (including 

the § 4958 excess benefit transaction tax amendments applicable to donor advised 

funds and supporting organizations) on the practices and behavior of donors, donor 

advised funds, sponsoring organizations, supporting organizations and supported organizations? 

Many donors provide fundraising events to benefit their funds to support community causes in which they have particular interest. This gives a broad segment of 

society with modest means a method to make a significant charitable impact. Prior 

to PPA related fundraising expenses could be made from those funds; following PPA 

they cannot. This is an area that should be amended to allow related fundraising 

expenses, with oversight on self-dealing, from a DAF. PPA is causing hardship for 

the small donor. The current law has the chilling effect of discouraging fundraising 

using a DAF and will drive more donors to form their own 501(c)(3)’s. Would you 

rather have one responsible community foundation with a community board of directors with oversight, paid staff, and one 990 filed that encompasses many accounts; 

or flooded with new mini—nonprofits to oversee at the Federal and state level To 

what purpose is the real question! 

Example: One donor lost a wife to breast cancer. He had a DAF rather than a 

501(c)(3) because he doesn’t want to run a board of directors or the administration 

of the fund, he simply wants to raise funds to prevent breast cancer using his own 

identifiable name on the fund. He wants to create a legacy. He is a good ‘‘salesman’’; 

he connects to others in the community; he brings in donations for the cause. He 

has modest means yet now pays for all expenses out of his pocket because we cannot 

reimburse him or pay the legitimate costs. He does this because he believes in his 

cause, but how long he can do this without reimbursement is questionable. Why is 

the current situation OK? It is not OK. PPA should be amended so his money spent 

is reimbursable. He gives his time and talent. Why is his treasure not treasured 

as a legitimate expense? 

2. What are the advantages and disadvantages of donor advised funds and supporting organizations to the charitable sector, donors, sponsoring organizations, and 

supported organizations, compared to private foundations and other charitable giving arrangements? 

For donors: Donor advised funds (DAF) provide an invaluable conduit for the 

‘‘everyday donor’’ to create a charitable fund, either pass through or permanent endowment legacy, without needing the vast sums of money necessary to create a private foundation., or the expense, expertise and work to create and maintain their 

own 501(c)(3). Because of the lower threshold to participate (as low as $5,000) the 

DAF is unique in the ability to rally philanthropic capital as no other tool can do. 

People crave the ability to have a fund ‘‘with an advisory voice’’ that stands in memory or honor of a loved one or their family name. It is a comfort, it gives back to 

the community and it encourages future family members to value participating as 

a steward of their community. This powerful tool lets everybody have a seat at the 

table of philanthropy. No other charitable tool duplicates these benefits. 

For community: The DAF is the lifeblood of local level philanthropy, and therefore 

the community foundation. At the local level donors with a DAF have access to local 

knowledge of charitable need, and local collaborations can be built with other likeminded donors. Endowed DAF’s provide an ongoing local funding source; always in 

high demand in communities across America. Charities depend on grants from these 

funds and as the DAF’s grow so do the distributions to accomplish more charitable 

work in the community. Compared to a private foundation a DAF can attract likeminded donors to that fund which is not the case for a private foundation which 

usually works as a solitary donor. One could argue that while private foundations 

may have more assets on a 1 to 1 fund basis, it is the local community foundation 

DAF that can ignite broad support for giving back to the community in a variety 

of interest areas. many donors provide special community events to fund their DAF. 

In this respect the commercial DAF is also at a disadvantage to a local community 

foundation. Without the DAF at the local level, community philanthropy would be 

severely curtailed and many community foundations may be in jeopardy of existence. This would not serve the community. 

179 

For charitable sector: Beyond having the funding source mentioned above, the 

DAF’s require due diligence on each nonprofit grantee. The charitable sector is well 

served by due diligence which vets recipients as viable tax exempt organizations 

with bona-fide missions, board governance and effectiveness. Due diligence is good 

for holding and encouraging high standards in the charitable sector. Without local 

DAF’s at community foundations, face to face diligence would not be available to the 

‘‘everyday donor’’ and the charitable sector standards would be viewed from afar 

which is heralded to lead to fraud and distrust of the sector. We do not see fraud 

and distrust at the community foundation. The DAF also serves the sector by suppressing the creation of more small 501(c)(3) organizations that in turn need oversight, community boards, operation incomes, and so forth. Without the DAF available the charitable sector would find more nonprofits out competing for less dollars. 

Not a good outcome. 

3. How should the amount and availability of a charitable contribution deduction 

for a transfer of assets to a donor advised fund or a supporting organization, and 

the tax-exempt status or foundation classification of the donee, be determined if: 

a. the transferred assets are paid to, or used for the benefit of, the donor or persons related to the donor (including, for example, salaries and other compensation 

arrangements, loans, or any other personal benefits or rights)? 

No donors are allowed to personally benefit from their gift. These are the rules 

and we would not accept any gifts to the contrary. Not sure why you are asking 

this question. 

b. the donor has investment control over the transferred assets? 

Not sure why you are asking this question either. The value of the gift is the 

value of the gift at the time of ownership transfer regardless of how it came to be 

an asset of the Foundation. The FMV at the time of the ownership transfer is the 

tax deductible amount. The key words are ownership transfer. The third party investment management retained at the time of transfer has nothing to do with ownership, distribution or investment control. There is no donor investment control. 

That investment house the donor’s gift is now our client and must meet our benchmarks, and so forth. If they do not meet our investment policy guidelines they will 

be fired. We own, manage and invest our assets, period. 

c. there is an expectation that the donor’s ‘‘advice’’ will be followed, or will be the 

sole or primary consideration, in determining distributions from, or investment of 

the assets in, the supporting organization or the donor advised fund? 

This question seems to indicate that DAF ‘‘expectation’’ is a bad thing or somehow 

relates to a following action. These semantics seem to blur clear intention. I would 

say both the Foundation and the DAF should have expectation to operate as the 

rules apply, not via advise. Each DAF must follow the rules of the signed funding 

agreement which assures each party how the rules and legal control apply. Our distributions are made following the funding agreements which clearly state the Foundation has sole control of distributions. We do not ‘‘blindly’’ follow advice. When receiving advised requests from a DAF we do the due diligence on the potential donee, 

confirm that the grant falls within our foundation published funding priority guidelines and confirm it does not benefit the donor or donor-related people. If it meets 

our standards there is no surface reason not to fund the advised grant even though 

the directors are free to refuse on any grounds. Practically, why would you refuse 

to fund something that meets the priority funding areas for your Foundation? 

Again, this is the benefit of a community foundation DAF which has priority funding areas for the community; something a commercial DAF does not have. 

d. the donor or the donee has option rights (e.g., puts, calls, or rights of first refusal) with respect to the transferred assets? 

We hold no assets with option rights nor would we. 

e. the transferred assets are appreciated real, personal, or intangible property 

that is not readily convertible to cash?. 

It is always our action to convert transferred assets to cash as quickly as possible 

so that a charitable distribution will be available. Our gift policy allows us to refuse 

gifts that have liquidity or legal issues. If an appreciated stock takes a tumble or 

rises before we sell it in the 24 hour window after receipt, this is the result of our 

action, not the donors, and the donor is given the FMV at the time of transfer as 

their gift value. We take the loss/gain on our capital gains/loss statement. Our investment actions remain accountable to the public as results are published. 

4. What would be appropriate payout requirements, and why, for: donor advised 

funds? 

Why are required payouts needed for a community foundation? Our goal is to get 

as much money as possible to the community, not incubate it while waiting for a 

cause. The community expects, and should receive, maximum annual distributions 

that leave growth of corpus intact for endowed funds. Our distribution policy lists 

180 

5% at the discretion of the directors in order to maintain endowment commitments 

and distribute as much a possible to the community annually. We generally give at 

least 5% of assets annually, last year was 11%, and much more if looking at the 

impact of annual pass through funds (sometimes 100% of those funds). If a DAF 

does not make advised grants regularly they are in jeopardy of being absorbed into 

the annual unrestricted community grant making program. If they had a restriction 

or area of interest, then they may be restricted as a community grant. I see no benefit to add restriction on distribution amounts for individual or collective DAF’s in 

a community foundation as they must already meet the distribution guides of the 

foundation which, in our case, would never fall below 5%. More regulation is not 

needed and would be another cost of administration if imposed to ‘‘prove’’ the singled out DAF class meets some kind of arbitrary payout. 

• funds that are excepted from donor advised fund treatment by statute or by the 

authority of the Secretary, but for which the donor retains meaningful rights 

with respect to the investment or use of the transferred amounts? 

Do not know about any such funds. 

• supporting organizations? • any other types of charities? 

5. What are the advantages and disadvantages of perpetual existence of donor advised funds or supporting organizations? 

DAF’s at a community foundation assist in providing a reliable funding base to 

meet emerging need in the community. The DAF is a substantial strand in the 3 

objectives of a community foundation: 

• growth of an unrestricted permanent endowment as the most effective means 

to meet the needs of the community now and in the future • administering a strategic grant-making program to maximize impact and effectiveness in achieving positive long-term changes in our community • leadership of charitable activities; identify and address the important issues of 

the local charitable sector and harness collaborative resources to improve the 

quality of life in the community 

Many community foundations are made up of over 90% DAF’s! The community 

is well served by their existence and donor passion to perpetuate charitable support. 

There are not perpetual DAF’s at our community foundation, but the fund itself 

can become perpetual. There is a two generation cap on family advising. If the account is at least $25,000 in assets we maintain it as a separate fund name and 

grant source. If it had restricted area of interest we maintain that restriction. It becomes part of our competitive grant cycle for community grant-making program. 

Money will always be available and money will always be distributed to meet 

emerging need. Again, flexibility to serve without preset restrictions allows for effective local distribution of funds. 

A word on supporting organizations: I can see no reason why there should be a 

problem with their perpetual existence as long as they meet the needs, rules and 

requirements. Many supporting organizations are integral to community foundations as they should be. They serve a defined charitable purpose that complements 

the supported organization. The community benefits from consolidated effort that 

meets the high standards of the organization. It is an efficient and effective relationship. 

f 

Statement of Kenneth H. Ryesky 

I. INTRODUCTION 

Per Hearing Advisory OV–4 (12 June 2007), and OV–5 (9 July 2007), House Ways 

and Means Oversight Subcommittee Chairman John Lewis solicited written on the 

provisions relating to tax-exempt organizations contained in the Pension Protection 

Act of 2006 (P.L. 109–280) (‘‘PPA’’). This Commentary is accordingly submitted. 

II. COMMENTATOR’S BACKGROUND & CONTACT INFORMATION 

Background: The Commentator, Kenneth H. Ryesky, Esq., is a member of the 

Bars of New York, New Jersey and Pennsylvania, and is an Adjunct Assistant Professor, Department of Accounting and Information Systems, Queens College of the 

City University of New York. He has also taught courses in Business Law, and in 

Taxation, at Sy Syms School of Business, Yeshiva University. Prior to entering into 

the private practice of law, Mr. Ryesky served as an Attorney with the Internal Revenue Service (‘‘IRS’’), Manhattan District. In addition to his law degree, Mr. Ryesky 

181 

holds BBA and MBA degrees in Management. He has authored several scholarly articles on taxation. 

Contact information: Kenneth H. Ryesky, Esq., Department of Accounting & Information Systems, 215 Powdermaker Hall, Queens College CUNY, 65–30 Kissena 

Boulevard, Flushing, NY 11367. Telephone 718/997–5070 (vox), 718/997–5079 (fax). 

E-mail: khresq@sprintmail.com. 

Disclaimer: This Commentary reflects the Commentator’s personal views, is not 

written or submitted on behalf of any other person or entity, and does not necessarily represent the official position of any person, entity, organization or institution with which the Commentator is or has been associated, employed or retained. 

III. COMMENTARY ON THE ISSUES 

A. Scope of Commentary 

Title XII of the PPA consists of several provisions relating to tax-exempt organizations (and having little, if any, direct connection with pensions). Confident that others who have more direct and comprehensive insight and experience with other provisions of Title XII will apprise the Subcommittee of their views on such other provisions (as indeed, has already occurred at the 24 July 2007 Subcommittee Hearing), 

this Commentator will limit the instant Commentary to PPA § 1217, the enhanced 

documentation requirements for charitable deductions, codified at I.R.C. § 170(f)(17). 

This PPA provision, though not the most significant in dollars, does affect every individual taxpayer who itemizes deductions. 

For the sake of clarity and brevity, unless specifically distinguished otherwise, the 

terms ‘‘charitable’’ and ‘‘tax exempt’’ will be used interchangeably in the current discussion, and the fine legal distinctions between charitable, religious, educational 

and governmental purposes, as reflected in the verbose provisions of I.R.C. § 501, 

will be largely ignored. 

B. Historical Overview 

It has long been the policy of the state and Federal governments to foster and 

encourage eleemosynary organizations, see, e.g. Matter of Kimberly, 27 A.D. 470, 473 

(N.Y. App.Div., 4th Dept. 1898). As Chief Justice Horace Stern of the Pennsylvania 

Supreme Court remarked, ‘‘there is no class of institutions more favored and encouraged by our people as a whole than those devoted to religious or charitable causes,’’ 

Bond v. Pittsburgh, 368 Pa. 404, 408, 84 A.2d 328, 330 (Pa. 1951). Indeed, those 

disinclined to contribute funds for charitable, religious or similar purposes were 

often suspected of impropriety. See, e.g. United States v. Pape, 253 F. 270 (S.D. Ill. 

1918). 

Consistent with the law’s favored view of charitable and religious causes, policy 

dictates that tax deductions for such purposes be facilitated and encouraged, see, e.g. 

Gardiner v. Hassett, 63 F. Supp. 853, 856 (D. Mass. 1945); 11 U.S.C. § 548(a)(2). 

Abuses of the tax-exempt status of charitable organizations were, for a long time, 

largely tolerated and condoned by the authorities and the public, given the overall 

benefits to society provided by the tax exempts. More recently, however, as abuses 

of the system have garnered public notoriety, the regulations affecting charitable organizations have multiplied. Over the years, the laws have responded to various 

public concerns ranging from unfair competition with legitimate taxpaying businesses, H. Rep. No. 2319, 81st Cong., 2d Sess. (1950), at 36–37, reprinted at 1950– 

2 C.B. 380, 409; S. Rep. No. 2375, 81st Cong., 2d Sess. (1950), reprinted at 1950 

U.S.C.C.A.N. 3053, 3081, 1950–2 C.B. 483, 504–05; C.F. Mueller Co. v. Commissioner, 190 F.2d 120 (3d Cir. 1951), aff’g 14 T.C. 922 (1950), to the use of tax-exempt 

organizations to support subversive political activity, see, e.g., A New Red Inquiry 

Approved by House: Will Study if Tax-Free Groups Use Their Wealth to Promote 

Subversion, N.Y.Times, April 5, 1952, p. 5. The use of tax-exempt organizations in 

insurance and Medicaid fraud schemes has been a problem, see, e.g. United States 

v. Hendricks, 2003 U.S. App. LEXIS 12938 (4th Cir. 2003); Easton v. Public Citizens, Inc., 1991 U.S. Dist. LEXIS 18690 (E.D.N.Y. 1991); Congregation B’nai Jonah 

v. Kuriansky, 172 A.D.2d 35, 576 N.Y.S.2d 934 (3d Dept. 1991), app. dismissed 79 

N.Y.2d 895, 590 N.E.2d 244, 581 N.Y.S.2d 659 (1992); Matter of Fuhrer, 100 Misc. 

2d 315, 419 N.Y.S.2d 426 (Sup. Ct. Richmond Co. 1979), enforced, 72 A.D.2d 813, 

421 N.Y.S.2d 906 (2d Dept. 1979); St. Francis Home, Inc., v. Ohio Dept. of Job and 

Family Services, 2006 Ohio 6147 (Ohio App. 2006), appeal denied 864 N.E.2d 653 

(Ohio 2007). The poster child for personal salary and perquisite abuse of charitable 

organizations was William Aramony, the CEO of the United Way of America, see 

United States v. Aramony, 88 F.3d 1369, cert. denied 520 U.S. 1239 (1997); see also 

Vacco v. Aramony, N.Y.L.J., 7 August 1998, p. 21 (Sup. Ct. N.Y. Co. 1998). 

Suspicion of complicity by tax-exempt organizations and their principals and employees in the inflation of charitable donation dollar values is not unknown, see, e.g. 

182 

St. German of Alaska Eastern Orthodox Catholic Church v. United States, 840 F.2d 

1087 (2d Cir. 1988). Taxpayers’ abuses involving unreported quid pro quo goods or 

services in return for charitable contributions led to the requirement of a written 

receipt from the charity for contributions of $250 or more, and not just a canceled 

check, Omnibus Budget Reconciliation Act 1993, P.L. 103–66, § 13172(a), 107 Stat. 

312, 455–456, codified at I.R.C. § 170(f)(8). 

And so, while encouraging and facilitating charitable works, the law must strike 

a balance so that abuses of and by charitable organizations can be deterred, detected and punished. 

C. The Requirements of PPA § 1217 

Prior to PPA, the taxpayer could substantiate cash donations amounting to less 

than $250 with ‘‘reliable written records showing the name of the donee, the date 

of the contribution, and the amount of the contribution.’’ Treas. Reg. § 1.170A– 

13(a)(1)(iii) (2006). The standard for the reliability of the written record was casespecific, Treas. Reg. § 1.170A–13(a)(2)(i) (2006). The Treasury had dispensed with 

some or all of the substantiation requirements by exempting the writing requirement in the case of a small cash contribution evidenced by ‘‘an emblem, button, or 

other token traditionally associated with a charitable organization and regularly 

given by the organization to persons making cash donations.’’ Treas. Reg. § 1.170A– 

13(a)(2)(i)(C) (2006). Under the ambiguous and subjective standard, the taxpayer’s 

bare unsubstantiated word, when credible, was accepted by the taxation authorities 

and the courts. Cf., e.g. Bagby v. Commissioner, 102 T.C. 596, 611 (1994); Robinette 

v. Commissioner, T.C. Summary Op. 2006–69; Fontanilla v. Commissioner, T.C. 

Memo 1999–156; Jackson v. Commissioner, T.C. Memo 1999–203; Matter of Eble, 

N.Y.S. Div. of Tax Appeals, Determination DTA No. 817710 (13 June 2002); Matter 

of Martucci, N.Y.S. Div. of Tax Appeals, Determination DTA No. 817748 (27 December 2001) (allowing unsubstantiated claims of cash donations to collections at houses 

of worship where taxpayer’s word was found to be credible), with Anthony Muhammad v. Commissioner, T.C. Summary Op. 2006–144; Curtis Muhammad v. Commissioner, T.C. Summary Op. 2006–174; Matter of Mott, N.Y.S. Div. of Tax Appeals, Determination DTA No. 818315 (January 24, 2002) (disallowing unsubstantiated 

claims of cash donations to collections at houses of worship, where taxpayer had 

credibility issues). 

Indeed, internal IRS directives permitted allowance of modest amounts credibly 

claimed by the taxpayer to have been given as undocumented contributions, see, e.g. 

Calderazzo v. Commissioner, T.C. Memo 1967–25, n. 3 and accompanying text. 

PPA § 1217 mandates that beginning with tax year 2007, all cash donations must 

be substantiated with either a written acknowledgment or a bank record showing 

the name of donee, date and amount of contribution. Documents that are bogus, altered or otherwise of questionable provenance will presumably continue to be rejected as fulfillment of the substantiation requirement, see, e.g. Curtis Muhammad 

v. Commissioner, T.C. Summary Op. 2006–174, n. 5; Prowse v. Commissioner, T.C. 

Memo. 2007–31; Matter of Paul Tam, N.Y.S. Div. of Tax Appeals, Determination 

DTA Nos. 819366 & 819367 (27 May 2004), as will bank records such as canceled 

checks which do not clearly indicate the required particulars of the charitable donation. See, e.g. Murray v. Commissioner of Revenue, 1989 Minn. Tax LEXIS 72 at 

*28–*29 (Minn. Tax Ct. 1972). 

D. The Specific Problems and Complications of PPA § 1217 

(1) Less money placed in the donation receptacles 

While it is too early to really do a comprehensive study, the anecdotal evidence 

to date, consistent with the Commentator’s limited personal observations, seems to 

indicate that less cash is being placed in public donation receptacles. Certain charitable organizations, including but not limited to the Salvation Army and the Jewish 

National Fund, have, over the years, developed public repute and recognition 

through their public donation receptacles. Through calendar year 2006, those who 

regularly or spontaneously used donation receptacles to effect small contributions to 

various charitable organizations could claim the tax deduction based upon a reasonable and good faith estimate. The congregant who, at the local synagogue’s morning 

minyan, regularly places a dollar bill in the pushke, can do the arithmetic to reach 

a fairly accurate estimate of his donations for the year. Starting in calendar year 

2007, such estimates have not been a valid basis for a charitable deduction. Accordingly, for those taxpayers who itemize their deductions, it now makes little fiscal 

sense to make undocumented contributions as previously described. 

183 

(2) Reduction in spontaneous donations 

A charitable deduction requires that the donor have charitable intent at the time 

of the donation, United States v. American Bar Endowment, 477 U.S. 105 (1986); 

Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). For reasons previously described, small spontaneous charitable donations via public collection receptacles 

make no fiscal sense for those who itemize their deductions. Charitable contributions must now be planned, or at least deliberated, so that the donor can write a 

check and/or find a donee who is postured to give a receipt for cash, or find a donee 

who is prepared to accept donations via credit card. Therefore, on account of PPA 

§ 1217, the spontaneous inspiration of the moment, which is inherent in scenarios 

such as the passing of a collection plate at religious services, or depositing a coin 

in a donation receptacle at the gravesite of a revered decedent, may well be overridden by the donor’s sense of fiscal responsibility and the imperative to optimize 

one’s financial position at tax time. 

Moreover, PPA § 1217 has also enhanced the very real possibility of pressure by 

the donor upon the donee to tender a noncontemporaneous receipt based upon the 

donor’s word instead of the donee’s records or recollections. Such actions obviously 

have a corrupting effect upon the integrity of the taxation system. 

(3) End of anonymous donations 

It may be appropriate or desirable to tender an anonymous charitable contribution. Such a situation may arise where, for example, the donor wishes to make a 

small one-time donation to an organization for a particular purpose (e.g., a fundraiser dinner journal ad where the guest of honor is a friend, relative or business 

associate of the donor), but has no intention of making subsequent donations, and 

does not wish to place undue burdens on the organization. If the donor’s identity 

is known, the organization may well spend more in the ensuing years on mailings 

and postage, for further solicitations, than the donor contributes on this one occasion. PPA § 1217 has severely limited the tax incentive for such a would-be anonymous donor. 

(4) Obsolete and invalid Treasury Regulation 

Prior to PPA § 1217, contributions of ‘‘a small amount’’ could be substantiated by 

‘‘an emblem, button, or other token traditionally associated with a charitable organization and regularly given by the organization to persons making cash donations.’’ 

Treas. Reg. § 1.170A–13(a)(2)(i)(C) (2007). Thus, tokens such as the red poppy from 

the American Legion, the daisy from Childrens Hospital of Philadelphia, or the 

wrapper of a candy bar from the Lions Club’s ‘‘Candy Day’’ fundraiser event were 

acceptable by the IRS as supporting evidence of small contributions to those charities. One gets the sense that the taxpayer in Jennings v. Commissioner, T.C. Memo 

2000–366, aff’d 19 Fed. Appx. 351, 2001 U.S. App. LEXIS 20731, 2001–2 U.S. Tax 

Cas. (CCH) ¶ 50,651 (6th Cir. 2001), may have at least partially demonstrated his 

entitlement to a deduction to the Tax Court, if only he would have been able to 

produce such an ‘‘emblem, button, or other token’’ associated with one of his charitable donees. 

PPA § 1217’s blanket reference to ‘‘subsection (a)’’ serves to limit the utility of the 

poppies and daisies and candy bar wrappers so severely as to make such tokens all 

but irrelevant in substantiating a deduction. Absent some Congressional relaxation 

of the stringent provision, it would behoove the IRS to review Treas. Reg. § 1.170A– 

13 in general and Treas. Reg. § 1.170A–13(a)(2)(i)(C) in particular. 

E. The Trade-Off of PPA § 1217’s Specific Problems and Complications 

Most charitable donors are motivated by higher forces and powers than the dollars and cents they contribute out of their pockets. It is obvious that in most instances, a donor can retain far more in his or her bank account by not giving anything at all to charity, taxation issues notwithstanding. Yet, people choose to give 

to charity. 

The IRS and other taxation authorities necessarily deal with charitable contributions in strict terms of dollars and cents. But there is also an unquantifiable aspect 

of charitable giving, the personal involvement of the donor in the process. From this, 

the donor receives great moral and spiritual benefit from his or her participation. 

The knowledge that he or she made some sort of difference on this Earth, and the 

personal connection with the process, benefit the donor in ways which can never be 

evaluated using fiscal or accounting principles. 

Congress must provide a statutory framework to foster fiscal and legal accountability of the charitable giving process, and the IRS and other law enforcement 

agencies must police the process and its participants. But, as Ricardo warned, taxation ‘‘frequently operates very differently from the intention of the legislature by 

184 

its indirect effects,’’ David Ricardo, The Principles of Political Economy and Taxation chapt. 16 at 157 (Everyman’s Library, no. 590, J.M. Dent & Sons, London, 

1969) (1817); also printed in 1 The Works and Correspondence of David Ricardo 

(Piero Sraffa, ed., Cambridge Univ. Press, 1951) at 239. 

There is, of course, a need to hold the charitable and other tax-exempt organizations to a relatively high degree of scrutiny, not only to ensure that the not be used 

in schemes to illegally evade taxes or to confer private inurement to their principals, 

but also to effect general law enforcement, including the funding of terrorism and 

subversive activities. In seeking to impose accountability upon the tax-exempt organizations and their contributors with PPA § 1217, Congress has placed an obstacle 

to many acts of charitable donation which, while low in dollar value, are nonetheless 

significant and important in other respects. 

Moreover, the numerous small-sized tax-exempt organizations that fill small specific niches and effectively handle specialized needs not well addressed by the broad 

brush approaches of the larger charitable organizations, are now being weighed 

down by the additional requirements of PPA and other recent legislation, much as 

the small family businesses and farms are being squeezed out by the giant retailers, 

manufacturers and agricultural concerns. 

The inflexible documentation requirement of PPA § 1217 certainly goes far toward 

ensuring accountability, but this strict accountability standard has come at a price. 

IV. CONCLUSION 

The opening statement by Chairman Lewis at the 24 July 2007 Subcommittee 

Hearing emphasized the need for a strong and healthy nonprofit sector. This can 

only come about if donors have a positive relationship and emotional connection 

with the respective charitable organizations who would receive their donations. 

On account of the provisions of I.R.C. § 170(f)(8), the operation of PPA § 1217 effectively operates disproportionately, if not exclusively, upon donations of less than 

$250.00. These donations may be small and insignificant, even in the aggregate, but 

there is more at stake than the small pocket change that is or is not deposited. The 

passionate relationship of many a large donor to his or her favorite charity has been 

initiated by a coin dropped, unacknowledged and undocumented, into a collection receptacle. Charitable organizations must continue to develop and nurture their donorships. PPA § 1217 has interposed some impediments to some traditional methods 

of donor development. 

It is well to note that the aforementioned I.R.C. § 170(f)(8), which addresses the 

documentation of the presence or absence of a quid pro quo in charitable donations 

of $250.00 or more, specifically authorizes the Treasury/IRS to relax some of those 

requirements, I.R.C. § 170(f)(8)(E). How ironic that PPA § 1217, as codified in I.R.C. 

§ 170(f)(17), is far more rigid for documenting smaller charitable donations! 

The Treasury/IRS should similarly be authorized to relax the documentation requirements for the smaller donations under appropriate circumstances, balancing 

the needs of tax enforcement and law enforcement in general against the salutary 

effects that small, spontaneous undocumented donations may have upon the charitable sector. 

According to Mr. Miller’s testimony at the Hearing on 24 July 2007, America’s 

charitable sector is generally in compliance with the tax laws; the deviations which 

receive attention in the news media are the exceptions, and not the general tendency. Problems relating to undocumented small pocket change donations are not 

among the charitable sector’s significant tax problems and issues highlighted by Mr. 

Miller in his testimony. 

Though reposing too much discretion in the tax collector does run the risk of the 

tax uncertainty Adam Smith admonishes us to avoid, the rigid standard of PPA 

§ 1217 does dampen and discourage a monetarily insignificant, though highly symbolic, method of public participation in the charitable giving process. Accordingly, 

Congress should consider giving the Treasury and the IRS a modicum of bounded 

discretion to enable the good faith tax return filer to benefit from a modest charitable deduction, so as to reflect spontaneous and undocumented cash contributions 

not currently deductible on account of PPA § 1217. 

f 

185 

Statement of Lester M. Salamon, Baltimore, Maryland 

Executive Summary: (2 pages) 

Nonprofit Governance and Accountability 

Lester M. Salamon and Stephanie L. Geller 

This report shows that, contrary to some accounts in the press, the nonprofit is 

adhering to reasonable standards of governance and accountability. The full text of 

the report is available at: 

http://www.jhu.edu/listeningpost/news/pdf/comm04.pdf 

Executive Summary: (1 page) 

Investment Capital: The New Challenge for American Nonprofits 

Highlights one of the significant challenges facing nonprofit organizations—their 

limited access to investment capital. The full text of the report is available at: 

http://www.jhu.edu/listeningpost/news/pdf/comm05.pdf 

Excerpts: (5 pages) 

Employment in America’s Charities: A Profile 

This report documents the enormous scale and growing role of nonprofits in the 

United States. The full text of the report is available at: 

http://www.jhu.edu/∼ccss/research/pdf/ 

Employment%20in%20Americas%20Charities.pdf 

Section 1: A significant employer 

Section 4: A dynamic sector 

Section 5: Regional variations in nonprofit employment growth 

Section 6: A diverse sector 

Section 7: Nonprofit prominence in particular fields 

Excerpt from: 

Nonprofit Governance and Accountability 

Lester M. Salamon and Stephanie L. Geller, ‘‘Nonprofit Governance and Accountability’’ Communique ́ No. 4. (Baltimore: The Johns Hopkins Center for Civil Society 

Studies, October 2005). 

EXECUTIVE SUMMARY 

Responding to concerns about nonprofit governance and accountability surfaced in 

a discussion draft 1 issued by the Senate Finance Committee, the Johns Hopkins 

Nonprofit Listening Post Project conducted a survey, or Sounding, of its nationwide 

sample of nonprofit organizations in five key fields (children and family services, elderly housing and services, community and economic development, theaters, and 

museums) to examine the governance and accountability practices of the nation’s 

nonprofit organizations. 

Key findings from this survey included the following: 

(1) Board roles. The boards of overwhelming majorities (85–90 percent) of the 

nonprofit organizations surveyed are highly or significantly involved in the key strategic oversight functions that nonprofit boards are expected to perform. These include: 

• Setting organizational missions (93 percent); 

• Setting the chief executive’s compensation (88 percent); 

• Establishing and reviewing organizational budgets and finances (87 percent); 

• Setting organizational objectives (87 percent); 

• Reviewing auditing and accounting policies and practices (83 percent); and 

• Approving significant financial transactions (81 percent). 

(2) Financial disclosure. The overwhelming majority (97 percent) of sampled organizations have undergone an independent audit within the past 2 years and comparable proportions (95 percent) regularly distribute their financial reports to their 

boards. 

(3) Ethics protections. The overwhelming majority of responding organizations 

also already have other policies and procedures in place to promote accountability 

and ethical behavior. This includes: 

• Internal controls on finances and financial accounting (98 percent); 

186 

• Records retention policies (84 percent); 

• Conflict of interest policies (83 percent); 

• Travel expense policies (81 percent); 

• Compliance programs for regulation (81 percent); and 

• Codes of ethics for board and staff (73 percent). 

Even among smaller organizations, a majority have such policies in place. 

(4) Best-practice standards 

• Nearly two-thirds of the organizations surveyed already take part in best-practice accreditation programs, and nearly 60 percent of these participate in more 

than one such program. 

• Of those organizations that do not participate in formal best-practice accreditation programs, most report following an internally developed set of standards. 

• Internal factors such as a desire to promote organizational excellence and improve transparency are more important in explaining adherence to best-practice 

accreditation standards than external pressures from funders, clients, or the 

press. 

(5) Organizational changes 

• Nearly one in three organizations (29 percent) reported making some material 

change in their structure, programs, funding, or mission over the previous two 

years. 

• However, most of these (54 percent) reported notifying the Internal Revenue 

Service of this change. And those that did not report typically experienced less 

significant changes (e.g., changes in funding sources). 

(6) Nonprofit awareness 

• Most nonprofit boards (80 percent) are at least ‘‘somewhat knowledgeable’’ 

about nonprofit laws at both federal and state levels, and two-thirds reported 

having discussed the federal Sarbanes-Oxley law. 

• Only 36 percent of the organizations reported having held at least brief board 

discussions of the Senate Finance Committee staff proposals for increased regulation of nonprofit governance. 

The full Communique ́ on Nonprofit Governance and Accountability is available for 

downloading at: www.jhu.edu/listeningpost. 

U.S. Senate Finance Committee, Staff Discussion Draft (June 22, 2004) (http://finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf). 

Excerpt from: 

Investment Capital: The New Challenge for American Nonprofits 

Lester M. Salamon and Stephanie L. Geller, ‘‘Investment Capital: The New Challenge for American Nonprofits’’ Communique ́ No. 5 (Baltimore: The Johns Hopkins 

Center for Civil Society Studies, April, 2006). 

EXECUTIVE SUMMARY 

Once considered fundamentally labor-intensive institutions, nonprofit organizations are increasingly confronting expanded needs for ‘‘investment capital’’ to finance the facilities, technology, and innovations required to remain viable in an increasingly competitive environment. Because of their relatively small scale and their 

non-profit character, which makes it impossible for them to issue stock, however, 

nonprofits confront special difficulties in accessing investment capital. Regrettably, 

though, precious little is known about the special challenges nonprofit organizations 

face in generating such capital or the degree of success they have had in overcoming 

them. 

To help fill this gap, the Johns Hopkins Nonprofit Listening Post Project took a 

preliminary ‘‘Sounding’’ of its nationwide sample of nonprofit organizations in five 

broad fields of nonprofit action (children and family services, community and economic development, elderly housing and services, museums, and theaters) to learn 

about the capital needs of these organizations and the ease or difficulty they face 

in meeting these needs. 

Based on the results of this Sounding, the following major conclusions emerge: 

1. Nonprofits in these core human service, community development, and arts 

fields have significant investment capital needs. 

2. These needs extend well beyond the traditional areas of physical capital to embrace program development, staff upgrading, and strategic planning. This likely reVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00190 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
187 

flects the growing competition in many of these fields and the substantial infusion 

of entrepreneurial spirit into the nonprofit sector in recent years. 

3. Despite these needs, nonprofits have encountered significant difficulty accessing 

the major pools of investment capital in our country, such as insurance companies 

and pension funds. Many nonprofits have limited knowledge of these capital resources, and those that do have knowledge report substantial difficulty in accessing 

them. 

4. Although other sources, such as commercial banks, government, foundations, 

and individual donors, are more familiar to nonprofits, some (e.g., government) are 

quite difficult to access for investment capital purposes and others (e.g., commercial 

banks, foundations, and individual donors) are limited in their areas of interest. 

5. Although some variations exist in the applicability of these findings among the 

different types of nonprofit organizations surveyed and between organizations affiliated with national intermediary organizations and those not so unaffiliated, what 

is most striking is how uniform they seem to be, at least among the types of organizations examined here. 

6. While it is impossible to say for certain whether these results apply equally 

to other types of nonprofit organizations, they certainly suggest the need for increased attention to the investment capital needs of nonprofit organizations and possible policy actions to level the playing field for nonprofit access to capital. 

Excerpts from: 

Employment in America’s Charities: A Profile 

Lester M. Salamon and S. Wojciech Sokolowski, ‘‘Employment in America’s Charities: A Profile’’ (Baltimore, MD: Johns Hopkins Center for Civil Society Studies, 

2006). 

Section I: A Significant Employer 

In the first place, these data sources make clear that charitable nonprofit organizations employ far more people than is widely recognized. As of the second quarter 

of 2004, the latest year for which data on nonprofit organizations are available, 

American charities employed 9.4 million paid workers and engaged another 4.7 million full-time equivalent (FTE) volunteer workers for a total work force of more than 

14 million workers (see Table 1).4

Table 1 Employment in American Charities, 2004 

Item Number As % of US Economy 

Paid workers 9.4 million 7.2%

Volunteer workers (FTEs) 4.7 million 3.9% * 

Total workforce 14.1 million 10.5% * 

Wages ($billions) $321.6 billion 6.6%

Sources: Data on paid employment and wages from Quarterly Census of Employment and Wages (QCEW) 

accessed through the U.S. Bureau of Labor Statistics. Data on volunteer workers from U.S. Census Bureau, 

Current Population Survey, (http://www.census.gov/cps/). Volunteer time converted into full-time equivalent 

(FTE) workers by dividing the total number of hours volunteered by the number of hours in a typical work 

year. For further detail on data sources, see Appendix A. 

* Volunteers added to total employment to compute percentage of total work force. 

The workforce of the charitable nonprofit sector thus represents 10.5 percent of 

the country’s total workforce. Put somewhat differently, the paid workers of charitable nonprofit organizations outnumber those of the utility, wholesale trade, and 

construction industries; and the paid and volunteer workers together outdistance 

the combined employment of all three of these major industries taken together (see 

Figure 1). 

188 

7See: Lester M. Salamon and S. Wojciech Sokolowski, ‘‘Nonprofit Organizations: New Insights 

from QCEW Data,’’ Monthly Labor Review (September 2005), p. 24. 

This sizable workforce naturally attracts significant wage payments. Nonprofit 

paid workers thus received $321.6 billion in wages in 2004, more than the wages 

paid by the utilities ($50.1 billion), construction ($276 billion), and wholesale trade 

($283.7 billion) industries, and almost as much as the finance and insurance industry ($355.8 billion). 

Section IV: A Dynamic Sector 

Not only is the nonprofit sector a sizable employer, but also it has been a growing 

employer, adding both paid jobs and volunteer workers at a much higher rate than 

the rest of the economy. This has certainly been true of the past two years, for 

which comparable national data are now available, though it is consistent with earlier findings covering a more extended period for a limited set of states.7 Thus, between 2002 and 2004, the nonprofit workforce, including paid and volunteer workers, grew by 5.3 percent. Both the paid and volunteer portions of the nonprofit workforce grew by over 5 percent during this period. By contrast, overall employment 

in the economy declined by 0.2 percent during this same period (see Figure 3). 


Insert 38087A.079
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Insert 38087A.080
190 


Insert 38087A.081
191 

Section V: Regional Variations in Nonprofit Employment Growth 

This pattern of nonprofit workforce growth at rates in excess of the growth of total 

employment is evident in almost every part of the country, though the actual scale 

of change differs markedly from place to place as does the contribution that volunteers and paid workers make to the totals. Thus, as Table 6 shows, the nonprofit 

workforce grew by anywhere from nearly 10 percent in the Pacific region to under 

1 percent in the West South Central region between 2002 and 2004. In every region, 

however, nonprofit workforce growth exceeded the growth of overall employment, 

though in one of these (the Mountain region) this was due largely to the substantial 

growth in volunteer employment. What is more, nonprofit employment grew even 

in regions where overall employment, affected by the economic recession then under 

way, actually declined. This suggests that nonprofit employment functions as a 

counter-cyclical mechanism, continuing to expand to meet needs even as overall employment slumps. 

This same pattern is also clearly apparent at the state level, though the variations here are greater. Thus, nonprofit employment grew at a faster rate, or declined at a slower rate, than overall employment in all but four states (Montana, 

Alabama, Missouri, and New Mexico), as shown in Table 7. 


Insert 38087A.082
192 


Insert 38087A.083
193 

8For a more detailed breakdown of the distribution of nonprofit employment by NAICS code 

categories, see Appendix C. 

Section VI: A Diverse Sector 

Charitable nonprofit employment is scattered across a wide variety of fields, from 

information and scientific services to religion and civic affairs. The bulk of this employment, however, is in human services, and within that broad category, in health 

services. In particular, as shown in Figure 4, hospitals alone account for one-third 

of all nonprofit employment, and other health providers, such as clinics and nursing 

homes, account for another 21 percent. Two other human service fields that account 

for substantial shares of total nonprofit employment are education (14 percent of the 

total) and social assistance (13 percent).8

Section VII: Nonprofit Prominence in Particular Fields 

While nonprofit paid workers comprise 7 percent of national employment overall, 

in many fields their role is far more prominent than this overall average might 

imply. Thus, nonprofit organizations account for more than half of all employment 

in hospitals, social care, and museums; and a third of all employment in nursing 

and residential care and colleges and universities (see Figure 5 and Appendix C). 

Without the nonprofit sector, therefore, crucial health, education, and social care 

functions would be lacking. 


Insert 38087A.084
194 

f 

Lettie Pate Evans Foundation 

Atlanta, Georgia 30303 

July 25, 2007 

The Honorable John Lewis, Chairman 

Subcommittee on Oversight 

House Ways & Means Committee 

Dear Chairman Lewis: 

This letter is in response to the House Ways and Means Oversight Subcommittee 

Advisory, OV–4, requesting written comments on provisions in the Pension Protection Act of 2006 related to tax-exempt organizations. On behalf of the Lettie Pate 

Evans Foundation and Lettie Pate Whitehead Foundation, this letter expresses our 

concerns with those provisions of the Pension Protection Act that contemplate a new 

minimum payout requirement for certain supporting organizations. 

Section 1241(d)(1) of the Pension Protection Act directs the Secretary of the Treasury to promulgate new regulations that require type III supporting organizations ‘‘to 

make distributions of a percentage of either income or assets to supported organizations.’’ Existing regulations require type III supporting organizations to distribute 

substantially all of income annually. However, a new asset-based minimum payout 

requirement—if enacted by the Treasury Secretary—would adversely impact supporting organizations like the Lettie Pate Evans Foundation and the Lettie Pate 

Whitehead Foundation, which have a long history of significant and growing distributions to beneficiaries and whose donors specified in their wills that grants shall 

be paid from income only. 

Trustees of the Lettie Pate Evans Foundation administer two separate funds—the 

Lettie Pate Evans Restricted Fund and the Lettie Pate Evans General Fund. Each 

fund is a separate type III supporting organization. The Lettie Pate Whitehead 

Foundation is also a type III supporting organization administered by its own distinct governing body. 


Insert 38087A.085
195 

Lettie Pate Evans Restricted Fund 

Lettie Pate Whitehead Evans left the bulk of her estate to establish the Lettie 

Pate Evans Restricted Fund as trustee for the benefit of 14 specified charitable 

beneficiaries. In her will, Mrs. Evans dictated exactly how the income—and she 

specified only income—from her residuary estate should be divided among the beneficiaries. Since its inception in 1953, the Evans Restricted Fund has distributed all 

of its income annually (from $225,000 in 1954 to over $41 million in 2006) to the 

14 beneficiaries. More than $489 million has been distributed to the beneficiaries, 

which is 61 times the value of the total assets contributed to the Fund. Cumulatively, the Evans Restricted Fund has become the largest donor to Georgia Tech, 

Berry College, the College of William and Mary, Washington and Lee University, 

Episcopal High School and the Protestant Episcopal Theological Seminary in Virginia. 

The will establishing the Evans Restricted Fund specified that the fund’s corpus 

‘‘shall not be invaded’’ and that all payments must be made from net income. If the 

current minimum payout requirement is amended to require type III supporting organizations to invade corpus and distribute more than net income, trustees of the 

fund would be prevented from complying with the donor’s instructions. The Evans 

Restricted Fund and its beneficiaries presumably would be forced to pursue equitable reformation proceedings in court, imposing significant hardship and considerable expenses on the fund and its beneficiaries. 

Lettie Pate Whitehead Foundation 

Mrs. Evans’ son, Conkey Pate Whitehead, established through his will the Lettie 

Pate Whitehead Foundation to honor his mother. The Whitehead Foundation was 

established for the primary purpose of providing educational opportunity to needy 

women in nine specified Southern states. Funded upon Mrs. Evans’ death in 1953, 

the Foundation immediately began making annual grants to educational institutions 

for need-based scholarships for women. Net annual distributions from the Lettie 

Pate Whitehead Foundation have grown from $100,000 in 1954 to $21,639,800 in 

2006. Annual support is now provided to 201 schools and colleges and 14 facilities 

serving elderly women. 

All 215 supported organizations receive a grant every year. More than $300 million has been distributed to beneficiaries since 1954, which is 16 times the value 

of the assets contributed to the Foundation. Since the Whitehead Foundation became a supporting organization, distributions to supported organizations have risen 

each year. Beneficiaries rely on this steadily growing income stream to fund scholarships for over 8,000 needy female college and nursing students and to fund the care 

of aged women. 

As in the case of the Evans Restricted Fund, the Lettie Pate Whitehead Foundation was created under the terms of a will that directs trustees to make grants only 

from net income. If the current payout requirement is amended to an asset-based 

requirement, trustees of the Whitehead Foundation would be unable to comply with 

the will’s prohibition on distributions of principal. In addition, distributions to beneficiaries would fluctuate with the market. Declining distributions in some years 

would jeopardize schools’ ability to administer a consistent scholarship program. 

Schools may feel obliged to drop students from the scholarship program in years 

when a market decline dictates a smaller grant. 

Donors to the Evans Restricted Fund and Whitehead Foundation understood that 

preserving principal ensures a stable and permanent income stream for supported 

organizations. These organizations’ investment policies seek reliable and consistent 

income growth while preserving the real value of the corpus. Trustees of these supporting organizations are concerned that new regulations requiring organizations to 

pay out more than income will steadily erode value from these funds, ensuring that 

less total philanthropic dollars could be distributed to supported organizations over 

time. 

Narrowly Tailor Regulations 

The Evans Restricted Fund and Whitehead Foundation are not the kind of abusive organizations Congress targeted in the Pension Protection Act of 2006. We understand and share Congress’s concern that some living taxpayers use supporting 

organizations as tax shelters while providing little or no benefit to charity. Such 

schemes prevent the public from realizing benefit from the donor’s tax deduction. 

Reported abuses seem most commonly to involve donors parking non-income producing assets in supporting organizations, making no distributions to charity (because there is no income) and borrowing assets from the supporting organization for 

reinvestment. 

196 

We support efforts to stop these abusive practices. In particular, we applaud those 

provisions of the Pension Protection Act that prevent loans from supporting organizations and that strengthen restrictions and penalties for abuse by disqualified persons. These and other provisions in the Pension Protection Act should go a long way 

toward eliminating the reported abuse. 

But no new regulations should cut so broadly as to limit legitimate philanthropy. 

Additional safeguards—such as a new minimum payout requirement—should be enacted only as necessary and should be crafted to target abusive taxpayers only and 

to avoid sweeping change that may adversely impact legitimate supporting organizations and their beneficiaries. New minimum payout requirements may be narrowly tailored to ensure that credible organizations like the Evans Restricted Fund 

and Whitehead Foundation can continue to distribute a steady, growing income 

stream to beneficiaries according to the donors’ direction. 

We recently suggested to the Treasury Department that new regulations limit an 

asset-based payout requirement only to those supporting organizations that have 

not yet distributed to charity the public benefit incumbent in the donor’s tax deduction. The existing payout requirement set out in Treasury Regulations section 

1.509(a)-4—‘‘substantially all’’ of income—is appropriate and sufficient for those type 

III supporting organizations that have distributed to charity an amount greater 

than or equal to the value of the donor’s cumulative gifts to the supporting organization. However, until a supporting organization distributes an amount equal to the 

donor’s gifts, it may be necessary to require the supporting organization to distribute a minimum percentage of assets annually. With this simple overlay to the 

existing payout requirement, no taxpayer may create or use a type III supporting 

organization to shelter non-income producing assets. 

We suggested that Treasury promulgate this new regulation by adding the following at the end of the first sentence of Treasury Regulations section 1.509(a)- 

4(i)(3)(iii)(a): provided, however, that until the first taxable year following the taxable year in which the supporting organization’s cumulative distributions to one or 

more publicly supported organizations equal the value of the donor’s contributions, 

the supporting organization must distribute at least X% of its assets to its publicly 

supported organizations for any taxable year in which such amount is greater than 

substantially all of its income. For purposes of applying the proviso in the prior sentence, (i) the value of a supporting organization’s assets shall equal the aggregate 

fair market value of all non-exempt assets as described in section 4942(e), and (ii) 

the value of any property that is contributed shall equal the fair market value of 

such property at the time the contributions were made. 

The following examples illustrate this provision’s operation and could be incorporated into the regulations if Treasury adopts this approach. 

Example 1. With a $100 million gift, a taxpayer establishes W, an organization 

described in section 501(c)(3), to support Y, a publicly supported organization. W 

meets the responsiveness test described in subparagraph (2) of this paragraph. W 

must pay at least X% of its asset value annually to Y until W cumulatively distributes at least $100 million to Y. In taxable years following the taxable year when 

W distributes a total of $100 million to Y, W must pay substantially all of its income 

to Y. 

Example 2. The taxpayer from the above example makes a subsequent $50 million 

gift to W. W must pay at least X% of its assets to Y until W distributes at least 

$150 million to Y. 

Adopting this approach will ensure that new regulations are narrowly drawn to 

curb abuse while also securing charitable distributions to supported organizations 

in perpetuity. Perhaps most importantly, this narrow approach to regulation will ensure that supporting organizations remain a vital, legitimate and attractive vehicle 

for taxpayers to support worthy charitable causes. Prospective donors will be less 

likely to create this kind of perpetual legacy if they are forced by regulation to liquidate charitable principal. Sound tax policy should encourage and facilitate the 

generous impulse of wealthy Americans like the donors who created the Lettie Pate 

Evans Restricted Fund and Lettie Pate Whitehead Foundation. 

Sincerely, 

P. Russell Hardin 

f 

President 

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Statement of Marin Community Foundation 

As members of the tax-exempt community, we are responding to the Committee’s 

Advisory of June 12, 2007 requesting written comments on provisions relating to 

tax-exempt organizations in the Pension Protection Act of 2006 (PPA). According to 

the Advisory, you are seeking public comments regarding the tax-exempt community’s views on the impact of the recently enacted provisions on charities and foundations. The Subcommittee is particularly interested in how these new rules affect, 

or will affect, charitable efforts and the difficulties that have arisen in implementing 

these provisions. Further, the Subcommittee requests comments on the provisions 

scheduled to expire on December 31, 2007. 

Overall, we believe the charitable incentives proposed are positive and most of the 

reforms are reasonable. However, there are a few areas of concern that we ask you 

to address regarding the impact on charitable foundations and their ability to meet 

their charitable missions. 

Charitable foundations help individuals, families, corporations, nonprofits and 

community groups achieve their charitable goals in communities throughout the nation. There are various tools available, such as utilization of a community foundation that can help stimulate significant private investment to further the quality of 

life in a given community. Some reforms within the PPA, if interpreted in a particular way, could limit the ability of charitable foundations, including community 

foundations, to function effectively. Furthermore, some provisions may be disincentives to charitable giving. 

We have outlined our concerns and suggestions in detail below. More specifically, 

the following sections describe challenges that the PPA poses to donor advised funds 

and supporting organizations, thus limiting a community’s ability to increase charitable giving. 

Some of the PPA Provisions Have Unnecessarily Saddled Donor Advised 

Funds and Supporting Organizations With New Regulations That Are 

Not Necessary to Correct the Abuses Identified by Congress 

At a minimum, donor advised funds and supporting organizations should not be 

penalized in comparison to private foundations. Donor advised funds and supporting 

organizations are popular and effective tools for philanthropy. For the most part, 

these tools have enjoyed a long history of success in the United States. They allow 

donors to relinquish control over assets easily and commit them for charitable purposes. Yet, they also allow donors to remain involved appropriately in a manner 

that engages the donors and their families with philanthropy. Our foundations collectively made charitable grants of over $333 million in 2006; with more than $147 

million from donor advised funds. 

We are concerned that the PPA provisions may unnecessarily cast a cloud of suspicion over donor advised funds and supporting organizations. The new provisions 

are already causing confusion in the minds of donors who do not understand the 

perceived criticism. To the extent donors begin to believe that donor advised funds 

and supporting organizations are not legitimate charitable vehicles, or donors are 

hampered by unreasonably bureaucratic restrictions or procedures, current and future charitable giving will be affected negatively. The impact will be compounded 

by the perception that giving through donor advised funds is no longer simple. Simplicity in giving has been an attractive hallmark of these funds. 

The PPA implements some additional restrictions and limitations that are not 

necessary. We believe that the desired reforms can be achieved in a more reasonable 

manner. Increased oversight can provide many of the necessary checks and balances 

and help detect and punish bad actors in the charitable sector. While we recognize 

there are some bad actors in the world of donor advised funds and supporting organizations that justify rigorous oversight including the review of an organization’s exempt status, we are concerned that the result will be the casting of a wide net that 

will unfairly entangle reputable organizations and their honest donors. 

In sum, we suggest that donor advised funds and supporting organizations should 

not be treated unfairly and discriminatorily in comparison to private foundations. 

While Overall the Five Year Excess Business Holdings Provision is Beneficial, There Are Circumstances Under Which It Can Be Excessive and 

Harmful to Donor Advised Funds and Supporting Organizations 

The excess business holdings provision, along with the provision allowing for an 

extended period under certain circumstances, may establish an appropriate policy 

for treating illiquid assets which are donated for charitable purposes. Five years to 

divest holdings of closely held stock (or other assets exceeding twenty percent of a 

business enterprise) is certainly a reasonable timeframe for most transactions. 

198 

However, there should be additional allowances for special circumstances that 

may arise while liquidating assets. There are many circumstances under which a 

community would benefit if the five year timeframe was extended. In fact, the five 

year limitation can have an unintended negative impact and unnecessarily limit utilization of donor advised funds and supporting organizations and in turn limit the 

philanthropic advantages to a community. 

This is best understood by example. A particular fund was created with closely 

held stock by the founder of a private company. After the death of the founder, the 

company’s value diminished greatly. It took slightly more than five years for the 

health of the company to rebound. If the stock was sold early, then the established 

foundation would have amounted to a few million dollars. However, allowing the 

company to regain its footing allowed for a stock sale price that netted over thirty 

times the original value of a few million dollars to support community needs. While 

no foundation should hold onto stock indefinitely, there is clear need to move beyond 

five years in specific circumstances to prohibit fire sales that shortchange a community. In another example, a donor advised fund received an ownership interest in 

a ranch just beyond a major urban area. The maximum value for selling that interest and creating liquidity for grantmaking was not realized until more than ten 

years later, when commercial development reached that area. 

Moreover, the new PPA provisions will make it very difficult for donors who want 

to contribute significant ownership of closely held business interests to a community 

foundation fund without the sale of those interests in the future. While there are 

complex options available to accommodate donors who want a community foundation to retain long-term ownership rather than receive and sell, the new PPA provisions are unnecessarily limiting and confusing. These provisions will likely cause potential donors to avoid utilizing these vehicles which will in turn harm philanthropy. 

As a further example, since the PPA provisions were passed, one of our foundations has been contacted by individuals wanting to know if they can still make donations whereby the Foundation would have long-term possession. In particular, siblings contacted the Foundation wanting to leave a portion of the bank stock in their 

estates to a charitable entity without the necessity of selling the stock at some point 

in the future. While the Foundation has been working hard to implement and explain these new provisions, it is clear that the burdensome nature of some of the 

provisions will cause donors to pull back. It is highly counterproductive to the purposes of philanthropy and the intent behind the PPA, to impose over-restrictive limitations on the use of donor advised funds and supporting organizations. Ultimately, 

a foundation has the responsibility and control with regard to investments and as 

such should have adequate discretion to make prudent decisions based on particular 

circumstances at a point in time including market conditions. Any establishment of 

timelines and limits in this regard is unnecessarily prohibitive. 

In sum, we suggest that additional allowances be made whereby the five year limitation can be extended. 

While the Excess Benefit Transaction Provisions Are Warranted, Some 

Technical Corrections and Definitions Are Needed 

We understand and appreciate inclusion of the excess benefit transaction provision in the PPA. However, we are concerned there is the potential to interpret and 

apply it too broadly resulting in unforeseen restrictions. The term ‘‘excess benefit 

transaction’’ in Section 1232 (which includes any grant, loan, compensation or other 

payment from a fund to a donor, donor advisor, family member of the donor or donor 

advisor, or an entity 35 percent controlled by a donor, donor advisor or family member) should not include uniform fees and charges paid by a sponsoring organization 

to a service provider so long as those fees and charges are reasonable. 

The routine fees for services to a sponsoring organization that are assessed by the 

sponsoring organization against all of the donor advised funds should not be considered a payment from a donor advised fund. For example, assume a bank provides 

services to a sponsoring organization and also is a donor to a donor advised fund 

maintained by that sponsoring organization. Assume further that the sponsoring organization assesses the bank’s fees uniformly against the donor advised funds that 

it maintains. The pro rata portion of the fees paid to the bank from the bank’s donor 

advised fund should not constitute an excess benefit transaction under this rule. 

Additionally, compensation for professional services to disqualified individuals 

should be permitted in the same way these types of payments are permitted for private foundations. Compensation rules should be applied equally to all entities. Professional services include investment management of assets by disqualified individuals. However, if this were allowed, it would be important to ensure that compensaVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00202 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
199 

tion is at market rate or below, and that investment returns are commensurate with 

similar investment products. 

Finally, the term ‘‘excess benefit transaction’’ should not automatically include the 

payment or reimbursement of reasonable expenses on behalf of a substantial contributor if the reasonable expenses are paid or reimbursed in the substantial contributor’s capacity as an organization manager. Consider the following examples: 

• A donor is a director of a supporting organization which is holding a meeting. 

The supporting organization buys lunch for all of the directors who attend the 

meeting and the donor eats the lunch. This should not automatically be considered an excess benefit transaction. It was not an act of self-dealing under Internal Revenue Code Section 4941 if given to or reimbursed to a foundation manager. • A supporting organization buys D & O insurance that covers all directors, including a donor. The pro-rata portion of the premium allocable to the donor’s 

coverage should not automatically be considered an excess benefit transaction. 

The pro-rata portion of the premium would not be considered an excess benefit 

transaction for a foundation manager. 

We believe there should be no direct or indirect benefit to the donor or persons 

related to the donor for a donor advised fund or supporting organization. The donor 

receives the maximum tax deduction allowed by law and has the ability to impact 

the community by being allowed to recommend an investment strategy and to give 

advice regarding the grant making. Moreover, there should be no charitable deduction for the transfer of assets to a donor-advised fund or supporting organization 

when those assets are paid back to or used for the benefit of the donor or persons 

related to the donor. However, there should be an appropriate standard for a nominal ‘‘benefit’’ which does not violate this principle. 

In sum, we ask that some clarifications and technical corrections be made in the 

excess benefit transaction provisions. 

The Bookkeeping Requirements of the PPA are Illogical, Overly Burdensome and in Some Instances Impossible to Fulfill 

The unreasonable nature of the PPA bookkeeping provisions is best understood 

with an explanation of the related laws. Under current law, any person who contributed more than $5,000 to an organization, if the amount contributed is more than 

2% of the total contributions received by the organization from its inception through 

the close of the taxable year of the gift, is a substantial contributor. Further, a substantial contributor remains a substantial contributor until: 

• He and related parties have not made contributions to the organization for 10 

years, 

• Neither he nor any related party was an officer, director, or trustee of the organization during those 10 years, AND 

• His (and related parties’) aggregate contributions are determined to be insignificant when compared to the aggregate contributions of another person. 

Under the PPA, supporting organizations may not make any grant, loan, compensation, or other similar payment to substantial contributors, their family members, and 35% controlled entities of any of them. Given that substantial contributors 

remain as such for at least 10 years, in order to avoid unwittingly entering into disallowed transactions, supporting organizations will need to keep a running list of 

all of their contributors from inception, their family members, and their respective 

businesses, calculating the overall gifts made and each contributor’s percentage 

thereof as of the end of each taxable year. 

This recordkeeping requirement is not only burdensome, but in reality nearly impossible to fulfill. As time passes and families and business interests expand and 

contract, there will be much confusion with regard to the recordkeeping required 

herein. A substantial contributor should cease to be classified as such as soon as 

his or her aggregate contributions constitute less than 2% of the organization’s aggregate contributions. 

Further, investment advisors who are substantial contributors to the organization 

should be permitted to act as investment advisors to the organization, and receive 

compensation as such. Currently, as a substantial contributor, an investment advisor cannot receive payments of any kind from the organization. In order to curb potential abuse, investment advisors, whether substantial contributors or not, should 

be treated as disqualified persons for the purposes of the excess benefit tax. Thus, 

while transactions between an investment advisor and an organization must be fair 

(and perhaps could be required to comply with the Treasury Regulation § 53.4958.6 

regarding safe harbor for excess benefit transactions), they will not be completely 

200 

disallowed. Such an allowance would be consistent with private foundation rules 

and would help prevent the application of unnecessary and arguably unintentional 

penalties on donor advised funds and supporting organizations. 

Moreover, foundations should be given flexibility with regard to reasonable expenses. At a minimum, reimbursements for services from vendors, including sole 

proprietors, should be permitted, particularly in situations where a donor advised 

fund or supporting organization has clear documentation from the vendor and support for the expenditure is directly related to a charitable program or purpose. For 

example, some donors want to host fundraising activities such as sporting or social 

events that encourage others to contribute to a donor advised fund. The fund could 

have one of many varied purposes including making grants that support research 

for a disease or making grants for memorial or educational objectives. Expenses for 

such events can be appropriately charged to a donor advised fund. However, for a 

variety of reasons including avoiding dealing with multiple vendors who helped with 

the event and writing many small checks, some community foundations elect to reimburse the donor for his or her expenditures. Foundations should be able to do this 

without concern. Foundations should be able to make payments directly to such vendors without concern that such payments will constitute taxable distributions. It is 

not always feasible for a foundation to exercise expenditure responsibility but there 

are ways to ensure that the expenses are appropriately related and legitimate. 

Without appropriate flexibility, donors with donor advised funds may be forced to 

cease participation in many charitable fundraising events which are a vital source 

of funding to benefit local communities. Donors often recommend donations to charities for fundraising events that produce most of the charities’ revenue. For example, 

a charity may sell tickets to a concert, sporting event, or dinner to raise money for 

its charitable mission. These events yield many donations for charities, yet some 

provisions of the PPA may decrease the amount of support charities receive through 

their fundraising events. The PPA provisions prohibit community foundations from 

making grants from donor advised funds which confer more than an ‘‘incidental benefit’’ to a donor or related party. Previously, many community foundations made 

grants to charitable organizations which offer donors admission to fundraising 

events if the foundation only paid the charitable portion from the donor advised 

fund and the donor paid the cost of any personal benefits, such as the value of a 

meal or party favors. The accuracy of this process is ensured because charities are 

required to state the fair market value of any goods and/or services a donor may 

receive through a fundraising event. The foundation can deduct the value of the 

goods and/or services to determine the tax-deductible portion of the donation. Because of uncertainty after the PPA was enacted, some community foundations have 

required that either a gift from a donor’s donor advised fund not be made, or if the 

gift is made, the donor must promise he will not attend the fundraising event. It 

is very onerous for a foundation to try to monitor whether or not a donor has attended a fundraising event to which his donor advised fund has made a gift. It 

should be permissible for a community foundation to verify the value of any benefits 

associated with a fundraising event and only pay the cost of the charitable portion 

from the donor’s donor advised fund. 

In sum, we ask that the PPA bookkeeping provisions be interpreted and applied 

in a logical manner to which donors and charities can easily abide. 

Donors Should Be ‘‘Invested!’’ 

While a donor should not have investment control over the charitable assets in 

a donor-advised fund, some donors have valuable investment expertise and could 

provide positive contributions to the investment growth of charitable assets. We believe donors should be welcome to make recommendations about the investment of 

charitable assets held in donor-advised funds, subject to the actual investment control and approval of the community foundation staff members and trustees. 

A distinction must be made between investment control and investment advice. 

If a donor best understands his charitable goals regarding grant making, a donor 

should be able to make suggestions regarding the investment strategy for a donor 

advised fund. A donor should expect to have a reasonable choice of investment options by which to grow the assets and maximize grants to the community. 

In closely held stocks or alternative assets, the donor and the independent board 

of the foundation must work together to make sure that the maximum possible outcome is achieved so that the community benefits. To date, discussions regarding illiquid assets have not been productive. Any future legislation and regulation on 

these issues should avoid unnecessary negative outcomes such as ‘‘fire sales.’’ 

It is important for the donor to feel as if he is an active partner with the community foundation. It has been our practical experience that the more a donor is engaged in the fiduciary management of the fund, the more thoughtful and engaged 

201 

he is in the granting of the funds. In other words, donors want to see their fund 

get positive returns on investments in both monetary and community benefits. 

By definition, a donor’s advice plays a central role in making grants from a donoradvised fund. This allows donor engagement in a way that motivates charitable giving. It also expands the community foundation’s knowledge of the community and 

its non-profit organizations. As long as the sponsoring public charity, such as a community foundation, retains control over the investment and distribution of the assets, there is no violation of the underlying basis for allowing a charitable contribution deduction. Following donor advice does not indicate an inappropriate level of 

donor control. It may simply mean that the donors are recommending grants to 

verifiable, legitimate and effective nonprofit organizations. Community foundation 

staff members and trustees should augment a donor’s judgment with their own professional and objective knowledge about the nonprofit grant recipient, its current 

nonprofit status and its legitimacy and effectiveness. The same level of a charitable 

contribution deduction would be available to the donor if the assets were given directly from the donor to the nonprofit. But by utilizing a donor-advised fund at a 

very low fee (most community foundations charge an annual one percent administrative fee), several benefits can be claimed for promoting additional charitable giving. Furthermore, the collaboration with and oversight of the community foundation 

are gained as added value for the promotion of good grant making. 

In sum, we ask that a key distinction is made between investment control and 

investment advice in the application of the PPA provisions regarding donor investments. 

We Support a 5% Distribution Requirement 

Overall, we support the implementation of a payout requirement for donor advised funds or supporting organizations. A payout commensurate with the private 

foundation requirement (five percent annually) is justified. However, the payout requirement should be applied to the aggregate of those funds. The circumstances in 

each donor advised fund are too unique to make a uniform five percent payout requirement for each fund feasible. Any regulation that would require tracking and 

apply a payout requirement per fund would unnecessarily add yet another layer of 

administrative burden on an already over-taxed foundation staff and ultimately reduce the positive impact to the community. 

Donor advised funds should be permitted to maintain their flexibility which will 

in turn maximize their benefit to the community. Some funds may need to accumulate over time in order to make a large grant that will have a more significant impact. Others have assets which require multiple years to liquidate appropriately. A 

payout in the aggregate would be a more efficient and effective way to ensure that 

there is a minimum aggregated annual distribution by all donor advised funds 

across the nation. 

Donor Advised Funds and Supporting Organizations Should Be Allowed to 

Participate in IRA Charitable Rollover 

Section 1201 provides for ‘‘charitable IRA rollovers’’ to virtually any charitable organization (including private foundations), but would prohibit rollovers to donor advised funds or supporting organizations. Donor advised funds and supporting organizations should be permitted recipients of charitable IRA rollovers for several reasons. 

• The Securities Industry Association has requested IRS confirmation that IRA 

trustees/custodians are not obligated to verify charitable requirements under 

Sec. 1201. Thus, donor advised funds and supporting organizations can serve 

as a valuable resource to verify the actual charitable intent of the transaction. 

• Donor advised funds and supporting organizations can serve as a valuable tool 

to help achieve charitable aims in a community. Donor advised funds allow for 

strategic deployment of charitable resources so that a donor’s (whether it be a 

family, individual or corporation) funds can be used for the maximum benefit 

of the community, not simply one organization. 

• Donor advised funds could help assure that IRA dollars are actually used for 

charitable purposes. Donor advised fund administrators possess expertise on 

charitable grant-making whereas IRA administrators do not. The PPA turns the 

IRA of every citizen into a donor directed fund that is arguably being administered by people who may not fully understand the complexities of charitable 

grant-making. Moreover, IRA administrators do not have the time and resources to investigate whether or not a beneficiary is a bona fide charity. Donor 

advised fund administrators have practices in place to ensure that charitable 

dollars will be distributed to qualified charities. 

202 

• With donor advised funds (or supporting organizations), the IRA rollover could 

easily support multiple charities. It is unlikely that the IRA administrator 

would allow the donor to disburse their donation to multiple charities. A community foundation for example can efficiently distribute this money into the 

community. 

• Donor advised funds play an important role in charitable giving, and serve as 

a valuable tool to help donors achieve their charitable goals. As reported in the 

Wall Street Journal (August 1, 2006) donor advised funds are increasingly popular, distributing $3.3 billion to other charitable organizations in 2005, an increase of 20.8% over the amount granted in 2004. Donor advised funds provide 

efficiency and flexibility in charitable giving, and are an ideal charitable entity 

to use in a charitable IRA rollover. 

• Given that donor advised funds are now subject to as or more stringent rules 

than private foundations, they should be eligible recipients for IRA rollovers. 

From an enforcement and/or compliance perspective, Congress and the IRS 

should be encouraging donors to use well-run sponsoring organizations of donor 

advised funds. Donor advised funds are well-qualified to identify and transmit 

funds to qualifying charities because they perform such transactions day-in and 

day-out during the regular course of their charitable activities. 

In sum, we ask that donor advised funds and supporting organizations be permitted to participate in IRA charitable rollovers. 

In Unique Circumstances, the PPA Can Unfairly Limit Scholarship Funds 

and Disaster/Emergency Relief Funds 

In some instances, advisory committees to scholarship funds and employer-created 

emergency relief or disaster relief funds are not appointed or controlled by the community foundation. Rather, the donor and/or persons appointed by the donor serve 

on the advisory committee and they review applications and select scholarship recipients. Typically, the funds follow an objective and nondiscriminatory selection 

process similar to a private foundation and review the final selections made by the 

committees to ensure they followed such a process. However, under the PPA, these 

funds would be classified as donor advised funds and prohibited from making distributions to individuals. Thus, we ask you to consider the following technical corrections: 

• If a fund can demonstrate it has proper checks and balances in place equivalent 

to showing that it is following a private foundation’s objective and nondiscriminatory selection process approved by its board, such funds should not be considered donor advised funds under the PPA. 

• In the event a scholarship fund is classified as a donor advised fund, the scholarship fund can make scholarship checks payable to a school and in so doing 

comply with the rule regarding prohibited grants to individuals. 

Closing Comments 

The PPA has provided some necessary and well-placed guidance for the charitable 

community as a whole. As a result, we expect to experience many benefits. However, 

we are concerned that particular provisions may be misinterpreted and lead to unforeseen circumstances that will make charitable giving and the continued work of 

charities difficult and sometimes impossible. 

We appreciate the opportunity to participate in this very important process. 

f 

League of Women Voters of Arlington, Virginia 

July 31, 2007 

Chairman Lewis 

Ways and Means Committee 

House of Representatives 

U.S. Congress 

Dear Chairman Lewis: 

I am writing to share with you the difficulties that the Pension Protection Act of 

2006 has created for the League of Women Voters of Arlington, VA in operating our 

small scholarship program. 

We created this scholarship program 15 years ago, in honor of a member who was 

killed in a car accident. Every year we award a scholarship in the amount of $1,000 

to $1,500 to one or two graduating seniors who plan to enter college in programs 

203 

related to public service. High school counselors notify students about applying and 

obtain the applications from them. A committee of local League members reviews 

the applications, interviews the applicants, and selects the winner(s). The majority 

of recipients are low income minority students with substantial needs for financial 

assistance in order to attend college. Over the years, some League members have 

donated between $50.00 and $100.00 per year to the scholarship fund. No relative 

of a League member has ever received a scholarship. The scholarship fund is administered for us by the Arlington County Community Foundation (ACCF). 

According to ACCF, the Pension Protection Act requires that we change our process in the following ways: 

• Change the composition of the selecting committee so that a majority of members are non-League members. This dilutes the commitment of local League 

members, and creates the burden of trying to find other interested individuals 

to serve. 

• Eliminate from service on the committee any League member (or other person) 

who has contributed to the scholarship fund, regardless of the dollar amount 

given. This again reduces the number of potential volunteers, and discourages 

involvement of those individuals most committed to the scholarship program. 

• Submit detailed documentation to ACCF about how our applicants are recruited 

and screened, as well as the names of members and non-members serving on 

the scholarship committee. We are in the process of providing this information. 

However, given that we are an organization of volunteers, additional paperwork 

requirements impose a hardship on us. 

We have spent a considerable amount of volunteer time in the last year trying 

to understand the requirements of the Pension Protection Act in relation to our 

scholarship program, and we are now in the process of trying to comply. From our 

point of view, these requirements do not improve the management or administration 

of our scholarship program. Rather, the Act has made the process more labor-intensive, with no visible advantages. 

Thank you for considering our concerns. 

Sincerely, 

Nancy E. Tate 

f 

President 

Statement of National Cattlemen’s Beef Association 

The National Cattlemen’s Beef Association (NCBA) appreciates the opportunity to 

comment on the charitable provisions of the 2006 Pension Protection Act (PPA). Producer-directed and consumer-focused, NCBA is the largest and oldest organization 

representing America’s cattle industry, and it is dedicated to preserving the beef industry’s heritage and future profitability through leadership in education, marketing and public policy. 

Section 1206 of the PPA changed the tax incentive for voluntary conservation donations—donations by private landowners that retire development rights to protect 

significant wildlife, scenic, and historic resources—and NCBA strongly supports 

H.R. 1576 which would make these provisions permanent. By providing a more significant tax benefit for conservation donations, this provision opens the door to voluntary, landowner-led conservation on millions of acres of land across the country, 

and it is particularly helpful to family farmers, ranchers, and other moderate-income landowners. It is also worth noting that many of these donations are made 

to local, community-based charities dedicated to keeping land in agriculture, conserving important wildlife habitats, and protecting important open space and historic resources. 

In the short time since the bill’s passage, this provision has greatly increased the 

interest in and use of voluntary conservation easement donations across the country, particularly among the farmers and ranchers who own the vast majority of 

America’s private land resources. It provides a real and effective incentive for private landowners to contribute to saving our Nation’s wildlife, watersheds, working 

farmlands, and our scenic and historic heritage. 

The donation of a perpetual conservation easement to a conservation organization 

is a serious and complex decision for any landowner, involving the disposition of 

what is usually their family’s most valuable asset. It is a decision that cannot and 

should not be rushed by a deadline. We thank you for your cosponsorship of H.R. 

1576, and urge you to do all you can to see that it is enacted into law. We look 

204 

forward to working with you and your Subcommittee on this and other issues involving the protection and conservation of our Nation’s natural resources. 

f 

Statement of National Christian Foundation 

I serve as General Counsel to National Christian Charitable Foundation, Inc. 

(‘‘NCF’’), a Christian community foundation with its headquarters in Atlanta, Georgia. NCF is exempt from federal income tax under Code Section 501(c)(3), and qualifies as a public charity (rather than a private foundation) under Code Sections 

509(a)(1) and 170(b)(1)(A)(vi). It maintains donor advised funds, and it is supported 

in its charitable service by several supporting organizations. Additionally, we are located just north of Atlanta, Georgia and are pleased that someone from Georgia is 

leading the effort to strengthen American charity. We are also honored to fund effective charities in your district in Atlanta. NCF appears in the 2006 Chronicle of Philanthropy report as the 4th largest charitable organization in Georgia (29th largest 

in the United States). 

I write in response to your subcommittee’s request of June 12, 2007, for comments 

regarding Title XII, Provisions Relating to Exempt Organizations, of the Pension 

Protection Act of 2006, P.L. 109–280 (the ‘‘Act’’). We are very grateful for the opportunity to comment on the Act because it has introduced significant unwarranted 

barriers to our charitable work, as well as uncertainty regarding what it prohibits 

and what it allows. 

Part 1 of Subtitle B of Title XII imposes heightened reporting and recordkeeping 

requirements and increased penalties for noncompliance with existing rules, and it 

eliminates deductions for contributions of property of doubtful charitable value. We 

applaud these enforcement provisions. Parts 2 and 3 are different. While captioned 

‘‘Improved Accountability,’’ they actually impose new rules and restrictions apparently intended to prevent private benefit that in fact the Code already prohibits. 

Moreover, they single out donor advised funds (‘‘DAFs’’) and supporting organizations (‘‘SOs’’). 

We believe Parts 2 and 3 significantly impede worthwhile charitable activities, 

and have no foundation in any rational public policy. We identify below modifications and clarifying corrections to those parts that we believe are necessary to remove unnecessary obstacles to charity. 

Misconceptions Underlying Parts 2 and 3 

Parts 2 and 3 impose private-foundation rules on DAFs and SOs, treating them 

essentially as private foundations, and sometimes—astoundingly—treating them 

more harshly than private foundations. In so doing, the sponsors of these parts betray a lack of appreciation for the value of DAFs and SOs, an unwarranted and unprecedented hostility to private donor influence, and lack of thought about the obvious differences between these charitable structures and private foundations. 

Donor advised funds and supporting organizations increase charitable giving, and 

correspondingly, charitable work, and enable donors to provide valuable, diverse 

input. 

DAFs and SOs increase the amount of contributions to charity, thereby increasing 

the level of good work charities can do, improving social conditions in the United 

States and abroad, and decreasing the burdens of government. Donors give more 

when they know they will be able to participate in decisions regarding ultimate 

charitable distribution. Donors give more when they can make large contributions 

efficiently all at once, without the necessity of identifying immediately the ultimate 

charitable beneficiaries. Donors give more, and more frequently, when their hearts 

are engaged by participation in the ultimate distribution decisions. 

At the same time, DAF sponsoring and supported organizations are better able 

than smaller charities to develop the specialized, relatively expensive expertise required to receive, hold, and liquidate complex gifts of assets other than cash and 

publicly-traded securities. Frequently the largest gifts, those that produce the most 

resources for charitable use, are such complex gifts. DAF sponsoring organizations 

and supported organizations efficiently spread the costs of developing such expertise 

and handling such assets over numerous contributions and charities. 

On the other side of the ledger, donors to DAFs and SOs provide valuable assistance to sponsoring and supported organizations in identifying for distributions and 

expenditures worthwhile charitable endeavors and the charities that best pursue 

those endeavors. 

This donor input makes giving through DAFs and SOs democratic giving; it 

spreads charitable choices over a broad spectrum of people rather than confining 

205 

those choices to the leaders of a few grant-making public charities and foundations. 

It is efficient, free-market giving that requires charitable causes and the charities 

that pursue them to compete for contributions from numerous potential donors. 

Moreover, it is dispersed giving that allows for experimentation by innovative charities without large-scale risk of waste or harm from failed experiments. These benefits are not realized in forced contributions (taxation) or in contributions to large 

grant-making charities with centralized decisionmaking and relatively limited donor 

input. 

Donor influence for charitable purposes is not and has never been considered inherently bad. 

The sponsors of Parts 2 and 3 appear to have acted on a general sense that donor 

influence is a bad thing. This is unprecedented and unjustified. 

The legislative history of the Tax Reform Act of 1969 identifies concern about 

abuse of private foundations for private benefit—not a simplistic aversion to private 

donor influence—as the reason for the restrictions and disincentives imposed on private foundations in that Act. See Treasury Report on Private Foundations 5–10, 

Staff of House Comm. on Ways and Means, 89th Cong. 

In fact, the intent of the charitable-contribution deduction as identified by the Supreme Court is exactly to encourage private charitable action. See Bob Jones University v. United States, 461 U.S. 574, 590 (1983) (purpose of deduction is ‘‘to encourage the development of private institutions that serve a useful public purpose’’ 

(emphasis supplied)). Clearly neither Congress nor the Supreme Court has treated 

private control over choices within the bounds of 501(c)(3) as an evil in itself. To 

the contrary, our laws historically demonstrate a belief that numerous private actors, some large and some small, make better decisions, as a whole, than does a centralized bureaucracy. DAF and SO structures stand squarely in this tradition. 

There is no reason to believe that somehow centralized decisionmakers in a few 

large public charities, unaided by donor input, make better charitable choices than 

do boards and staff of DAF sponsoring organizations aided by input from numerous 

donors, or leaders of SOs subject to supervision by the supported organizations. 

Likewise, there is no reason to believe that public charities without donor input 

make better decisions about the timing of ultimate distribution or expenditure. Once 

given to a DAF or SO (or even a private foundation), funds may not be used for 

the donor’s private benefit; thus, a donor gains no personal benefit by withholding 

funds for a need of which he or she has been convinced. In fact, donors who advise 

DAF sponsoring organizations to make distributions serve as a check on the motivation directors, officers, and staff of other kinds of public charities may feel to withhold distributions and expenditures inappropriately in order to assure the continuation of their livelihoods. 

Treating donor advised funds and supporting organizations like private foundations (and sometimes worse) is unjustified: unlike a private foundation, a donor advised fund structure, as well as a supporting organization structure, checks a donor’s use for his private benefit. 

Of course the risk of private benefit outside the bounds of 501(c)(3) is a bad thing, 

but that risk in a DAF or SO structure logically is less than any such risk perceived 

to attend private foundations, and is no greater than any such risk that may attend 

any other kind of public charity. Accordingly, it is inappropriate to subject a DAF 

or SO to private foundation restrictions and disincentives. 

DAF and SO structures provide for an independent check on a donor’s power to 

use his contributed funds for private interests that is in addition to the checks 

present in a private foundation structure. This check is the interest of the independent directors and officers in assuring that the sponsoring organization or SO 

complies with the requirements for its exempt status and truly advances worthwhile 

charitable interests. Whatever the risk that a foundation controlled by an individual, family, or business will expend funds for inappropriate purposes, expend too 

little for charitable purposes, unduly delay charitable expenditures, or expend funds 

for a private interest (we expect such incidents are relatively infrequent), the risk 

that a fund or organization merely advised or influenced by such an interest is significantly smaller. This is the reason that, according to the Senate Report on the 

1969 Act, SOs do not ‘‘give rise to the problems which led to the restrictions and 

limitations’’ on private foundations. S. REP. No. 91–552, at 56 (1969). The same is 

true for DAFs. 

In summary, DAFs and SOs are useful structures resistant to abuse, and should 

be encouraged rather than discouraged. 

Specific Problematic Provisions and Proposed Changes 

The Act has produced the negative effects discussed below. We suggest that Congress make the following modifications to the Act’s provisions in response. 

206 

Prohibition Against Distributions From a DAF To any Natural Person—Code Section 4966(c)(1)(A). Rescind, or at least clarify that ‘‘distribution’’ means only gratuitous payments. 

The prohibition against a DAF making a distribution ‘‘to any natural person’’ 

blocks many gifts to needy people that will simply go unmade through any other 

means. It should be rescinded. 

No other public charity—and not even a private foundation—is prohibited from 

making benevolence distributions to the poor. There is no public policy justification 

for such a prohibition against any charitable organization, and especially not 

against a DAF or SO: a donor is just as likely as a public-charity or private-foundation employee to identify worthy needy recipients. Moreover, a distribution from a 

DAF must be approved by independent staff members of the sponsoring organization who are concerned to maintain its tax-exempt status. Accordingly, a DAF benevolence distribution is no more likely to provide an improper private benefit than 

is a benevolence distribution made by a public-charity employee without any donor 

input, and is less likely to do so than is a private-foundation benevolence distribution. 

The fear that ‘‘distribution’’ might be construed to include compensation payments 

prevents any direct charitable action with DAF funds. For example, a sponsoring 

organization may not use DAF funds to hire a missionary, teacher, or researcher. 

At the least, then, the DAF community needs a clear definition of ‘‘distribution’’ that 

confines its meaning to gratuitous payments and excludes payments of compensation. 

Congress should not shut down direct good work by a DAF unless for a compelling 

reason, and there is no such reason when the Code already prohibits private benefit 

and private inurement, and when DAF payments are subject to approval by disinterested board members with input from disinterested staff members of the sponsoring organization. ‘‘Distribution’’ customarily refers to a payment not made in exchange for goods, services, or a promise to repay. Thus, Congress probably intended 

the same meaning in the Act, and this should be made clear. 

Prohibition Against Distributions From a DAF To a Type III Non-Functionally-Integrated Supporting Organization—Code Sections 4966(c)(2)(A), (d)(4)(A)(i), and 

4943(f)(5)(B). Suspend effectiveness until the Treasury Department issues Regulations defining ‘‘functionally integrated Type III supporting organization.’’ 

The Act recognizes the two categories of Type III SOs established in the Regulations, those that qualify as SOs on account of their integration into the operations 

of their supported organizations (functionally-integrated SOs), and those that do not 

qualify as functionally-integrated SOs and therefore must make distributions to 

their supported organizations (non-functionally-integrated SOs). The Act prohibits a 

DAF from making distributions to a non-functionally-integrated SO unless the DAF 

sponsoring organization exercises cumbersome expenditure responsibility over the 

distribution. 

The problem is that the definition of a functionally-integrated SO in the Regulations is undeveloped and vague. Therefore, it is impossible to determine what qualifies as a functionally-integrated SO and what qualifies as a non-functionally-integrated SO. 

In this state of uncertainty, a supported organization no longer can make distributions to a SO that it believes to be functionally integrated but cannot be sure is 

functionally integrated. Being able to make these distributions is beneficial because 

it enables the supported organization in essence to receive and liquidate complex 

gifts and then hold the proceeds for its Type III SOs, distributing funds to them 

just as needed to make grants or conduct operations. Like other supported organizations, NCF has developed technical expertise required to receive, process, hold, and 

liquidate non-cash contributions, and employs the experienced, trained staff necessary to manage receipting, investment, and administrative functions. Moreover, 

the supported organization through this practice maintains direct control over the 

funds the SO needs, and therefore greater control over the SO to assure that it operates exclusively to carry out the purposes of the supported organization. At the 

same time, the supported organization and all the funds it holds, including the 

funds in the particular DAF, are shielded from the SO’s liabilities. 

Accordingly, this provision should be suspended until the Treasury Department 

clarifies the meaning of ‘‘functionally integrated.’’ 

Prohibition on DAF Distributions that Produce More Than Incidental Benefit To a 

Donor—Code Section 4967. Clarify that distribution is permissible if it would be deductible as a contribution paid directly by the donor. 

207 

The Act does not define what a more-than-incidental benefit is. Accordingly, a 

DAF cannot now safely make a distribution to a public charity that then uses the 

funds to pay travel and other expenses of useful ministry performed by the donor, 

even though the donor could pay those expenses directly and receive a charitablecontribution deduction. Similarly, a DAF cannot safely make a distribution to a public charity as part of a fundraising event in which the donor pays separately for a 

banquet, golf tournament, or similar premium item, even though the donor could 

pay the charity directly and receive a partial deduction. Moreover, there is great 

concern among community funds and their donors that making distributions in fulfillment of a donor’s pledge provides a more than incidental benefit. These possible 

interpretations of the Act would serve no purpose other than as traps for the unwary. 

Accordingly, Section 4967 should be amended to clarify that a distribution will not 

be deemed to result in a more than incidental benefit if the full amount of the distribution would be deductible as a charitable contribution if paid by the donor. 

Doing so would in essence make authoritative the explanation of the Joint Committee on Taxation that a more than incidental benefit is one that would reduce a 

donor’s contribution deduction if a charity provides it in exchange for such contribution. 

Prohibition On Payment By DAF or SO Of Even Reasonable Compensation To Donors (or Substantial Contributors), Related Persons, or Donor-Designated Advisors— 

Code Sections 4958(c)(2) and (3), (f)(1)(D), (7), 4966(d)(2)(A)(iii). Rescind the ‘‘firstdollar’’ definition of excess benefit transaction, or at least clarify that the prohibition 

of any compensation does not apply to an independent investment advisor recommended by the donor. 

The Act amends Code Section 4958 to add donors to DAFs, substantial contributors to SOs, and persons related to them to the list of disqualified persons to whom 

an exempt organization may not provide excess benefits, on pain of the disqualified 

person and organization managers incurring substantial penalties. We believe these 

are reasonable additions. 

However, the Act goes further and defines an excess benefit transaction as paying 

any compensation for services, even the ‘‘first dollar,’’ to one of these new disqualified persons. This rule prevents a DAF or SO from paying reasonable compensation 

to qualified donors and related persons for direct charitable work (social work, evangelism, teaching, etc.), grant investigation and auditing, general administration, or 

investment management. A quirk in the definition of a donor-related person for 

DAF purposes also prevents a DAF from compensating any professional investment 

advisor recommended by the donor. 

This first-dollar definition of excess benefit transaction should be rescinded. (If it 

is not, at least Section 4958(f)(7) should be amended to clarify that its list of disqualified persons does not include an investment advisor with no relation to the 

donor other than that the donor recommended that the DAF sponsoring organization engage him for investment advice.) 

The first-dollar prohibition of compensation is inexplicable. Donors and related 

persons make excellent service-providers. They naturally are mission-minded, and 

motivated to assure that their (or their family member’s) contributed dollars are 

used efficiently. For the same reason, they carefully select whom they recommend 

as service-providers. It is not rational to bar a skilled service provider—especially 

one who is personally motivated to achieve and protect maximum funds for his or 

her charitable concerns—from serving a DAF or SO merely because he or she is the 

donor or has been recommended by the donor. 

Moreover, this first-dollar prohibition applies only to DAF and SO structures and 

not to any other type of exempt organization, not even a private foundation, even 

though DAF and SO structures better protect against unreasonable compensation. 

The independent directors and officers of a DAF sponsoring organization or supported organization exercise overriding legal control and supervision to prevent a 

donor from receiving unreasonable compensation, and they are motivated to do so 

in order to protect the organization’s exempt status and mission. In the context of 

a DAF, the directors and officers feel a special motivation: they must protect the 

tax-advantaged status of the entire sponsoring organization, including the DAFs of 

all other donors. 

Prohibition Against DAF Owning Excess Business Holdings—Code Section 4943. Rescind the prohibition. 

Extending the excess business holding prohibition to DAFs discourages donors 

from contributing valuable business income streams, and thereby reduces funds for 

charity and constricts charitable work. 

208 

Most wealth available for gifting exists in the form of interests in businesses rather than cash. Many of these interests produce significant revenue streams even 

though they are not readily marketable or are transfer-restricted. Often the donor 

and charity correctly believe the charity will benefit more from holding these interests and continuing to receive the revenue streams for a long period of time than 

from liquidating them immediately. Business interests are where the wealth lies, 

and gifts of those interests hold tremendous promise for turning American business 

into an engine for charitable good here and around the world. Charities are able 

to tap into this source through use of the DAF structure. 

For the following reasons, the DAF structure facilitates gifts of business interests, 

and without it most of those gifts will not be made. First, a DAF enables a donor 

of a business interest to give once, at the particular time the donor is able to give, 

while spreading the funds among several needy charities as their needs arise and 

as they prove their effectiveness over time. This gift-spreading reduces the risk that 

a donor’s gift will be used ineffectively or even wasted, or that it will over-fund a 

charity and cause it to become complacent, unaccountable, and moribund. Moreover, 

sometimes a gift is simply too large for one charity’s needs. Confining such large 

gifts to large charities stifles smaller, newer—perhaps more innovative—charities. 

Second, a DAF enables a donor to give to only one charity rather than being 

forced to attempt to split up the business interest among numerous charities. Splitting a gift is unnecessarily expensive and time consuming, for both donor and charity. Moreover, a DAF sponsoring organization is able to develop the expertise required to receive and hold business interests. Most operating public charities do not 

have this expertise, and it does not make economic sense to require them to duplicate the effort and expenditure of resources necessary to develop it. Similarly, a 

DAF sponsoring organization develops through experience the sophistication necessary to be a reasonable shareholder while also protecting the charitable benefit 

of the gift. At the least, a donor knows the risk of bad shareholder behavior is less 

when only one charity—one the donor has investigated thoroughly—owns an interest, than when numerous charities do. In contrast, splitting a business interest 

among numerous charities increases the risk of at least one unsophisticated charity 

either unnecessarily asserting minority shareholder rights, or passively enabling the 

donor to exclude the charity from the full benefits to which its ownership entitles 

it. 

Finally, a potential, eventual buyer of the donor’s and the charities’ interests is 

less likely to be interested in purchasing if it will have to deal with numerous charities rather than just one. This is also true of a donor’s partners in the enterprise 

who must often waive restrictions to allow the donor to transfer any of their interest 

to charity. If the charity is unsophisticated in these type gifts or if there are multiple charities, it is understandably less likely that the charitable gift will occur. 

Accordingly, the prohibition against a DAF maintaining business holdings should 

be rescinded. 

Extending the private foundation restriction against excess business holdings to 

DAFs again demonstrates a failure to think about the differences between private 

foundations and DAFs. Congress identified the following concerns when it imposed 

the restriction on private foundations in 1969, none of which apply to DAFs: 

• Increased use of foundations to maintain control of businesses, and a corresponding decrease in concern about producing income for charitable purposes. 

A donor concerned to maintain his control over his business will not contribute 

it to a DAF, which is controlled by independent directors and officers and over 

which he has only the power to advise. Likewise, the independent directors and 

officers of a DAF sponsoring organization can have no motivation to perpetuate 

a donor’s control to the detriment of the organization’s charitable mission. 

• Uncertainty in the law about what point business involvement or noncharitable 

purposes become substantial non-exempt purposes for which the only penalty 

is the harsh one of revoking exempt status. There of course would be uncertainty about when the purpose in the head of a donor who controls both business and foundation switches from charitable advancement to personal business 

advancement. There is no such uncertainty about the purposes of the independent directors and officers of a DAF sponsoring organization. 

• Diversion of most of the interest and attention of the foundation managers 

away from their charitable duties to the maintenance and improvement of the 

business. The donor who controls a foundation can force foundation personnel 

to attend to his business; the donor who merely advises a DAF has no such 

power over the personnel of the DAF sponsoring organization. 

• Where the charitable ownership predominates, the running of a business in a 

way that unfairly competes with businesses whose owners must pay tax on the 

209 

income derived from their businesses. This concern is effectively addressed by 

Unrelated Business Taxable Income rules, applicable to all charitable entities 

including DAF’s and SO’s. Moreover, the only reason the independent directors 

and officers of a DAF sponsoring organization would agree to accept, and then 

hold, a business interest is that the interest produces greater revenue for charitable purposes than does another holding. In other words, the DAF sponsoring 

organization is motivated to maximize its revenue rather than maintain a business that can compete only with lower returns. In any event, this concern is 

no greater when a DAF sponsoring organization holds the interest than when 

any other kind of public charity holds it. 

See S. REP. No. 91–552 (1969), cited in Priv. Ltr. Ruling 199939046. Accordingly, 

there is no rational public policy interest that justifies the significant harm done 

to charity by extending the excess business holdings rule to DAFs. 

Exclusion of DAFs, SOs, and Private Foundations As Recipients of IRA Rollovers— 

Code Section 408(d)(8). Extend the IRA rollover at least to DAFs and SOs, and preferably to private foundations as well. 

The exclusion of DAFs, SOs, and private foundations as recipients of IRA rollovers 

limits overall funding for charitable work, and places these beneficial structures at 

a disadvantage relative to other types of public charities. The IRA rollover should 

be extended to each. 

The exclusion is nothing more than a means of discouraging or limiting giving to 

DAFs, SOs, and private foundations, similar to the way the 1969 legislation limited 

the deductibility of contributions to private foundations. As argued previously, hostility to donor influence generally is unjustified and unprecedented. At the least, 

DAFs and SOs should be added as permissible recipients of IRA rollovers since they 

are not subject to the perceived greater risk of private benefit that drives the various private foundation disincentives. 

Thank you for your consideration of these significant barriers to charitable activities thrown up by the Act, and of our requests for relief. We would be pleased to 

provide additional information or other assistance to the Subcommittee as you may 

request. Our president or I would be very pleased to testify to the Subcommittee 

or assist you in any way regarding the great work we are able to do with input from 

our donors through the DAF and SO structures. 

Sincerely, 

Timothy W. Townsend 

f 

General Counsel 

Statement of National Committee for Responsive Philanthropy 

NCRP recommends that the Committee: 

• Extend the charitable provisions found in the Pension Protection Act, including 

the IRA Rollover, and keep them in their current form. 

• Subject supporting organizations and donor-advised funds to the excise tax, 

similar to how private foundations already pay the tax, and dedicate the revenue to oversight of the sector. 

• Simplify the supporting organization structure by eliminating the Type III classification, through which most abuses occur. 

• Develop a clear set of guidelines and requirements for international organizations to be considered charitable organizations. 

As the nation’s premier philanthropic watchdog group, NCRP values this opportunity to substantively contribute to the discussion, which we anticipate will have 

an impact on efforts to promote the public’s interest among foundations, corporate 

grantmakers, individual donors and public charities. 

Comments from the National Committee for Responsive Philanthropy 

July 30th, 2007 

The National Committee for Responsive Philanthropy (NCRP) is pleased to have 

the opportunity to provide comments to the House Ways and Means Committee on 

the subject of provisions relating to tax-exempt organizations contained in the Pension Protection Act of 2006 (P.L. 109–280). 

210 

As the nation’s premier philanthropic watchdog with a 30-year track record of research and action on non-profit and philanthropic accountability, NCRP is well acquainted with the questions being addressed by the Committee. Throughout our 30- 

year history, NCRP has been at the forefront of bringing about substantive change 

in the philanthropic sector, and with the passage of the Pension Protection Act last 

year, NCRP believes significant steps were taken to make philanthropy more responsive and address the needs of communities that need help the most. 

The efforts of the 109th Congress in passing the Pension Protection Act of 2006 

constituted, we believe, a noble starting point in the fight to significantly reform the 

practices of tax-exempt organizations in the United States. Notable among these revisions were the regulations put in place on donor-advised funds, supporting organizations and private foundations. Many of the regulations put in place were long 

overdue and received the full support of both NCRP and other organizations in the 

philanthropic sector. However, despite the many substantial reform measures put 

in place by the Pension Protection Act, NCRP believes more can be done to strengthen the charitable community by revising several of the measures introduced with 

the legislation last year. 

In addition, the five new tax incentives that were introduced to help encourage 

charitable giving are set to expire at the end of 2007, and NCRP strongly believes 

they should be extended in their current state. Chief among these provisions is the 

IRA Rollover incentive, which permits taxpayers 701⁄2 and older to make tax-free donations from Individual Retirement Accounts (IRAs) to charitable organizations. 

Overall, NCRP strongly supported the passage of the Pension Protection Act and 

today fully endorses the vast majority of the provisions contained within it. Only 

a small portion of the legislation directly affects the non-profit community, with the 

main section being Title XII, also known as the portion of the bill pertaining to taxexempt organizations. The giving incentives and reform measures included are a 

huge step forward toward increased transparency in the philanthropic sector, and 

the changes made have already had a substantial impact on the sector as a whole. 

NCRP welcomes the efforts of the 110th Congress to address the concerns of the 

philanthropic sector, and we believe the arrival of new leadership in Congress this 

session can truly bring about substantive change in the philanthropic community. 

The comments we have submitted below outline NCRP’s main concerns with the 

Pension Protection Act and highlights the sections of the bill we feel deserve reexamination by the Ways and Means Committee; in addition, we have also outlined 

several areas we believe deserve the attention of the Committee going forward when 

considering new legislation pertaining to the non-profit and philanthropic sectors. 

TAX INCENTIVES FOR CHARITABLE GIVING 

The passage of the Pension Protection Act last August brought with it five new 

tax incentives that were put in place to encourage greater contributions to charitable organizations. All five of these incentives have had a positive effect on communities all over the United States, and NCRP strongly supports extending these programs before they are due to expire at the end of the 2007 calendar year. Tax deductions allowed for food and book donations especially are programs that we believe will significantly benefit the American people; new legislation from the 110th 

Congress that permanently extends these programs is highly recommended and encouraged by NCRP. 

The Pension Protection Act includes a tax incentive relating to IRA accounts, and 

the provision allows taxpayers 701⁄2 and older to make tax-free donations to public 

charitable organizations. The donations have had a remarkable effect on communities all over the country, and NCRP supports legislation that would keep the IRA 

rollover program in its current state and permanently extend the provisions that are 

contained. Any changes to the requirement of which charitable organizations are eligible to receive these tax-free contributions would detract from the primary purpose 

of the IRA Rollover in the first place, which was to provide IRA account holders the 

opportunity to make charitable donations that would best serve the interests of the 

charitable community. 

Current restrictions in the Pension Protection Act prevent IRA account holders 

from making tax-free contributions to donor-advised funds, supporting organizations 

or private foundations. Legislation introduced in Congress this year by the House 

and Senate (H.R. 1419 and S. 819, respectively) would repeal these restrictions and 

allow contributions to be made to these funds. NCRP is concerned that if these restrictions are lifted, more money will be taken away from public charities and will 

sit in donor-advised funds or private foundations unused. By sitting in the bank accounts of large private foundations, money that could have been donated to public 

charities directly will simply add to the assets of foundations. By extending the curVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00214 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
211 

rent IRA rollover tax credit in its current state, NCRP believes that money contributed from these IRA accounts will truly be put to the best use possible. 

DONOR-ADVISED FUNDS 

The passage of the Pension Protection Act brought forth the first substantive effort to regulate donor-advised funds. The vast majority of the provisions contained 

in the Pension Protection Act are changes that NCRP supports, and many are 

changes that were advocated by NCRP in the years leading up to the passage of 

the Act last August. However, there a few issues we feel should be corrected relating to donor-advised funds, and these include a payout requirement, the tax issue 

arising from donations to a donor-advised fund in place of a donation to a private 

foundation and the issue of excessive donor control. 

In passing the Pension Protection Act, lawmakers removed an expected provision 

that would call for a minimum annual required level of distributions for donor-advised funds, a provision which NCRP fully supported. Instead of including the provision in the bill, the Pension Protection Act calls for a study commissioned by the 

Treasury Department and the secretary of the Treasury to answer several questions 

relating to donor-advised funds and supporting organizations. These questions include: whether tax deductions for contributions to supporting organizations and 

donor-advised funds are appropriate given how donated assets are used, and whether the donor receives any benefits from the transaction, either directly or indirectly; 

second, whether there should be a payout requirement on donor-advised funds; and 

finally, whether the retention by donors of rights associated with their contribution 

is consistent with the tax treatment of donations as completed gifts. The Treasury 

Department’s study is set to be completed and turned into the Senate Finance Committee some time before the end of 2007. NCRP submitted comments in April of this 

year to the IRS relating to the Treasury study, and the study, when released, will 

hopefully be responsive to the issues we raised in our comments, which can be 

viewed on our website. 

NCRP feels that there are a few minor inadequacies in the Pension Protection Act 

that should be corrected by future pieces of legislation. The first of these measures 

concerns donations being made to a donor-advised fund in place of a gift to a private 

foundation. Deduction limits already in place that prevent large, unethical gifts to 

private foundations are a needed check against tax abuse in the United States. Because of these laws, donors have the potential to make significant tax-exempt contributions to donor-advised funds to try and circumvent tax responsibilities. The 

Pension Protection Act does not address this problem. We realize that correcting all 

the problems relating to tax evasion with tax-exempt organizations is far from certain, but with legislation aimed at correcting these evasion techniques, the sector 

can become more responsive to the needs of the constituents they claim to be representing. 

The second concern we have found in the Pension Protection Act relating to donoradvised funds concerns the issue of excessive donor control. One of the key requirements for a fund to be considered a ‘‘donor-advised fund’’ is the notion that the 

donor has the right to provide advice on how the fund makes investments or donations. A donor can recommend which charities receive the funds, but the foundation 

administering the fund is under no legal obligation to allocate the funds per the request of the donor. When a grant is made from a donor-advised fund to the donor’s 

private foundation, we believe the transaction of funds constitutes excessive donor 

control. While technically allowed under the Pension Protection Act, which allows 

a donor-advised fund to make a donation to any organization, NCRP believes action 

should be taken to address the unethical nature of grants and donations being made 

from a donor-advised fund to a private foundation that features the same individual. 

SUPPORTING ORGANIZATIONS 

The structure currently set in place by the Pension Protection Act regarding supporting organizations is confusing at best. The distinctions between Type I, Type II 

and Type III organizations, despite the clarification brought forth in the bill, still 

remain unclear. The definitional tests put in place remain complex, and with no 

clear, transparent definitional test in place, the potential for abuse and fraud remains high. This is most true with Type III supporting organizations, where the 

control by the sponsored legislation is the weakest and the potential for abuse is 

the strongest. With Type I and Type II supporting organizations, there is at least 

some level of control set in place, and because of this, the abuse of funds is less 

likely to occur. We urge Congress to look into revising the section of the Pension 

Protection Act dealing with supporting organizations and scrapping the category of 

Type III supporting organizations all together; by eliminating this category and refining the definitions and classification of supporting organizations, the hope is that 

212 

greater transparency and responsiveness will result. NCRP addressed the issue of 

Type III organizations in our comments to the IRS back in April 2007. 

Similar to our argument for a minimum annual required level of distributions for 

donor-advised funds, NCRP believes the same rule should be applied to supporting 

organizations. To achieve a maximum level of accountability concerning supporting 

organizations, and donor-advised funds, all efforts should be made to ensure stronger disclosure of the distributions made by the funds. NCRP would like to see legislation introduced in Congress this session concerning an effort to require ‘‘real time’’ 

disclosure of grants made by supporting organizations that would result in detailed, 

unrestricted disclosure. Greater insight into who is receiving these funds in a quick 

and responsive way has the potential to encourage increased accountability among 

the supporting organizations and donors themselves, in the end resulting in more 

dollars going to the charities that need the money the most. 

EXCISE TAXES 

One of the provisions missing from the Pension Protection Act that we would like 

to see amended by future legislation concerns supporting organizations and donoradvised funds paying excise taxes. Given the history of abuse and fraud that is prevalent in both supporting organizations and donor-advised funds, we believe a mechanism that must be put into place is to require the funds to pay excise taxes, similar 

to how private foundations already do. With billions of dollars in assets, donor-advised funds and supporting organizations can easily afford to make the payments, 

and when coupled with a strict payout requirement, the taxes paid should not take 

away from the charitable contributions the funds are making. NCRP believes excise 

taxes on private foundations, donor-advised funds and supporting organizations 

should be used exclusively for oversight of the nonprofit sector. Adding a new excise 

tax to donor-advised funds and supporting organizations without dedicating the revenue to oversight of the sector would serve little purpose. 

INTERNATIONAL ORGANIZATIONS 

One aspect of the Pension Protection Act that deserves clarification is the provision dealing with international organizations. When a donor-advised fund issues a 

grant to an international charitable organization, the fund is required to ‘‘make a 

good faith determination that the organization is equivalent to a domestic charity,’’ 

with no standards or rules governing how this determination is supposed to be 

made. With the potential for fraud and abuse by international organizations and the 

good-natured intent of donor advised funds being tarnished because of unclear specifications, NCRP feels that new standards should be put in place by either the Treasury Department or Congress that clarify the expectations used when making grants 

to international organizations. With clearer guidelines as to what constitutes a charitable international organization, donor-advised funds can have a better understanding as to whom they are contributing to; in addition, having the regulations 

in place can ultimately make sure charitable dollars are allocated to the people and 

resources that need them the most. 

REPORTING REQUIREMENTS 

Section 1223 of the Pension Protection Act, located under the Reforming Exempt 

Organizations subtitle, issues new reporting requirements on tax-exempt organizations that are not currently required to file information returns. Under the current 

law, these organizations have gross receipts of less than $25,000 on an annual basis. 

This threshold has not been raised in nearly three decades, and NCRP believes an 

increase in the threshold will benefit smaller organizations that cannot afford to 

take on the workload of the increased reporting requirements. We believe raising 

the annual threshold to $50,000 will have a positive impact on the sector and decrease the number of organizations that have to file the normal amount of paperwork that larger organizations are required to file. NCRP will be submitting comments to the IRS next month concerning the revisions of the 990 form, and will include comments on the threshold, and how we strongly encourage a raise in the reporting requirement. 

CONCLUSION 

NCRP has been on the offensive for years relating to the problems associated with 

donor-advised funds, supporting organizations and private foundations. The changes 

made in the Pension Protection Act were a noble step forward in the fight to bring 

about more responsiveness and transparency to the philanthropic sector. However, 

there is still substantial work that needs to be done, and NCRP hopes that through 

our comments and the comments of our colleagues there can be a dialogue to bring 

about change. Despite the passage of the Pension Protection Act nearly a year ago, 

tougher regulation standards on donor-advised funds and supporting organizations 

213 

are still sorely needed, and NCRP believes this can be achieved, partly, through 

mandatory payout requirements and excise taxes. It is our hope that through new 

legislation these measures and the others laid out in our comments can be achieved. 

Finally, we would like to stress our fundamental belief that the charitable provisions in the current Pension Protection Act deserve renewal. By permanently extending these provisions, Congress will be sending a clear message to the philanthropic community that they are encouraging charitable activity, especially in regard to the IRA Rollover program. NCRP strongly believes that the best way to ensure strong charitable giving through the IRA Rollover program is to leave the provision in its current state. Changing the provision in any sort of meaningful or substantial way would harm the essential spirit of philanthropy that resides in its current form. NCRP is hoping to see legislation this session that refrains from revising 

the IRA Rollover plan and leaves the charitable revisions contained in the Pension 

Protection Act intact. The other charitable revisions contained in the bill, including 

rewarding donations to food and book programs, deserve an extension as well. 

We would like to thank the House Ways and Means Committee for allowing us 

to submit comments pertaining to the provisions in the Pension Protection Act that 

relate to tax-exempt organizations. NCRP is willing to assist the Committee in any 

way we can relating to issues concerning the non-profit and philanthropic sectors, 

and we look forward to working with the Committee to bring about substantive 

change to the charitable community. 

f 

Statement of National Committee on Planned Giving 

National Committee on Planned Giving (NCPG) is the professional association for 

individuals whose work includes developing, marketing and administering charitable planned gifts. NCPG consists of more than 130 local councils representing upward of 11,000 nonprofit fundraisers as well as consultants and donor advisors 

working in for-profit settings. Collectively these individuals transact billions of dollars in charitable gifts each year. 

The mission of NCPG is to increase the quality and quantity of charitable planned 

gifts by serving as the voice and professional resource for the gift planning community. As such, NCPG strongly supports federal legislation that permits older Americans to transfer money from their Individual Retirement Accounts (IRAs) directly 

to charities without suffering tax penalties. This legislation is commonly referred to 

as the IRA Charitable Rollover. 

In August 2006, a limited version of the IRA Charitable Rollover was enacted into 

law as part of the Pension Protection Act (Public Law 109–280). This provision, 

scheduled to expire at the end of 2007, permits IRA owners beginning at age 701⁄2

to make outright charitable gifts totaling up to $100,000 per year from their IRAs 

directly to eligible charities. The donor does not have to report the distribution as 

taxable income and is not entitled to claim a charitable income tax deduction for 

the gift. 

NCPG is pleased to report that this provision has generated an enormous amount 

of new charitable giving. For example, NCPG has received reports of nearly 4,500 

charitable gifts made pursuant to this provision, totaling over $80 million. This data 

is the result of a voluntary, unscientific survey conducted by NCPG, so the total 

number of charitable gifts from IRAs is likely much higher. 

In short, the IRA Charitable Rollover has allowed older Americans, particularly 

those individuals who do not itemize their tax deductions and would not otherwise 

receive any tax benefit for their charitable contributions, to donate money to thousands of nonprofits that work every day to enrich lives and strengthen communities 

across the country and around the world. Unfortunately, the IRA Charitable Rollover is scheduled to expire at the end of the year. If the provision lapses, the nation’s charities risk losing out on millions of dollars that could be generated by this 

important tax provision. 

Accordingly, NCPG strongly supports enactment of the Public Good IRA Rollover 

Act (H.R. 1419), introduced on March 8, 2007 by Representatives Earl Pomeroy and 

Wally Herger, which would make permanent and expand the current IRA Charitable Rollover. Over 900 organizations from every state in the country have joined 

with NCPG to support this legislation. 

Specifically, H.R. 1419 accomplishes four important things. First, the legislation 

makes the IRA Charitable Rollover permanent. Second, it removes the $100,000 cap 

per year on IRA gifts. Third, it permits all charities to receive IRA gifts. Fourth, 

the legislation permits IRA owners, beginning at age 591⁄2, to create a life-income 

gift through existing planned giving options such as charitable gift annuities, chariVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00217 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
214 

table remainder unitrusts, charitable remainder annuity trusts and pooled income 

funds. 

NCPG believes H.R. 1419 will build upon the great success of the current IRA 

Charitable Rollover. The legislation will spur millions of dollars in new charitable 

donations that will go to support critical programs and services. NCPG urges the 

Congress to act on this legislation soon. 

f 

Statement of National Council of Nonprofit Associations 

Introduction 

The National Council of Nonprofit Associations (NCNA) respectfully submits this 

testimony to the Subcommittee on Oversight of the House Committee on Ways and 

Means in response to the Overview Hearing on the Nonprofit Sector on July 24, 

2007 and the request for comments regarding the passage of the Public Good IRA 

Rollover Act of 2007 (H.R. 1419, S. 819). 

NCNA is the network of state and regional nonprofit associations serving over 

22,000 members in 41 states and the District of Columbia. NCNA links local organizations to a national audience through state associations and helps small and midsized nonprofits: 

• Manage and lead more effectively; 

• Collaborate and exchange solutions; 

• Save money through group buying opportunities; 

• Engage in critical policy issues affecting the sector; and 

• Achieve greater impact in their communities. 

NCNA also serves as a unified voice for the small and midsize nonprofits who continue to positively impact their communities. Over 90% of nonprofits in America 

have operating budgets of less than 5 million dollars. Representing all fields within 

the nonprofit sector—healthcare, education, the arts, environmental groups—these 

small and midsize nonprofits are vital contributors to improve our nation’s quality 

of life. It is in the interests and perspective of these organizations that we submit 

our comments. 

The following comments express NCNA’s support of two issues: (1) the Nonprofit 

Capacity Building Initiative, which would increase the capacity, effectiveness, and 

accountability of small to midsize nonprofits and, ultimately, improve the quality of 

life in local communities and (2) the Public Good IRA Rollover Act of 2007 (H.R. 

1419, S. 819), which has already resulted in over 75 million dollars in gifts to nonprofit organizations. 

The Nonprofit Capacity Building Initiative 

The recently released GAO report (Nonprofit Sector—Increasing Numbers and Key 

Role in Delivering Federal Services, July 24, 2007) identified several policy issues 

related to how the federal government interacts with the nonprofit sector. The report noted that key to a healthy nonprofit sector include: strengthening governance, 

enhancing capacity, ensuring financial viability, and improving data quality without 

overly burdening the sector with unnecessary or duplicative reporting and administrative requirements. NCNA and its state association members have proposed a program that will address the key issues identified in the GAO report through the Nonprofit Capacity Building Initiative (NCBI). This initiative would create a federal revenue stream for training and capacity building, especially for small nonprofits 

through existing technical assistance and management support entities at the state 

and local level. Combining federal assistance with state and local level programming 

is necessary for best management practices to be widely understood and adopted 

within the nonprofit sector. 

Over 90 percent of nonprofits operate with annual budgets under $5 million. 

These organizations play a vital role in local communities and in the quality of life 

of all Americans through their work in education, healthcare, the arts, social services, and other fields. While small and midsize nonprofits are best positioned to 

reach and serve all Americans they are least likely to have the adequate resources 

to meet the needs of their constituents and access to programs and information designed to help them manage and govern their operations. As aptly stated in the 

GAO report, ‘‘Given the way the sector is woven into the basic fabric of our society, 

it is essential we maintain and cultivate its inherent strength and vitality and have 

accurate and reliable data on the overall size and funding flows to the sector.’’ 

Specifically, topics and activities addressed by NCBI would include the following: 

(1) Leadership Development (Board Composition and Function, Staff Professional 

215 

Development, Volunteer Training, and Development and Succession Planning); (2) 

Organizational Development (Board Governance, Systems: Management, Human 

Resources, Financial, Planning, Policies and Procedures, Fiscal Controls); (3) Legal 

Compliance and Reporting (Policies and Procedures, New and Existing Federal and 

State laws, On-Line Reporting Systems); and (4) Technology (Training, Equipment, 

and Software). 

The NCNA network has the national infrastructure and expertise to launch a 

Nonprofit Capacity Building Initiative for the nonprofit sector through state associations of nonprofits. By investing in this already existing network, the federal government can leverage the collective experience, resources, and strength of these established organizations. This investment can improve the quality and reach of services 

to build the capacity of nonprofits, while reducing redundancy, and avoiding the creation of new bureaucracies at the national, state, and local level. 

The Public Good IRA Rollover Act of 2007 

In addition, the NCNA supports the Public Good IRA Rollover Act of 2007. The 

response to the 2007 Act—more than 75 million dollars in giving—is a clear indicator that the IRA Rollover Act serves donors, charities, and the public at large and 

should be extended permanently. While NCNA has not yet gathered systematic data 

on the impact of the IRA Rollover on our members, initial reports are favorable. 

Small organizations are reporting IRA Rollover contributions that exceed past giving. For example, the Executive Director of an interfaith Pharmacy in Louisiana 

writes reports that one donor contributed $1,203, ten times more than the donor’s 

previous gift. Community Foundations, including those in Montana and Louisiana, 

are reporting IRA Rollover contributions. This is a positive sign for the NCNA network because local and community foundations often fund our extensive network of 

small and midsized nonprofits. 

In Closing 

NCNA supports the efforts of the House Ways and Means Committee in strengthening the partnership between government and the nonprofit sector, increasing the 

accountability of nonprofits, and supporting the capacity and effectiveness of the 

charitable community across the country. We believe that the Nonprofit Capacity 

Building Initiative and the IRA Rollover Act are examples of policies that work to 

achieve our shared goals. 

Thank you for the opportunity to submit these comments, please contact me if you 

have questions or need additional information on these or related issues. 

f 

Statement of National Multiple Sclerosis Society 

The National Multiple Sclerosis Society thanks the Subcommittee for this opportunity to provide comment on the significant role and impact that the IRA charitable rollover provision enacted as part of the Pension Protection Act of 2006 is having on tax-exempt charitable organizations. In addition, these comments focus on 

our support for the ‘‘Public Good IRA Charitable Rollover Act of 2007’’ (H.R. 1419). 

Multiple sclerosis (MS) stops people from moving, and the National Multiple Sclerosis Society (the Society) exists to make sure it doesn’t. Through our home office 

and 50-state network of chapters, the Society funds MS research, provides a variety 

of programs and services to people with MS, offers professional education, and furthers our efforts through advocacy at the local, state and Federal levels. The Society 

is dedicated to ending the devastating effects of MS and moving closer to a world 

free of this disease. 

The Society is classified as a 501(c)(3) non-profit organization under the Internal 

Revenue Code. To that end, we applaud the adoption of the provision in the Pension 

Protection Act of 2006 that allows for taxed exempt charitable rollover IRA distributions to non-profits from individual IRA plan holders. Specifically, the provision provides an exclusion from gross income for otherwise taxable IRA distribution of up 

to $100,000 per year from traditional and Roth IRAs for making qualified charitable 

distributions during the tax year 2006 and 2007 by individuals who have attended 

at least age 701⁄2 at the time of disbursement to the charity of choice. 

While limited in its scope, the IRA charitable rollover provision has already made 

a significant impact on charities across the U.S. According to the Independent Sector and the National Committee on Planned Giving, initial reports show that during 

the first four months this provision was in effect, more than $70 million in IRA 

charitable rollover contributions were made to eligible non-profits. Between September 2006 and December 2006, the Society recorded $131,000 in contributions 

from charitable rollover IRAs applicable to our fiscal year 2007 operating budget. 

216 

The IRA charitable rollover provision encourages a new type of planned giving 

that enables charities to keep improving the lives of Americans and give more back 

into their communities. Thus far, this type of planned giving helped organizations 

build new cancer centers, develop additional counseling programs for at risk youth, 

support housing for homeless families, and provide art therapy for elderly Americans and individuals with developmental disabilities. In addition to the community 

benefits, the charitable rollover IRA provision helps older Americans support their 

favorite causes without tax penalties when receiving required disbursements from 

their IRAs. 

The current charitable rollover IRA provision will expire on December 31, 2007. 

Given the significant impact that this type of planned giving has had on the Society 

and the non-profit community in a very short timeframe, we urge the Subcommittee 

to support the Public Good IRA Charitable Rollover Act of 2007 (H.R. 1419). H.R. 

1419 would extend and broaden the current charitable rollover IRA provision by 

making it permanent. In addition, the bill seeks to remove the current $100,000 per 

taxpayer per year limitation, make all charities eligible to receive these types of donations, and would allow donors to make contributions beginning at age 591⁄2. The Society strongly supports H.R. 1491, and we encourage this Subcommittee 

and Congress to take a more in-depth look at the significant benefits the charitable 

rollover IRA provision has had on non-profits and communities across our country. 

Non-profits exist to provide programs and services that help better the lives of 

Americans, and the charitable rollover IRA provision provides additional resources 

through which non-profits can improve and increase delivery of these programs and 

services. These additional resources go directly back into the communities non-profits serve. The Society urges the Subcommittee to mark-up and report out the Public 

Good IRA Charitable Rollover Act of 2007 (H.R. 1419). Thank you. 

f 

Statement of New York Community Trust 

Introduction 

For almost a century, community foundations have been building permanent charitable resources to meet the current needs of their communities and the unforeseen 

needs of the future. And for more than 80 years, The New York Community Trust 

(The Trust), through the generosity of donors past and present, has supported nonprofit organizations in the New York metropolitan area that work daily to ensure 

that our community is a vital and healthy place in which to live and work—for all 

residents. When we started in 1924, our sole mission was to distribute to nonprofit 

organizations the income from charitable trusts set up by will and held by New 

York City banks. The Trust’s founders were men of vision who understood the power 

of an institution that could employ the combined charitable passions of individuals 

to meet a broad variety of community needs. They also understood that contemporary donors could not anticipate the compelling issues that would confront their 

successors—and they were committed to ensuring that adequate resources would be 

available for the future. In those early days, our donors set up unrestricted or broad 

field-of-interest funds through bequests, trusting tomorrow’s leaders to spend it 

wisely. Today, The Trust has assets of $2 billion; $700 million of that total is held 

in more than 1,000 donor-advised funds, which range in size from $5,000 up to $99 

million. Those funds routinely pay out more than 10 percent of their assets to charity annually. The remaining $1.3 billion rests in permanent unrestricted or fieldof-interest funds. 

We opened our first ‘‘donor-advised’’ fund in 1934, before there was even a name 

for it—and long before there were any specific laws or regulations. During her lifetime, this first ‘‘donor advisor’’ made suggestions to the staff of The Trust as to charitable distributions from the fund. When she died, the assets remaining in the advised fund became part of The Trust’s discretionary grantmaking program—a program that relies on a professional staff that assesses community needs, investigates 

nonprofits, vets their projects and finances, and recommends grants to our distinguished volunteer board. Grants we make from the fund she created, which now has 

$64 million in assets, support projects to help low-income elders keep their homes 

and apartments, train poor, young women to become licensed day-care providers, reduce environmental health hazards in substandard housing, and much more. 

A profoundly important social contract was established with that first donor-advisor that continues to this day: in consideration for the privilege of making grant recommendations, money would be left in the fund for future generations. That is still 

our expectation and is characteristic of our relationship with most donors to The 

Trust. 

217 

The philanthropic world has changed since 1934 and 21st century donors have significantly more choice than they did years ago. When the IRS gave public charity 

status to donor-advised funds sponsored by financial institutions, donor expectations 

changed. The notion of community philanthropy pioneered by community foundations morphed into individual charitable checking accounts, with little expectation 

of, commitment to, or mechanism for permanence. 

Nonetheless, The Trust and its donors support a dazzling array of charitable activity. So it was with dismay that we greeted the tax advantages offered for Hurricane Katrina giving and the IRA charitable rollover because those incentives were 

not available for contributions to donor-advised funds. In addition, other provisions 

of the Pension Reform Act of 2006 imposed burdens that seem designed to discourage charitable giving and based on assumptions that donor-advised funds are inherently flawed and that contributions to these funds are not, in fact, completed gifts. 

We recognize that there have been some egregious misuses, but we believe that enforcement of existing regulations can surely find and punish those individuals who 

violate the law without penalizing generous people who use their funds to do good. 

Indeed, the 1976 Treasury regulations implementing the Tax Reform Act of 1969, 

and the so-called ‘‘Section 507 regs,’’ set out in careful detail the facts and circumstances needed for a completed gift. Guided by the Section 507 regulations, The 

Trust, and our community foundation colleagues, instituted policies to make sure 

that our charitable institutions and our donor-advisors are in compliance. 

In short, donor-advised funds are not a new-fangled tool to avoid taxes; they are 

a long-standing approach developed by community foundations and addressed in 

Treasury Regulations to enhance and encourage donors to invest charitably in the 

immediate and future needs of communities. They are one of many ways that permanent charitable institutions are able to both consolidate many grants from different funds—restricted, unrestricted, and donor-advised—to support community 

programs and to build their assets for the future health and well-being of their communities. 

This is the prism through which we respond to the Committee’s request for comments on how the Pension Protection has affected community foundations. 

Definition of Donor-Advised Funds 

The Trust considers the definition of donor-advised fund under Code Section 

4966(d)(2) to be overly broad in that it includes donor-advised funds established by 

governments, public charities, and private foundations. As a result, donor-advised 

funds established by governmental and tax-exempt entities are prevented from indirectly supporting the types of programs that they are still permitted to operate or 

for which they may provide direct support. This result seems at best unintended 

and at worst counterproductive. Treasury Regulation Section 1.507–2(a)(8) sets out 

in detail the requirements for a private foundation that terminates its existence and 

transfers ‘‘all of its right, title, and interest in and to all of its net assets’’ to one 

or more Code Section 170(b)(l)(A) organizations. The Section 507 regulations provide 

clear rules, and have been looked to since their promulgation in the mid 1970s as 

the legal anchor not only for the proper termination of private foundations into 

donor-advised funds of public charities, but also for the establishment of donor-advised funds within public charities. In fact, the regulations under Section 170 governing component funds of community trusts specifically cross reference Treasury 

Regulation Section 1.507–2(a)(8) in defining how a transferor private foundation 

may transfer its assets to a fund at a community trust that would qualify as a component fund. Until the mid-1950s, The New York Community Trust existed solely 

in trust form, and the various funds that constituted The Trust met the requirement 

of being a ‘‘component fund’’ as prescribed in the special community foundation regulations under Code Section 170 and adopted by Treasury in 1976. Twenty years 

before the ’69 Tax Act, The New York Community Trust created a sister not-forprofit corporation, Community Funds, Inc., to which donors could make contributions for all the same purposes and in analogous forms as contributions to The 

Trust. The two entities are treated as one organization for tax purposes. Most community foundations formed in recent years have taken the form of not-for-profit corporations rather than trusts, and virtually all community foundations, regardless of 

the structure, have looked to the Code Section 507 regulations for guidance in establishing and operating donor-advised fund programs. 

The PPA also sweeps up in its definition a fund where the advisors are ‘‘appointed’’ by the donor—even when they are named in the instrument. As a result, 

a fund set up by will is deemed to be a donor-advised fund if the decedent named 

unrelated individuals to an advisory committee. In addition, the broad definition of 

what constitutes advisory privileges pulls in relationships so minor that the donor 

218 

cannot be viewed as controlling the fund, for example, where the donor’s advice is 

limited to the amount of money to be expended each year. 

Applying Private Foundation Rules to Donor-Advised Funds 

Donor-advised funds encourage charitable giving by individuals who want to engage regularly in thoughtful, responsible philanthropy and want to be part of a permanent charitable institution that will respond to the community’s needs now and 

in the future. They offer a community, with all of its complexity and diversity, the 

opportunity to receive support from an array of donors whose passions and commitments reflect that very diversity and complexity: popular vs. unpopular causes, general support vs. project support; liberal vs. conservative; direct services vs. policy 

work; immediate needs vs. future needs. 

As a ‘‘sponsoring organization’’ under the new nomenclature of the Pension Protection Act of 2006, The Trust (and other community foundations) provides its 

donor-advisors with professional grantmaking staff and knowledge of the community 

and its needs. Its board can hardly be viewed as controlled by its donors. At The 

Trust, staff also brings a high level of diligence to its review of potential grantees 

prior to approving grant recommendations. In this respect, The Trust performs an 

independent investigation of any charity recommended for support, including support from a donor-advised fund at The Trust. The charitable sector as a whole benefits from this kind of review because it imposes a discipline on prospective grantees, 

who know that both their fiscal and program operations are being scrutinized. 

In addition to providing guidance on the selection of grantees, the sponsoring organization provides an extra layer of oversight and necessary administration that 

is otherwise difficult for individual donors or unstaffed family foundations to manage. A sponsoring organization is responsible for determining that grantees have 

current financial statements and or audits, operate with independent boards of directors, have timely filed their Forms 990 with the IRS, and have an organizational 

structure adequate to the projects being undertaken. Because The Trust, as a sponsoring organization, has legal title and control over all of its assets, including donoradvised funds, it assumes the responsibility for charitable assets and assures that 

these assets are used exclusively for tax-exempt charitable purposes. Being part of 

a major charitable institution that is equipped to manage and oversee grants to 

hundreds of organizations empowers donors to hold grantees accountable for the 

quality of their work. 

The law governing charitable contribution deductions (Section 170 of the Code and 

the accompanying Treasury Regulations, court cases and so forth) quite clearly provides that a gift to a charity that provides impermissible private benefit to the donor 

or another private individual is not tax-deductible. To create special rules and regulations for contributions to donor-advised funds that are part of a functioning public 

charity does not add anything material to existing law. The need is for best practices and oversight by sponsoring organizations and donors and for enforcement by 

the IRS: new and redundant special rules will only create a maze of foot faults. 

Rules restricting certain grants, described more fully below, also treat donor-advised funds like private foundations, including restrictions on grants to foreign organizations, 501(c)(4) organizations for charitable purposes, and individuals. The likely 

effect will be to drive more donors to private foundations, rather than to the more 

cost-effective donor advised funds at a professionally staffed sponsoring organization. 

Prohibition on Certain Types of Grants from Donor-Advised Funds 

Scholarship Funds: Complex rules about when a donor is deemed to control the 

advisory committee to a scholarship fund are overly broad. The PPA should have 

excluded from the definition those funds established for scholarships and awards, 

regardless of composition of committee. Congressional concern about inappropriate 

benefits to the donor or her family is already addressed by other rules prohibiting 

personal benefit. And the prohibition on grants from donor-advised funds to individuals should not have included funds with a specific charitable purpose such as scholarships and awards, regardless of the composition of the advisory committee. Many 

of our scholarship funds are small, but important, and function efficiently only because they are advised by the families or individuals who created them. We have 

reconstituted these committees in compliance with PPA, but we are concerned that 

they will not function as well as they have, and discourage future donors who want 

to involve their families in philanthropy. 

Grants to Foreign Charities and 501(c)(4)s: Many of our donors support charities 

abroad. Requiring the sponsoring organization to exercise full expenditure responsibility imposes an unreasonable burden, and has compelled us to prohibit donors 

from suggesting these grants. Similarly, many 501(c)(4)s have charitable missions, 

219 

including volunteer fire departments and rotary clubs. The burden of exercising expenditure responsibility for what are often modest grants is excessive, and we no 

longer permit them. 

Supporting Organization: The rules precluding grants from donor-advised funds 

to non-functionally integrated type III supporting organizations also make the sponsoring organization responsible for determining which organizations meet the type 

III definition. This imposes an unreasonable burden on a sponsoring organization 

with hundreds of donor-advised funds. Such determinations should be the responsibility of the IRS. 

Penalties on Certain Transactions 

Section 4967 imposes a tax on a donor or advisor who recommends to the sponsoring organization a distribution from a donor-advised fund if the distribution results in a donor, donor-advisor, or related person receiving a more than an ‘‘incidental benefit.’’ A tax also is imposed on the donor, donor-advisor or related person 

who receives the benefit and fund managers of the sponsoring organization who 

knowingly agree to make the distribution, with no concomitant burden on the grantee that improperly provides the benefit. 

This new provision will require a sponsoring organization to devote more of its 

resources to the administrative task of identifying those individuals and entities 

that might be related to the donor or donor-advisor. 

Section 4958 (Intermediate Sanctions) 

The inclusion of investment advisors as disqualified persons is overly broad, picking up all investment advisors for many sponsoring organizations, whether they are 

independent or have a relationship with a donor to a donor-advised fund. Compensation to any vendor should be reasonable, but to create an additional category 

of disqualified persons solely for sponsoring organizations makes no sense. If Congress considers investment advisors and their fees suspect, then they should be suspect for all public charities. 

Section 4943 (Excess Business Holdings) 

The Pension Protection Act extends the application of the excess business holdings 

rules to donor-advised funds. In applying the rules, each donor-advised fund’s holdings are aggregated with the holdings of disqualified persons with respect to the 

donor-advised fund, as defined by Code Section 4943(e)(2). A sponsoring organization will now be required to devote considerable staff and financial resources to compliance with these rules—no small undertaking in light of the breadth of the aggregation rules. A sponsoring organization must monitor the holdings of each donoradvised fund to determine whether it falls within the 2 percent de minimus rule 

and, if not, additionally identify the disqualified persons and their investment holdings that are in common with the donor-advised fund. This is a daunting task because of the endless string of relatedness constituting disqualified persons. There is 

no rational way that an institution with numerous donor-advised funds can gather 

and track this information in any meaningfully accurate way; the result is likely 

to be significant noncompliance or meaningless attempted compliance. 

IRA Charitable Rollover 

Because of the estate tax rates on IRA assets left to heirs other than a spouse, 

and because many donors can afford to forego these assets, we applauded the charitable rollover provision of the PPA. However, donor-advised funds should not have 

been excluded. Indeed, donor-advised funds at a community foundation, with the 

oversight and grantmaking experience explained above, are the ideal vehicles for 

the rollover; investment managers that hold IRA assets do not have this expertise. 

The Trust also believes that the rollover should be made permanent. 

Form 990T 

The PPA requires that Form 990T be made public. Unlike the Form 990, the information return, which is public information, the 990T is a tax return. Individuals’ 

and corporations’ tax returns are not public documents, and this provision puts public charities, and any taxable companies in which they have an interest, at a disadvantage. 

As explained in the Introduction, community foundations and similar charitable 

institutions have twin goals: to serve living donors and meet immediate community 

needs; and to be permanent endowments that have the resources to respond to the 

needs we cannot now imagine. Encouraging donors to think in terms of contributing 

220 

to a permanent fund buttresses both goals. At The Trust, all donor-advised funds, 

if not fully expended after two successions of advisors, become unrestricted funds 

of The Trust. And with our other component funds, they provide irreplaceable support for the voluntary institutions that are a vital part of American democracy. 

f 

Statement of Ohio Grantmakers Forum 

Ohio Grantmakers Forum is pleased to provide the following comments on the impact of the Pension Protection Act of 2006’s charitable provisions as they relate to 

our members, who are private and community foundations, other public charity 

grantmakers and corporate foundations and giving programs. We appreciate and applaud the Subcommittee’s interest in exploring the impact—both intended and otherwise—of this important legislation through written comments and the scheduled 

public hearing. 

IRA Charitable Rollover Provision 

Ohio’s community foundations and Jewish federated funds have received nearly 

$5 million in donations due to the IRA charitable rollover provisions included in last 

year’s Pension Protection Act. During its short duration to date, the incentive has 

been a significant source of new dollars and some new donors, with gifts ranging 

from a few hundred dollars up to the $100,000 cap on contributions. These gifts result in additional funds flowing into nonprofit organizations that provide critical 

services to people in need, support educational achievement, make communities 

safer places and strengthen Ohio’s economy. According to our research, many more 

dollars could be raised if more types of organizations—such as donor advised 

funds—were eligible for the charitable rollover of IRA assets. Ohio Grantmakers 

Forum supports H.R. 1419 and its provisions to expand and extend the rollover beyond this tax year. 

Regulatory Provisions 

Our community foundation members, those most affected by the new regulations 

included in the Pension Protection Act, have indicated to us that they are quite 

cumbersome and expensive to implement. This is of special concern to us since 

Ohio’s charitable grantmakers already are regulated by federal and state law, to ensure that they fulfill their fiduciary duties and operate ethically. Additionally, the 

charitable sector has numerous voluntary self-regulation mechanisms in place to 

educate and help nonprofit entities to behave at the highest ethical levels. For instance, members of Ohio Grantmakers Forum indicate each year that they adhere 

to our Guiding Principles that call for greater transparency and accountability. (See 

below for the list of Guiding Principles.) 

Furthermore, community foundations across the nation and in Ohio are rapidly 

adopting ‘‘National Standards.’’ These self-regulatory standards include detailed financial, grantmaking and operational practices and policies. Adding additional federal regulations, definitions and reporting requirements is not only unnecessary, but 

directs the attention of foundations away from their vital work as grantmakers. The 

one-size-fits-all approach to the new regulations can be particularly problematic in 

this regard for smaller foundations with minimal or no paid staff. 

We hope that the Oversight Subcommittee will review the issues outlined by Independent Sector and the Council on Foundations last fall, in a letter to the IRS, and 

consider how it might address and resolve these issues in this session. 

Thank you for the opportunity to comment upon the Pension Protection Act’s provisions impacting charitable organizations and giving. 

Ohio Grantmakers Forum Guiding Principles 

1. Adhere to the highest standards of ethical behavior in all philanthropic activities. 

2. Operate with an active governing board that sets and regularly reviews all organizational policies, including those related to governance, conflict of interest, 

grantmaking, and finance (including audit). 

3. Have basic information readily available regarding programs, funding priorities 

and application requirements. 

4. Maintain constructive relationships with applicants, grantees, donors and the 

public based on mutual respect, candor and confidentiality. 

221 

5. Strive to include the perspectives, opinions and experiences of the broadest 

possible cross-section of people to inform the organization’s grantmaking/contributions, governance/staff structure and business practices. 

6. Support continuous learning by trustees, staff and grantees. 

7. Honor donor intent through thoughtful deliberation in the context of changing 

social conditions. 

8. Fulfill all fiduciary and legal responsibilities. 

Revised by the Board of Trustees August 1, 2006 

OGF Board of Trustees 

David T. Abbott 

The George Gund Foundation 

Chair 

Rene Hoy 

Honda of America Foundation 

Vice Chair 

Scott McReynolds 

The Greater Cincinnati Foundation 

Treasurer 

Patricia R. Conley 

KnowledgeWorks Foundation 

Secretary 

Margot James Copeland 

KeyBank 

Stuart W. Cordell 

Robert S. Morrison Foundation 

Kim Cutlip 

The Scioto Foundation 

Heidi Jark 

Fifth Third Bank 

Susanna H. Krey 

Sisters of Charity Foundation of Cleveland 

Dennis M. Lafferty 

Jones Day 

Michael M. Parks 

The Dayton Foundation 

Richard W. Pogue 

Deaconess Community Foundation 

Ronn Richard 

The Cleveland Foundation 

Gordon Wean 

The Raymond John Wean Foundation 

Denise San Antonio Zeman 

Saint Luke’s Foundation of Cleveland, Ohio 

f 

Ohio Osteopathic Foundation 

Columbus, Ohio 43201–0130 

July 5, 2007 

The Honorable John Lewis, Chairman 

Committee on Ways and Means Oversight Committee 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Lewis: 

I am submitting this letter in response to the request of the Ways and Means 

Oversight Committee for written comments concerning the impact of the Pension 

Protection Act on charitable organizations. 

222 

The Ohio Osteopathic Foundation (Foundation) is a 501(c)(3) organization classified as a supporting organization within the meaning of section 509(a)(3) of the Internal Revenue Code. Immediately prior to the enactment of the Pension Protection 

Act (PPA) of 2006, the Foundation received the first installment of a five-year grant 

from a non-operating private foundation that will allow us to substantially increase 

the quality of our programs. As a result of the PPA restrictions on the ability of 

supporting organizations to accept or receive gifts from private foundations, however, the remainder of this grant is now in jeopardy. The grantor is concerned about 

violating these restrictions and triggering the excise tax created by the PPA. As a 

result, the grantor is withholding the remaining installments of the grants unless 

we change our public charity classification to that described in 509(a)(1) or 509(a)(2). 

The Foundation has functioned as a ‘‘Type I’’ supporting organization for more 

than 20 years. It is operated, supervised and controlled by the members of the Ohio 

Osteopathic Association (Association) to ensure that its programs and grants benefit 

the entire osteopathic profession in Ohio and do not inure to the benefit of any disqualified individual or group of individuals. 

As a small organization, we have been able to avoid duplicative administrative 

costs by donating employee time from the Association to support Foundation programs. We have also maximized investment income in the Foundation to benefit osteopathic education and research. The main beneficiary of our grants has been the 

Ohio University College of Osteopathic Medicine, a public institution in the state 

of Ohio. 

While conversion of the Foundation to a 509(a)(1) or 509(a)(2) organization might 

have been easily accomplished in the past, we are now hindered in making a conversion because of another large grant we received immediately prior to enactment of 

the PPA. That grant significantly increased our annual investment income, which 

may exceed the one-third income limitation needed to qualify for exemptions under 

one of these other sections. 

The Foundation believes that the restrictions imposed by the PPA on the ability 

of private foundations to make distributions to supporting organizations need to be 

refined to allow these distributions to be made when appropriate governance mechanisms are in place. We further believe that Type I supporting organizations which 

have appropriate governance structures and accountability mechanisms should be 

treated in the same manner as public charities that receive their exemption under 

509(a)(1) or 509(a)(2) of the Internal Revenue Code. 

Sincerely, 

Jon F. Wills 

f 

President 

Statement of the PGA Tour 

The PGA TOUR is very grateful for this opportunity to provide comments to the 

Committee on the exempt organization provisions in the Pension Protection Act of 

2006, and will focus its attention entirely on section 1205. 

Section 1205 of the Pension Protection Act of 2006 (‘‘PPA’’) was a positive first 

step toward resolving a problem that was created a decade ago when Congress unexpectedly altered the rules relating to transactions between tax-exempt organizations and certain taxable subsidiaries. 

In general, interest, rents, royalties, and annuities (i.e., payments of passive income) are received free of tax by exempt organizations. Under Code section 

512(b)(13), however, these payments are subject to tax if they are received from a 

‘‘controlled’’ organization (e.g., a subsidiary). Prior to the enactment of the Taxpayer 

Relief Act of 1997 (‘‘TRA 97’’), an organization was considered controlled if the exempt organization had a direct ownership interest of 80 percent or more in that organization. TRA 97 changed the ownership percentage to 50 percent. According to 

the TRA 97 Committee Reports, the reason for automatically taxing income from a 

controlled organization was to prevent subsidiaries of tax-exempt organizations from 

‘‘reducing otherwise taxable income by borrowing, leasing, or licensing assets from 

a tax-exempt parent organization at inflated levels.’’ 

Section 1205 of the PPA in structure is the product of close to a decade of discussions between members of the exempt community and Congress. As adopted, the 

section modifies TRA 97 to provide that interest, rents, royalties and annuities received by an exempt organization from a controlled organization will only be taxed 

when the payment exceeds fair market value. A 20 percent penalty is imposed on 

excessive payments. Tax-exempt organizations that receive interest, rent annuity or 

223 

royalty payments from a controlled organization must report payments on informational tax returns. The change to Code section 1205 only applies to payments made 

under binding written contracts (or their renewals under substantially similar 

terms) in effect on the date of enactment. The fair market UBIT test is in effect 

for 2006 and 2007. 

Congress also provided that the Treasury Department will submit no later than 

January 1, 2009, a year after the section expires, a study of the effectiveness of the 

Internal Revenue Service in administering the new section. 

Section 1205 was needed to correct an anomaly in TRA 97 which resulted in exempt organizations becoming liable for UBIT on payments of passive income even 

when they reflect fair market amounts. For example, many exempt organizations receive rents at an arm’s length amount from taxable subsidiaries that were established and operate for non-abusive purposes. Under TRA 97 these exempt organizations were subject to tax, even though their receipt of rents from unrelated organizations under the exact same terms would not be subject to tax. This treatment significantly reduced funds available for tax-exempt purposes at a time when government funding of many tax-exempt organizations is being substantially reduced and 

private sector organizations are being called upon to assume additional responsibilities. 

Section 1205 recognizes that fair market value can be established generally by 

reference to amounts paid in comparable arrangements by unrelated third parties. 

Similarly, fair market rents or royalties can be established or referenced to existing 

transfer pricing principles. The Internal Revenue Service has extensive experience 

in determining the fair market value of transfers between related parties under 

Code section 482. Moreover, the Service is applying section 482 principles to transactions involving tax-exempt organizations. For example, IRS letter rulings hold 

that tax-exempt organizations must comply with section 482 in transfers of tax-exempt property. Thus, both the Service and taxpayers have experience with these 

principles. 

The effort to modify the changes enacted to section 512(b)(13) in the TRA 97 resulted prior to 2006 in the adoption of provisions similar to section 1205 (but not 

containing the limitations discussed above) in tax bills that cleared one House of 

Congress but not the other, and at one point in a budget reconciliation bill that was 

vetoed by President Clinton on unrelated grounds. The American Bar Association 

Section of Taxation endorsed these efforts, which were at the time embodied in a 

pending Senate provision, in a letter to the Chairmen and Ranking Members of the 

tax writing committees dated February 3, 2006 stating that ‘‘[t]he amendment addresses concerns that many tax-exempt organizations have raised for a number of 

years.’’ 

While section 1205 of the PPA is a step forward, it has two notable limitations 

which we urge the Committee to address this year. 

First, the provision only applies to binding contracts in existence on the date of 

enactment of the PPA, or renewals of such contracts on substantially similar terms. 

The Committee should remove this limitation; after all, the provision contains mechanisms against abuse both in the form of the application of a market value concept 

using the principles of section 482, and, in addition, applies a tough twenty percent 

penalty tax on the portion of any payment that exceeds fair market value. These 

mechanisms are the product of years of discussion between Congress and the exempt community and will be effective both with respect to existing and new arrangements between exempts and their controlled subsidiaries and there is no technical reason under the circumstances to limit the provision to existing contracts. 

Second, the PPA provision as modified to cover new contracts should be extended 

beyond the current expiration at the end of 2007, preferably on a permanent basis. 

These rules were intended, absent the limitations that were added last year when 

the provision was made a part of the PPA, to settle the issue on a permanent basis 

and provide exempts with certainty regarding the tax treatment of transactions 

with controlled subsidiaries; they were not intended as temporary measures and 

were not so limited in any of the pieces of legislation in which they had previously 

been included. 

A great many exempt organizations maintain controlled taxable subsidiaries as a 

permanent part of their structure. Only by extending the provision, preferably on 

a permanent basis, will the exempt community have the certainty it needs in this 

area. 

Arguably the authors of the PPA version of this provision limited it with the expectation that Congress would eventually receive a Treasury study on which to base 

a further evaluation of the provision’s effectiveness. But we submit that the approach taken will be more harmful than helpful to exempts. After all, the study 

224 

might not be submitted until a year or more after the PPA provision expires creating another round of uncertainty for exempts. 

Both Congress and Treasury maintain regular oversight of the tax system and 

will no doubt study the operation of section 512(b)(13) for some time to come. Regular oversight of an existing provision is much less disruptive, and we submit better 

tax policy, than enacting temporary tax provisions that can be renewed only after 

they have expired and only after a special study has been done of their effectiveness. 

For these reasons, we urge the Committee to treat section 1205 of the PPA as 

a good first step, and to adopt the changes proposed in this submission in order to 

create certainty both for exempt organizations in this area as well as for Treasury. 

f 

Statement of Putnam Scholarship Fund 

I am writing as President of the Putnam Scholarship Fund to ask for revisions 

to the portions of the Pension Protection Act of 2006 dealing with ‘‘donor advised 

funds.’’ 

The Putnam Scholarship Fund was founded in the late 1940’s by Roger and Caroline Putnam of Springfield, Massachusetts with the support of many local citizens. 

The founders believed that securing a college education was the best way to help 

people of color become successful members of American society. Since then the Fund 

has provided help to thousands of students. Over the years recipients have gone on 

to careers as doctors, lawyers, politicians, clergy and other contributing members of 

society. Every annual donation dollar goes to scholarship aid. The Putnam Family 

covers all operating expenses and the Board of Trustees provides their services pro 

bono. In order to maximize efficiency, the Fund made arrangements with the Community Foundation of Western Massachusetts to manage its corpus and to ‘‘triage’’ 

all applications. 

This last point appears to be the major problem with the new changes in the Act. 

Because the Scholarship Fund collected the donations and had also been making the 

award decisions, we were considered ‘‘donor advised’’ and subject to the new regulations. As I note below, this has caused us significant additional expense (affecting 

what we can award) and forced us to reduce the role of our volunteer board. We 

also worry that our donors will wonder if their wishes are being as clearly followed 

given the increased overhead and involvement of ‘‘outsiders.’’ 

We would like to propose the following changes in order to address these concerns 

and yet provide the protections the Act was aimed at: 

The definition of ‘‘donor advised’’ in the Act is too broad. With what understanding we have of the rationale behind the Act, the need is focused on the following items: 

1. Source of Funding—If the ongoing operating or initial funding comes from a 

limited pool (one individual or a small group of individuals), then there should be 

cause for concern. In the case of our scholarship fund, our corpus has been built up 

over years and came from a variety of unrelated people. Our annual fundraising 

also comes from a variety of people, some of whom are members of the Putnam family, but, again, the majority of funds raised every year, both in total dollars and in 

source of donations, comes from people all around the country not related to anyone 

in my family. 

2. Relationship of Recipients to Donors—If there is a relationship between ‘‘material’’ donors (those whose annual contributions or income from capital contributions 

equals or exceeds the average annual award) and recipients, then there needs to be 

a clear and documented separation between those who solicit funds and those who 

make awards (the ‘‘independence’’ in the current Act). In our case, this does not 

exist and never has, but the current Act requires our Board to be separate from the 

‘‘Selection Committee.’’ It forced us to remove family members who have been participating for years in both fundraising and award evaluation from one or the other 

activity. Since this work is all done ‘‘pro bono,’’ this has impacted us severely, but 

accomplished nothing since there is no relationship between donors and recipients. 

We have also made sure that every individual member of the Board has signed off 

every year indicating if they have any relationship to any recipient or would otherwise benefit from any award. While that has never happened, if that were to be the 

case, that member would abstain from any such award decision. 

So where you have a fund that receives its money from a variety of unrelated individuals and has a Board that is unrelated and independent of the recipients, the 

Act should be modified to remove them from the definition of ‘‘donor advised’’ and 

the subsequent restrictions. Where the source of funding is provided by a small pool 

225 

AND there is a relationship between the recipients and the donors, then the restrictions make sense. 

We propose the definition of ‘‘material’’ because there can be instances where 

someone who has routinely donated small amounts over time may be related to a 

recipient. Our average award is close to $2,000, but any gift of $1,000 or above is 

put into our (independently run) capital fund and we derive only the sustainable 

income for awards (about 4.5% annually). 

Your feedback is appreciated as well as any information on the process so that 

I can understand what to expect. 

Thanks, 

W. Lowell Putnam 

f 

President 

Statement of Robert M. Hearin Support Foundation 

I commend the Subcommittee on Oversight for its appreciation of the importance 

of the work of the charitable community and its role in American life. I am writing 

on behalf of the Robert M. Hearin Support Foundation (the ‘‘Foundation’’), a Type 

III supporting organization located in Jackson, Mississippi. We are pleased to have 

the opportunity to offer comments concerning certain tax-exempt provisions contained in the Pension Protection Act of 2006 (the ‘‘Act’’), pursuant to the Subcommittee’s June 12, 2007 advisory. 

As set forth in the instrument that created the Foundation, 

The principal goal of the Foundation is to contribute to the overall economic 

advancement of the state of Mississippi (the ‘‘State’’) by making funds available to any one or more of [fifteen listed schools] (the ‘‘Schools’’), to prepare 

students who will directly contribute to the State through capital investment, creation and expansion of higher paying jobs, and improvement in 

the general economy of the State. In making distributions . . . the Foundation shall concentrate its efforts on attracting promising students to any 

one (1) or more of the Schools, and on improving the quality of instruction 

in the Schools, in either case in the fields of business, science, engineering, 

economics, law, medicine, accounting, pharmacy, architecture and other 

academic disciplines which directly contribute to the overall economic advancement of the State and are viewed by trustees as furthering the goals 

of the Foundation (the ‘‘Areas of Emphasis’’). Concentration of efforts shall 

be reflected in a general and long-term philosophy and goal of developing 

and supporting fewer larger projects at the Schools (rather than numerous 

small gifts to such institutions) which have the potential to accomplish the 

Foundation’s principal goal of economic advancement of the state of Mississippi and to create recognition for excellence at one (1) or more of the 

Schools. 

Certain provisions of the Act created significant new burdens, limitations and uncertainty for Type III supporting organizations. We would like to offer comments on 

several of these provisions that are of particular significance to the Foundation. 

1. Minimum Payout Requirement 

The Act directs the Secretary of the Treasury to promulgate new Regulations setting out a new payout requirement for Type III supporting organizations (other than 

those that are functionally integrated). The eventual Regulations must, according to 

the Act, require each such Type III organization to distribute a percentage of either 

its income or assets to supported organizations. Act Section 1241(d)(1). Traditionally, a Type III supporting organization has been able to fulfill its payout requirement by distributing ‘‘substantially all’’ (i.e., at least 85%) of its income. Treas. Reg. 

§ 1.509(a)-4(i)(3)(iii)(a). 

On August 1, 2007, the Treasury issued an ‘‘advance notice of proposed rulemaking’’ concerning payout requirements for Type III supporting organizations that 

are not functionally integrated (the ‘‘Advance Notice’’). The proposed new payout requirement is anticipated to impose an annual payout obligation for Type III supporting organizations equal to five percent of the fair market value of non-exemptpurpose assets (i.e., the same distribution requirement imposed on private non-operating foundations). 

A payout requirement tied to the value of a Type III supporting organization’s assets would pose particular difficulties to organizations that own interests in nonpublicly traded business entities and other assets that are not easily valued. A supVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00229 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
226 

porting organization could make payouts based on a presumed value of an investment asset notwithstanding that this value is not fully realized for any number of 

possible reasons, including lack of marketability and losses from unpredictable 

causes like hurricanes. Especially in the case of Type III supporting organizations 

owning interests in business entities with significant contingent liabilities, a payout 

requirement tied to value could effectively require the supporting organization to 

dispose of its ownership interest—which might necessarily occur in a manner that 

involves a considerable loss of value. Additionally, the Foundation (which has six 

trustees and no operational staff) would be required to pay outside experts to appraise its investment assets each year, thus incurring expenses that would reduce 

the funds ultimately available for the beneficiaries. 

If, notwithstanding these considerations, Congress believes it desirable to have a 

payout requirement tied to the value of a Type III supporting organization’s assets, 

it would be preferable to have a payout requirement similar to the standard applicable to private operating foundations, as proposed by the Comments in Response to 

IRS Notice 2007–21 on Treasury Study on Donor Advised Funds and Supporting Organizations submitted to the Internal Revenue Service by the American Bar Association Section of Taxation on August 1, 2007. As those comments explain, the proposed payout requirement for non-functionally integrated Type III supporting organizations would be the lesser of 85% of net income or 41⁄4% of asset value, with a 

minimum distribution requirement of 31⁄3% of asset value. 

The Advance Notice also set out the Treasury’s intention to propose regulations 

that would ‘‘limit the number of publicly supported organizations a non-functionally 

integrated Type III supporting organization may support.’’ Prospectively, the limit 

would be five publicly supported organizations. The Advance Notice explained that 

an organization already in existence when the regulations are proposed would be 

permitted to ‘‘support more than five supported organizations only if the organization distributes at least 85 percent of its total required payout amount to, or for the 

use of, publicly supported organizations to which the supporting organization is responsive pursuant to Treas. Reg. § 1.509(a)-4(i)(2)(ii).’’ For reasons discussed below 

(in part 3 of this letter) in connection with the proposed changes to the responsiveness test, this restriction on distributions would create considerable problems for the 

Foundation. 

In light of these difficulties, it is desirable for Congress to provide more specific 

guidance to the Secretary of the Treasury concerning the payout requirement for 

non-functionally integrated Type III supporting organizations, calling for an approach that avoids the problems described above. 

2. Excess Business Holdings 

The excess business holdings rules under IRC Section 4943 previously applied 

only to private foundations. Under the Act, however, the excess business holdings 

rules apply to Type III supporting organizations (other than those that are functionally integrated). Act Section 1243. 

Under the excess business holdings rules, an excise tax ordinarily would be imposed if a Type III supporting organization, together with its baseline and certain 

disqualified persons, were to hold (directly or indirectly) more than a 20% voting 

interest in a business enterprise. If one or more persons, other than the Type III 

supporting organization together with certain disqualified persons, have effective 

control of an enterprise, then the limit is raised to 35%, although the burden is effectively on the Type III supporting organization to establish that the control resides 

in other persons. A safe harbor exists under which the Type III supporting organization need not consider the holdings of disqualified persons if it (together with certain related exempt organizations) holds no more than a 2% interest in the voting 

stock of a given business enterprise. Transition rules apply to donated assets. Excess business holdings are subject to a 10% annual excise tax, plus a 200% excise 

tax if the holdings are not timely reduced to permitted levels. See generally IRC Section 4943. 

The rules described in the preceding paragraph would be applicable to Type III 

supporting organizations on both a prospective and retroactive basis. However, 

Type III supporting organizations are granted the benefit of transition rules over 

an initial, two-phase period of 25 years. At the end of that period, the combined 

holdings of a Type III supporting organization and its disqualified persons in a business enterprise must not exceed 35% of the voting stock or 35% of the equity value 

of the enterprise (rather than the usual limit of 20% of the voting stock), subject 

to the further limitation that if disqualified persons held more than 2% of the voting 

stock of the business enterprise during the prior 25-year period, the holdings of the 

Type III supporting organization must not exceed 25% of the voting stock or 25% 

of the equity value. Because of the application of a very complex set of rules that 

227 

may be triggered by changes in ownership of the business enterprise during the 

transition period, it is possible that the actual ownership limits will be lower than 

the maximum percentages stated above. Changes in ownership percentages that 

trigger these prohibitions can occur as a result of transactions in which neither the 

supporting organization nor any disqualified person participates (e.g., the redemption of stock held by an unrelated owner as a result of that owner’s retirement or 

death, or any other type of change in business circumstances affecting such unrelated owner.) 

The imposition of the excess business holdings rules on Type III supporting organizations could force such an organization to reduce its business holdings solely in 

order to effectuate compliance with a tax rule, without regard to whether the decision is necessarily in the economic best interests of the organization or, indeed, the 

best interests of its beneficiaries, who would bear the burden of any resulting loss 

of value. Reducing one’s interest in a closely held business is sometimes very difficult to accomplish given the absence of a market for ownership interests in the 

business. The new rules also interfere with the ability of an organization to comply 

with a donor’s wishes that a Type III supporting organization retain certain assets 

indefinitely. (In this regard, it is useful to bear in mind that some donors elected 

to create Type III supporting organizations in the first place in order to ensure that 

businesses with which they were involved could be preserved without regard to the 

rules that limit the business holdings of a private foundation. In many cases, the 

donor’s family is no longer involved with the business in which the supporting organization has an ownership interest.) 

Although the Act contains two narrow exceptions to the excess business holdings 

rules as applied to Type III supporting organizations, one exception is available only 

in those relatively limited circumstances where state officials on or before November 

18, 2005 used their authority to direct an organization’s investment decisions, and 

the other exception seems unlikely to be available unless state officials have taken 

some action to direct an organization’s investment decisions. In other words, the exceptions are available only in extremely rare circumstances and, in effect, they impose a burden on Type III supporting organizations that is significantly higher than 

the burden faced by other public charities in connection with their investment activities. 

It is desirable for Congress to amend the Act to create true ‘‘grandfathering’’ for 

the excess business holdings of some or all Type III supporting organizations, especially those established by donors who are no longer living. Such a rule would preserve the autonomy of boards of Type III supporting organizations to make investment decisions based purely on sound fiduciary and appropriate financial considerations. 

3. Qualification of Trusts as Type III Supporting Organizations 

Under current Treasury Regulations, a Type III supporting organization must 

meet a ‘‘responsiveness’’ test with respect to its supported organizations. See Treas. 

Reg. § 1.509(a)-4(i)(2). A Type III supporting organization structured as a charitable 

trust has traditionally fulfilled the responsiveness requirement simply by reason of 

being a trust and the fact that its supported organizations have the power to enforce 

the trust and compel an accounting. See Treas. Reg. § 1.509(a)-4(i)(2)(iii). However, 

the Act provides that this traditional means of fulfilling the responsiveness requirement will not be sufficient after the first anniversary of the Act’s effective date. Act 

Section 1241(c). Although the Act itself does not elaborate, the Joint Committee Report states that each Type III supporting organization structured as a trust will be 

required to establish to the satisfaction of the U.S. Secretary of the Treasury that 

the organization has a ‘‘close and continuous relationship’’ with the supported organizations, such that the supporting organization is responsive to the needs or demands of the supported organizations. 

The Advance Notice anticipates that the proposed Regulations under this provision of the Act will adopt the responsiveness test under Reg. § 1.509(a)-4(i)(2)(ii). 

Under those rules, one of the following elements must be present and, by reason 

of such element, one or more supported organizations must have a ‘‘significant 

voice’’ in the investment policies of the supporting organization, the timing of 

grants, the manner of making them, the selection of grant recipients, and otherwise 

directing the use of the income or assets of the supporting organization. 

One or more officers or trustees of the supporting organization must be elected 

or appointed by the officers, directors, trustees or membership of the supported organizations. One or more members of the governing bodies of the supported organization must also be officers or trustees, or hold other important offices in, the supporting organization. The officers or trustees of the supporting organization must 

228 

maintain a close and continuous working relationship with the officers, directors or 

trustees of the supported organizations. Treas. Reg. § 1.509(a)-4(i)(2)(ii). 

The third of those alternatives (the ‘‘close and continuous working relationship 

standard’’) is especially appealing for a Type III supporting organization that supports multiple charities. However, the payout requirement described above for nonfunctionally integrated Type III supporting organizations with more than five beneficiaries has the potential to create difficulties. As noted, the Advance Notice anticipates that such organizations will be permitted to ‘‘support more than five supported organizations only if the organization distributes at least 85 percent of its 

total required payout amount to, or for the use of, publicly supported organizations 

to which the supporting organization is responsive pursuant to Treas. Reg. 

§ 1.509(a)-4(i)(2)(ii).’’ 

In order for a supporting organization to be responsive to a particular supported 

organization, the supported organization must have a ‘‘significant voice’’ in, among 

other things, the timing of grants, the manner of making them, and the selection 

of grant recipients by the supporting organization. If some supported organizations 

had such a significant voice and others did not, the appearance of favoritism or conflicts of interest could result. These problems would be particularly acute in the 

Foundation’s case because its beneficiaries are the four-year colleges and universities in Mississippi. To a much greater extent than the multiple beneficiaries of 

other grant-making organizations (such as secondary schools or arts organizations), 

these colleges and universities compete head to head with each other for students, 

faculty and other resources. 

Further, if every supported organization had a ‘‘significant voice’’ in some manner, 

management of the supporting organization could become unwieldy and subject to 

undesirable competition for grants where there are numerous beneficiaries. It would 

also become more difficult for the supporting organization to verify that grants were 

being used appropriately if its governing body consisted entirely or primarily of 

trustees appointed by the supported organizations. There would also be the danger 

of ‘‘log-rolling’’ by the trustees, which would frustrate the Foundation’s stated preference for ‘‘developing and supporting fewer larger projects at the Schools (rather 

than numerous small gifts to such institutions).’’ 

Apart from the portion of the payout requirement relating to non-functionally integrated Type III supporting organizations with more than five beneficiaries, the anticipated regulations concerning the responsiveness test for charitable trusts appears workable. But the combination of the change in the responsiveness test for 

charitable trusts and the payout requirement would create serious difficulties. Consequently, it is desirable for Congress to provide more specific guidance to the Secretary of the Treasury concerning the payout requirement for non-functionally integrated Type III supporting organizations that would avoid the burdensome suggested rule for Type III supporting organizations with more than five beneficiaries— 

especially those that support higher education. 

4. Payment of Compensation and Expense Reimbursements to Certain Persons 

Under the Act, the entire amount of a grant, loan, payment of compensation, or 

‘‘other similar payment’’ by any type of supporting organization to a substantial contributor or a related person is an automatic excess benefit transaction, which triggers the various penalty provisions of IRC Section 4958 even if the payment is reasonable. IRC Section 4958(c)(3)(A)(i)(I). According to the Joint Committee report 

that accompanied the Act (the ‘‘Joint Committee Report’’), the term ‘‘other similar 

payment’’ includes an expense reimbursement. 

The IRC Section 4958 excise tax (commonly known as ‘‘intermediate sanctions’’ 

and more precisely referred to as the tax on ‘‘excess benefit transactions’’) is ordinarily imposed only when transactions are unreasonable and lead to excessive compensation to a disqualified person. However, for supporting organizations that pay 

compensation or reimbursements to a substantial contributor or related person, the 

tax is imposed with respect to the full amount of the compensation or reimbursement, without regard to whether the amount is reasonable or is otherwise justified. 

This excise tax is imposed on the recipient of the excess benefit and may be imposed on organization managers who approve the compensation or reimbursement 

giving rise to the excess benefit. The tax on the recipient of the excess benefit is 

25% of the excess benefit (again, in this case, the entire benefit), plus an additional 

200% tax if the excess benefit (again, the entire benefit) is not timely refunded to 

the supporting organization. 

Because of the severity of this excise tax, the new rule effectively prohibits any 

supporting organization, regardless of its type, from paying even reasonable compensation or expense reimbursements to its founder, his or her spouse and children, 

and other family members. This is true whether the compensation is for services 

229 

as a director or trustee, as an executive director or program officer, or as an outside 

advisor. In this respect, the new rule is more stringent than the rule for a private 

foundation, which may, without adverse tax consequences, reimburse documented 

expenses and pay compensation to ‘‘disqualified persons’’ (provided the compensation is not excessive and provided that the services provided are reasonable and necessary to the foundation’s tax-exempt purposes). See IRC Section 4941(d)(E). 

Even a Type I supporting organization founded, funded and controlled by a university or other public charity could run afoul of the new rule if (for example) the 

supporting organization pays reasonable compensation or reimbursements to (for example) the spouse or child of a director or officer of the supporting organization. 

Hence, the Type I supporting organization would be effectively prohibited from entering into a compensation arrangement that the founding organization itself could 

enter into. 

It is desirable for Congress to amend the Act in order to eliminate or modify the 

automatic excess benefit transaction rules that the Act imposes on supporting organizations. 

f 

Statement of Rodrigues, Horii & Choi LLP 

These comments were prepared in response to Chairman John Lewis’s invitation 

for public comments on the impact of the Pension Protection Act of 2006, Pub. L. 

No. 109–280 (the ‘‘PPA’’) on tax-exempt organizations. Specifically, this letter addresses the impact of the new rules of the PPA on donor-advised funds (‘‘DAFs’’) and 

supporting organizations (‘‘SOs’’). The law firm of Rodriguez, Horii & Choi LLP respectfully submits the following comments in response to Chairman Lewis’s request. 

While the firm represents a wide range of community foundations, SOs, private 

foundations (‘‘PFs’’) and individual donors, these comments were not made on behalf 

of any firm clients. The comments were, however, based on the firm’s experience 

with sponsors of DAFs, SOs, PFs and individual donors. 

A. Advantages of DAFs and SOs 

DAFs and SOs serve many important functions with respect to charitable giving. 

DAFs and SOs increase overall charitable giving and funding for charitable organizations. Private foundations (‘‘PFs’’) generally view the five percent required minimum distribution as both a floor and a cap. The majority of PFs distribute only 

five percent of the value of their assets annually as compared to DAFs and SOs 

which typically, and definitely in the aggregate, distribute much greater percentages 

of their assets. In fact, it is not uncommon for a DAF to distribute 100 percent of 

its contributions within a year of contribution. 

Unlike many PFs, DAFs and SOs involve management by public charities unrelated to the donors. These unrelated managers are well aware of their responsibilities and potential liabilities in managing the DAF or SO. In addition, the need to 

present proposed actions to unrelated managers causes self-regulation by donors 

who know that any proposal will have to be justified to the public charity’s board 

of directors. Having the donors accountable to the unrelated organization also reduces potential abuse, thereby reducing the need for Internal Revenue Service oversight. 

DAFs provide many unique advantages to donors. DAFs are routinely used to facilitate gifts to public charities. Many charities do not have the expertise to accept 

gifts of real estate, private stock and other assets with special considerations. A 

community foundation or other sponsor of DAFs may process the gift for one or 

more charities and distribute the proceeds to them. PFs are not a practical alternative because of the limitations on the tax deduction for the donor and the limitations on assets that PFs can accept. 

DAFs can accept gifts on behalf of a charity that is awaiting its Internal Revenue 

Service determination letter. PFs in particular are reluctant to make grants to a 

charity that has not yet received its determination letter. Consequently, such a 

charity would miss out on needed start-up funding. 

Organizations that sponsor DAFs and SOs provide a donor with investment advice to maximize the amount available for charitable funding. Sponsoring organizations can also make recommendations for achieving a particular donor’s charitable 

goals and bring together other donors to achieve common goals they may not be able 

to achieve on their own. DAFs enable a donor new to charitable giving arrangements to test out his or her philanthropy goals before incurring the expense of creating a PF to achieve these same goals. 

230 

PFs have significant start-up and administrative costs and have a psychology of 

permanence. While they are an important long-term source of funding for the charitable sector, the benefit they provide will almost always be spread over a long period 

of time. DAFs, on the other hand, provide the most immediate benefit to charities 

and experience the highest payout percentages as compared to SOs and PFs. DAFs 

are routinely suggested as a vehicle to allow a donor to make a single gift that will 

be distributed to charities within a year. For a donor facing timing issues with respect to making a gift (e.g., providing disaster relief or a possible sale of an asset), 

the simplicity of creation, low cost and flexibility of the DAF encourage charitable 

giving that might not otherwise occur. A donor who has timing issues with respect 

to a gift of $10,000 can easily create a DAF but would never consider a PF because 

the donation would likely be eaten up by start-up costs. Indeed, a PF for a short 

term would almost never be practical given the amount of resources and time that 

it takes to create a PF. 

DAFs allow donors at more modest levels to have flexibility in giving, making philanthropy more attractive to a donor at a five, six or even low seven figure giving 

level. While some of these benefits can be enjoyed with direct gifts, the flexibility 

of the DAF may be the key difference between making or not making the gift, or 

at least the amount of the gift. 

DAFs provide a significant administrative benefit to the Internal Revenue Service. 

They eliminate the need for processing separate information returns and for oversight of the individual accounts. 

SOs also serve an important role in charitable giving. SOs generally involve significant participation by the supported public charities. While an SO is not subject 

to a minimum distribution requirement like PFs, the presence of the public charity’s 

board of directors brings a sense of immediacy to the SO’s board of directors, encouraging distributions. 

SOs are routinely used by public charities that wish to create a new entity for 

liability purposes such as hospital fundraising foundations. An SO is also useful 

when a charity wants different governing boards for different aspects of its operations. For example, one board may manage the exempt purpose activities of the 

charity while an SO may be established to hold the endowment with a governing 

board focus on investment expertise. Generally, a PF would be unattractive to a 

public charity for these functions, and the activities might not otherwise qualify for 

public charity status absent the SO rules. 

SOs are also used by public charities working together jointly to carry out a charitable purpose. The operations of the joint charity may be limited in a PF, and the 

joint activities or funding may not qualify for public charity status. 

In short, DAFs and SOs serve a vital role to the charitable sector that cannot be 

filled by the other public charity classifications or by PFs. These structures are important to charitable giving arrangements because they increase overall giving to 

the charitable sector and are essential to the structuring of its operations. The direct benefits that DAFs and SOs provide justify treating them as public charities 

for all purposes, including charitable contribution deductions. Indeed, public charity 

treatment is essential to allow DAFs and SOs to serve their vital missions. However, the restrictions imposed on DAFs and SOs by the PPA makes these charitable 

vehicles less attractive to donors and will reduce charitable giving overall. 

B. Impact of the PPA on DAFs and SOs 

Donor benefits from DAFs and SOs are best regulated under the excess benefit 

rules under section 4958 of the Code that existed prior to the PPA with one exception. Donors to other types of public charities receive the maximum charitable contribution deduction allowed under the Code even if they engage in transactions that 

do not violate the excess benefit transaction rules. To ensure that excess benefit 

standards and scrutiny are applied to transactions that may involve the donor or 

a related party, it is appropriate to treat the donor to a DAF as a disqualified person with respect to transactions related to the DAF. Such treatment will ensure 

that the public charity analyzes any such transaction as a potential excess benefit 

transaction and takes the appropriate steps to ensure that no excess benefit is provided to the donor. 

The automatic excess benefit rules added to section 4958 of the Code by the PPA, 

on the other hand, are not an appropriate mechanism to address DAFs and SOs. 

The automatic excess benefit rules implicitly assume that the managers of DAFs 

and SOs will not review transactions with related parties as carefully as managers 

of other public charities that are not DAFs or SOs. Experience does not support this 

assumption. As noted above, these managers take their obligations seriously and are 

aware of their potential liabilities. As with other types of public charities, there will 

be lapses in oversight by managers of some DAFs and SOs, but these lapses should 

231 

be dealt with on an individual basis as is done with other public charities. There 

is no evidence that DAFs and SOs experience greater mismanagement than other 

public charities. 

The provisions of the PPA have and will continue to adversely impact charitable 

giving. The complexity and ambiguity of the provisions have already forced DAF 

sponsors and SOs to incur significant compliance costs. The distribution limits on 

DAFs significantly and unduly restrict the flexibility of DAFs. There is no evidence 

to conclude that wide spread abuses of DAF distributions to individuals existed, and 

yet many legitimate DAF charitable programs that assisted individuals in need 

have been forced to terminate. 

While there was no wide spread abuse of compensation from DAFs and SOs, the 

automatic excess benefit rules under section 4958 of the Code have forced the termination of many legitimate employment relationships. The onerous effective dates 

caused needless anxiety and expense for DAFs and SOs with such relationships. The 

automatic excess benefit rules are particularly problematic for SOs, which as legal 

entities, often require employees and impose legitimate expenses upon their officers 

and directors that should be reimbursed or paid by the SO as part of its administrative costs. 

Furthermore, the provisions of the PPA result in traps for the unwary. For example, a donor who intended to run fundraising events out of a DAF is now prohibited 

from being reimbursed for any expenses by the DAF because the reimbursement 

would be an automatic excess benefit even if the expenses are reasonable. Such expenses may also be a taxable distribution under section 4966 of the Code as distributions to individuals are strictly prohibited from a DAF. Donors who put funds 

for fundraising expenses into a DAF prior to the PPA have no way of pulling those 

funds out of the DAF. Donors who create a DAF after the PPA must be aware of 

this rule and reserve some of the funding to fund fundraising events, resulting in 

a trap for the unsophisticated donor. The consequences of these rules result in donors being less inclined to conduct fundraisers, resulting in less funding going to 

the charitable sector. 

Additionally, there is insufficient guidance on how to apply the PPA provisions 

to DAFs and SOs. It is not clear what types of payments from DAFs and SOs would 

be considered a payment similar to a grant, loan or compensation under the automatic excess benefit transaction rules. Would this include the payment of a donor’s 

personal pledge that is satisfied through the donor’s DAF? It is not a direct payment 

from the donor but it alleviates an obligation of the donor and consequently, has 

been held as an act of self-dealing in the PF context. 

On the other hand, the satisfaction of a donor’s pledge may properly be addressed 

under the rules of prohibited benefit transactions under section 4967 of the Code. 

A prohibited benefit includes a distribution on which a donor of a DAF provides advice and that results in the donor receiving, directly or indirectly, a ‘‘more than incidental benefit.’’ The legislative history states that ‘‘[i]n general, a distribution results in a more than incidental benefit if, as a result of a distribution from a DAF, 

a disqualified person receives a benefit that would have reduced (or eliminated) a 

charitable contribution deduction if the benefit was received as part of the contribution to the sponsoring organization.’’ The satisfaction of a pledge would have been 

tax deductible as a charitable contribution to the donor so it appears to be excluded 

from the definition of a prohibited benefit and, therefore, permitted under section 

4967 of the Code. 

The problem with this uncertainty for the donor is that correction and the excise 

taxes imposed on the transaction are not the same. A donor who is not sure which 

rules properly apply must guess. If the donor does not come to the same conclusion 

as the Internal Revenue Service, the donor will be subject to additional failure to 

report and failure to pay penalties, resulting in another trap for the unwary. 

Another question on the minds of DAF donors is whether a donor can purchase 

tickets to a charitable fundraising event which the donor attends if the donor bifurcates the cost of the ticket by paying for the non-deductible portion of the ticket 

himself or herself and having the DAF pay for the portion of the ticket that would 

result in a charitable contribution deduction. A payment by the DAF for only the 

charitable portion, with the donor paying the non-deductible portion, should not result in the donor receiving a prohibited benefit, because the amount that would have 

reduced (or eliminated) the charitable contribution deduction is not being paid out 

of the DAF. However, the answer is unclear given the conflicting guidance that the 

Internal Revenue Service has issued in the PF context with respect to the self-dealing rules. 

All of the uncertainty caused by the PPA will inevitably reduce charitable giving 

because donors and sponsoring organizations will not want to make distributions 

that may later be determined to be a prohibited distribution and subject to excise 

232 

taxes by the Internal Revenue Service in the future. This uncertainty, coupled with 

the PPA making DAFs and SOs less flexible, will discourage some donations and 

encourage other donors to form PFs, thereby reducing and deferring the amount 

that will go to the charitable sector. For active philanthropists with diverse sources 

of gifts and activities, the PPA will require the formation of multiple entities in 

order to accomplish goals that might have previously been accomplished with a single DAF or SO. Multiple entities increase the administrative costs of the philanthropy, reducing its overall benefit. Multiple entities also add to the return processing and compliance burden of the Internal Revenue Service. 

C. Conclusion 

Public charities and donors make routine and wide-spread use of DAFs and SOs 

to carryout the important work of the non-profit sector in the United States. The 

existing provisions of the PPA and any further regulation should be based on a 

study of the operations of all DAFs and SOs, not widely reported actions of a few 

DAFs and SOs. There is no basis to conclude that sponsors of DAFs and SOs are 

less compliant with tax and fiduciary requirements than managers of other public 

charities. Accordingly, DAFs and SOs should be accorded the same flexibility and 

benefits given to other public charities. 

As a final note, in contrasting PFs with DAFs and SOs, we do not intend to diminish the vital role that PFs play in the non-profit sector. PFs are the endowment 

of the non-profit sector and often are the first source of funds for new and innovative programs. PFs, however, have limitations that would make it impossible for 

them to fulfill the roles of DAFs and SOs. As important as PFs are, if DAFs or SOs 

are not available or are subject are further limitations, the non-profit sector will be 

diminished. 

If you wish to contact the firm regarding these comments, please do not hesitate 

to contact Reynolds T. Cafferata, William C. Choi or Shannon M. Paresa. 

f 

Samaritan’s Purse 

Boone, North Carolina 28607 

July 26, 2007 

Oversight Committee 

Committee on Ways & Means 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington, D.C. 20515 

Honorable Members of the Subcommittee: 

Samaritan’s Purse is grateful for dozens of gifts totaling hundreds of thousands 

of dollars donors have contributed from their IRAs pursuant to the Philanthropy 

Protection Act of 2006 (PPA). We would encourage the permanent extension of the 

charitable IRA rollover provisions of the PPA continued for those who have attained 

age 701⁄2. We also believe that expanding the law to allow transfers into planned 

giving arrangements such as Charitable Remainder Trusts and Gift Annuities for 

those who have attained 591⁄2 would be in the best interests of donors/taxpayers, 

charities and those they serve, and the government. Further expanding the provisions to include rollover gifts from other qualified retirement accounts and tax-deferred annuities would likewise create a winning combination. We believe that these 

provisions likely would accomplish the following: 

1. Samaritan’s Purse could help more victims of war, poverty, disease, natural disasters and famine. 

2. Many charities would be able to help more people who otherwise would be dependent on government or would go without help. 

3. Large amounts of money currently sitting out of the reach of taxes in retirement and tax-deferred annuity accounts would be moved into planned-gift arrangements that will pay out income to the donors. That income would be fully taxable 

during the lifetime of its recipient. The income amount paid to a taxpayer from a 

gift annuity or charitable trust in many cases would exceed the Required Minimum 

Distribution (RMD) amount for many donors over age 701⁄2. This would increase tax 

revenues. 

4. For donors between 591⁄2 and 701⁄2, there is great reluctance to withdraw funds 

from a tax-deferred account because of the tax on such withdrawals. If such donors 

were allowed to roll over such funds into a charitable trust or gift annuity, many 

would be highly motivated by the ability to make a greater difference through their 

233 

favorite charities with the initial tax disincentive removed. We have talked to numerous donors both under and over 701⁄2 who would be willing to pay tax on their 

income from the trust or annuity if they are able to avoid taxation on moving funds 

from the tax-deferred account to the charitable gift plan. The result would be increased tax revenues. 

5. Many donors withdraw only the RMD from their retirement accounts until they 

die, after which they give all or a portion of the account to charity. This means no 

income tax is ever collected on the remaining tax-deferred funds. Allowing tax-free 

rollovers into charitable trusts and annuities means that some of this tax-deferred 

money would be taxed as it is paid out to donors through the trust income or annuity payments. 

Thank you for considering the extension and expansion of the IRA charitable rollover gift provisions in the Philanthropy Protection Act of 2006. 

Sincerely, 

James J. Loscheider 

Vice President of Donor Ministries 

Steve Nickel, J.D. 

f 

Senior Gift Planning Counsel 

Schwab Charitable Fund 

San Francisco, California 94104 

July 30, 2007 

The Honorable John Lewis, Chairman 

House Ways and Means Oversight Subcommittee 

1136 Longworth House Office Building 

Washington, D.C. 20515 

Dear Mr. Chairman: 

Thank you very much for the opportunity to submit written comments on the provisions relating to tax-exempt organizations contained in the Pension Protection Act 

of 2006 (P.L. 109–280). On behalf of the Schwab Charitable Fund, I am writing to 

share our views on how the Pension Protection Act of 2006 (‘‘PPA’’) has affected our 

operations, and to suggest two areas in need of improvement. 

The Schwab Charitable Fund is an independent, non-profit organization that is 

recognized as a tax-exempt public charity. The Charitable Fund was launched in 

September 1999 and had received more than $2.2 billion in contributions as of June 

30, 2007. Currently, the Charitable Fund has 8,340 accounts (called ‘‘Charitable Gift 

Accounts’’). A donor can contribute $10,000 or more to open a Charitable Gift Account. A significant majority of charitable gift accounts have assets of less than 

$50,000. Since inception, the Charitable Fund has made more than 155,000 individual grants totaling $673 million to more than 32,000 different charitable organizations. More than 31 percent of all donations made to the Charitable Fund have 

been granted to public charities throughout the country, in every state in the union. 

In 2006, the Charitable Fund received more than $700 million in donations, a record 

and a 28% increase over 2005. More than $215 million was granted to over 15,000 

charities in 2006 alone. 

The Pension Protection Act contains a number of provisions affecting donor-advised funds held by charitable organizations. The Charitable Fund supports many 

of the new provisions, particularly the Section 4967 excise tax on prohibited benefits 

from donor-advised fund distributions. The Charitable Fund expects that most of the 

PPA’s donor-advised fund provisions will have little effect on it because the provisions are consistent with longstanding Charitable Fund policies. In addition, the 

Charitable Fund is aware that the PPA included a requirement that the Department of the Treasury conduct a comprehensive study of donor-advised funds and report back to Congress with any recommendations for further legislation. The Charitable Fund has been actively involved in this process by submitting a detailed comment letter about the Fund’s operations and policies, and by meeting directly with 

IRS and Treasury staff to answer questions. Our comment letter to the Treasury 

Department provides a more comprehensive review of the Charitable Fund and its 

policies, and also addresses a number of specific questions posed by Treasury in 

their request for comment. We would be happy to provide a copy of that comment 

letter to the Committee if that would be helpful. 

234 

1 ‘‘NCPG Survey of IRA Distributions to Charity: Results as of June 4, 2007,’’ National Committee on Planned Giving, p. 1. Available at http://www.ncpg.org/gov_relations/NCPG%20 

IRA%20Survey%206-4-07.pdf. 

For the purposes of the Committee’s request, we will limit our comments to two 

areas of the PPA that have already proven to be problematic: the prohibition on rolling IRA funds directly to a donor-advised fund, and the restriction in new section 

4966 on making grants to ‘‘disqualified supporting organizations.’’ 

IRA Charitable Rollover 

The Pension Protection Act included a provision allowing individuals age 701⁄2 and 

over to make charitable donations of up to $100,000 from IRAs and Roth IRAs directly to a charity without having to count the distributions as taxable income. According to data collected by the National Committee on Planned Giving, more than 

$75 million was donated to charity during the first 10 months after enactment of 

the legislation, in gifts ranging from $25 to $100,000.1 None of those dollars, however, were donated to a donor-advised fund, because donor-advised funds were specifically excluded from the definition of ‘‘eligible charity’’ in the legislation. 

The Schwab Charitable Fund believes strongly that the IRA Charitable Rollover 

provision, which is set to expire at the end of 2007, should be made permanent and 

that it should be expanded so that individuals can make IRA and Roth IRA distributions to donor-advised funds. Representatives Earl Pomeroy (D–ND) and Wally 

Herger (R–CA) have introduced legislation, the Public Good IRA Rollover Act of 

2007 (H.R. 1419), that will accomplish both goals. Their bill, a companion of which 

has been introduced in the Senate, has attracted a bipartisan group of more than 

50 Members of Congress. There is virtually no disagreement that permitting rollovers from IRAs directly to charities has been a positive development for charitable 

giving, as the $75 million donated to date attests. Awareness of this option for contributing to charity is still relatively low, given the short amount of time financial 

institutions and financial planners have had to promote it to their clients. By making the charitable rollover permanent, charitable contributions from IRAs should 

continue to rise significantly. Congress should quickly make this provision permanent so as not to slow the growing momentum from their important new mechanism 

for philanthropy. 

Given that contributions to donor-advised funds also represent irrevocable gifts to 

charity, it is important that donor-advised funds also be allowed to accept these IRA 

distributions. Donor-advised funds bring a number of advantages to the philanthropic arena, including: 

• Providing liquid assets readily available to respond quickly to natural disasters; 

• Maintaining a source of funds for charitable giving during downturns in the 

economy; 

• Reducing the red tape, time pressure, and administrative burdens that often get 

in the way of giving; 

• Enabling donors to research charitable organizations and find a matches for 

their interests; and 

• Establishing a legacy of charitable giving that can involve the whole family and 

be passed on to future generations. 

In summary, they simplify the process of giving for the donor, particularly if the 

donor wants to use his or her IRA funds to give to multiple charities. Donor-advised 

funds can play an important role in helping individuals make the most of the IRA 

charitable rollover. 

The PPA and the legislative history underlying it provide no rationale for why 

IRA holders were not allowed to send distributions directly to a donor-advised fund, 

and there is no policy reason for their exclusion. Passage of the Public Good IRA 

Rollover Act of 2007 would ensure that donor-advised fund holders could take advantage of this important new mechanism for philanthropy. I urge the Committee 

to bring this legislation to a vote at the earliest opportunity. 

Restrictions on Grants to ‘‘Disqualified Supporting Organizations’’ 

The other provision of the PPA that has already begun to have a significant impact on the Charitable Fund’s operations is the restriction in new Section 4966 on 

making grants to ‘‘disqualified supporting organizations,’’ as defined in Section 

4966(d)(4). On December 4, 2006, the Internal Revenue Service issued Notice 2006– 

109, which provides interim guidance on several issues, including how donor-advised 

funds can determine whether a potential grantee is a disqualified supporting organization. As a result of Section 4966 and Notice 2006–109, the Charitable Fund has 

instituted new due diligence procedures designed to determine (1) whether a public 

235 

charity is a supporting organization; (2) if so, whether it is a Type I, II or III supporting organization; and (3) if it is a Type III supporting organization, whether it 

is functionally integrated. The Charitable Fund must also determine if the donor or 

donor-advisor directly or indirectly controls a supported organization of the supporting organization (as described in Section 4966(d)(4)(A)(ii)(I)). These determinations are often difficult for the grantor and time-consuming for both the grantor and 

the grantee. 

The Charitable Fund anticipates that relatively few of its recommended grantees 

will be Type III supporting organizations that are not functionally integrated and 

even fewer will be subject to the control relationship described in Section 

4966(d)(4)(A)(ii)(I). Given that the Charitable Fund makes hundreds of grants to 

supporting organizations each year, the Charitable Fund believes that more practical and efficient procedures are needed for determining a supporting organization’s 

status. Several proposals have been suggested, including permitting reliance by 

grantors on a grantee’s representation of its status as reported on its most recent 

Form 990 or on an affidavit. The Charitable Fund supports these proposals and any 

others that would simplify the process of making grants to supporting organizations. 

As the Committee continues its review of the tax-exempt provisions of the PPA, 

please do not hesitate to contact me if I can answer questions or provide additional 

information. 

Sincerely, 

Kim Wright-Violich 

f 

President 

Statement of Senator Byron Dorgan 

Chairman Lewis, Ranking Member Ramstad and other distinguished Subcommittee Members, I appreciate this opportunity to visit with you today about one 

of the most important charitable giving tax incentives that Congress has passed in 

decades. 

Last summer, the Congress passed and the President signed into law a major bill 

to reform our pension laws. This 392-page bill contained a little noticed but important new charitable giving tax incentive. 

For the first time, the Tax Code permitted taxpayers who have reached age 701⁄2

to give money directly from their individual retirement accounts (IRAs) to qualifying 

charities on a tax-free basis without the need to worry about complicated adjusted 

gross income and other restrictions that otherwise would apply to tax deductible 

charitable contributions. The charitable IRA rollover provision in H.R. 4 applied 

only for direct IRA gifts, is capped and is available for a limited time—expiring at 

the end of this year. 

In fact, the charitable IRA rollover provision in H.R. 4 adopted the same general 

approach of legislation for direct IRA gifts that I have been working on called the 

Public Good IRA Rollover Act with Senator Snowe of Maine and several of our Senate colleagues. 

Before the charitable IRA rollover was enacted into law, I was told by many charities that potential donors frequently asked about using their IRAs to make charitable donations but decided against such gifts after they were told about the potential tax consequences under then-current tax law. I am pleased to report that the 

charitable community is feeling a positive impact of the new charitable IRA rollover 

measure. According to a survey conducted by the National Committee on Planned 

Giving, over 4,000 IRA donations totaling more than $80 million have been made 

to eligible charities since the tax-free IRA rollover provision took effect last August. 

I’m told that the IRA rollovers have resulted in significant gifts in North Dakota. 

For example, it reportedly inspired a donor to Lutheran Social Services of North Dakota to contribute $15,000, an amount higher than the donor’s typical gift. This 

charitable gift will help the organization to continue its diverse programs in such 

areas as adoption services, counseling for at-risk youth, economic self-sufficiency for 

refugees, and services for farmers and ranchers. Lutheran Social Services believes 

that the IRA rollover provision encourages people to give more and to continue giving. The University of Mary has received five IRA gifts totaling some $280,000. The 

Theodore Roosevelt Medora Foundation has received four IRA gifts and commitments of over $300,000. Jamestown College received fourteen IRA gifts totaling 

$130,000. Other North Dakota charities, including Catholic Health Services for 

Western North Dakota, have benefited from tax-free IRA gifts as well. Hillsboro 

Medical Center Foundation has received nearly $20,000 in IRA rollover commitVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00239 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
236 

ments that will help build a new nursing home, an assisted living facilities and 

needed hospital improvements. Most recently, the State Historical Society of North 

Dakota Foundation has endorsed the bill. 

The positive results are undeniable: the temporary charitable IRA rollover incentive is working well and making a difference in the lives of people who are assisted 

by the nation’s network of charities. But we can even do better. That’s why the Public Good IRA Rollover Act that we have introduced in the 110th Congress would remove its current dollar cap, expand it to allow taxpayers who have attained age 

591⁄2 to make life-income gifts and by make it a permanent part of the Tax Code. 

Mr. President, with the help and hard work of the Independent Sector the charitable IRA rollover approach in this legislation has been endorsed by nearly 900 

charitable organizations, including: the American Cancer Society, the American Red 

Cross and American Heart Association, America’s Second Harvest, American Association of Museums, Big Brothers Big Sisters of America, Ducks Unlimited, Easter 

Seals, Goodwill, Lutheran Services of America, March of Dimes, the Salvation 

Army, United Jewish Communities, United Way of America, Volunteers of America, 

YMCA of the USA, Prairie Public Broadcasting, the North Dakota Community 

Foundation and many others. I am very pleased that the U.S. Senate is previously 

on record in support of the Public Good IRA Rollover Act in its entirety. In doing 

so, the Senate recognized that the charitable IRA rollover is an important tool for 

charities to use to raise the funds they need to serve those in need, especially when 

government assistance is not available. 

The Bush Administration supports charitable IRA rollovers. In his FY 2008 budget submission, President Bush has proposed making permanent the limited tax-free 

charitable IRA distributions provision passed last summer that is scheduled to expire at the end of this year. While the President’s charitable IRA proposal has 

merit, the Public Good IRA Rollover Act is superior in one important respect: by 

allowing tax-free life-income gifts from an IRA whose owner has attained the age 

of 591⁄2. 

In addition to direct IRA gifts, many charities use life-income gifts to secure funds 

today to meet their future needs. Life-income gifts involve the donation of assets to 

a charity, where the giver retains an income stream from those assets for a defined 

period. 

The benefit of allowing life-income gifts at an earlier age is twofold. First, the lifeincome gift provision would stimulate additional charitable giving. The evidence also 

suggests that people who make life-income gifts often become more involved with 

charities. They serve as volunteers, urge their friends and colleagues to make charitable gifts and frequently set up additional provisions for charity in their life-time 

giving plans and at death. Second, this approach comes at little or no extra cost to 

the government when compared to other major charitable IRA rollover proposals. 

Life-income gifts are an important tool for charities to raise funds, and would receive a substantial boost if they could be made from IRAs without adverse tax consequences. But life-income gifts are not part of the administration’s proposal. Again, 

the Public Good IRA Rollover Act permits individuals to make tax-free life-income 

gifts at the age of 591⁄2. 

In closing, Mr. Chairman, I hope your Subcommittee and the Full House Ways 

and Means Committee will act this year to permanently enact into law a tax-free 

IRA rollover provision that charities say is needed to encourage billions of dollars 

in new giving that will provide assistance to those who need it most. 

f 

Statement of Goodwill Industries International 

On behalf of Goodwill Industries International, Inc., I am writing in response to 

the request by the House Ways and Means Subcommittee on Oversight for comments on the recently enacted Pension Protection Act of 2006 (P.L. 109–280). 

Goodwill Industries International, Inc. is a network of 186 community-based, 

independent member organizations in the United States, Canada, and 14 other 

countries. Each organization serves people with disabilities, low-wage workers and 

other job seekers by providing education and career services, as well as job placement opportunities and post-employment support. 

Through its services, the network helps people overcome barriers to employment 

and become independent, tax-paying members of their communities. In 2006, nearly 

one million people benefited from Goodwill’s career services. Donations of clothing 

and household goods help to fund our mission. 

The new law changes the tax treatment of donated clothing and household goods 

by allowing tax deductions only for such donated items that are in ‘‘good used condiVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00240 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
237 

tion or better.’’ Under the new provisions, however, a deduction is allowed regardless of the condition if the amount claimed for the item is more than $500 and the 

taxpayer has a qualified appraisal. The Internal Revenue Service (IRS), under the 

new law, can deny a deduction for the contribution of clothing or household items 

that have minimal monetary value, such as used socks and underwear. 

The IRS has issued new guidance on these provisions in Publication 561 that references the price that buyers of used items actually pay in used clothing stores as 

an indication of value. We strongly support educating taxpayers about the new provisions. Many of our retail stores now include language on their donation receipts 

to indicate that ‘‘federal law provides that donated clothing and household items 

must be in good used condition or better for tax purposes.’’ In addition, many of our 

agencies offer sample valuation guides, that is, a guide with the selling price of a 

range of clothing and household goods to assist taxpayers in valuing their donations. 

We have found, however, that much confusion still exists over this new law. Many 

of our donors have been told that they can no longer take any deductions for clothing and household goods. Others have been told that the charity must place a value 

on the item. The new law is clear that deductions still can be taken by the taxpayer 

as long as the new requirements are met and the onus remains with the taxpayer 

to value his or her items. The public needs to hear this message from the IRS. 

We ask that you request the IRS to issue further guidance pointing out that, subject to these requirements, donations of clothing and household goods to charities 

like ours remain tax-deductible and serve a worthy public purpose. 

If we can be of any assistance, please feel free to contact Lisa P. Kinard, Director 

of Public Policy and government Relations for Goodwill Industries International, 

Inc. 

f 

Statement of Stewart Mott Foundation 

On behalf of the Charles Stewart Mott Foundation, these comments are submitted 

in response to the Advisory from the Committee on Ways and Means Subcommittee 

on Oversight, dated June 12, 2007, requesting comments from the public on the provisions relating to tax-exempt organizations contained in the Pension Protection Act 

of 2006 (PPA) (P.L. 109–280). We wish to comment on one provision of the PPA that 

affects the Charles Stewart Mott Foundation directly: the provision amending sections 4942(g) and 4945(d)(4)(A) of the Internal Revenue Code, restricting grants to 

supporting organizations by private foundations. 

The Charles Stewart Mott Foundation is a private grant making foundation established in 1926 in Flint, Michigan. The Foundation’s mission is ‘‘to support efforts 

that promote a just, equitable and sustainable society.’’ The Foundation’s grant 

making activity is organized into four major programs: Civil Society, Environment, 

Flint area and Pathways Out of Poverty. Other grant making opportunities, which 

do not match the major programs, are investigated through the Foundation’s Exploratory and Special Projects program. In 2006, the Foundation’s grant actions totaled 545, and total grant payments were $122 million. The Foundation has assets 

in excess of $2.5 billion. 

The PPA requires private foundations to exercise expenditure responsibility when 

making grants to Type III supporting organizations that are not functionally integrated. It also prohibits private foundations from counting such grants toward their 

annual minimum distribution requirement. Unfortunately, prior to the enactment of 

the PPA, the Internal Revenue Service (IRS) had never classified supporting organizations by type. The IRS also did not make determinations with respect to whether 

Type III supporting organizations are or are not functionally integrated. Private 

foundations are generally permitted to rely on IRS Publication 78 in determining 

when a grant requires the exercise of expenditure responsibility under section 4945 

because the grantee is not a public charity. However, the IRS did not publish information about whether an organization’s public charity status was based on section 

509(a)(1), section 509(a)(2), or section 509(a)(3) in Publication 78, so the Publication 

is not helpful to a foundation seeking to comply with this provision of the PPA. 

The IRS Business Master File (BMF) is also available to download directly from 

the IRS Web site. Alternatively, on March 27, 2007, in the 2007–8 issue of EO Update, the IRS provided that a grantor may use a third party to obtain the BMF information. In this circumstance, the third party must provide the grantor the BMF 

information in a report that includes: (i) the grantee’s name, Employer Identification 

Number, and public charity status under section 509(a)(1), (2), or (3); (ii) a statement that the information is from the most currently available IRS monthly update 

to the BMF, along with the IRS BMF revision date; and (iii) the date and time of 

238 

1GuideStar is the operating name and registered trademark of Philanthropic Research, Inc., 

a 501(c)(3) public charity. GuideStar is a third party database of information on all IRS-recognized 501(c)(3) nonprofit organizations eligible to receive tax-deductible contributions. 

the grantor’s research. The report must also be in a form which the grantor can 

store in hard copy or electronically. GuideStar’s 1 Charity Check subscription service 

includes IRS Publication 78 information and has recently been enhanced to include 

information from the IRS BMF. 

However, this information is still incomplete. The BMF includes the Code section 

under which an organization was classified as a public charity [that is, section 

509(a)(1), (2), or (3)], but does not include the type of supporting organization or 

whether it is functionally integrated. As a result, a private foundation cannot rely 

on even this more detailed information when making a grant to a supporting organization. 

In recognition of the difficulties faced by foundations when making grants to supporting organizations after passage of the PPA, the IRS issued interim guidance in 

Notice 2006–109, section 3.01. The guidance in the Notice, while helpful in the absence of legislation correcting the problems created by this provision of the PPA, requires a foundation to follow a cumbersome process to determine whether a grantee 

is a Type I, Type II, or functionally integrated Type III supporting organization. 

This process requires a grantor to collect and review specified documents and a 

written representation signed by an officer, director, or trustee of a supporting organization grantee and to make its own determination, acting in good faith, as to the 

status of the grantee. (As an alternative, a grantor may rely on a reasoned written 

opinion of counsel of either the grantor or the grantee concluding that the grantee 

is a Type I, Type II, or functionally integrated Type III supporting organization.) 

We have found that the collection and review of the specified documents, including copies of governing documents of the grantee and, if relevant, of the supported 

organization(s), is a time-consuming and burdensome process for both the grantor 

and grantee. Even for a larger foundation like the Charles Stewart Mott Foundation, which has the resources to try to follow the guidance in the Notice, the process 

increases substantially the cost of making a grant to a supporting organization and 

the time required to process the grant. It also means that many smaller grants (including grants under matching gift programs) are cost-prohibitive and simply will 

not be made. And it means that many smaller foundations, without the resources 

to apply the guidance in the Notice, may just stop making grants to supporting organizations. 

Other commenters have reached similar conclusions. On June 4, 2007, the American Bar Association Section of Taxation submitted comments to the IRS on Notice 

2006–109. As the Section notes on p. 59 of its comments: 

‘‘While the procedures of Notice 2006–109 are helpful in that they set out 

safe harbors, the procedures are often impractical, time-consuming and expensive. The result is that many donors will simply forego making contributions to [supporting organizations].’’ 

In its comments, the section makes a number of recommendations to address the 

problems posed by this section of the PPA. In all, the section’s recommendations and 

discussion on this provision of the PPA run to over six single-spaced pages. Key to 

the recommendations is the proposal that the IRS expand its existing determination 

letter program to further classify supporting organizations as Type I, II, or III (and 

whether a Type III is functionally related) and that the IRS embark on a program 

to so reclassify all existing supporting organizations. We wonder whether an already 

overburdened IRS can even consider such a proposal. Indeed, the extent and nature 

of the section’s comments suggest to us that the problems posed by the provision 

cannot be fixed administratively. 

We acknowledge there have been instances in which individuals have misused 

supporting organizations for their personal benefit. We also believe that many of the 

changes made by the PPA effectively address these abuses. However, we think the 

changes made by the provision we are discussing here go too far. They may have 

some corrective effect on the abuses noted by Congress (although we believe those 

abuses are adequately addressed elsewhere in the PPA). But they impede legitimate, routine grant making by private foundations to supporting organizations to 

such an extent that whatever corrective effect they have is far outweighed by the 

restrictions they impose on foundation philanthropy. 

For that reason, we recommend that Congress repeal this provision of the PPA. 

If repeal is not possible, we join in the call from Steve Gunderson, President and 

chief executive officer of the Council on Foundations, in testimony before the Subcommittee on July 24, that Congress temporarily suspend the penalties for making 

239 

grants to certain supporting organizations until the IRS can reliably identify those 

organizations. 

We appreciate the Committee’s attention to this important issue, and we thank 

you for the opportunity to provide these comments. 

Respectfully submitted, 

Phillip H. Peters 

Group Vice President-Administration and Secretary

f 

/Treasurer 

Statement of Studio Museum in Harlem 

Thank you for your call for comments on provisions of the Pension Protection Act 

of 2006 (PPA). My name is Thelma Golden, and I am the Director and Chief Curator 

of The Studio Museum in Harlem. I am writing with respect to section 1218 of PPA, 

which has restricted ‘‘fractional’’ gifts of art and collectibles to museums. 

Section 1218’s two major restrictions are: 

• Donors must complete gifts in ten years. Previously, there was no time limit. 

• Donors may no longer claim a tax deduction for the fair market value of the 

work after the initial fraction, no matter how much it may have risen in subsequent years. Previously, each fraction could be deducted at its actual fair market value. 

By discouraging generosity, Section 1218 has practically destroyed one of the most 

effective means of transferring private wealth to the public sector. Further, it has 

greatly curtailed museums’ ability to build their collections, because most museums 

rely mainly on private gifts, especially at a time of rising prices in the art market. 

In the case of the Studio Museum in Harlem, we have 13 fractional gifts in 

progress. We have had no new fractional gifts since the PPA. These 13 gifts are a 

significant addition to our growing collection, and represent works made by some 

of the leading artists of African descent working today. 

The old law worked well for museums, donors, and the public. It was both flexible 

and fair. Now, works of art will remain in private homes and hands, unseen by the 

public, and rarely used by scholars and art historians, and people will not donate 

fractional gifts until much later in their life. Meanwhile, the museum has no guarantee that the gift will actually be made; it could fall victim to financial problems 

or family disagreements. Allowing donors to give the first fraction earlier rather 

than later has the effect of ‘‘locking in’’ the gift. 

Finally the fact that PPA did not ‘‘grandfather’’ gifts that were already in the 

process of being made means that many current gifts have been stopped cold. In 

other words, people who gave an initial fraction, relying on their future ability to 

give subsequent fractions and claim deductions for fair market value, now have no 

reason to continue giving while they are alive. The only way that they can preserve 

a full deduction, instead, is to bequeath the work upon their death. 

Thank your for your interest in this matter. I would be happy to answer any questions that Members of the Subcommittee may have. 

f 

The Meadows Foundation 

Dallas, Texas 75204 

August 6, 2007 

The Honorable John Lewis, Chairman 

Subcommittee on Oversight, Committee on Ways and Means 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Lewis: 

I am writing today on behalf of the Meadows Foundation, Inc. (The Meadows 

Foundation), of Dallas, Texas, in response to your Subcommittee’s request of June 

12, 2007, for comments regarding the Pension Protection Act of 2006, P.L. 109–280 

(‘‘2006 PPA’’). We would first like to express our appreciation to you and Members 

of your Subcommittee for your willingness to consider and re-evaluate the provisions 

of the 2006 PPA, many of which are complex and most of which were not the subject 

of Committee hearings in the House of Representatives during the 109th Congress. 

240 

1 Except as otherwise indicated, all references herein to Sections refer to sections of the Internal Revenue Code 1986, as amended (‘‘I.R.C.’’). 2The 2006 PPA added a similar provision to Section 4942 so that grants to those same supporting organizations will also fail to be treated as qualifying distributions. That treatment applies even if the foundation complies with the detailed requirements for exercising expenditure 

responsibility. I.R.C. § 4942(g)(4)(A). 

The Meadows Foundation, Inc. is a private foundation. Accordingly, while there 

are likely a number of provisions in the 2006 PPA that deserve re-examination, our 

comments focus on two provisions of the 2006 PPA that directly impact private 

foundations and that we believe to be based on unsound policy. Our comments are 

as follows. 

Grants from Private Foundations to Supporting Organizations 

Since 1969, private foundations have been significantly limited in the types of 

charitable grants they can make. Under section 4945, certain grants to individuals 

can be made only under programs pre-approved by the IRS, and grants to charitable 

organizations have been limited to public charities and exempt operating foundations, unless the foundation complies with the detailed requirements for exercising 

expenditure responsibility.1 Grants that do not comply with these limitations are 

subject to prohibitive excise taxes under section 4945. 

The 2006 PPA amended Section 4945(d) to further limit the types of charitable 

grants that can be made by private foundations. As amended, Section 4945(d)(4) 

now also prohibits private foundations from making grants to certain types of supporting organizations unless the foundation complies with the detailed requirements 

for exercising expenditure responsibility. Technically, this new limitation applies to 

grants to type III supporting organizations that are not ‘‘functionally integrated’’ 

and grants to any other supporting organization that is directly or indirectly controlled by, or whose supported organization is directly or indirectly controlled by, a 

disqualified person of the foundation that makes the grant. I.R.C. § 4945(d)(4).2

As a practical matter, the Section 4945 rules added by the 2006 PPA have created 

a situation where a private foundation cannot make a grant to any supporting organization without risking a Section 4945 excise tax. This is because (a) the IRS has 

only recently begun including in determination letters of supporting organizations 

a statement of which ‘‘type’’ they are; (b) the IRS has not included in determination 

letters of supporting organizations a statement of whether they are ‘‘functionally integrated’’; and (c) even if those details were covered in determination letters, there 

could still be a risk in some situations because of the above-described control prohibition. The Meadows Foundation is concerned that a number of our current and 

former grantees and other nonprofits organizations fall into this category. Let me 

give you some examples. 

The Center for Nonprofit Management Assistance Loan Fund was created as a 

support organization to provide cash flow loans to nonprofits dependent on contracts 

that were slow to pay. It is a support organization that has proven very effective 

in raising funds to loan out yet remains controlled by the Center for Nonprofit Management. It was created by The Meadows Foundation. 

The Children’s Medical Center Foundation of Central Texas is a support organization that was created to assist in the development of a new children’s hospital to 

serve the central part of Texas. It is located in Austin and has been a good funding 

partner for the Foundation. 

The College For All Texans: Closing The Gaps is a support organization located 

in Austin to serve the entire State. It raises funds to help students attend college 

who normally would not have considered it. It is a support organization that has 

worked well to raise funds and public awareness of this issue. It has also been a 

good partner in assisting the Foundation in its work in education. 

Presbyterian Healthcare Foundation is a support organization that assists in 

fundraising for one Dallas’ largest public hospitals. The Foundation’s founder, Algur 

Meadows, gave the land for the original campus that is still in use. This support 

organization does a wonderful job and remains a longstanding partner of The Meadows Foundation. 

Starr County Historical Foundation is located in Rio Grande City, along the border, and supports historical preservation and adaptive reuse strategies in border 

communities. It is an excellent partner of The Meadows Foundation as it works in 

the border region of Texas. 

There are many other examples that I could have provided, but I hope these make 

the point. 

IRS Notice 2006–109 sets forth procedures that a private foundation can use to 

conclude that a supporting organization is not covered by the above-described limiVerDate Aug 31 2005 02:09 Oct 20, 2007 Jkt 077629 PO 00000 Frm 00244 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
241 

tations. Those procedures, however, require the private foundation to, at a minimum, review supporting documents and make a legal judgment unless the foundation or its grantee incurs the added expense of obtaining an opinion of counsel. 

Many private foundations will simply choose not to make grants to any supporting 

organizations rather than comply with the burdensome rules that govern which supporting organizations may receive grants. Because of the new Section 4945(d)(4) 

rules added by the 2006 PPA, The Meadows Foundation will no longer consider a 

grant to a supporting organization unless there is an extraordinary reason for the 

grant. 

Charity functions best when organizations are able to identify and support a variety of different needs. Each new restriction on grants reduces the ability of a foundation to identify and support the needs of its community. Accordingly, restrictions 

should not be placed on foundation grants absent a compelling need. In the case of 

the 2006 PPA, there was no compelling need for the restrictions against grants from 

private foundations to supporting organizations. 

There is also no obvious reason for the distinction created by the 2006 PPA between grants to functionally integrated and non-functionally integrated type III supporting organizations. The term ‘‘functionally integrated type III supporting organization’’ is defined by new Section 4943(f)(5)(B) to include any type III supporting 

organization that ‘‘is not required under regulations established by the Secretary to 

make payments to supported organizations—due to the activities of the organization 

related to performing the functions of, or carrying out the purposes of, such supported organizations.’’ The definition apparently refers to the integral part test of 

Treas. Reg. § 1.509(a)-4(i)(3). That test requires, in part, that a type III supporting 

organization either (a) perform the functions of or carry out the purposes of its supported organizations; or (b) pay substantially all its income to or for the use of its 

supported organizations. In other words, type III supporting organizations that are 

not functionally integrated are already required to pay substantially all their income 

to their supported organizations. Given that requirement, the complexity involved 

in differentiating between functionally integrated and non functionally integrated 

type III supporting organizations does not seem justified. 

In summary, the restrictions added by the 2006 PPA to grants from private foundations to supporting organizations should be repealed. The restrictions are highly 

complex and burdensome, and there was no compelling need for the restrictions. 

The restrictions serve only as additional burdens on private foundations that further 

restrict the ability of private foundations to identify and support the needs of their 

communities. 

In a time of limited federal and state resources, private foundations are being 

asked to do more and more through their grantmaking. As we did when Katrina 

struck and are currently doing now in the wake of the disastrous flooding in Texas, 

The Meadows Foundation has voluntarily responded by providing funding and assistance to our nonprofit partners who are helping the families hurt by this natural 

disaster. Please allow us to remain flexible and able to respond when necessary 

without tying our hands in burdensome regulations. 

Taxation of Charitable Use Assets 

Section 4940 imposes a 2% excise tax on the ‘‘net investment income’’ of private 

foundations. The term ‘‘investment income’’ historically included only dividends, interest, rents, payments with respect to securities loans, royalties, and capital gains 

from the sale of properties used for the production of such income. The Treasury 

Regulations specifically excluded any capital gains from the sale of property used 

for charitable purposes. Treas. Reg. § 53.4940–1(f)(1) (not yet updated for the 

changes made by the 2006 PPA). 

The 2006 PPA amended Section 4940(c) so that the section 4940 excise tax is now 

also imposed on capital gains from the sale of property used in a charitable activity 

if the property produced dividends, interest, rents, payments with respect to securities loans, royalties, or similar sources of income. The only exception to this taxation 

appears to be new Section 4940(c)(4)(D), which allows the tax to be deferred in the 

event of certain like kind exchanges. 

We believe the extension of the section 4940 tax so that it now taxes the capital 

gains of charitable use property reflects a poor policy decision that should be reversed. There is no policy objective achieved by the tax, other than raising additional revenues for the Federal government. The decision to raise those revenues 

from charities was regrettable. Charitable organizations have traditionally been 

looked upon very favorably in this country, and have been granted tax-exempt staVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00245 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
242 

3See Revenue Act of 1894, ch. 349, § 32, 28 Stat. 509, 556 (1894). 1Pub. L. No. 109–280, 120 Stat. 780 (2006). 

tus since 1894.3 The imposition of a tax on the sale of charitable use property is 

far out of line with that traditional treatment. It also creates a disincentive for foundations to use property directly for charitable purposes. And it will increase the 

amount of funds that foundations must pay to the Federal government at a time 

of growing charitable needs in the communities supported by foundations. The likely 

end result will be an increased need for governmental assistance in those communities. Accordingly, we encourage the Committee to reconsider the expansion of the 

Section 4940 excise tax and to revise Section 4940 to reverse that expansion. 

Mr. Chairman, one of the great traditions that sets our nation apart from others 

is our nonprofit sector and the spirit of philanthropy that generously donates billions of dollars each year to provide assistance and address real problems. We are 

privileged to do this work and take this responsibility very seriously. We appreciate 

the fact that private foundations are tax-exempt, although we do pay excise tax to 

the federal government each year, and are subject to oversight. 

I am concerned that the burden of over regulation and unnecessary restrictions 

will having a chilling effect on philanthropy as we go forward. Please protect this 

important sector and allow it to flourish with Congressional support. 

We appreciate your consideration of our comments and your willingness to reexamine some of the more complex and burdensome provisions of the 2006 PPA. 

Sincerely, 

Linda P. Evans 

f 

President and Chief Executive Officer 

Una Chapman Cox Foundation 

Corpus Christi, Texas 78470 

August 7, 2007 

The Honorable John Lewis, Chairman 

Subcommittee on Oversight 

Committee on Ways & Means 

U.S. House of Representatives 

343 Cannon House Office Building 

Washington, D.C. 20515 

The Honorable Jim Ramstad 

Ranking Member 

Subcommittee on Oversight 

Committee on Ways & Means 

U.S. House of Representatives 

103 Cannon House Office Building 

Washington, D.C. 20515 

Dear Chairman Lewis and Congressman Ramstad: 

I am writing to you to provide comments from the Una Chapman Cox Foundation 

(‘‘UCC’’) pursuant to your request for comments from the nonprofit sector on the 

charitable provisions of the Pension Protection Act 1 (the ‘‘PPA’’). For more than 25 

years, UCC, a type III supporting organization to the United States Foreign Service, 

has been dedicated to enhancing the recruitment, professionalism and effectiveness 

of the Foreign Service; improving the well-being and retention of its best employees 

and their families; and increasing public knowledge and understanding of the Foreign Service and its role in supporting U.S. foreign policy and national security interests. Throughout this period UCC has had a close working relationship with the 

leadership of the Foreign Service, especially the State Department, and we have repeatedly received expressions of appreciation for UCC’s efforts on the Foreign Service’s behalf from State Department officials. 

We thank the Subcommittee for this opportunity to voice our concerns regarding 

some of the new supporting organization provisions of the PPA and the broad discretion given to the Treasury Department to interpret these provisions in ways that 

may be harmful to efficient and effective supporting organizations like UCC. 

Summary of Recommendations 

For the reasons detailed below, we respectfully suggest that the supporting organization provisions of the PPA be revisited, as follows: 

243 

2 Internal Revenue Service, Advance Notice of Proposed Rulemaking, ‘‘Payout Requirements 

for Type III Supporting Organizations That Are Not Functionally Integrated,’’ 72 Fed. Reg. 

42,335, 42,338 (Aug. 2, 2007) (‘‘Advance Notice’’). 3 Id. 4Mrs. Cox was married twice but had no children, and her second husband died before she 

did. 

1. Congress should amend the PPA to define ‘‘functionally integrated’’ supporting 

organizations more specifically, so that organizations like UCC with a bona fide 

close operating relationship with their supported organization are not denied that 

status simply because they have an endowment or fail to meet other criteria imposed by Treasury from time to time. Specifically, type III supporting organizations 

like UCC that are performing activities in support of government entities should be 

classified as functionally integrated. 

2. Congress should apply the favorable treatment of functionally integrated type 

III organizations to other type III organizations that satisfy the existing responsive 

requirement and that have no substantial contributor (nor any individual or entity 

that is a disqualified person by virtue of a relationship with a substantial contributor) involved in the management of their operations. 

3. Congress should also direct Treasury not to impose a payout requirement on 

functionally integrated supporting organizations or, in the alternative, only to impose a flexible payout requirement that can be appropriately responsive to the needs 

of the supported organization(s). 

Introduction 

UCC supports both the recent revisions to the Form 990 that improve the transparency of supporting organizations as well as the IRS’s increased scrutiny of supporting organizations and enforcement of the current regulatory standards. Certainly reports of individuals or families who used charities, in some cases supporting 

organizations, to enrich themselves are sobering and these abuses should be 

stopped. I am concerned, however, that in seeking to stop the abuses perpetrated 

by a few, the onerous restrictions imposed on type III supporting organizations by 

the PPA (and by new regulations the Treasury Department has been given broad 

discretion to develop) will also squelch the efforts of legitimate organizations, which 

provide vital support for countless charitable and governmental entities. Many 

harsh PPA provisions—such as those that have caused many private foundations to 

refrain from funding all type III supporting organizations (and sometimes all supporting organizations, whatever the type)—impair the good and the bad alike. And 

the Treasury Department has indicated in its recent Advance Notice of Proposed 

Rulemaking 2 that it is poised to extend by regulation the most onerous PPA provisions to an unknown number of additional organizations by denying functionally integrated status to many organizations that perform essential functions of their supported organizations, merely because they have more than 35% of their assets in 

an endowment or because the varying annual needs of the supported public charity 

(and thus the expenditures of the functionally integrated supporting organization) 

do not necessarily fluctuate directly with the supporting organization’s annual income stream or stay above a fixed percentage of the supporting organization’s assets.3

Background 

UCC was established in 1980 by Mrs. Una Chapman Cox of Corpus Christi, Texas 

as a private foundation and, after her death, the bulk of her estate was added to 

UCC. After her death, there was no longer anyone who could control UCC who was 

a disqualified person (other than by virtue of being a foundation manager).4 By letter dated July 8, 1988, the IRS recognized UCC’s termination of its private foundation status, its close and continuing historic relationship with the Foreign Service, 

and its conversion to be a supporting organization of the Foreign Service described 

in Code section 509(a)(3). 

UCC’s focus is strengthening American diplomacy by enhancing the professionalism and effectiveness of Foreign Service officers and increasing public awareness of the Foreign Service. To do this, UCC functions as a think tank that both 

generates and stimulates ideas for improving the effectiveness of the Foreign Service and its personnel. UCC’s Executive Director, the Honorable Clyde Taylor, a retired ambassador himself, and its policy council, comprised of distinguished current 

and former Foreign Service officers and respected academics, work together not only 

to identify opportunities for improvement of the Foreign Service, but also to evaluate a wide range of possible projects for UCC to undertake annually. The most 

promising projects are discussed in advance the Director General of the Foreign 

Service or with the appropriate officials at the supported government offices before 

244 

recommendations are made to the UCC Board. The UCC Board meets regularly 

with the Director General, and UCC’s Executive Director and staff maintain a continuous liaison with the Director General and his or her staff to obtain guidance 

as necessary throughout the year. 

Projects undertaken by UCC range from the annual sabbatical leave Fellowships 

initiated by Mrs. Cox that allow promising mid-level State Department officers to 

come home to the United States for a year to conduct outreach projects to several 

projects recently designed to support the recruiting of young officers. These include 

sponsoring overseas internships in the Charles Rangel Fellowship Foreign Service 

recruitment program at Howard University and working with the State Department 

to strengthen and enhance the officer intake process, which formerly has taken an 

average of 28 months. 

Because the costs and expertise required for the various projects can vary significantly, UCC relies not only on its own resources but often works in collaboration 

with other organizations and with various governmental agencies. For example, for 

the production of ‘‘Profiles in Diplomacy,’’ a documentary on the Foreign Service 

made for national television, UCC had to raise money from other organizations. For 

another project, the Commission on Advocacy of U.S. Interests Abroad, commonly 

called the Carlucci Commission, which reviewed the role of United States foreign 

assistance in advancing our National interests, UCC partnered with another funding organization. UCC also provides funding for some projects administered directly 

by the State Department (or another governmental agency), while for some other 

projects UCC implements them itself by engaging or funding third parties to perform the necessary activities. 

UCC, like other supporting organizations for governmental entities, found the 

type III classification to be the most appropriate because such supporting organizations have governing boards that are independent of those of their supported entities, and it is often this independence from the government that allows organizations such as UCC to be most effective in supporting the designated governmental 

entity. As discussed further below, supporting organizations to governmental organizations, unlike supporting organizations to non-governmental organizations, also 

often cannot choose to be type I or type II supporting organizations, whose governing boards are controlled by or overlapping with those of the supported organizations, because of limitations on government employees serving on the boards of nongovernmental entities. 

Although not controlled by their supported organizations, type III supporting organizations such as UCC nevertheless must demonstrate that they have sufficiently 

close relationships with their supported organizations to justify public charity status. Under existing Treasury Regulations, a type III supporting organization does 

this by meeting two tests: a ‘‘responsiveness test’’ and an ‘‘integral part test.’’ The 

responsiveness test requires that the supporting organization be responsive to the 

needs and desires of its supported organizations, while the integral part test requires that the support actually provided by the organization is substantial and necessary to the conduct of the supported organization’s exempt activities. Together, 

these two tests ensure that, despite a supporting organization’s independent management, it is operating closely with the supported organization in much the same 

way as a controlled subsidiary would. 

Distinguished panelists at the Subcommittee’s hearing on July 24, including Steven T. Miller, Commissioner of the Tax Exempt and Government Entities Division 

of the Internal Revenue Service, noted that the charitable sector is generally ‘‘very 

compliant’’ with the tax laws. Thus, although we support ridding the sector of those 

that enrich themselves at charities’ expense, we do not understand the PPA’s harsh 

treatment of all supporting organizations, and all type III supporting organizations 

in particular. UCC has for many years functioned hand in hand with the State Department (and other federal government agencies) to leverage its relatively modest 

resources to produce significant improvements in America’s current and future diplomatic resources, and we urge you to allow us to continue to do so efficiently and 

effectively. For reasons described below, certain of the PPA provisions relating to 

type III supporting organizations, particularly as the Treasury Department is suggesting they be interpreted, will significantly impair UCC’s ability to provide this 

assistance in the best manner possible. 

Functionally Integrated and Non-Functionally Integrated Type III Supporting Organizations 

When it enacted the PPA, Congress brought into the Code the longstanding regulatory distinction between type III supporting organizations that are ‘‘functionally 

integrated’’—those that carry on activities that perform the functions of or carry out 

the purposes of their supported organization—and those that are not, directing the 

245 

5PPA, § 1241(d), 120 Stat. at 1103; I.R.C. § 4943(f)(5). 

6See Treas. Reg. § 1.509(a)-4(i)(2), -4(i)(3). 7See Treas. Reg. § 1.509(a)-4(i)(3)(iii). 8 Advance Notice, 72 Fed. Reg. at 42,338–42,339. 

9See I.R.C. §§ 4942(g)(4), 4943(f), 4945(d)(4). While private foundations are not categorically 

prohibited from making grants to non-functionally integrated type IIIs, they receive no credit 

toward their 5% payout for such grants, destroying their incentive to make them. 10See Advance Notice, 72 Fed. Reg. at 42,338. 11Letter from the American Bar Association Section of Taxation to Kevin Brown, Acting Commissioner of Internal Revenue at 53 (June 4, 2007); Advance Notice, 72 Fed. Reg. at 42,338. 

Treasury Secretary to revise the payout requirement that has always applied to the 

latter.5 As noted above, type III supporting organizations must be both responsive 

to and an integral part of their supported organizations in order to demonstrate the 

close relationship with a supported charity or governmental entity that is the defining characteristic of supporting organizations.6 Those type IIIs that are not functionally integrated have effectively been subject to a payout requirement under the 

integral part test,7 although many, including the Treasury Department in its recent 

Advance Notice of Proposed Rulemaking, have asserted that a payout requirement 

based on a percentage of the organization’s assets (or on the lesser of a percentage 

of the organization’s assets or its income) may be a more appropriate measure than 

the current regulatory requirement based on a percentage of income.8

In addition to a revised payout requirement, harsh new restrictions, including a 

virtual ban on private foundation funding and application of the private foundation 

limits on excess business holdings, were also imposed on non-functionally integrated 

supporting organizations.9 This presumably reflects a view that non-functionally integrated supporting organizations are more likely to be subject to donor abuses and 

less likely to be effectively supervised by their supported organizations than are 

functionally integrated organizations. However, the recent Advance Notice of Proposed Rulemaking reveals Treasury’s disposition to eliminate abusive situations regardless of the collateral damage done to legitimate supporting organizations. Treasury would vastly broaden the number of organizations subject to the new PPA restrictions by redrawing the definition of ‘‘functionally integrated’’ exceedingly narrowly.10

Where the proper relationship of accountability and responsiveness exists, however, the new provisions of the PPA that apply to non-functionally integrated type 

III supporting organizations are inappropriate. In such cases, the PPA’s per se prohibitions are more likely to prevent activity that is actually in the supported entity’s 

best interests than to stop abuse. The PPA and the pre-existing law recognized this 

fact with respect to type I and type II supporting organizations—entities controlled 

by, or under common control with, their supported organizations. With narrow exceptions, such organizations are not subject to any payout requirement nor to the 

PPA’s restrictions on private foundation funding and business holdings. Similarly, 

if a type III supporting organization is functionally integrated (as such term is now 

defined with reference to current Treasury Regulations) and thus providing functional support to a charity or governmental entity in a manner that is consistently 

responsive to that entity’s needs, it can be presumed that an accumulation of income 

in any given year is a proper means of conserving resources in order to provide the 

needed support at a later date. For such organizations, no payout requirement has 

ever been required and indeed is unnecessary, as such a payout requirement may 

force an organization to be less responsive and effective, providing more funds than 

the supported entity needs in one year at the expense of support in subsequent 

years. This puts the directors or trustees of the supporting organization in the difficult position of choosing between fulfilling their fiduciary duty to be a responsive 

and effective supporter and federal tax compliance. 

Assuming Congress continues to distinguish between favored and disfavored type 

III organizations, it should recognize that there are type III supporting organizations that do not meet either of the proposed tests for functionally integrated status 

but which should be treated as functionally integrated because for them additional 

regulation is unnecessary. Already, both the American Bar Association and the Internal Revenue Service have identified parent organizations of hospital groups as 

organizations that should be treated as functionally integrated even if they do not 

technically meet the proposed tests for that status.11 Similarly, we believe that Congress should extend similar protection to type III supporting organizations to governmental organizations, which—like hospital parent organizations—often do not 

have the option of becoming type I or II organizations. 

Type III supporting organizations are particularly important in the governmental 

context for several reasons. First, federal or state government conflict of interest 

rules may prohibit control of a particular organization by government employees. 

246 

This is true for UCC, where due to federal conflict of interest statutes it is the State 

Department’s position that current Foreign Service employees (the people that the 

Foreign Service would most naturally appoint to control UCC) cannot be appointed 

to serve on the UCC Board. More fundamentally, putting the organization under 

governmental control would often defeat the purpose of providing support to a government entity in the first place. Often type III organizations are created to provide 

targeted support for a single purpose—in UCC’s case, the strengthening of the Foreign Service—but if such organizations were controlled by the government, their 

funds could be redirected to other unrelated government purposes. 

If this were allowed to occur, then private support for governmental programs 

would cease. Mrs. Cox was passionate about the value to America of a strong Foreign Service and was willing to devote her hard-earned assets to its support. She 

would not have made the same gift to the United States Treasury to fund any and 

all federal government programs. As was observed at the Subcommittee’s hearing, 

our country’s needs are too great for the government alone to meet and it is essential for private charitable organizations to partner with the government if we are 

to effectively meet the many challenges that we as a nation face. Imposing inflexible 

payout requirements can have a similar effect, as such requirements can force supporting organizations to transfer funds to a government entity that are not currently needed for additional programs and so may lead to government funds being 

reallocated to other government entities or priorities, undermining the very purpose 

of the private support, which is to provide additional support for particular government programs. 

Governmental control may also make a supporting organization less effective. For 

example, UCC identified the need for a website to provide information about the 

Foreign Service to the public in order to increase the general knowledge of and support for the diplomatic corps, and more specifically to assist in recruiting talented 

young persons for Foreign Service careers. UCC then appropriately addressed this 

need by developing a website which provides a variety of information on the Foreign 

Service, its challenges, needs, and opportunities. One reason the website is effective 

is precisely because the content was produced by an independent, non-governmental 

entity, not by the Foreign Service itself. Similarly, in many cases it is essential that 

a supporting organization be strictly non-partisan. When an organization is controlled by the government, it may not be able to stay above the political fray—and 

even if it does, the mere fact of government control may be enough to create at least 

the appearance of partisanship. 

Furthermore, governmental entities are unattractive supported organizations for 

donors who wish to use a supporting organization to provide improper benefits to 

themselves. While a type III supporting organization’s support can be crucial in 

funding supplemental programs, governmental entities typically have their own 

large budgets and highly qualified staffs, making them immune to domination (or 

even undue influence) by a supporting organization’s substantial contributors. They 

also typically have well-developed mechanisms for monitoring the appropriate use 

of funds, making them ideally suited to hold the supporting organization accountable for any abuses. 

Recommendations with Regard to the Definition of Functional Integration 

Congress should clarify the definition of ‘‘functionally integrated’’ by incorporating 

the current regulatory standard into the Code and by directing Treasury to clarify 

by regulation that supporting organizations performing activities that support governmental entities and which satisfy the existing responsiveness test will be considered ‘‘functionally integrated,’’ particularly where, as is the case with UCC, there 

is no involvement of any substantial contributor or a related person. At the very 

least, such organizations should be presumed to be functionally integrated, subject 

to the IRS’s right to challenge that presumption in particular cases. 

Alternatively, in targeting the impact of the PPA toward abuses, it may be more 

effective to allow all supporting organizations that meet the responsiveness test and 

have no substantial contributors or their family members on their governing bodies 

to receive the same treatment as functionally integrated type III organizations. Almost all of the publicized abuses of type III organizations seem to have involved operation of those entities for the benefit of the single donor and his or her family 

members or other related parties. Thus, there seems to be no ground for applying 

the PPA’s special restrictions on private foundation funding or the private foundation excess business holding rules when substantial contributors have no continued 

voice in the supporting organizations’ affairs. For instance, since the death of Una 

Chapman Cox, the UCC Board of Trustees has not included any substantial contributors nor anyone else who would be a disqualified person (other than by virtue of 

their position as trustees). Indeed, no descendents or spouses survived Ms. Cox. 

247 

12See I.R.C. § 4943(f)(5). 

Thus, UCC should not be subject to restrictive rules designed to prevent her from 

improperly using UCC for the advantage of her and her family, which is simply not 

a realistic concern in case of organizations like UCC. 

By providing more guidance to the Treasury Department regarding the definition 

of a functionally integrated type III supporting organization, Congress will ensure 

that legitimate classes of type III organizations are properly protected. One defect 

of the PPA is that it does not specifically delineate the class of ‘‘functionally integrated’’ organizations that should be exempted from the new type III anti-abuse provisions. Rather, it simply identifies them as those not subject to a payout requirement under rules promulgated by the Treasury Department.12 Since Treasury has 

the discretion to impose a payout requirement on all type IIIs, as a practical matter 

it has the power to ignore Congress’s intention not to apply the PPA’s new restrictions on non-functionally integrated type III organizations to all type IIIs simply by 

defining functionally integrated type III organizations very narrowly. Given the 

Treasury Department’s institutional role in combating abuse, it is likely that the 

definitions it crafts will err on the side of preventing abuse, taking inadequate consideration of the important functions served by many legitimate type III organizations like UCC. We therefore urge Congress to give Treasury additional statutory 

guidance as detailed above. 

Considerations for an Appropriate Supporting Organization Payout Rule 

Although a payout requirement has long been considered unnecessary for functionally integrated organizations, and can even be counter-productive for organizations like UCC that are effectively matching their support with the needs of their 

supported organization, rather than the ebbs and flows of their own income, the recent Advance Notice of Proposed Rulemaking, which suggests imposing a payout requirement on all type III supporting organizations, prompts us to include the following observations regarding appropriate payout requirements for supporting organizations. We agree that a percentage of assets payout may be an easy way address 

concerns that a non-functionally integrated organization with continuously low distributions may not really be closely connected with its supported organization and 

may signal an abusive situation. However, because the vast majority of the sector 

is compliant with the existing tax laws, any payout requirement will be applied primarily to legitimate supporting organizations. Thus, any supporting organization 

payout should take into account the differences between supporting organizations 

and private foundations in setting the appropriate payout percentage. 

While private foundations are free to grant their funds to any of a potentially unlimited pool of charitable beneficiaries, type III supporting organizations are, by design, dedicated to specifically named publicly supported charities. In addition, a type 

III supporting organization must be responsive to the needs and demands of its supported public charities. In many private foundation funding situations this is reversed: it is the charity that must be responsive to the goals and demands of the 

foundation funder. 

Non-functionally integrated organizations typically perform functions similar to 

those of an endowment, assuring that the supported organization will continue to 

have the funds needed to support particular programs both now and in the future. 

As noted above, functionally integrated supporting organizations, which perform the 

functions of the supported organization, not only are committed to performing their 

supportive activities over the long-term, but also to providing support as and when 

needed by the supported entity. A university press is most effective if it is free to 

publish the number of books ready for publication in a given year; a strict requirement that it publish 50 volumes each year would hardly be appropriate. Similarly, 

UCC’s primary contribution to the Foreign Service is not the amount of money it 

spends in any given year. Its budget is never more than a drop in the bucket compared to that of the State Department. UCC’s primary contribution to the Foreign 

Service is the function of generating, stimulating and providing a clearinghouse and 

a unique capability for evaluating a wide range of ideas for strengthening and enhancing American diplomacy and the effectiveness of American diplomats. UCC is 

most effective if it can choose to implement the most promising projects identified 

in a given year and to implement only those projects that are determined to be likely to produce the desired impact for the Foreign Service. It would be a waste of resources to spend the time and resources of UCC on an ineffective project simply because the Tax Code required money to be spent this year. 

248 

Recommendations with Regard to a Payout Requirement 

For the foregoing reasons, we recommend that Congress clarify that functionally 

integrated supporting organizations should not be subject to a payout requirement, 

including a payout requirement imposed as part of the definition of ‘‘functionally integrated,’’ as Treasury has suggested should be the case. 

Alternatively, we recommend that Congress direct Treasury to adopt a flexible 

payout requirement for all type III supporting organizations so that such organizations can appropriately respond to the needs of their supported organization(s). Such 

a flexible payout requirement should be no more than 4%, i.e., significantly less 

than the 5% of net assets requirements for private foundations, as private foundations may be controlled by their substantial contributors and are therefore more 

open to abuse than type III supporting organizations. To permit variation in payout 

amounts to match the needs of the supported organization(s), type III supporting 

organizations should also be able to meet this payout requirement by averaging this 

payout over a significant period (e.g., 7 years). 

Thank you for providing exempt organizations with an opportunity to comment 

on the hardships and uncertainties created by the PPA. If you should have any 

questions regarding the above, please feel free to contact me at (361) 888–9261. 

Very truly yours, 

Harvie Branscomb, Jr. 

f 

Chairman of the Board 

Statement of United Jewish Communities 

United Jewish Communities is the national organization representing and serving 

155 Jewish Federations (referred to also as ‘‘Federations’’), their affiliated Jewish 

community foundations, and 400 independent Jewish communities in more than 800 

cities and towns across North America. In their communities, the Jewish federations 

and volunteers (collectively, the ‘‘UJC System’’) are the umbrella Jewish fundraising 

organizations and the central planning and coordinating bodies for an extensive network of Jewish health, education, and social services. 

Federations are the heart and soul of North American Jewry’s philanthropic and 

humanitarian activities. They embody a 3,500-year-old tradition of caring—translating today into the pursuit of Jewish community, values, and peoplehood. Federations build and strengthen the community by reducing poverty and hunger, rescuing 

and resettling new immigrants, and spurring Jewish renaissance worldwide. Federations also are involved in the general community, funding and supporting local 

social service programs as well as helping in times of national and international disaster such as Hurricane Katrina and the 2004 Asian Tsunami. 

The endowment departments of Federations and their affiliated Jewish community foundations maintain numerous charitable vehicles including donor advised 

funds (‘‘DAFs’’), supporting organizations (‘‘SOs’’) (together referred to as 

‘‘participatory funds’’), funds to support one or more specified public charities or programs, and charitable income plans. Endowment gifts enable donors to support a 

general or specific area of interest. Participatory funds allow donors and their families to partner with Federations to fund areas most deserving of support. 

UJC appreciates the House Ways & Means Subcommittee on Oversight (‘‘the Subcommittee’’) examination of the impact on the tax-exempt sector of the charitable 

giving provisions contained in the Pension Protection Act of 2006 (‘‘the PPA’’). As 

the second largest philanthropic network in North America, virtually every one of 

the charitable giving provisions in the PPA has an impact on the UJC system. In 

general, UJC applauds Congress for including several important tax incentives for 

charitable giving in the PPA and supports many of the reforms enacted last year. 

However, UJC remains concerned that some of the provisions: (1) are overreaching 

and have caused, and will cause, significant impediments to potential donors who 

plan to make gifts to important and well-established charitable vehicles; and (2) will 

require tax-exempt organizations to refrain from making grants to worthy projects. 

UJC remains committed to the overriding principles of transparency and good governance in the tax-exempt sector and looks forward to working with the Subcommittee to address many of the issues contained in this submission. 

Organization of our comments: UJC has a keen interest in many of the charitable giving provisions contained in the PPA. UJC has been an active participant 

in the debate over reforms in the non-profit sector over the last several years. UJC 

filed comments on the Senate Finance Committee staff White Paper on Reforms for 

Tax-Exempt Organizations in 2004 (‘‘the White Paper’’) and the Tax Reconciliation 

249 

Act of 2005 (S. 2020) proposals relating to nonprofits, among others. Of particular 

interest are the reforms with respect to participatory funds. Our comments will (1) 

provide background on and outline the importance of participatory funds to the UJC 

System; (2) address charitable giving items of general interest; and (3) provide specific detailed recommendations regarding participatory funds. 

1. Background and importance of participatory funds 

Participatory funds are essential fundraising tools for the UJC System and have 

been a vital funding source for health, education, and social service programs. Many 

of the provisions contained in the PPA provide needed statutory definitions and 

operational rules for participatory funds as well as a penalty tax framework that 

can be applied to discourage unwarranted acts of self-dealing. However, it is in the 

public interest to continue to provide incentives for donors to contribute assets to 

vehicles in which a public charity has control, such as participatory funds, rather 

than to place or leave such assets in vehicles in which a public charity has no control, such as private foundations. 

DAFs and SOs provide numerous benefits to the community, charities, donors, 

and the government. First, the Jewish community and its philanthropic and social 

service mission benefit because such vehicles provide a reliable pool of dollars to 

fund a variety of social service activities. Second, the particular Federation benefits 

because the relationship with the donor fosters an ongoing dialog about community 

priorities and challenges of securing adequate funding. Efficient administration, 

sound investment policies, stewardship, and donor educational programming in both 

general and specific philanthropy issues—all provided by the sponsoring organization—building relationships of trust with current and future donors, increasing the 

likelihood of enhanced giving and involvement, raising additional opportunities for 

donor engagement in the community, and gaining insight into individual donor priorities. Third, individual donors benefit because participatory funds provide cost-effective alternatives to private foundations and offer on-going educational benefits regarding community philanthropic activities. This includes ready access to the knowledge and experience of Federation professional and volunteer leadership regarding 

the needs of the community as well as a means to engage succeeding generations 

in the philanthropic process. Relieved from burdensome administration and recordkeeping, donors are free to concentrate on the substance of charitable giving. Finally, there is the added benefit to the public of efficient tax administration, as welladministered DAFs and SOs have policies and procedures in place to assure qualified grants are made and impermissible material benefits to donors are not present. 

This oversight function is an important component of the overall tax compliance system operating in concert with the goal of furthering philanthropic endeavors. 

Participatory funds encourage an on-going partnership between public charities and 

donors. These and other benefits distinguish participatory funds from private foundations and other charitable giving vehicles. It is an unfortunate, and perhaps unintended, consequence that certain PPA provisions are forcing some donors to move 

away from the public charity environment toward private foundations. 

Federation-managed participatory programs make periodic distributions approved 

by an appropriate committee or the governing body itself. UJC has provided leadership in the field of DAFs by assisting Federations and donors in expressing and following good philanthropic practices, and this, in turn, has created an expanded 

donor base. SOs that support Federations and other public charities provide many 

of the same benefits as DAFs. Almost all SOs affiliated with the UJC System are 

organized as ‘‘Type I’’ SOs and were created by individual families. They meet the 

Type I SO requirements of Internal Revenue Code Section 509(a)(3) (hereinafter referred to as ‘‘Section’’) because they are ‘‘controlled’’ by the Federation or affiliate 

they support, and their distributions are made to, for the benefit of, to perform the 

functions of, or to carry out the purposes of the Federation or the affiliate they support. 

Participatory funds represent critical fundraising tools for the UJC System. Collectively, the UJC System raises over $2 billion each year and manages over $11 

billion in endowment assets. Included in total endowment assets are both restricted 

and unrestricted funds, donor advised funds, and funds held by supporting organizations. Assets in DAFs and SOs amount to approximately 60% of the endowment assets held by Jewish Federations, yet these participatory funds were the source of 

80% or just over $1 billion of the $1.24 billion in grants made from endowment assets to support Federation programs or other charitable activities. Distributions 

from DAFs and SOs represented 20.5% of their combined assets at the prior yearend. This spending rate compares favorably with the spending rate of all Federation 

endowment vehicles, which exceeded 14.5%. It is also important to note approxiVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00253 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
250 

mately 30% of the funds from Federation DAFs and SOs were distributed to the 

general community while 70% were distributed within the Jewish community. 

UJC does not support the development or continuation of DAFs formed to provide 

personal benefits to the donor and applauds the enforcement efforts of the IRS in 

prosecuting such abusive DAF arrangements. We note with favor the comments on 

‘‘charities established to benefit the donor’’ including ‘‘abusive DAFs’’ and ‘‘SOs established to benefit the donor’’ in the prepared testimony of Steven T. Miller, Commissioner, Tax Exempt and Government Entities Division, before the Subcommittee 

on July 24, 2007. Our concerns relate to DAFs and SOs established and administered by our Federations and those established by other community foundations and 

recognized publicly supported and broad-based charities. We are exceptionally proud 

that agencies within the UJC System employ the highest ethical standards of selfregulation in the governance and operation of participatory funds. We regularly 

share expertise with other charities and policy makers outside the Jewish community on a variety of charitable giving issues. To meet these high standards, appropriate rules and best practices are set forth in two separate UJC publications, Donor 

Advised Funds: A Guide for Jewish Federation Endowment Professionals, and 

Handbook on Supporting Foundations, for use by the UJC System. These publications are now being revised to reflect the new requirements of the PPA. 

2. Items of general interest 

As noted above, UJC applauds Congress for including a number of important 

charitable giving incentives in the PPA. We recommend that the following incentives be made permanent. In addition, we believe the tax-free Individual Retirement 

Account (IRA) charitable rollover be expanded as discussed below. 

• Tax-free Individual Retirement Account charitable rollover. Under the 

PPA, individuals age 701⁄2 or older may make direct charitable gifts from an IRA of up to $100,000 per year to public charities other than DAFs and SOs. This provision is set to expire on December 31, 2007. The IRA charitable rollover should 

be made permanent and it should be expanded to permit direct gifts to DAFs and 

SOs. Participatory funds play a vital role in philanthropy in general, and in Jewish philanthropy in particular, and such funds should not be treated adversely as 

compared to other public charities. The numerous statutory safeguards on such 

funds contained in other provisions of the PPA render moot the arguments for excluding DAFs and SOs from the IRA charitable rollover. In addition, we recommend that Congress consider expanding the IRA charitable rollover provision 

to cover life-income gifts by individuals who have attained age 591⁄2. Gift vehicles 

such as charitable annuity trusts, pooled income funds, and gift annuities are 

well-recognized and well-regulated under existing law. We support the enactment 

of H.R. 1419 and S. 819, ‘‘The Public Good IRA Rollover Act,’’ which makes the 

changes noted above and removes the $100,000 annual cap on rollover gifts. • Increased adjusted gross income ceiling for qualified conservation easements. Two provisions in the PPA provide increased incentives for gifts of qualified conservation easements: (1) individuals may deduct the fair market value of 

any qualified conservation contribution to charity described in Section 170(b)(1)(A) 

to the extent of the excess of 50% of adjusted gross income (AGI) over the amount 

of all other allowable charitable contributions and such contribution is not taken 

into account in determining the amount of other allowable charitable contributions; and (2) individuals may carryover any conservation contribution exceeding 

the 50% of AGI limit for up to 15 years. These provisions, set to expire at the 

end of December 31, 2007, should be made permanent. 

Numerous provisions in the PPA are intended to tighten the general rules for 

charitable donation. In addition to the statutory changes made to participatory 

funds, we believe that a number of these provisions are causing donors and some 

charities to spend an inordinate amount of time, effort, and expense in order to meet 

the statutory requirements. We especially note: 

• Penalty taxes and reporting requirements for Donor Advised Funds and 

Supporting Organizations: There is a fine line between preventing abuses by 

certain ‘‘tax-exempt organizations’’ and preventing or inhibiting much-needed 

charitable giving. Given the essential role for public charities in our society, it is 

regrettable that several of the provisions of the PPA applicable to participatory 

funds have made oversight increasingly expensive and, in some cases, virtually 

impossible to manage. Numerous professionals within the UJC System are expending a great deal of time and energy to make ‘‘more than a good-faith effort’’ 

to comply with the provisions of the PPA. The experience of the past eleven 

months demonstrates, however, that these provisions impose severe administrative burdens that translate into a great expense for the UJC system with little 

251 

or no corresponding benefit to the public treasury. Additional due diligence requirements represent an ‘‘opportunity cost’’ that is being paid for with a drain on 

the resources available to fulfill our charitable mission. 

In addition to imposing new oversight responsibilities on fund administrators, the 

provisions of the PPA have complicated a donor’s choice of philanthropic vehicles. 

It is important to note in many cases, DAFs and SOs are now subject to more restrictive penalty provisions and excise taxes than other types of public charities, as 

well as private foundations, historically the most restricted of Section 501(c)(3) taxexempt entities. 

Examples include: (1) grants to individuals are, per se, taxable rather than restricted; (2) expenditure responsibility is required for certain grants to Section 

509(a)(3) public charities; and (3) compensation, including expense reimbursement, 

paid to disqualified persons is considered, per se, an excess benefit transaction as 

to the entire amount of the payment. At a minimum, existing DAFs and SOs must 

at the least review and rewrite operating agreements and by-laws in light of the 

PPA provisions. Some have abandoned DAF or SO status and have sought private 

foundation status. 

• Cash contributions. The PPA provides that regardless of the amount of a cash 

gift, a donor must maintain a record of the contribution, bank record, or a written 

communication from the donee showing the name of the donee and the date and 

amount of the contribution. Even though the PPA does not require charitable organizations to make any changes to their current policies for issuing tax receipts 

to donors, certain charities, including some religious organizations and others dependant upon cash donations, will likely be forced to spend additional time and 

expense on administrative duties to make sure they satisfy donor requests for receipts. Unless the charitable organization provides a written communication, cash 

donations put into a ‘‘Christmas kettle,’’ collection plates, and pass-the-hat collections will not be deductible. We recommend Section 170(f)(17) be stricken. 

• Clothing and household items. A charitable deduction for donated clothing or 

household items is not permitted unless such items are in ‘‘good used condition 

or better.’’ Most donee charities will issue receipts for qualified clothing and 

household donations including the descriptive statement ‘‘good used condition or 

better.’’ However, the statute, existing IRS regulations, and the tax form instructions do not provide any guidance as to the definition of ‘‘good used condition.’’ 

Although we acknowledge some taxpayers may have claimed inflated charitable 

contribution deductions for gifts of clothing and household items, we believe such 

a vague standard should either be further defined by Congress or the Treasury 

Department, or eliminated from Section 170(f)(16). 

3. Specific recommendations regarding donor advised funds and supporting organizations 

Definition of a donor advised fund/clarification of grants for travel, study 

or similar purposes. A DAF, defined in Section 4966(d)(2)(A), is prohibited from 

making a grant to an individual. A fund will not be considered a DAF and will be 

permitted to make grants to individuals for travel, study, or other similar purposes 

if the fund meets certain requirements including that the fund is advised by a 

‘‘scholarship committee’’ not controlled, directly or indirectly, by the donor. See Section 4966(d)(2)(b). There is some ambiguity whether the sponsoring organization can 

agree in advance to appoint the donor to the scholarship committee. UJC believes 

such an appointment should be permitted so long as the donor or persons appointed 

or designated by the donor do not control the committee, whether directly or indirectly. In addition, there can be situations where DAF funds are granted to another 

charity which in turn makes the final scholarship selection. UJC believes it should 

be permissible for the DAF donor to be appointed to the other charity’s selection 

committee, again provided the control provisions of Section 4966(d)(2)(B)(ii) are not 

violated. Such a situation would be similar to the existing law governing private 

foundations. Section 4945(g) provides that taxable expenditure rules do not apply 

to certain individual grants awarded on an objective and nondiscriminatory basis 

pursuant to a procedure approved in advance by the IRS. Treasury Regulation Section 53.4945–4(a)(4) provides a grant by a private foundation to another organization, which the grantee organization uses to make payments to an individual, is not 

regarded as a grant by the private foundation to the individual grantee if the foundation does not earmark the use of the grant for any individual, and there is no 

agreement the grantor foundation can cause the selection of the individual grantee 

by the grantee organization. Such grants are not considered a grant by the foundation to an individual grantee even though the foundation has reason to believe certain individuals would derive benefits from the grant so long as the grantee organiVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00255 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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zation exercises control, in fact, over the selection process and actually makes the 

selection independent of the private foundation. 

UJC understands the Council on Foundations (CoF) is also recommending proposed changes to the definition of a DAF, including an exception for funds created 

by public charities and government entities and a clarification regarding the designation of scholarship committee members by position or title. UJC has reviewed 

both of these proposed changes and agrees with the conclusions of the CoF. 

Distributions and prohibited benefits from donor advised funds. New Section 4967 imposes an excise tax if a DAF makes distributions providing a ‘‘more 

than incidental benefit’’ to a donor, donor advisor, and related party. Although the 

statute does not define the term ‘‘more than incidental benefit,’’ it is important to 

note the Joint Committee on Taxation Technical Explanation (JCX–38–6) provides 

on pages 349–350 that ‘‘there is more than incidental benefit if as a result of a distribution from a donor advised fund, a donor, donor advisor, or related person with 

respect to such fund receives a benefit that would have reduced (or eliminated) a 

charitable contribution deduction if the benefit was received as part of the contribution to the sponsoring organization.’’ Use of this so-called ‘‘Section 170’’ test to determine no goods or services have been provided to the donor is the most administrable 

and effective means to preclude the provision of impermissible benefits to donors 

under Section 4967. UJC urges that guidance be provided to make it clear that a 

grant from a DAF (or an SO) does not provide any benefit to the donor if the 

amount of the grant would have been fully deductible as a charitable contribution. 

Illustrative of our concern is the discussion in Revenue Ruling 77–160, 1977–1 

C.B. 351. As summarized in this ruling, fees and dues or other payments to a public 

charity are deductible under Section 170, including membership fees where any 

rights and privileges obtained are incidental to making the organization function according to its charitable purposes, and the only return benefit is the satisfaction of 

participating in furthering a charitable cause. Examples permitted under Section 

170 include rents, building fund assessments, and periodic dues paid to a church. 

Such payments, if made by a private foundation relating to a disqualified person, 

would be prohibited. What is considered by this ruling as a ‘‘direct economic benefit’’ 

for private foundation purposes would be considered only an incidental benefit for 

purposes of Section 170 and, we submit, should be considered incidental for purposes of Section 4967. 

UJC also believes a public charity’s approval of a recommendation to make a distribution to a charity would be permitted even though in some venues such a distribution might be considered as satisfaction of a legally binding pledge. The definition as to what constitutes a pledge or legally binding pledge varies significantly 

among various state laws and depends upon particular facts and circumstances. It 

is unrealistic to expect that a public charity would be in a position, while running 

large fundraising campaigns, to be able to determine whether a pledge or a legally 

enforceable pledge has been created under applicable state law in each and every 

case. Whether a pledge exists or whether such a charitable pledge is legally enforceable is a matter of state law. Many public charities sponsoring DAFs run annual 

charitable giving campaigns and conduct other fundraising events. In response to 

solicitations for contributions, some donors make cash contributions and others indicate their intention to contribute in the future. A donor thereafter may recommend 

a DAF make a distribution, which may be deemed to satisfy a charitable pledge. 

The DAF may be a fund sponsored by the public charity to which the pledge has 

been made or it may be a DAF sponsored by a different public charity. In either 

case, a donor’s recommendation is not binding upon the board of the public charity. 

The board makes the decision as to whether to distribute funds which would be 

deemed to satisfy a pledge. It is administratively infeasible for a public charity to 

make such a determination on a contribution-by-contribution basis, given the conflicting state laws on what makes a pledge ‘‘legally binding.’’ 

Originally, the White Paper proposed to make clear that DAFs should be permitted to make distributions satisfying a charitable pledge of a donor, whether or 

not such pledge is enforceable under state law. Such a clarification would drastically 

reduce the administrative burden on public charities sponsoring DAFs and, in so 

doing, would serve the interest of charitable beneficiaries and the public at large. 

Any concern that a donor would realize a prohibited benefit under Section 4967 

should a DAF be permitted to make a distribution which, in turn, might be deemed 

to satisfy a pre-existing charitable pledge, does not comport with the legal principles 

that should apply to this question. By definition, a public charity enjoys broad public support and is subject to significant public oversight. Unlike a private foundation, a public charity is not subject to the control of a major donor. In this respect, 

we refer to federal income tax authorities, which concluded satisfaction of another 

253 

party’s legally-binding charitable obligation is not treated for federal income tax 

purposes as resulting in adverse tax consequences. See Revenue Ruling 55–410, 

1955–1 C.B. 297, Revenue Ruling 64–240, 1964–2 C.B. 172 and Wekesser v. Commissioner, T.C. Memo 1976–214. At a bare minimum, it would be erroneous to conclude 

the position we support would change existing tax law, although, as in the case of 

the White Paper recommendation, it would clarify the confusion currently surrounding this issue. 

UJC understands that the CoF is also recommending proposed changes to the 

rules covering distributions from a DAF, including permitting distributions for 

which the sponsoring organization receives consideration, the value of which equals 

or exceeds the amount of the distribution. In addition, CoF is proposing funds be 

permitted to make distributions to individuals for relief of poverty or distress. UJC 

has reviewed both of these proposed changes and agrees with the conclusions of the 

CoF. 

Reliance and certification by donors and grantees. In addition to the excise 

tax imposed on a donor, donor advisor, or related person where there is a prohibited 

benefit, a tax is also imposed on any fund manager of the sponsoring organization 

who knowingly agrees to make the distribution. See Section 4967(a)(2). This provision will require sponsoring organizations to devote additional time and resources 

to the administration of grants in order to identify individuals and entities related 

to the donor or donor advisor. New Section 4966 imposes a 20% excise tax penalty 

on sponsoring organizations for each ‘‘taxable distribution’’ from a DAF and a 5% 

excise tax on a fund manager who knowingly approves a taxable distribution. A taxable distribution includes distributions to a ‘‘disqualified supporting organization’’ 

(an organization directly or indirectly controlled by the donor, an advisor to the 

fund, or any persons related to the donor or the advisor, unless the sponsoring organization implements expenditure responsibility over such distribution meeting the 

requirements of Section 4945(h)). It is important to note the burdens of Section 

4945(h), previously applicable only to private foundations, may prove to be costly 

for many sponsoring organizations and could result in such organizations adopting 

policies precluding any distributions from DAFs to SOs. 

To prevent an unwanted chill on the philanthropic endeavors of DAFs and SOs, 

it is essential that charities administering such funds not be burdened with unnecessary procedures and requirements when accepting gifts, approving grants, or making distributions in their normal course of activities. This would include determining 

whether: (1) the objective standard of Section 170 noted above has been satisfied 

with respect to the donor; (2) distributions from DAFs are not made to disqualified 

SOs: and (3) the SO is in receipt of a gift from a donor or related party who controls 

directly or indirectly the governing body of the supported organization. This third 

compliance task is essential because newly enacted Section 509(f) could potentially 

recharacterize the SO as a private foundation if it were to receive contributions from 

persons ‘‘in control’’ of the SO. We recommend either Congress clarify or that the 

Treasury Department promulgate regulations that permit sponsoring organizations 

to rely on written certification from the donor that the requested grant will not be 

used for a prohibited purpose or result in a ‘‘more than incidental benefit.’’ For example, the grant distribution form could include language such as the following: 

‘‘As a person authorized to make this request, I hereby suggest that you 

make the grant distribution indicated below. I understand that by making 

this request, I am certifying that no tangible benefit, goods, or services (including any grant, loan, compensation, expense reimbursement or similar 

payment) are being received by the Donor or by any individuals or entities 

related to the Donor or the above mentioned donor advised fund.’’ 

A similar statement could also be included in the grant transmittal letter, indicating to the recipient organization that acceptance of the grant is conditioned on 

the understanding the donor will receive no more than an incidental benefit. Such 

an example could include the following: 

‘‘By accepting this check, your organization certifies that (1) the Donor, 

Donor Advisor and parties related to the Donor or Donor Advisor shall not 

receive more than incidental benefit (specifically, no tangible benefit, goods 

or services), (2) no grants, loans, compensation, expense reimbursements or 

similar payments shall be made to the Donor, Donor Advisor or parties related to the Donor or Donor Advisor, and (3) that your organization is not 

a disqualified supporting organization within the meaning of Code Section 

4966(d)(4) of the Internal Revenue Code 1986, as amended (the ‘‘Code’’), or 

a private foundation not described in Section 170(b)(1)(A)(vii) of the Code.’’ 

254 

In addition, sponsoring organizations of a DAF should be permitted to rely on a 

written representation from a prospective grantee SO that it is not directly or indirectly controlled by the donor, the advisor to the fund, or any persons related to the 

donor or the advisor as defined by Section 4966(d)(4). Providing sponsoring organizations with safe harbor rules based on the certification of others is not without 

precedent. Treasury Regulations contain numerous examples where taxpayers are 

permitted to rely on the certification of another that there has been or will be compliance with the technical provisions of the tax law or the information provided is 

correct. One example of third party reliance is the exemption from backup withholding based on payee certification (see Treasury Regulation Section 31.3406(h)(3)). 

Indeed there is an example in the PPA itself. Newly-added Section 170(e)(7)(d) provides an exception from the rules requiring a donor to recapture some tax benefits 

for contributions of appreciated tangible personal property not used for an exempt 

purpose if the donee organization certifies the use of the property was related to 

the organization’s exempt purpose or how such use became impossible or infeasible 

to implement. 

Excess business holdings rules. Owners of closely held businesses sometimes 

meet their charitable objectives through gifts of a part of their business interests. 

Under prior law, such objectives could be obstructed by the rules prohibiting a private foundation from having ‘‘excess business holdings,’’ defined as holdings in any 

business enterprise exceeding ‘‘permitted holdings.’’ These complex rules and excise 

taxes were designed to limit private foundation holdings of interests in business activities and the conduct of unrelated business activities. 

UJC believes the excess business holdings rules should not apply to DAFs and 

recommends the repeal of new Section 4943(e). Sponsoring organizations of such 

funds do not predicate decisions on how long to retain certain assets based on the 

private interest of the donor, but in fact seek to maximize the long-term value of 

assets held in such funds. Tax policy and IRS regulations should not discourage donors from making gifts of property to tax-exempt organizations, especially as a substantial portion of personal wealth is in the form of ‘‘illiquid assets’’ such as real 

property and closely-held business interests. 

Although reduction or elimination of tax incentives for gifts of such types of property should be resisted, it is also important that sponsoring organizations maintain 

gift acceptance and investment management policies fostering the prudent stewardship of all donated assets as well as achieve the goal of investment portfolio balance. 

Adherence to such policies, which are prevalent throughout the UJC System, should 

be sufficient to assure that DAFs operate in a manner which would obviate the need 

for application of the excess business holdings rules. We would also note the revised 

Form 990, released for comment by the IRS in June 2007, would create a new required schedule asking for detailed information on gifts of property with a claimed 

value of $5,000 or more. Disclosure by charities through instruments such as this 

new schedule should provide the IRS with sufficient information to target abuses 

in this area. 

Specific recommendations regarding supporting organizations 

Certain provisions should be restricted to certain supporting organizations. UJC 

believes several of the provisions in the PPA adversely impact long-existing SO arrangements established by public charities for sound legal and policy reasons. We 

further believe that the provisions that substantially restrict the operation of SOs 

should be limited to non-functionally integrated Type III SOs. Concerns about donor 

control are not applicable to Type III SOs established by public charities or third 

parties, such as courts of law, to carry out specific charitable objectives. Similar to 

many public charities, a number of Federations and their beneficiary agencies within the UJC System hold their endowment funds in separate charitable entities 

structured as SOs, generally Type I or Type II, but in some cases Type III. Often 

this is done for important legal reasons, such as to separate endowment assets from 

activities creating liabilities or other creditor protection reasons. Separate endowment funds are also established for programmatic reasons, such as to enable a separate community-based governing body to oversee endowment fund investments and 

distributions, or to keep endowment development activities separate from annual 

fundraising campaigns. Similarly, SOs are used as the parent organizations in 

health care systems and other multi-entity systems of public charities providing direct services. 

Intermediate sanctions. The Internal Revenue Code imposes excise taxes on 

certain excess benefit transactions between disqualified persons and charitable organizations where the transaction is one in which a charity directly or indirectly provides a disqualified person an economic benefit exceeding the value of the considerVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00258 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
255 

ation (including the performance of services) received for providing such benefit. 

New Section 4958(c)(3) provides any grant, loan, compensation or other similar payment from a SO to a substantial contributor or related party is automatically considered to be an excess benefit transaction, whether or not it exceeds in value the 

consideration given in exchange. 

UJC believes the restrictions of Section 4958(c)(3) should not apply to Type I, 

Type II, and functionally integrated Type III SOs. The concern that substantial contributors or disqualified persons can control these organizations is unfounded. The 

element of control exercised by the supported organization in the case of a Type I 

and Type II SO, and the functional integration present in such a Type III SO is 

sufficient to provide the essential oversight of such SOs. Precluding substantial contributors and other disqualified persons from receiving appropriate compensation or 

reasonable expense reimbursement on the same basis permitted by a private foundation is an unnecessarily harsh result and could force some newly-formed organizations to refrain from applying for SO status and force existing organizations to convert to private foundation status. 

UJC also believes Congress or the IRS should clarify whether the rules of Section 

4958 apply in the case of circumstances where an officer or director of an SO attends a charitable event in a representative capacity. We believe such an individual 

who is not a substantial contributor or related party should be able to attend such 

an event and the SO should be able to treat any such cost as administrative expense 

without the individual being required to include such reimbursement in gross income. Similarly, where the officer/director pays the nondeductible portion of an 

event ticket, the ‘‘Section 170 test,’’ as discussed above, should apply. 

Reliance and certification by donors and grantees. Procedures assuring certain SOs (Type I and Type III) do not receive contributions from persons in control 

of a supported organization also need to be implemented reasonably. Gift acceptance 

forms from potential donors to Type I and Type III SOs could require a certification 

that neither the donor, their family members, nor their controlled entity, either directly or indirectly, control the governing body of its supported organization. This 

would alleviate the need for the SO to decline any contribution proffered by any person connected with the supported organization simply because it lacks the resources 

to engage in extensive investigation that could involve any number of persons other 

than the donor. 

Summary. UJC supports the overall objective of the provisions of the PPA and 

appreciates the concern expressed by the House Ways & Means Subcommittee on 

Oversight in examining the impact of these provisions on the tax-exempt sector. We 

are concerned however that several of the PPA provisions have imposed administrative burdens or penalty taxes inhibiting charitable giving and grantmaking to deal 

with what arguably may have been a limited number of abusive situations. The 

added administrative costs and the fear of potential penalty taxes has slowed the 

flow of funds to certain types of organizations, resulting in a diminution in the level 

of social services provided to the general public. UJC urges the Members of the Subcommittee and others in Congress to carefully consider the suggested changes noted 

above. 

f 

Statement of Wisconsin Alumni Research Foundation 

The Honorable John Lewis, Chairman 

The Honorable Jim Ramstad, Ranking Member 

Subcommittee on Oversight 

Committee on Ways & Means 

U.S. House of Representatives 

343 Cannon House Office Building 

Washington, D.C. 20515 

Dear Chairman Lewis and Congressman Ramstad: 

Thank you for your invitation to comment on the exempt organizations provisions 

of the Pension Protection Act of 2006 (the ‘‘PPA’’). I am the Managing Director of 

the Wisconsin Alumni Research Foundation (‘‘WARF’’), a Type III supporting organization to the University of Wisconsin—Madison (the ‘‘University’’). For over 80 

years, WARF has worked closely with the University, patenting and licensing University discoveries and using the resulting income to enrich scientific research and 

education at the University. On March 14, 2005, WARF received the National Medal 

of Technology—the nation’s highest honor for technological innovation—from PresiVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00259 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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1See I.R.C. §§ 509(f)(1)(A), 6033(l). 2 I.R.C. § 509(a)(3)(C). 

3The Bayh-Dole Act is officially known as the Patent and Trademark Law Amendments Act, 

P.L. 96–517, 94 Stat. 3015 (Dec. 12, 1980), codified at 35 U.S.C. §§ 200 et seq. 

dent George Bush, recognizing WARF’s support of research at the University, and 

WARF’s ‘‘pioneering’’ technology transfer of university ideas to U.S. businesses ‘‘to 

improve the human condition, benefit the U.S. economy and fund further scientific 

inquiry.’’ 

My comments focus on the PPA’s provisions affecting supporting organizations 

like WARF. Some of the PPA’s new provisions were aimed at particular abuses, 

often involving a single donor or family funding a supporting organization that was 

effectively, if not formally, under their control. That organization would then operate to benefit the donors in various ways. I applaud attempts by both Congress and 

the Treasury Department to stop this kind of abuse. However, I am concerned that 

many of the new provisions are drafted so broadly that they also significantly impede the efficient functioning of legitimate organizations such as WARF. 

Already the new PPA provisions have cost WARF and the University millions in 

current and future foregone funding, as well as needlessly complicating a variety 

of WARF’s activities in support of the University. Given that many of the PPA’s provisions were introduced without any extended discussion with the charitable sector, 

there is real concern that over time WARF will continue to find its ability to provide 

efficient and effective support to the University impaired by unforeseen consequences of the PPA. More fundamentally, I must object to the apparent premise 

of the PPA that all supporting organizations, especially Type III organizations, are 

somehow suspect and in need of regulation akin to the private foundation rules— 

regardless of how closely or successfully they have worked with their supported institutions. Having successfully supported the University for over 80 years, WARF 

should not be treated equivalently to a newly-formed supporting organization created as a charitable giving device to maximize some donor’s tax benefits while making minimal distributions for charitable purposes. 

While I propose specific fixes to some of the problems noted below, it would be 

better to start anew with provisions targeted much more narrowly on the abuses 

Congress means to stop. Indeed, it may be that the PPA’s provisions requiring increased disclosure to the IRS and to a supporting organization’s supported organizations 1 will allow the IRS to stop these abuses through redoubled enforcement of existing standards, notably the rule preventing direct or indirect control by substantial 

contributors and other disqualified persons.2 Even if Congress does not undertake 

a global revision of the PPA’s supporting organization provisions, at a minimum 

Congress should amend or clarify these provisions so that they will not further disrupt successful supporting relationships like the one between WARF and the University. 

I. WARF Fulfills an Essential Technology Transfer Role Under the BayhDole Act 

WARF was organized as a Wisconsin not-for-profit, nonstock membership organization on November 14, 1925, to own and manage patents arising out of University 

research on behalf of the University in order to support further research at the University and to benefit the public. At that time, the University had no mechanism 

to administer a patent that Professor Harry Steenbock wanted to contribute to the 

University so that it could be licensed to generate funding for future University research. Technologies made available to the public by WARF have had an incalculable impact on the general welfare; Dr. Steenbock’s discovery alone—a process for 

creating Vitamin D through ultraviolet light irradiation—has led to the virtual 

elimination of rickets in the United States. WARF’s successes have also allowed it 

to provide supplemental funding to the University for scientific research and education, propelling the University to its current stature as one of the nation’s leading 

scientific universities. 

One of the most important ways WARF supports the University is by fulfilling 

the University’s obligations under the Bayh-Dole Act.3 That Act encourages utilization of inventions arising from federally-funded research, including research conducted by universities and other nonprofits, by allowing the researching institutions 

to take title to any resulting intellectual property provided certain conditions are 

met. Under the Bayh-Dole Act, such organizations must report all inventions arising 

from federal funding and notify the government whether they intend to take title 

to such inventions. If they take title, they must promptly patent the inventions, report periodically to the government on their utilization, and use the net income received from the licensing or other use of such inventions (after administrative exVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00260 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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4See 35 U.S.C. § 202(c). 5 35 U.S.C. § 202(c)(7)(A); 37 C.F.R. § 401.14(k)(1). 

6 I.R.C. § 4943(f)(1), (3)(A). 

7 I.R.C. §§ 4942(g)(4)(A)(i), 4945(d)(4)(A)(ii). 

8Treas. Reg. § 1.509(a)-4(i)(3)(iii); PPA, § 1241(d)(1), 120 Stat. at 1103. 

9 I.R.C. § 4943(f)(5)(B); Staff of the Joint Committee on Taxation, Technical Explanation of 

H.R. 4, the ‘‘Pension Protection of 2006,’’ as Passed by the House on July 28, 2006, and as Considered by the Senate on August 3, 2006 (JCX–38–06) at 360 n. 571. 10 Internal Revenue Service, Advance Notice of Proposed Rulemaking, ‘‘Payout Requirements 

for Type III Supporting Organizations That Are Not Functionally Integrated,’’ 72 Fed. Reg. 

42,335, 42,338 (Aug. 2, 2007). 11Treas. Reg. § 1.509(a)-4(i)(3)(ii). 12Treasury Proposal, 72 Fed. Reg. at 42,338. 

penses and payments to inventors required by the Act) to support further scientific 

research or education.4

The Bayh-Dole Act and the regulations thereunder expressly allow a research organization such as the University to delegate its right to take title to an invention 

(and its attendant responsibilities) to a nonprofit organization with a principal function of managing intellectual property.5 The University has made such a delegation 

to WARF, allowing and requiring WARF to fulfill its responsibilities under the 

Bayh-Dole Act. 

II. Congress Has Not Adequately Protected Legitimate Functionally Integrated Type III Supporting Organizations Such As WARF 

Many new restrictions under the PPA apply only to certain Type III supporting 

organizations, namely those that are not ‘‘functionally integrated’’ with one or more 

supported organizations. Such organizations are now (1) limited in the amount of 

stock in a company they and their disqualified persons can hold; 6 (2) virtually prohibited from receiving grants from a private foundation grantor because any such 

grantor must exercise expenditure responsibility and cannot count the grants toward its payout requirement; 7 and (3) subject to an annual payout requirement that 

the PPA makes mandatory.8

Under any reasonable definition of the term, WARF is ‘‘functionally integrated’’ 

with the University. The vast majority of WARF’s staff time is spent on its core 

technology transfer activities. Such activities are an essential part of any major scientific research university’s program in the twenty-first century. Indeed, WARF’s activity fulfills the University’s legal responsibility to patent and license its federally 

funded inventions under the Bayh-Dole Act; WARF has been specifically delegated 

those responsibilities as expressly contemplated by the Bayh-Dole Act. Moreover, because WARF is responsible for this crucial component of University operations, it 

has continuous contact with University administrators, professors, and researchers. 

Thus, one would expect WARF to qualify as the prototypical organization that is 

‘‘functionally integrated’’ with its supported organization. 

However, Congress left Treasury great discretion in defining the term ‘‘functionally integrated’’; the statute defines the term exclusively by reference to the definition in the Treasury Regulations, and the Joint Committee on Taxation’s Technical 

Explanation (‘‘Technical Explanation’’) suggests that Treasury has the authority to 

narrow its definition of functional integration and even to abolish the class of functionally integrated organizations altogether.9 Treasury has recently indicated in an 

Advance Notice of Proposed Rulemaking (the ‘‘Treasury Proposal’’) 10 that it intends 

to use this broad authority, grafting extraneous new requirements onto the concept 

of functional integration in ways that could exclude WARF and numerous other organizations despite longstanding and close operational integration with their supported organizations. 

Under current regulations, an organization would be considered functionally integrated if it conducts activities ‘‘to perform the functions of, or to carry out the purposes of, [its supported] organizations,’’ and if such activities are so important to the 

supported charity that ‘‘but for the involvement of the supporting organization, 

[they] would normally be engaged in by the publicly supported organizations themselves.’’ 11 Treasury proposes to maintain this test, but to graft in two additional requirements taken from the private operating foundation context. First, the organization would have to spend substantially all (85%) of its income, up to at most 4.25% 

of its net assets not in charitable use, on direct conduct of activities meeting this 

‘‘but-for’’ test rather than on providing financial support to the supported organizations.12 Second, at least 65% of the assets of the organization would have to be used 

directly in the conduct of those activities. This proposed definition is alarming for 

multiple reasons. 

258 

13PPA, § 1241(d), 120 Stat. at 1102 (emphasis added). 

The Treasury Proposal effectively applies a payout requirement to all Type III 

supporting organizations. While Congress did give Treasury considerable discretion 

in defining the term ‘‘functionally integrated,’’ it also instructed Treasury to impose 

a payout requirement on the subset of ‘‘Type III supporting organizations which are 

not functionally integrated.’’ 13 Despite this apparent intention to distinguish between functionally integrated and other Type IIIs, Treasury’s proposal effectively 

subjects all Type III supporting organizations to some sort of payout requirement. 

This seems at odds with Congress’s explicit instructions. 

The Treasury Proposal unfairly penalizes broad classes of Type III organizations 

without regard for their relationship to their supported organizations. Treasury’s 

proposal seems to mandate that all functionally integrated Type III organizations 

provide support in the same way. If an organization’s principal asset is an endowment that it uses to fund functionally integrated activities, it cannot qualify as functionally integrated—no matter how responsive to and closely integrated with its 

supported organization it might be. 

Similarly, an organization that uses only half of its income to operate its functionally integrated activity and distributes the excess to the supported organization 

could also fail to qualify. This rule leads to especially strange consequences in the 

case of Bayh-Dole patent management organizations like WARF. Paradoxically, an 

organization like WARF could qualify as functionally integrated if its patent licensing activity were unprofitable enough to absorb most of its investment income. But 

a successful patent management organization does not spend substantially all of its 

net income on its technology transfer activity because it has substantial amounts 

of income over and above those expenses—net income that is turned over to the supported university, potentially causing the organization to fail the proposed payout 

test. This bizarre result would unfairly penalize Bayh-Dole patent management organizations for successfully doing what they are required by federal law to do. 

The Treasury Proposal will also prevent universities and other charities from 

using Type III supporting organizations to hold interests in for-profit subsidiaries. 

Such charitable holding entities would often be impermissible: they would not be 

functionally integrated if more than 35% of their assets would be interests in an 

unrelated business, and therefore they would be prohibited by new section 4943(f) 

from owning more than 20% of that business. These restrictions needlessly limit 

how a university system can structure ownership of its own for-profit subsidiaries. 

More generally, the Treasury Proposal seems to subscribe to a mistaken notion 

that functionally integrated organizations should be limited in their ability to provide direct financial support. In my experience, WARF has been successful precisely 

because it provides both financial and operational support. Unquestionably, WARF’s 

close working relationship with the University gives it a familiarity with the University and its needs that allows WARF to be far more responsive than the typical 

organization that simply writes a check to its supported organization each year. But 

it would be absurd to say that WARF would be either more responsive to or more 

integrated with the University if it limited its support to its technology transfer activities. Rather, because of WARF’s close involvement with the University’s science 

programs, WARF has been able to identify a variety of programs it can support for 

which other funding is generally not available. Recent examples include a competitive research grant program, faculty and graduate student fellowship programs, and 

the construction of major new biotechnology and interdisciplinary research facilities 

on the University’s campus. WARF-supported programs have become a mainstay of 

the research program at Wisconsin, and the campus is dependent on them to keep 

its competitive edge, to retain faculty, and to recruit new faculty. WARF works 

closely with the University to tailor these programs to the University’s evolving 

needs. Surely this kind of financial support, informed by WARF’s extraordinarily 

close operational relationship with the University, counts in favor of treating WARF 

as a full-fledged public charity, not against it. 

Treasury’s criterion for determining which activities are functionally integrated is 

inadequate for supporting organizations of governmental entities. Under current law 

and the Treasury Proposal, a functionally integrated organization must conduct activities that the supported organization would otherwise conduct itself. Normally, 

this rough test serves to screen out those organizations that do not have activities 

essential enough to the supported organization to give it the incentive to monitor 

those activities. In the governmental context, however, the supporting organization’s 

activities may be crucial to the governmental entity precisely because the governmental entity could not (or could not easily) perform those activities itself due to 

restrictions specific to governmental entities. In such cases, the Treasury Department’s test would apparently yield the wrong result. 

259 

14PPA, § 1241(d)(1), 780 Stat. at 1103; Treasury Proposal, 72 Fed. Reg. at 42,338. 

Recommendation: Congress should define ‘‘functionally integrated’’ supporting 

organizations more specifically, ensuring that organizations are not denied that status simply because they have an endowment, generate revenue through their integrated activities, provide a combination of financial and functional support, or perform essential functions that their supported organization could not perform themselves. Specifically, that definition should clarify that Bayh-Dole patent management organizations like WARF qualify as functionally integrated. 

III. Restrictions on Non-Functionally Integrated Type IIIs Unfairly Harm Legitimate Organizations—Especially Those Supporting Governmental Entities 

The PPA deprives legitimate organizations (and the public interests they serve) 

of needed funding. WARF is concerned about Treasury’s apparent willingness to 

narrow the class of functionally integrated organizations because of the serious consequences to legitimate organizations that fail to obtain that technical status. Perhaps most seriously, such organizations will be effectively foreclosed from seeking 

private foundation funding, since private foundations would receive no credit for 

such grants in meeting their own payout requirements. For instance, one private 

foundation has pledged to give WARF $50 million to help pay for a new state-ofthe-art interdisciplinary research center that WARF is building on the University’s 

campus. That grant is possible because WARF is functionally integrated under the 

current regulations; if the Treasury Proposal is not modified, WARF’s endowment 

will prevent it from receiving such grants in the future. This will not prevent any 

abuses of which I can conceive; it will simply decrease the amount of funds available 

to advance research and build the University. 

Furthermore, the restriction on private foundation funding will negatively impact 

WARF and other organizations even if they are functionally integrated, because 

many private foundations will not be willing to perform the necessary due diligence 

to determine what type of supporting organization the potential grantee is. The University has already felt the impact of this restriction; one private foundation is terminating a $1 million annual grant formerly paid to WARF and used to fund University research because the PPA has made it too complicated to give grants to Type 

III supporting organizations. 

The PPA’s new payout requirements can actually harm governmental and other 

supported organizations and other charities with needs that fluctuate over time. The 

PPA directs Treasury to impose a payout requirement on all non-functionally integrated supporting organizations; currently, Treasury is proposing to apply the same 

5%-of-assets payout requirement to supporting organizations that applies to private 

foundations.14 This importation of the private foundation rules overlooks the fundamental difference between private foundations and supporting organizations. Unlike 

the typical private foundation, a Type III supporting organization is dedicated to 

specifically named charities or governmental entities, so any current spending directly impacts the amount that will be available to those entities in the future. 

When a supported organization can be expected to have varying needs over the 

years, requiring a fixed payout can actually harm it, keeping it from saving its resources for when they are needed most. 

These concerns are especially pressing for state universities and other governmental entities dependent on annual budget appropriations. There is a constant risk 

that state legislature appropriations may be frozen or cut with the next economic 

downturn or change in administration. Furthermore, it can be difficult for state universities to find room in tight state budgets to obtain supplemental appropriations 

for special projects, leaving them able to cover core operating expenses but not to 

undertake the kind of major capital projects necessary to ensure that university facilities remain technologically current. 

A Type III supporting organization with an endowment that can be used to supplement the standard appropriations process can play a key role in filling these 

gaps. For instance, in addition to its normal annual support of the University’s programs, WARF is currently spending $80 million to construct three new buildings on 

the University’s campus, and is committed to construction of a major new research 

institute to which it will contribute an expected $100 million. It is precisely because 

WARF was free to accumulate its income in prior years that it now has amassed 

an endowment large enough to meet these special needs as they arise and to compensate for cyclical variations in Wisconsin’s funding for the University. 

Type III supporting organizations offer unique advantages and should not be 

treated as second-class citizens of the charitable sector. The PPA demonstrates unmistakable hostility to Type III supporting organizations, as if there are no valid 

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15Technical Explanation at 358. 

reasons for choosing Type III status. As Managing Director of WARF, I witness the 

benefits of that status every day. Some of those benefits are specific to WARF’s patent management role. A major problem for modern universities is dealing with institutional conflicts of interest—roughly, the fact that universities and other research 

institutions may have commercial interests that could, if unmanaged, taint the objectivity of their research interests in commercializing and profiting from their research. The separation between WARF and the University helps to mitigate these 

concerns by making an independent organization, WARF, responsible for commercializing the University’s research, leaving the University free to focus on its educational and scientific mission. 

Type III status also allows WARF to avoid being treated as a Wisconsin state entity itself. If it were a state entity, it could become subject to public information 

laws, making potential licensees reluctant to risk disclosing their proprietary information by licensing with WARF; public procurement laws, as noted above, could 

limit its ability to negotiate licenses; and civil service rules would affect its ability 

to deal with employees. WARF’s freedom from state bureaucracy has also been especially important in enabling it to put together retention packages to keep star scientific faculty at the University. Because of their financial and bureaucratic constraints, state universities have perennially had difficulty quickly assembling compensation packages that can compete with those offered by private institutions. In 

two recent instances, the University would have lost key faculty members without 

WARF’s help. Given the many legitimate reasons for choosing Type III status, that 

status alone should not be enough to single out an organization for special regulation. 

Recommendation: The PPA’s new restrictions on Type III non-functionally integrated organizations (especially the payout requirement and limit on private foundation funding) are counterproductive and should be repealed. They are particularly 

ill-suited for Type III supporting organizations to governmental entities and patent 

management organizations, which should therefore be exempted from these restrictions even if they are not repealed. 

IV. Section 4958(c)’s New Restrictions on Transactions with Supporting Organizations are Stricter Even Than Those Applicable to Private Foundations 

Prior to the PPA’s enactment, section 4941 prohibited most transactions between 

a private foundation and its ‘‘disqualified persons’’—directors, officers, substantial 

contributors, and certain related parties. Section 4958, on the other hand, allows 

public charities to engage in such transactions but imposes a 25% tax against the 

disqualified person for any amount he or she receives in excess of fair market value. 

Under new section 4958(c)(3)(A)(i)(I), the 25% excise tax automatically applies to 

the entire amount of ‘‘any grant, loan, compensation, or other similar payment’’ that 

a supporting organization provides to a substantial contributor or a related party, 

and to any loan to the organization’s disqualified persons—regardless of whether the 

payment is reasonable in amount. It thus appears intended to impose a regime on 

supporting organizations similar to the one that applies to private foundations. In 

fact, though, it overshoots that mark, treating WARF and other supporting organizations even more harshly than they treat private foundations. 

Definition of Prohibited Payments. Section 4958(c)(3)(A) does not define what 

payments are ‘‘other similar payments’’ subject to penalty. The Technical Explanation cryptically indicates that the term was meant to include expense reimbursements but not bona fide sale or lease payments—without any explanation as to why 

the former but not the latter are considered similar to grants, loans, and compensation.15 The result is a regulatory regime for insider transactions that makes no 

sense from a policy perspective: private foundations can pay compensation and reimburse legitimate expenses, but cannot buy or sell property, whereas supporting organizations can buy or sell property but cannot pay compensation or reimburse expenses. The Technical Explanation also raises questions about which other forms of 

payment might be covered. Since it apparently approves fair market rental payments to a substantial contributor, it seems other payments for the use of property, 

such as royalties, should be permissible. But given the draconian penalties that 

apply to these new payments, it behooves Congress to identify the disfavored payments more precisely. 

Recommendation: Section 4958(c) should be repealed, or at a minimum, amended to include an express provision stating that no rental, lease, sale, purchase, royVerDate Aug 31 2005 23:47 Oct 19, 2007 Jkt 038087 PO 00000 Frm 00264 Fmt 6602 Sfmt 6621 E:\HR\OC\38087.XXX 38087
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16WARF has acquired its assets primarily in return for future royalties or by investment. 

Thus, a donation of well under 1% of WARF’s total assets could easily be over 2% of its total 

contributions. 17 I.R.C. § 4941(d)(2)(E). 18 I.R.C. § 62(c); Treas. Reg. § 1.62–2(c)(4). 19Treas. Reg. § 53.4958–4(a)(4). 20Treas. Reg. § 53.4946–1(a)(8) (for purposes of § 4941, ‘‘disqualified person’’ does not include 

501(c)(3) organizations other than certain organizations that test for public safety); Treas. Reg. 

§ 53.4958–3(d)(1) (501(c)(3) organizations are deemed not to have ‘‘substantial influence,’’ and 

thus prevented from becoming disqualified persons except by relationship to some other person). 

alty, or interest payments shall be considered a ‘‘grant, loan, compensation, or other 

similar payment’’ under section 4958(c)(3)(A)(i)(I). 

Reasonable Compensation and Expense Reimbursement. Charities, like 

other employers, often reimburse expenses that their employees, officers, and directors incur out-of-pocket costs in the course of their duties. To take just one example, 

WARF typically will pay the costs associated with bringing its Board of Trustees— 

prominent business and community leaders from across the nation—together for 

periodic board meetings. In some cases WARF pays for the travel directly; in other 

cases it is more convenient for the trustee to book the travel arrangements and then 

obtain reimbursement. Other organizations may provide their trustees with a small 

amount of compensation for time spent serving the organization. 

The PPA complicates these routine matters for WARF. As is the case for many 

other charities, WARF’s trustees are among those most likely to be enthusiastic 

enough about WARF’s work to contribute to it. Such charitable contributions should 

be encouraged, not penalized. However, under the PPA, even a relatively minor donation to WARF could turn a donor-trustee into a substantial contributor, because 

the relevant test requires only that the trustee have contributed at least $5,000 and 

at least 2% of all contributions to the organization. Section 4958(c)(3) of the Code 

punishes such a donor-trustee for his or her generosity; from the time he or she becomes a substantial contributor, that trustee is relegated to second-class status, becoming ineligible to have his or her WARF-related out-of-pocket travel expenses reimbursed or to receive the same compensation paid to other trustees. Even WARF’s 

direct purchase of plane tickets for such a donor-trustee could be considered an inkind grant under section 4958(c)(3). This seems bizarre; the purpose of the new 

rules should be to prevent improper benefits to substantial contributors, not to prevent a charity from holding board meetings at its own expense. In WARF’s case, 

the new rules will discourage trustees from making personal commitments to funding the charitable and educational endeavor of scientific research at the University. 

This disincentive for board-level giving is as unprecedented as it is perverse. Even 

in the private foundation context, where concerns about donor control of charitable 

resources are at their highest, the Code allows substantial contributors to be paid 

reasonable compensation for personal services rendered in furtherance of the organization’s exempt purposes, and to be reimbursed for out-of-pocket costs associated 

with providing those services. There is no reason to impose a stricter rule simply 

because an organization has a connection to a public charity. 

Recommendation: Congress should avoid treating supporting organizations 

worse than private foundations by amending section 4958(c)(3) so that it does not 

apply to reasonable compensation for services or to reimbursement of reasonable 

and necessary out-of-pocket expenses, at least when made on the same terms available to other similarly situated, non-substantial contributors. 

Alternative Recommendation: Even if the prohibition on compensation is retained, Congress should clarify that it does not apply to non-personal expense reimbursements. U.S. tax law generally excludes such reimbursements from an individual’s income when he or she is paid under an accountable plan, which requires the 

reimbursed individual to substantiate the business purpose of the expense. The current section 4958 regulations take the same approach, disregarding reimbursements 

under an accountable plan and other similar benefits that are excluded from income. 

Congress should confirm that these kinds of proper reimbursement arrangements 

will continue to be disregarded for purposes of section 4958(c)(3). Substantial contributors should not be penalized if they are reimbursed for legitimate, properly substantiated expenses or if they use property provided by the charity in the course 

of performing their duties. 

Transactions among charities. Section 4958(c)(3)(C)(ii) provides that public 

charities other than supporting organizations are not considered substantial contributors, thus implying that private foundations and supporting organizations are substantial contributors, and therefore loans, grants, or compensation paid to them are 

subject to penalty. This is a marked departure from prior law. Until now, sections 

262 

4941 and 4958 have applied to protect against transactions between charities and 

private parties that could divert charitable funds to private use, but neither section 

4941 nor section 4958 covered transactions between charities. 

This expansion of section 4958 prohibits many innocent transactions, particularly 

in the common context of a system of affiliated charitable entities. For instance, 

WARF is the parent of another Type III supporting organization of the University, 

WiCell Research Institute, Inc. (‘‘WiCell’’). Because WARF provided initial funding 

to WiCell, WARF is a substantial contributor to WiCell. WiCell pays WARF service 

fees for bookkeeping and similar administrative services as part of a cost sharing 

arrangement so that the two organizations do not have to duplicate their efforts in 

such areas. Congress should encourage, not punish, this kind of consolidation and 

efficient use of charitable resources. Yet under the PPA, WiCell’s service fees paid 

to WARF, a substantial contributor, would presumably be ‘‘compensation’’ subject to 

draconian penalties. By reaching transactions between supporting organizations to 

the same University, the PPA creates artificial and senseless barriers to the efficient flow of funds and services among charitable affiliates. 

Recommendation: The cleanest solution to this problem, and the one Congress 

should adopt, is to return to the previous policy of sections 4941 and 4958, excluding 

all charities from the definition of substantial contributor. At the very least, however, an exception should apply to transactions within a system of related charities. 

V. Conclusion 

We at WARF believe that there is something immensely valuable about the collaborative relationship that WARF and the University have enjoyed over the past 

80 years. That relationship attests that Type III supporting organizations can make 

unique contributions to their supported organizations, particularly when they support state universities or other governmental entities. I urge you to consider amending the PPA so that it will not disrupt or penalize these kinds of longstanding support relationships. 

Sincerely, 

Carl E. Gulbrandsen 

f 

Managing Director 

Statement of Zimmerman-Lehman, San Francisco, California 

I have worked all my life in the public interest arena primarily with small and 

effective nonprofit organizations. Currently, I consult with a wide range of small to 

midsize nonprofits, many of them social change organizations that have small administrative staff. 

I am concerned any time I see major regulatory changes since I know each and 

every time there is a change, regardless of the reason, there is a cost to learning 

and implementing the change which means more overhead expenses and less resources for programs. This is particularly true for the types of organizations for 

which I work. Both the Pension Protection Act of 2006 and now the revised draft 

Form 990 will and do have the unintended consequence of requiring organizations 

with limited capacity to divert resources to accountants, auditors and others to collect, track and process the data required to meet the suggested reporting standards. 

The proposed changes will reduce service delivery and increase administrative overhead. Also very few changes add value other than more transparency (the largest 

value added new regulatory change in the Pension Act, the IRA rollover, is limited 

to only two years). 

Generally, when I study the background on these changes the intentions are good 

and fit with the types of governance procedures I promote. However, I also feel they 

are often addressing problems that are faced more often by large, financially comfortable organizations such as colleges, hospitals and foundations. It is the rare 

small nonprofit that need worry about over ‘‘compensation.’’ More often I worry 

about under-compensation and assisting organizations to not only run their programs effectively and efficiently but raise all the money they can to increase their 

capacity for service. I work with many many honest hard working fundraisers who 

struggle every day to increase resources for services that used to be provided by the 

government. In recent years, many public schools and even cities have needed assistance in raising private funds. 

I ask you to do a ‘‘cost-benefit analysis’’ of every proposed change before it is 

made—especially the cost to smaller agencies. 

• Is this new regulation really needed? 

263 

• How will it benefit the public? 

• Will compliance reduce services to the public? 

• Will this new regulation really promote more effective as well as transparent 

services? 

• Should the same information be required from all nonprofits regardless of size, 

type or focus? 

Thank you for your consideration, 

Ann Lehman 

Partner 

p.s. At the hearing on July 24, 2007 I read that nonprofit abuses ‘‘. . . included 

inflated valuation of non-cash donations, charities that are established primarily to 

benefit a single donor, abusive donor-advised-fund arrangements, the blurring of the 

line between tax-exempt and commercial activities, excessive compensation, and improper political activities. . . .’’ These abuse should not be dismissed, but rarely affect small to midsize nonprofits and do not warrant the increase in regulations and 

scrutiny that has been recently heaped on all nonprofits. Rather than increasing 

overhead expenses for all—which donors hate to fund—the IRS should do a better 

job ferreting out the bad players. 

Æ