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TAX EXEMPT ORGANIZATIONS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

MAY 16, 2012

Serial No. 112–OS13 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

CHARLES W. BOUSTANY, JR., Louisiana, Chairman 

DIANE BLACK, Tennessee 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

KENNY MARCHANT, Texas 

TOM REED, New York 

ERIK PAULSEN, Minnesota 

JOHN LEWIS, Georgia 

XAVIER BECERRA, California 

RON KIND, Wisconsin 

JIM MCDERMOTT, Washington 


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C O N T E N T S 

Page 

Advisory of May 16, 2012 announcing the hearing .............................................. 2 

WITNESSES 

Mr. Roger Colinvaux, Associate Professor, Columbus School of Law, The 

Catholic University of America, testimony ........................................................ 6 

Ms. Diana Aviv, President & Chief Executive Officer, Independent Sector, 

testimony .............................................................................................................. 16 

Ms. Joanne M. DeStefano, Vice President for Finance and Chief Financial 

Officer, Cornell University, Testifying on behalf of the National Association 

of College and University Business Officers, testimony ................................... 27 

Mr. Michael Regier, Senior Vice President of Legal and Corporate Affairs, 

VHA Inc., testimony ............................................................................................. 33 

Mr. Bruce R. Hopkins, Senior Partner, Polsinelli Shughart, testimony ............. 43 

SUBMISSIONS FOR THE RECORD 

American Association of Museums ......................................................................... 65 

American Bankers Association ............................................................................... 68 

American Hospital Association ............................................................................... 75 

Association for Healthcare Philanthropy ............................................................... 77 

Catalogue for Philanthropy ..................................................................................... 84 

Cause of Action ........................................................................................................ 85 

Charity Navigator .................................................................................................... 91 

CharityWatch ........................................................................................................... 92 

Community Catalyst ................................................................................................ 99 

Credit Union National Association ......................................................................... 104 

Jewish Federations of North America ................................................................... 107 

National Association of Federal Credit Unions ..................................................... 115 

National Council of Nonprofits ............................................................................... 117 

The Community Foundation for Greater Atlanta ................................................. 121 

MATERIAL SUBMITTED FOR THE RECORD 

Question for the Record: 

Ms. Diana Aviv ........................................................................................................ 123 


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TAX EXEMPT ORGANIZATIONS 

WEDNESDAY, MAY 16, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The subcommittee met, pursuant to call, at 10:05 a.m., in Room 

1100, Longworth House Office Building, the Honorable Charles 

Boustany [Chairman of the Subcommittee] presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

Boustany Announces Hearing on Tax Exempt 

Organizations 

Wednesday, May 16, 2012 

Congressman Charles W. Boustany Jr., MD (R–LA), Chairman of the Subcommittee on Oversight of the Committee on Ways and Means, today announced 

that the Subcommittee will hold a hearing examining operations and oversight of 

tax-exempt organizations. This will be the first in a series of hearings by the Subcommittee on the tax-exempt sector and IRS oversight of tax-exempt activities. The 

hearing will take place on Wednesday, May 16, 2012, in Room 1100 of the 

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. However, any individual or organization 

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

list of invited witnesses will follow. 

BACKGROUND: 

Tax-exempt organizations have long played an important role in the United 

States. Since the first income tax was imposed in 1913, certain organizations have 

been exempt from taxation, including those organized and operated for religious, 

charitable, scientific, or educational purposes. Such organizations remain the most 

common types of exempt organizations and are defined in section 501(c)(3) of the 

Internal Revenue Code (‘‘IRC’’). In addition to the longstanding exemption for such 

organizations under section 501(c)(3), there are 28 other types of organizations that 

may qualify for tax-exempt status. 

As of 2008, 1.85 million organizations qualified for tax-exempt status, and 1.18 

million qualified as charitable organizations under section 501(c)(3). In 2008, charitable organizations had $2.5 trillion in assets. It is estimated that tax-exempt organizations employ approximately 10% of the U.S. workforce (charitable organizations 

employ 7% of the U.S. workforce). 

Tax-exempt organizations are subject to a variety of rules to ensure compliance 

with Federal tax law and limit abuses, including rules that prevent private 

inurement, limit certain activities, and subject business income related to for-profit 

activities to income tax. 

On October 6, 2011, Chairman Boustany sent a letter to the Internal Revenue 

Service (IRS) seeking information related to the agency’s administration and oversight of tax-exempt organizations (including charitable organizations). The letter 

sought information on a variety of topics to help the Committee understand the current state of relations between the IRS and tax-exempt entities, and provide a foundation for further engagement in overseeing this important sector of the U.S. economy. The letter focused on a number of issues related to corporate governance and 

compliance, requested information related to new reporting requirements for tax-exempt hospitals, and asked for an update on the ongoing Colleges and University 

Compliance Project that was launched in 2008. 

In announcing this hearing, Chairman Boustany said, ‘‘Oversight of the tax-exempt sector is an important priority for the Subcommittee, and it has been 

an area that both Republicans and Democrats agree needs greater attention. In my letter to the IRS last October, I asked the IRS about recent efforts to address certain concerns that have been raised regarding the operation of tax-exempt organizations, including corporate governance issues 

and mishandling of funds by officers. It is now time for the Subcommittee 

to hear from members of the tax-exempt community for a more complete 

picture of the current state of affairs. This review allows us to examine the 


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state of the tax-exempt sector, as it currently exists today and consider this 

information as we continue the Committee’s efforts toward comprehensive 

tax reform. In both cases the goal is the same—to ensure that the tax-exempt sector is operating in an efficient manner and that the laws governing tax-exempt organizations are being applied fairly and evenly.’’ 

FOCUS OF THE HEARING: 

The hearing will focus on certain current issues related to tax-exempt organizations, including the current IRS compliance initiative related to Universities, recently enacted reporting requirements for tax-exempt hospitals, recent efforts by 

tax-exempt organizations to design and implement good governance standards, and 

taxpayer involvement in redesigning the Form 990. In addition, the hearing will discuss the history of recent legislative changes to the Tax Code dealing with tax-exempt organizations and what prompted those changes. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit written comments 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 ‘‘Hearings.’’ Select the hearing 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, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close 

of business on Wednesday, May 30, 2012. 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) 225–3625 or (202) 225–2610. 

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 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 hearing 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. 

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. 

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

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

f 

/. 


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Chairman BOUSTANY. The subcommittee hearing will come to 

order. Welcome to this morning’s hearing on tax-exempt organizations. This hearing will be the first in a series of hearings exploring 

tax-exempt issues and related IRS compliance efforts. 

Tax-exempt organizations, especially charitable organizations, 

serve an important role in our society. From the local Little League 

to nonprofit hospitals to major universities, tax-exempt organizations are intertwined with our communities and economy. 

Tax-exempt organizations also control vast resources. It is esti- mated that in 2008 charitable organizations had $2.5 trillion in assets. In addition, tax-exempt organizations employ 10 percent of 

the workforce. With so many Americans relying on, working for, 

and engaged in economic relationships with tax-exempt organizations, taxpayers should have confidence that tax-exempt organizations, especially charitable organizations, are operating efficiently 

and hopefully using good governance practices to maximize benefits 

provided to the community. To support these goals it is important 

that this committee review the substantive rules that apply to taxexempt organizations, IRS compliance efforts, and the operations 

and governance of tax-exempt organizations. 

In addition, Congress must ensure that the IRS has the information it needs to effectively interact with tax-exempt organizations. 

The IRS is charged with ensuring tax-exempt organizations are operating in furtherance of their tax-exempt purpose and it is important that tax-exempt organizations and the IRS effectively communicate with each other to meet this goal. 

With this in mind, in October of last year I sent a letter to Commissioner Shulman to discuss a variety of current issues involving 

tax-exempt organizations and IRS compliance efforts. Today we 

have invited witnesses who can provide information from the taxexempt sector’s perspective on the issues that were raised in my 

letter, such as good governance and compliance, the IRS college 

and universities compliance project, and new reporting requirements for nonprofit hospitals. 

In addition, we have a witness who can provide historical background about recent changes in tax-exempt rules and the general 

structure of the tax-exempt sector. This is an opportunity to hear 

from the tax-exempt community on these important issues and 

learn what the current landscape looks like for tax-exempt organizations. 

I want to thank all of our witnesses for joining us here this 

morning. With that I will now yield to my friend Mr. Lewis, the 

ranking member of the subcommittee. 

Mr. LEWIS. Thank you, Mr. Chairman. Thank you, Chairman 

Boustany, for holding this hearing today. Tax-exempt organizations 

play an important role in our society. There are many types of taxexempt organizations and each type serves an important role. 

There are organizations that help our poor and feed our hungry. 

There are colleges and universities that educate our young people 

and hospitals that care for our sick. There are also organizations 

that touch every corner of our life: religion, labor and the arts, and 

advocate on our behalf. In total there are over 1.8 million tax-exempt organizations that work to make our lives and our communities better. 


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Throughout the year I have been concerned about the IRS budget 

and the effect of the budget cuts on tax administration. The IRS 

currently has a budget of $100 million, and fewer than 900 employees to oversee nearly 2 million organizations that have more than 

$1 billion in revenue and $2.5 trillion in assets. 

I continue to be concerned that, not if properly funded, the Agency harms taxpayers and in this context harms the public trust 

when bad actors are discovered. I look forward to learning more 

about the tools used to ensure compliance with the Federal tax 

laws. 

In closing, I am mindful that tax reform is looming. If we adopt 

a Republican goal of a top individual tax rate of 25 percent, some 

tax preferences will need to be eliminated. However, I believe that 

tax-exempt organizations play a major, valuable, and necessary 

role in our economy and in our country, and charitable giving 

should be encouraged. I look forward to hearing from the witnesses 

today and I want to thank each witness for your testimony and 

thank you for being here. 

And with that, Mr. Chairman, I yield back. 

Chairman BOUSTANY. Thank you Ranking Member Lewis. 

Next it is my pleasure to welcome the excellent panel of witnesses seated before us today. Today’s witnesses have extensive experience studying or working with tax-exempt organizations and 

their experience will be very helpful as we examine the current 

state of the tax-exempt sector. 

First I would like to welcome and introduce Mr. Roger Colinvaux. 

Professor Colinvaux is an associate professor of law at Catholic 

University and an expert on matters relating to nonprofit organizations. From 2001 through 2008, Professor Colinvaux served as legislation counsel with the Joint Committee on Taxation. Mr. 

Colinvaux, welcome. 

Second, we will hear from Ms. Diana Aviv. Ms. Aviv is the president and CEO of Independent Sector, a national network of nonprofit organizations, foundations, and corporate giving programs. 

Before working at Independent Sector, Ms. Aviv worked as the associate executive vice chair for the Jewish Council of Public Affairs. 

Welcome, Ms. Aviv. 

To introduce our third witness I am pleased to yield to my friend, 

the gentleman from New York, Mr. Reed. 

Mr. REED. Thank you very much Mr. Chairman for yielding. 

And it is my honor and privilege to introduce to the committee a 

witness, the third witness on our panel today, Joanne M. 

DeStefano, Cornell University’s vice president for finance and chief 

financial officer. She has custody and control of the university 

funds and has general responsibility for the maintenance of the financial records of the entire university. She oversees the comptroller’s office, the treasurer’s office. She holds an MBA from Cornell 

University. And before that, she worked for the private sector for 

Race Mark International, Inc. and Slumberge, Incorporated. She 

and I both live in the beautiful area of the Finger Lakes of New 

York. And it is my pleasure to introduce her in one of her first testimonies to the committee, and I know it will not be her last, having had the privilege of reading her testimony before it was given 

here today. 


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And with that, I yield back and welcome her for her testimony. 

Chairman BOUSTANY. Thank you Mr. Reed, and welcome, Ms. 

DeStefano. 

Fourth, we will hear from Mr. Michael Regier. Did I pronounce 

it correctly? 

Mr. REGIER. Yes. 

Chairman BOUSTANY. Senior vice president of Legal and Corporate Affairs for VHA, Incorporated. VHA is the Nation’s largest 

alliance of nonprofit hospitals serving members in 47 States. Welcome, sir. 

And finally we welcome Mr. Bruce Hopkins, senior partner at 

Polsinelli Shughart in Kansas City, Missouri. Mr. Hopkins has 

published multiple treaties on nonprofit tax issues and is a former 

chair of the American Bar Association’s Committee on Tax Exempt 

Organizations. 

I want to thank you all for being here today and spending time 

with us. The committee has received each of your written statements and we will make those part of the formal hearing record. 

Each of you will be recognized for 5 minutes for your oral remarks. 

And Mr. Colinvaux, we will begin with you. You are recognized for 

5 minutes, sir. Thank you. 

STATEMENT OF ROGER COLINVAUX, ASSOCIATE PROFESSOR, 

COLUMBUS SCHOOL OF LAW, THE CATHOLIC UNIVERSITY 

OF AMERICA, WASHINGTON, D.C. 

Mr. COLINVAUX. Thank you. Thank you, Mr. Chairman, Mr. 

Ranking Member, Members of the Committee. Thank you for inviting me to testify today and for holding this hearing. The (c)(3) sector is a vital and dynamic part of our civil society, but it is also 

a sector with its share of business interests, bad actors, and vested 

interests as well. In part for this reason, the law governing our taxexempt organizations is increasingly complex and also adrift. 

I am here today to express my concern that the law is developing 

without a clear sense of the Federal role or a tax policy towards 

(c)(3) organizations. Now, we first granted exemption about 100 

years ago and the law has changed a lot. For one thing (c)(3)s have 

to apply for their status and report annually. They didn’t when we 

started. (C)(3)s face restrictions on some of their activities like campaigning and substantial lobbying, but initially there were no activity restrictions. (C)(3)s must pay tax on some types of income, their 

unrelated business income, and private foundations pay tax on 

their investment income, so we don’t have a blanket exemption 

anymore. Some (c)(3)s also are preferred over others. Public charities face many more restrictions than private foundations, so not 

all charities are still treated equally. 

So over time, Congress has placed limits on exemption. But what 

is interesting is that these limits are mostly negative in nature. 

That is, what we have said is, don’t do this or don’t do that or 

please file a form with the IRS as you go along. But we haven’t 

really required anything affirmative of (c)(3) organizations. That is, 

we don’t say that they must do anything to secure their status. 

Thus, we have kept the broad purposed-based approach to exemption under which it is relatively easy to become a (c)(3) and remain 

one. 


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We have also kept the all-or-nothing approach to exempt status 

making the main tool IRS has for enforcement, revocation of status, which because it is so drastic is also a somewhat limited tool. 

The results I believe are legal standards that facilitate growth but 

little in the way of oversight capability, in large part because there 

is not much for the IRS to measure. This can lead to problems and 

it has. In recent years we have seen far too many (c)(3) organizations associated with scandals and we have had legislation as a result. 

Now, I want to talk about this legislation for a few seconds because it highlights what I see as the current trends in the law. 

First, Congress has shown frustration with the breadth of the (c)(3) 

exemption standard. 

First, in the case of credit counseling groups and then in the case 

of hospitals, Congress decided to impose more rigorous exemption 

requirements on these organizations than other (c)(3)s. This, in my 

view, is very significant because it treats some (c)(3)s worse than 

others based on the organization’s purposes. We haven’t done that 

before. What this means is that the sector can be broken down into 

its component parts, disaggregated, with legal standards tailored to 

each organization type. 

Second, Congress has shown a willingness to blur the line between public charity, and private foundation, in several cases 

adopting the bright-line anti-abuse rules applicable to private foundations and applying them to stop abuses at public charities. This 

matters because it suggests that the old way for distinguishing 

(c)(3)s as public or private is less relevant today and that abuses 

can and do occur at public charities. 

However, rather than selectively applying foundation rules to 

abuses of public charities, it might be better to reexamine this distinction entirely. We can look at each abuse, decide if it is still a 

concern, and, if so, for which type of (c)(3). 

The final related trend to emerge is that Congress is showing a 

preference for brighter enforcement lines, more intermediate sanctions, and so frustration with the current facts and circumstances 

approach to enforcement. All these trends are important because 

they show the current direction of the law. We have a 

disaggregation of the sector based on purpose, a weakening of the 

public charity, private foundation distinction and a preference for 

bright, if harsh, enforcement lines. 

Now, going forward, I think the question is whether to continue 

on this path, and here I see a fork in the road. Right now the path 

is focused on abuse. Policymakers respond to abuses with new 

rules, and stopping abuse and protecting the integrity of the sector 

are very important goals. And in my written testimony I highlight 

some ways we might consider to focus on that. 

Another avenue for tax reform is to reconceive of the role the 

Federal Government has to (c)(3) organizations. Our current approach is somewhat monolithic. We tie all the tax benefits to (c)(3) 

exemption. Why not instead focus on areas where the Federal interest is the greatest: on support for charitable contributions; and 

decide whether eligibility to receive contributions should depend on 

the satisfaction of new criteria, perhaps based more on activities 

and outcomes rather than purposes? 


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I see I am out of time. I recognize the very important goal of 

oversight. And thank you for inviting me to testify today. 

Chairman BOUSTANY. Thank you Mr. Colinvaux. 

[The prepared statement Mr. Colinvaux follows:] 


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"indepcndellt sector" - but for purposes of my testimoTI), 1 \\'ilillse the phrase "section 501 (c)(3) sector." 

rhis is because the identity of the sector stems not exclusively from ils nonprotit status, charitable nature, 

nor independence, but rather from its relationship to this iconic section oftlle tax code. 

B. II istorical and Current 1.l;'gal Charactcrbtics of the Section 501 (c )(3) Sector 

The initial exemption \vas passcd in 1913 and had seyeral notable characteristics: (I) The 

exemption was self-enforcing - there was no requirement that the organization apply tor the exemption or 

report regularly. (2) No t'xplidt limits were placed on activities.!'; (1) The exemption \-vas 11 complele or 

blankel exemption, lhat is, it covered all of an organization's im;ome. (4) The exemption applied equally 

to all organi/ations meeting it<.; terms, (5) The exemption \\ias all or nothing: either the org11ni;:ation met 

the requirements and was free from income tax or it did not meet the requirements anJ was subject to 

im:ome lax. (6) The exemption ~as conditiom:d on a "g:ood" purpose and no dTori \\-8<'; made lo define 

purpose in concrete terms, hascd on outcome, content, or other quantifiable measure. (7) The exemption 

was conditioned on the private inurement restriction; that is the profits of the organization were required 

to go to the good purposes of the organization, and not be paid out to private persons or private intere~ts. 

(8) The standard for tax exemption was used as. a basis for other, distinct tax benefits; for example, as of 

1917, the language of the exemption provided a basis for thl: charitable contribution dl:duction. 

It is not surprising that 100 years later, the law has changed. Section 501 (c)( 3) stalus is not selfenforcillg, but is. conditiolled upon an .;xpli.:;it ucterminalion by the Intemal Revenue Servil:e ("IRS") and 

subject 10 ongoing oversight through the filing of annual information returns. Congress also decided that 

ccrlain activ itic5 wen.: inconslstcnl witi) taA exemption: for example, sedioll 501 (c}(3) organizations may 

not participate in political campaigns or engag~ in subs1,mtial lobbying. Further, the exemption is 110t a 

hlanket e'Xemption. All charitable organizations are subject to tax on income [rom husiness activities that 

are not related to the organization's section SOl(c)(3) purpose; and some section 501 (c)(3) organizations 

(i.e., private foundations) are ~ubject to ta::\ on their investment income. Finally, the e'\ernption no longer 

applies equalJy to all. Section 501(c)(3) organiL<1tions are divided into broad categories: public charjtie~ 

and priYate foundations; with the I<mncr being preferred to the latter for purposes of the charitable 

deduction, tnx e'\cmption, and permissible aeti\ itie-; and ~ur\'eil!ancc 

TIl.ese changes are all significant legal responses to experience WIth section 501(c)(3) 

organi7<ltions o\'er the course of a century. Yet much o~' the foundational statutory l<1\\'s and historical 

appr0Jches to section 501(c)(3) status and enforcement have remained the same. The two core statutory 

requirements of the 1913 exemption are unchanged: section 50 1(c)(3) exemption still (importantly) 

reqnire,; a generically ··good" purpose; 7 and the exemption stllJ is conditioned on th~ private inurement 

restriction. in addition, the requirement., for the charitable deduction rema111 linked to the requirements 

for section 501(c)(3) e'(cmption, i.e., the law does not require separate tests for two rather different tax 

benelits. Further, section 50 I (c)(l) stntus remains, for ~1l intents and purpose." an either/or pmpositiun. 

Sherlock & Jane G. Graydle, Congo Research Serv., R40919, An O"erncw afme Nonprotit and Charimble ~cctor 

3,9-12 (2009) (reporting a~ of July 2009 and not including organizations that do not rep011 to the IRS on tile annual 

intormation return (Foln} qC)O series) such as churchc::. and smaH organizations). 

6 In 1919, however, the Tr~a<;ur) ad(lpted a reguial10n for purposes of Lhe eharilable ,:onlribntion rJ~dW';lion ()f I Y 17 

stating "assuci:ltions formed to disseminate contron~rsial or partisan propaganda arc not educational v.ithin the 

m~aning nfthe statut~." Reg. -1-5, art. 517(1919), in T.D. 2R31. 21 Treas. Dec. lnt. Rev. 2~5 (1920). 

I 01' Cllursc, a century's worth or e'pericnl:e provides con'5icierahle pr(;"ccuent as to what qualifies as " <,ectlOn 

SOI(c)(3) organi.wtion <.I" delemlined OWl lim.: oJ the ms am] tht: courts. 
10 


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Re\ ocation of e)..emption, which i.,; ba!:>ed on an inqlLiry into all the facts and circul1lstance~, re1Hajn~ the 

primary sanction for [,flilure to meet a condition of section 50 I (c)(3) ~tatu~.g 

C. Observations Regarding Historical Changes 

Thinking. broadly, about what has changed and what has stayed the same, a number of 

observation:. can be made. First. the historical trend is towmd more restTictiol1S on the ~ection 50 I (c)(3) 

designation. What began in 19!3 as a fairly straightfof\\ard and sweeping tax exemption, has been 

incrementally pared back and subjected to more rules and requirements. Section 501(e)(3) organizations 

must apply for their status (with churches a principal exception), lllay not engage in certain activities, 

must pay tax with respect to some income, and some organizations will he treated bettcr than others. 

Sec(lud, these restrictions generally ha\'e tflkcn the form ofncgati\-e rmller Wflll POSiLivC" 

requirements. Positive requirements are the things a section 501(c)(3) organization must do to secure and 

keep its status. By contrast negative requirements are the things a section 501(1.:)(3) organization rnu~t 

refrain from doi1lg. In other word'), section 501(e)(J) organizations have been asked to refrain hom doing 

certain things, such as politicking or lobhying, or engaging in (untaxed) business activit~. But section 

501(c)(3) organizations have not, in general. been asked to do anything affirmative, apart from tile 

fonns.') Thus, the century's l1rl.rro\"ing of the 501(c)(3) designation has oCL:urred not through an dlort tn 

limit eligibility for the preference or to demand som0thing quantifiable in return for tax benefits, but 

through mles that constrain the scope of the preference once eligibilily has been established. 

;\ third ob~ervation relates In a consequence ofa century of retreat from the scope of the original 

tax preference in the form of negative and not posirive restrictions: the facilitation of a large and growing 

section 50 HeX3) ~ector. Without positive requirements. becoming and remaining a charity is relativdy 

easy. And although a charity In 20 t2 faccs a lot more rules and restrictions than a charit) of J 9 t 3, apart 

fr0111 a "vagu~ entreaty to rem(lin '·opcrated·· for its purpose, lhe l'x.el1lption, once granted, i~ unJikd) to be 

withdnmn. Furth~r. the pluralistic approach w\\ard defining section 50I(c)(3) organi7ations means th"t 

the definition evolves to accommodate societal change and as it does so, the activities encompassed by 

section 50 ItL:)(3) grow. In addition, because tile requirements for the chClritab!e deduction are linked TO 

requirement" for section 50 I (c)(3) exempli on (and other benefits), the amount of support rrovidt:d h) the 

federal government to the sector via the section 501(e)(3) designation also naturally increases along with 

the scope of the excmption standard. 

A fourth observation relates to enforcement. Overall, the risk of audit for a section 501 (c}(3) 

organization is low. But to a certain extenl, th(: examination rate as such is h(:sidc the point. E"en iCth(:re 

'"vcre a dramatic increase in resources and a corresponding uptick in audits and ~xaminati011s, Lherc likcly 

would be little meaningful ch.mge in growth or in the nature of organizations qualifying for section 

501(c)(3) st;ltuS. Thi~ is because, at least \\ith resped to public charities, there i!> \\;!ry little "hard" law for 

the IRS to enforce. In general, the IRS b limited to an inquir) into "purpose," "ith the thrust ofthe 

inquiry being not on the ~ubsl<mce of the purpose, or the direct accomplbillnenb ufthe organization, but 

on the more ethl.'real inquiry into whether the organization n:all) is bl.'ncfiting pri\atc intcrl.'sts more than 

public ones. Importantly. this existential question is the heart of the matter primarily because ofthe 

absence of anything positi\-c to m..:asure and the all-or-nothing, facts and circumstances nature of 

enforcement. An organi/ation either qualifies as a SUI (c)(3) organization or i1 do("s not, there i':> no 

middle ground. Further, bccausl;! the sanction is severt:, "n alrt:ad) delkate quer) is Lo" ..:ertain extenl 

R There are excepLiom •. EXl:i~e U\xe~. or intermediate ~andions, may be impo~ed on self-deJ.ling tram.action~ and 

cxc~~s lobbying. IRe ~ 49-J.1, 4058, -1-911 

'I The principal exceplion li..llhis is illlpo<,ilion oL.l pay Ollt requirelllenl on privak founciation'->. IRe ~ 49-1-]. 
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tilted in favor of the organization. Re\ ocation oftlle 501(c)(3) desigllati011 is a serious step, and. as a 

practical maUer, is not (and should not he) undertaken lightly. This leaves the IRS with very little other 

than the somewhat limited tool of intermediate sanctions to try to deter and pWlish bad behavior, which in 

any event has very little to do with overseeing the accomplic,hments urthe organization. 

A final related observation is that the consequences of regulation by negative restriction and the 

relative absence orbright enforcement lines are beginning to stre')s the viability of the regulatory system 

and the ::.ection 501(c)(3) designation. The all-or-nothing nature ofthe tax preference combineu with the 

vague positive requirement to be operated for section 501 (e )(3) purposes and no other positive measure, 

has limit~d the ahility ufthe fRS, fur hetter or for \\ orsc, dfc\.:ti\'ely to police abuse or to ch~ck the 

growth of the section 501 (c )(3) sector in any meaningful way. or even to provide any strong degree of 

confidence that the organizations receiving the section 501 (c )(3 J moniker, typically at the outset of their 

existence, meet their promises or ::Ire actually serving a public benefit The outcome is a large and 

growing section 501 (c)(3) sector aud legal standards that accommodate gnnvth. 

D. Trends E-x:emplified by Recent Legislation 

Gro\'l,th \..,i1hou1 measureable standards io:; conducive to problems. Although the section 501(c)(3) 

fonn is vital. it is also rel<ltively e<1sy to abu!:>e flTId hard to enforce. And so in recent years. scandalc:: ha\'e 

Loo onen been associated with section 501((;)(3) organintions, at some considerahle cost to the "halo" 

effect oCthe sector a~ ~ whole. Scandals have imolved celia in konic institutions, contributions of 

noncash proPi.':fty, p<'lrtieipation in tax ~helter trans~ctions, spending ('md malwgi.':ment rlbnses at private 

foundations, concerns ahout grant~makiJ1g public charities ,<{uch as donor-advised funds and supporting 

organizations, scandals in the hospital and credit cOlmseling industries. and excess cOlllpens~tiol1 to nmlle 

some of the more prominent. 

Scandab led (0 signifieaIll seclio1l50Ilc)(3) rej()nn legislation over the past several years. These 

legislative respom,es are telling, quite apart from the ~uhstancc, in that the legislation highlights gw\\ing 

tensions within the current tax policy hamework. For one, through the legislation Congress in eftect has 

said that the breadth and amorphous nature ofille section 50 I (c)t3) l:olanJard i,.., to{) gellerolls. For another, 

Congre~s has .::x.rr.::s~ed disaffection with the current ba~i~ for distinguishing i'ITIlUng charilie:; a~ "public" 

or "private." And for a third, Congress has begun to approve blighter lines over facts and circumstances 

appro(\~hes to enforc.::mcilt. 1t is important to s.::e how tllesc trends are b~ing articulat<.:d throl1gh legal 

changes hecause they provide the bt;:::'l st;:l1se of the \.:urrenl dirediol1 of the law. 

(i) TrU'ill'atiot1 wJth the hl"eadlh ({lid OIllOrpllOll.I qlltlli()' (if the sectio/l 501/c)(3) ['\:empliol1 

standard 

Althollgh the open-ended standard for exemption yields the benefits of a Jiverse sector. it also 

comes with costs. As noted, the lack of affirmative standards makes measmement and enforcement 

difficult, a problem magnified by the size of the sector. Altematives might be to require that some 

threshold of acti \- ity be met, 10 naJTo\\ the ~cope ofthe section 50 l( c )(3) ::.tandard, or even to illlpo~e 

guidelines on how money is to be spent and for whose benefit. Another, less divisiye. response is to 

focus 011 proces~. Positive hut proces~-orienteJ requirements do not mandate Ihat a specific type or 

amount ofa public good be provided, but nonethel~ss r~qllire action by the 501(c)(3) organization, action 

intendcd to facilitatc production of the public good. The reform legislrttion took significant steps toward a 

more proct;:~s~oriel1ted approach. 

Credit cmmseling organizations are an e"aruple. In response to abuses, Congress took creditcounseling organizations out of the generic frruucwork ofseetioH 501(e)(3), and provided a series of 

distinct bright-line stand8rds for section 501(c)(3) statu~. AeconJingly, credit counse1ing organizations 
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mu~t satisfy sewral .:xtensivc reqllirelll~nt~, including rules about th..:: composition ofth~ gnverning body, 

rules requiring a reasunable fee policy (one that n.:quires provision of servicl!s evcn irthe consumer docs 

not havl.: the ability to pay), catcgori(:al ruks about permissible pra(:tiecs, rules about owner~hip of related 

entities, and rules limiting the amount of allowabJe revenue from certain sources. 

Such statutory precision regarding the conditions of scction 50 l( c )(3) status for a particular type 

of organization was unprecedented. It represented a significant conecptmll shift. considering that the 

general operating principle nfsectinn 501(cl(3) has been that all poblic charities are crealed equally; that 

is. if you have a "good" purpose, the law will not adversely discriminate because of such purpose. 1L1 Even 

when Congress created second-clnss citiLenship for priy~.ue foundations. foundations generally \\'ere 

disfavored because thc foundation form could lead to abuse, and not because of the ~llbstancc of 

foundation activity. By contrast, credit-counseling organizations now are singled out by their purpose, 

and ~peciallUles are applied on this b('tsls. 

Hospitals are another example. As a class, hospitals are perhaps the most prominent part of the 

section 50J{c)(3) sector, ::md have long rai<;ed questions about the meaning of the section 50l(c)(3) 

exemption standard. This is because many section 501(c)(3) hospitals may seem indistinguishable from 

taxable for-profit hospitals. Both, after all, pertorm similar functions. In general, the legal difference is 

that a sec lion 50 I (c)O) hospital must provide a "c(lmmunity bel1efit." But thi-; standard ha-; been widely 

critlciJ:ed for lts lack of a positive measure. Accordingly, a policy question has been whether section 

50J(c)(3) hospitals ~hould be subject to affimlative posilive requirements. such as mandating some rrce or 

charity care as a condition of section 501(c)(3) status. 

In response, in 2010 Congress adopted ne"" exemption ~tandards for ">ection 50](c)(3) hospitals. 

To maintain 5UJ(c)(.i) status, hospitals 1l1U'it, amnng: other things. and in <lddihon to generally applicable 

standards. conduct a "community ht:alth needs assessment" at least once every lhree years. establish a 

written linanc1aJ assistance polky and a \\oritten poliC) rdaling to tht: provision of em~rgem:y medical 

care, limit the amount of charges to certain patients for emerg~nc)' or other medically necessary care, and 

refrain from engaging in "extraordinary collection actions" without first making reasonable etforts to 

discover whether a patient is eligible for financial assistance. New reporting requirements and excise 

taxes also apply. 

It is noteworthy that these new standards do not impose a substami\'c positive requirement on 

section 50 L(c)(3) hospitals: ralht..!f. tht..! Icgisbtion ::.ettles for proces~-ori':l1lcd rult..!s that arc dcsign...:d to 

promote a more charitable outcome. For example, the financial assi~tance and emergency care policies, 

and requirements to stop overcharging the indigent and perfomling unreasonable collections arc antiabuse oricnted: Le., focusing on stopping manifestly uncharitable behavior. Although important. this of 

course is different from affimlatively requiring charitable aClivity. The community health needs 

assessm~nt comes closer to impm,ing an affirmative charity ::.tandard. By requiring sectIon 501(c)(3) 

hospitaJs tonTlally to seek input from and as-;cs::. the nc~ds ofthclr communities, the legislation aims to 

force hospitals to consider how the), are integrated within and accoUlltablc to the cOllllllunitics they serve, 

and, therefore, to take active steps to foster a communi!) (and charitable) benefit. Notably, however, the 

legislation stays wen on t11C side ofproress. providing no hint as to "",hat a commwlily henefit might be 

subslantiv<:iy. 

The credit counseling and hospital-specific legislation not only highlight the difficulty of 

imposing substantive positive requirements. but also show that Congress continues to wrestle with the all10 J'hcre is somc rlffimlalivC' d!~crlmination ofl",cd on purpose: ehun::hc,>, ho,>pitrlls, flnu colleges and universit1cs nre 

generally con:'ldered to be "public charitlt:s" (and not private foundRiions) by detiOltion--thal is, hased 011 their 

purpose. IRe § 509(<-1)( 1). 
13 


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6 

or-nothing naUlre of \ection 501(c)(3) ~tahls. For example, l11os1 afthe new llOspilal requirements are 

conditions of section .5UI(c)(3) statllS. 111 theory at least, this means that ira charitable hospital violates a 

requirement. for example by engaging once in an unreasonable collection activity, tI,e hospital's 501(c)(3) 

s.tatus is revoked. This outcome i\ highly unlikely, hov- ever, making these new requirements (and others 

like them) a~plrationu.l in nature--i.e., a sanction is plausiblt: only in the most egn:gious ofc-ases. Thus, 

these efforts to tighten the standards for section 50 1(c)(3) status show how difficult it is to rCb,rulate 

behavior when tht:re are 11(.) p()~itin~ ohligations to enforce and the principal sanction is fe, ocation of 

501(c)(3) status. This difIiculty is evidenced by the fact that the Treasury Depaliment and the IRS have 

not yet issued administrative gl..lidance that describes thc consequences of or penalties for noncompliance 

with the additional exemption requirements. 

(ii) t;rosion (~flhc puh/ic c1wri~l'-priv{ltejollnd{{tion distinction 

Initially, the law made no distinction among section 501 (c)(3) organizations: all in effect were 

treated equally. Yet, as time passed, the "private" foundation was :-ingled out for adverse treatment. The 

priyate foundation is defined in the negativc, as something other than a "public"' charity. Some 

organizations ure deemed public because of their runclion and role in the community: ho~pilals, colleges 

and universities, and churches. Most other organizations must satisfY a public support test. The theory is 

that all ~uch "'puhlic" organiz(1tions will be overseen effectively hy their donor or scrvice-based 

community. Such oversight, lacking for a private foundation, mean'> in theory that the puhlic charity is 

lesf:, sllsceptible to abLlse, and so should escape additional reglllation. In effecl, by distinguishing public 

chl'lrity trom private foundation in thi~ \vay, Cnngres:::, a~sumed that public charities did not raiEle the :;.ame 

concerns, either as a matter of fonn or substance. 

The conseqllellces or being puhlic or private are :::,tark. Opemtionally."L comprehensive .. mtl-abus.;: 

regime - a series ofnegativ~ restrictions - applies to priYate foundations, and is enforced by stifT excise 

tax.es. The anti-abuse rules target [our areas: self-dealing hetween the foundation and foundation insidns, 

excessive ownership of a for-profit business, the making of risky investments, and spenuing for nonexempt purposes. In addition, private foundations are sllbject to a key positive requirement - they must 

pRJ' out a percentage of investment assets each year for oxempt purposes. Private fOWldations also are 

di5.favoreJ for pmposes of the charitahle deduction rules; and most private foundation.;; mu.;;t pay a tax nn 

investment income. Public charities face far fewer restrictions. 

The existence or the pllblic-pri\'ate distinclion is important becau>;e it demon~1rates in law and 

policy a prererence for certain categories or so I (c)(3) organization over others. It also presents 

alkrnative n::gulator) approaches, giving polic!makers a ba~e fmm \\hi'h to regulate abll~(; generally. 

Thus, the ro;;:cent wide ana) or reported scandal~ at public charities tested the underlying theory oUhe 

public-privaTe di.;;tinction, raising the question whethl.!r additional anti-abuse rules were necessary for 

public charities. For example. if self-dealing at public charities is not sufficiently addressed by current 

la\v. <;hould the less forgiving.: private-foundation self-dealing rules be applied? Similar questions could 

be asked of all the private foundation anti-abm.e rules. 

Although the ongoing. efficacy of the public-privme distinction was not directly addressed in lhe 

refonn legiblation, Congres~ madt:: liberal use of the prhate roundation rule~ in rer01ming tv....o type~ or 

public I:harily: donor a(h ised runds and supporting org .. mization.'.. Here, Congres~ applied private 

foundation-1ike rules in the are<lS of the charitable dcduction. self-dealing. payouts for c'\.cmpt pmposcs. 

exce5..'. holdings of a business. and nonexempt purpose o;;:xpenditurt::s. 

While utilizing prj,· ate foundation rnlcs for these types of public charities may be a natural and 

appropriate response, the more the private foundation rules arc applied to public charities, the less distinct 

public charities and priv3te foundations become. indeed. it is Iiki3ly that with each new scandal at a 
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public charily, tl1l6 pressure \\ ill in~rea~e to extend the private foundation anti-abuse rules to CO\ er the 

n"':\\1 scanda1. 

The trouble with such a selective incorporation approach, however, is that it neglects to address 

the underlying isslles. Granted that our current systt::m treat~ 'lome 501 (c )(3) organizations better than 

others, does the current basis for doing so make sense'? Should we assume that some 501(c)(3) 

organizations are inherently deserving o[·'better" treatment because ortheir function, or sources of 

support'! Or can we draw different lines'.) Rather than sdcctivcly incorporating aspects of the private 

foundation rcgime to public charities, a morc scnsible approach might be to reexaminc the basis for the 

distinction altogether and analyze each abuse currently regulated and decide the e\:t...:nt to ,yhich the abuse 

remains a concem. and if so, \\ith respect to what types of 501 (c)(3) organi.lations. Should all section 

501(c)(3) organi/..ations be :-.ubject to an excise tax for non~exempt purpose spending? Should there be tax 

consequences to imprudent investing for an)" type of section 50 1 (c)(~) organinlinn'! ShOllld \\"e 

distinguish 501(c)(3) organizations for purposes of the charitable deduction, not just on the basis of 

whether the organization actively conducts a program (as upposed to primarily making grant~), but also 

un the type of program or puhlic good pro\'lded? 

(iii) Toward hrighter enforcement line,~ 

One response to abuse of sectiOJl 50 [(c)(]) organizations is for more and better enforcement of 

the laws. But one of the difficulties \\'ith a "more enforcement" argument, apart hom the political 

question of resources. is the question of standards for enforcemenl. For public charities, there rlre no 

measurable affirmative obligations and few anti-abuse rules. Enforcement is largely of broad purpose 

requir~ment<; or ofncgatJve restriction;.; thetl depend intt..'nsivdy ('0 fadS and circu1llstatlce~ 

uetenninali(llls; tor example, no private inun:ment, no private hendi!, no inten cntion in a political 

campaign, and no suostantial lobbying. 11 Further, bccallse of the all-or-nothing nature of 50 t(c)(3) tax 

exemptlOl1, coforcement for puhlic charities generally means the drastic step of revocation of charitable 

statu~. The chief exception to revocation is the intennediate sanction<;: or excess henefit tnmsaction ruleo;, 

but these are fairly generous as compared to the private foundation rule:;. on self-dealing. are proccss~ 

oriented, and fairly limited in scope. 

More effective enforcement might depend on a new legislative approach: brighter lines and. 

pel hap!:>. po:-.itive requiremenb. There is e\ idence that the legislative policy i:-. heginning to shift in this 

direction. Precise standards imposed on credit counseling organizations and the private fuundation-like 

rules that apply to donor Cldvised funds and supporting organizations are each modest confessions that 

additional cnfon.:cm!..!nt tools are ll!..!ed!..!d to police c!..!rtaill abuses. In addition, thc:::.!..! provisions :-,ho\\ a 

prefercncc for brighter lines in enforcement over the prevailing facts and circumstances or value-based 

standards for imposition of sanctions. 

Even stronger evidence of a shift is found in the nde enacted in 2006 designt:d to swp 

particip~tion by tax-I;:x<!mpl organiJ:ations in tax shdter transactions. The provl::.ion imposl;:s a 100 

percent excise tax 011 proceeds attributable to kno\\ ing participation by a (ax-exempt organization in a 

·'prohibited tax shelter trrulsaetion:' Notably, the tax appJies even absent knowing conduct. though the 

rate is reduced in such ca~e~ to 35 percent. 

In cnacting thb provision, more than any ofthc other reform provision'>, C()nf!.re~s changed the 

ground rulc~ for taA~excmpt statu~. As a policy matter, the provision stands for the proposition that it is 

II \\'ith rc:::.pect to lobhying, ~e('tion ':;OJ(c)(3) organization<; th.at make an election under ,>cetinn 501(h) of the Code 

are <;ubject to all e"\t~nsive set of regulatory rule':.. and so are nnt subject to the default facE. and C1fCLlm~tance~ "no 

sub"tantlaljxlrt'· test. 
15 


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iunJaml..:ntally incoTI:-.istent \\ ith h!x-e:\empt status to engage in conduct that cnabks ta'\. c\ asion. True to 

form. it is a llegatiyc restrictio1l, but unlike some of the other broad negative restrictions (no substantial 

lobb) iug. no political intcrvt;!ution), it was written with a strong dderrent that does oot requin: revocation 

oftax~e:\empt status. And con~jstcnt with the anti-abus(' approaches taken with respect to donor advised 

funds and supporting organizations tfollo\\ting tile private foundation approach), the rule in effect stops 

the transaction. without allowance for much ill the way of facts and circumstances ambivalence. In short. 

the rule proyides the IRS with a strong, previously 1acking, enforcement tool. 

Going forward. the question is the extent to which this trend will continue. Although bright lines 

i,.:an hayc inequitable outcomes, thcir admini~trative appeal ;s m:mifest. As the puhlie charity-private 

foundation distinction breaks down and the section 50 I (e)(3) sector continnes to grow, there will be 

increasing pressure for more certainty in tax enforcement through imposition of bright-line rules. 

E Concluding Observations: Tax Policy and Section 501(e)(3) 

In general, ova the course of II century. not\vithstanding dramatic chllnge in the scope [lud 

divcrsity of the section 501(e)(3) sector, and so of the aggregate value ofthc tax benefits, most legal 

change: has becn in the form ofnegati,·e requirements or process-oriented positive requirements and not in 

the impo:;ition of :;ubstantive positive obligation:;. Although the initi:11 exemption of 1913 has b(;en 

signific8ntly restricted in many W8yS, key fundamental traits h8ve remained relatively untouched: the 

broad purpose-based approach to qualification as a section 501(c)(3) organization, the all-or-nothing 

approach to enforcement for public charities, and the policy of linking mllltiple tax benefit:>; to a 

ddermination under section 501(c)(J). The result has heen f;\ Jarge. growmg. and di\erst: section 

50J (c)(3) sector, btlt also a sector, especially With respect to public charitIes, that IS proving increaslOgly 

difficult to oversee. 

Recent reform legislation shows that the law is V\rre:;.tl1ng with the remaining legacies of the initial 

approach to section 501 (c )(3) exemption. Clear trends that emerge are tnlstration \\ ith the breadth of the 

standm'd under section 501(c)(3) and with the all-or-nothing, facts and circumstances-based means of 

enf()TCCmenl. Tllc result has h:en pic~emeaJ reform; a fragmentation ofihe s..:ctiol1 50 I (c)(3) ~-.:ctor bas...:d 

on purpose (but an unwillingness or inabilit) to measure the purpose), and a gradual but selective 

blending of the public charity-private foundation distinction. This piecemeal refoffil approach has some 

preJictive capacity. As llew :;canJals are reported, the law \\ illlikel) continue to :-.hifl in the direction 

now cast - following the IcaJ of crcdit counseling organizations and hospitals. and further disaggn::gming 

the sector. And the law likely will continue to borrow anti-abuse measures from the private foundation 

regime and seleL:lively appJy them to publiL: charities 011 a case-by-ca~e basis. 

Such picc~mcal reform. ci.main to have detractors. nevertheless should be viewed as a 

consequence of the reluctance to impose substanti\e po::.itive obl1,gations on section 501(c)(3) 

organizarions. In the absence ofa positive stand3rd for exemption and tlle presence ofa gro\ving sector, 

Whl.:ll it comes tu oversight, there may be little I.:hoice but to draw adJitionailines based on fonn and not 

sub~tance. This may result in formal compliance, \\ ith greater emphasis placed on functional Gltegorie~ 

and pro\,;e~s: such as through governance initiatives. greater disclosure and transparency, cummunitybased input and accountability, and brighter (ifhar~h) enfon.:emcnt lines to police abuses. 

Key questions going forward are whdher additional reform is necessary along the line~ 

established, whether the status quo is acceptable, and whether the currcnt system has become too 

complex. My sllgge~tlOn is to start from first principles - and to debate anew the lelationship of the 

federal tax lav,; and private. "'good purpose" organizations. My overarehing concern is that our law is 

dcveloplIlg without a clear understanding ofthc fcderallegal role. To what extent docs tax excmption 

warrant reglllation? \Vhat types of entities does thc goycrnment seek to promote? Should the government 
16 

f 

Chairman BOUSTANY. Ms. Aviv, you may proceed. 

STATEMENT OF DIANA AVIV, PRESIDENT AND CHIEF EXECUTIVE OFFICER, INDEPENDENT SECTOR, WASHINGTON, D.C. 

Ms. AVIV. Thank you, Mr. Chairman, Representative Lewis, and 

Members of the Subcommittee for this opportunity to testify. I 

serve as the president and CEO of Independent Sector, which is a 

national coalition of nearly 600 public charities, foundations, and 

corporate giving programs and, that, with their affiliates, total tens 

of thousands of charitable organizations across the United States. 


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Every day charitable organizations work to provide help for families in need, assist victims of disaster, enhancing the cultural, 

physical, and spiritual life of communities, and foster the democratic values of justice and individual liberty. 

These life-changing programs, as well as the 13.5 million jobs and $670 billion in annual wages provided by the nonprofit sector, 

are made possible in part by the generosity of Americans who contribute millions of hours and billions of dollars to support the charitable causes they care about. 

The difficult economy has affected both charitable giving and the 

need for services from charitable organizations. Annual giving 

dropped $30 billion between 2007 and 2009, and has not yet fully 

recovered to pre-recession levels. At the same time, charitable organizations have struggled to meet payroll or hire additional workers 

as they work to keep pace with the dramatic increase in demand 

for services. According to a study by the NonProfit Research Collaborative, human service organizations, for instance, saw a 78 percent increase in demand in 2010. 

Congress can help by immediately passing the expired tax extenders package which includes the IRA charitable rollover and enhanced deductions for donations of food. 

As you look towards tax reform, we also ask you to keep in mind 

the positive impact of tax incentives for charitable giving on the 

people we serve, and explore ways to expand those incentives. 

Because charitable giving depends in part on the high level of 

public trust in our sector, nonprofit organizations are deeply committed to ensuring effective and transparent governance, maximum 

accountability, and ethical conduct. 

Independent Sector, with the encouragement of congressional 

leadership, convened the Panel on the Nonprofit Sector, which in 

2005 issued a report that recommended improvements within the 

sector, more effective oversight and changes in the law. 

The Pension Protection Act of 2006 included many of the provisions from our report, such as increased financial penalties for bad 

actors, safeguards against the use of charitable assets for personal 

gain, and improved information sharing between Federal and State 

oversight agencies. 

The recently redesigned IRS form 990 also reflects many panel 

recommendations. As a publicly available document, the Form 990 

has become an important accountability and transparency tool, and 

we are therefore keenly interested in IRS efforts to make further 

improvements. One issue of particular interest is removing barriers 

to electronic filing, which will improve the quality and accuracy of 

data, promote accountability and transparency, and save time and 

money for donors, nonprofits, and the government. 

Using data from the redesigned Form 990, the IRS is evaluating 

whether good governance leads to better compliance. Their preliminary analysis of data from 1,300 returns shows a statistically significant positive correlation between a number of governance practices and tax compliance. 

The nonprofit community also recognizes the importance of selfregulation. To that end, the Panel issued The Principles for Good 

Governance and Ethical Practice: A Guide for Charities and Foundations, which outlined 33 recommendations designed to improve 


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compliance, governance, financial oversight and fund-raising practices. Almost 200,000 copies of the principles have been downloaded 

and used to develop governance policies, adjust board responsibilities, and offer guidance for those seeking to improve their practices. 

Taken together, the actions outlined in my written statement— 

legislative, regulatory and voluntary—have strengthened governance and improved oversight of tax-exempt organizations, and they 

reflect a deep mutual commitment on the part of Congress, the 

IRS, and charitable nonprofit organizations to accountability, 

transparency, and good governance. They have also allowed charitable organizations to maintain the public trust that is key to continued confidence in and support for our work. 

Mr. Boustany, Mr. Lewis, and Members of the Subcommittee, 

thank you for the opportunity to share these perspectives with you. 

Chairman BOUSTANY. Thank you Ms. Aviv. 

[The prepared statement of Ms. Aviv follows:] 


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;~C~~~~~~J41·~~1:1~··:. 

;. ,f.,j·.:.i.,.r r~ .~. ~ 

STATEMENT FOR THE RECORD 

DIANA L. AVIV 

INDEPENDENT SECTOR, PRESIDENT AND CEO 

HOUSE WAYS AND MEANS COMMITTEE 

SUBCOMMITTEE ON OVERSIGHT 

"HEARING ON TAX ExEMPT ORGANIZATIONS" 

MAY 16,2012 

Chalrmar, Boustimy, Representative I,ewls, and distinguished Members of the SubcofYlmittee, thank 

you for the opportunity to share the perspectives of Amel'ica's charitable sector as the 

Subcommittee examines oversight of tax exempt organizations, 

I serve as the president and chief executive officer of Independent Sector, a national coalition of 

approximately 600 public charities, foundations, and corporate giving programs that 'Nlth their 

affiliates total tens ot thousands of charitaClle orgdnlzat'ons across l'le counlry, OU" nonpar'tisan 

coalition leads, stl'engthens, and mobilizes the nonprofit and ;:>hrlanthroplc community in orcel'to 

fulfill OUI' vision of 2 just and inclusive society, as well as a ~,ealthy demoCl'acy of active dizens, 

effective institutions, and vlb'Clnt communities, We work to ensure that Amenca's 1.3 million 

chalitable olganlzations dre dble to help people dno impmve communities acros; the countlY and 

amund the worlc. 

Importance of the Nonprofit Sector 

Every day, charitable nonprofit organizations pmvide cducationai and economic oppol'tun:ties for 

famiiies In need. worl< to alleViate poverty and suffenns at home and abroad, assist v!ctlms of 

disaster, enhance the cultucdl and spiritual development of individuals and communities, dnd foster 

worlawide J;:>preciation for the demOccc1tlc values of justice and individual liberty thet are part of 

Lhe American character. 

Cities, subul'os iind I'ural communities in evelY corner of the United States are enriched by the 

work of norprofit, philantnropic dnd I'eligious organizatioils, The United Way of Southwest 

LOUisiana, fo:' example, has supported the educatio~al and social development of chi:dl'en by 

pmviding quality aFter,school and summer pmgrams for 32,90 I childl'en In 2009, and the Second 

Halvest Food Bank of Grea~er New Orleans and Acadiana fights nungei' in soutilel'r, Louisiana 

thmugh food distnbutlon, advocacy, education, ilnd d'sastel' response, serving more than 260,000 

people each year. 
20 


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In I-esponse 10 April 20 I I tomadoes that destroyed 600 homes in Georgia, Amelic"il Red ClOSS 

volunteers end staff pmvlded 486 peoplP safe havon 'n Red C,'OSS shelter;, served 49.703 meals, 

and distributed 10.754 bUlk ItelT1S, including diapel's, baby formula, Insect repellant, dust masks, and 

mOI'e, On a dady basis, :he Points 0: Light Institute, based in Atlanta, puts people at the center of 

Lranjonnlng their communities through enterpnses I'ke the Hdnds on Netwol-k, who:,e 250 

volunteer centers In 16 coumnc<; around the world partner Wltr, rr.ore thdn 70,000 corporate. 

faith, and nonprofit organizations to delivel' approximately 30 million volur,teer hour; valuec at 

avel' $626 I'lililOn ec.er. year 

P,e charit"ble nonprofit and philanthmp'c sector is also a critical component ofthe mtion's 

economy. Near:y one in 10 wOll<ers in the U.s. IS employed by a nonpmfit organization, and With 

13.5 million employees. we employ Illore people than the fir,ance and real estate secor; 

combined. FUlihcr, we collectively pay nearlv $670 billion allnually In wages and benefits - salal'les 

that SUPPOI'! middle class families In communities across America - and in 2008, 50 I (c)(3) 

org<miz2tions paid $32.4 billion in payroll taxes. I 

In addition, char~able no,'proflt organizations inspired 62.8 million American adults to contribute 

mOI'e than 8 b,Il,Q,' hours of volunteer service in 20 I 0, the equivalent of 4 million full-time Jobs 

valued at approximately $173 b;l;ion.' 

T ne nonprofit sector's brOAd commu:lity impact and pub!ic support is evidenced by ~he bre(ldth of 

Its funding sources, Millions of Americans m~lkc donations each year, collective!y prov!dlng nearly 

$300 billion) to 'Support the work of challtable nOllpl-ofit org:mizations. Rut chan::ablc donaticns 

are only parl ofwhaL;s needed to ensure that the sector's pmgrams and services can conLinue 

MOle than 52 percellt or revenue auoss the seelor IS del'ived fmm fees paid rOI" services. rdnging 

frorn tuition and patient care chdrge:. to eve, It admission fees. All addrtional one-th!rd of Ilonprof.t 

sector r'evenue is generilted through paltnering with illl levels of govemment to deliver progl"ilnlS 

and services like after-school care, nutrition assistance, and health care Set\llCes,-+ 

Impact of the Economic Downtum 

The struggling economy has made It more difficult fOI- charitable organizatiollS to <;,erVE> thpilmiSSIons, a<; America's nonpmfits have been hit hard financiallY in recent ye21-S. The Nonpl'ofit 

Hnance ~undl a communrty development financial agency. surveyed over a thousand f"lonprofit 

organizations "' Apnl 20! 0, and found 12 percent operating above a break-even pOlnt.s Sixty two 

percent of organizations had enough cash on hand to covel- less than thr'ee months' wort" of 

expenses, and half cf those (31 percent) hod enough for less thall one month 

IRS delta. fj~6~\~.J::.....'2S~Q?Zlts~Q!:~1~n!?.k.:..tt~0--,2.::~Z-'_1.6fub.lr'..'. 

L ~erpor~tion for I'-.JaLior'ai a'ld CCl11l".Irlity 5(;r/:c, "Vulu'ltc:erng w Am':'llca," 20 I I 

J USA FOL:nd2r':.IOn (20 I I:,. Givng USA 20 I I, T:le Annua: Report on Phii21~~I-.ropy for the Ye"r 20 j 0, Ch:Cdg:::: 

GiVing Found2.tion 

l ['\lat'Dna' Centcr fer Chal itablc StaLlslic:::. (!'JeeS), 1 he lJrbdfl In:::.Lltl.1.c T~c ~lonpl"Orlt Alrnandc 20 II SOUI"CCS of 

Revenue iOI" Reportln€: Public Charities' NCCS calcuiat'ons of IRS Statis:ics of Income Dlvislor [xernpt Organizations 

Sample (200T!, NeCS Core Files 1'2009): American HOSDicdi A.o;,oci.:.tlor, \AHA) 2009 s-Jrve" and tre :'\latonal Healt:l 

r~odLiced hi Cfv'S. 

Fir,ance FU.1C, "2.0 J I S:ate :::Jf the Sectcr ~:Jr.'e/," 20 I I 

2 
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Like our countel'parts in other I"YHJOI" seGars of the economy, mcmy nonprofit employers have 

stl1Jggled to meet poymll dUring the past three years and countless more have been unable to hire 

additional workel" needed to keeD pace with an Increased demand for selYlces. In )009 alone. 38 

percent of human services nonpm"ts reported laying off employees, "0 pel'cent froLe or ,'educed 

sdlal ies, and 23 percent I'educed employee beneGts." 

Tnese financially challe'1ging times have also seen a significant increase in demand fOI~ help fOI- those 

IllOSL in need, ~ documented In numerous recent studies. One such study, conducted by the 

NorProfit Researc.h Collabo""dtive, fOL.nd that hU'IJan services organizations expenenced a 78 

percent Increase in demand for services between 2009 and 20 I 0. 7 tarller, an acceal SUryey 

cOl1ducted by Catholic Chimllos foune that Its agencies had served 9,164,981 people In 2009, an 

increase of nearly 19 per'cer,t Inc'ease from 2007.' 

Many chantable nonpr'ofit organizations have strLlggled to keep pace With this :ncreased demand in 

pilli because they SeW revenues fall dUl'ing the er onomic downtu''ll. Fror'1 2007 through 2009, 

ClJlnllal rhdntable giving declined by rt1rnost $10 t;:I;lon9 as Amel"iclllS c;tnJ:;gJeci to '1dvlgatf' a difficult 

economy. Fedel'al. state, a"d local budget cuts have fcllthel' bLwdened and diminished the capacity 

of non profits. and this has dispmportlomtcly affected people wi,o arc least able to help 

thenlSelves. 

T nere ctre meclnlngful ways in which Congress mlgH help charitable orgariz(1tlons secure the 

suppoli they need to deliver these much needed services. S?ecl'lcally, we ask that you enact the 

expired tax extenders vithout delay. It is dl+lcult to ovel-statc tt--c uf6ency for our cunmuility, and 

the peoDle we serve, of Immediately reinstating the charitable giving incentives In the tax extendels 

package. which illCluJe ti,e IRA charitable m:Jovel' as well as enhanced inlent;ves for the Jomtlons 

offood. boo;<s, c.omputel~equipl;lent. and lalld conservation easelnel;ts. 

More bmarl!y. as Congress looks towal'd comprehens;ve tax refocm, we ask you to keep In mind 

the value of c"antable glvicg to the wori< of PUbliC chanties and private foundatio"s, and the 

Important role of tax policy "1 encoulAaglng that glvln;-~. We know that A:1lenCans give generously 

Lo the GilISe~ the}' Cdre about: we also know that how much d'ld Vvhen they give is innuenced by 

incentivE's in the tax code, There is flfXh?ps no better Illustration of This than the fact that more 

than 22 pf'rcent of all (lllllUai onlim: chantablc dOllations in the U.s. are made on December 30 

al1d 31,'° as taxpayers seek to make donat;ons before the deadlire to clai", a charl~able deduction 

Millions of lives ar'e improved every day because our tax laws e.ocourage people to give, and I ul-ge 

you to explore ways to Increase the Impact of those Incentives. 

" E::zabeth T. borIS, '::r",,,1'1 de Lear, K,ltIe L .3.nC l'e:m2 I"Jlkoi0Y;:;, 'r-luMan ~ervlce Ncnp:ollts arc' Government 

of Nonprofit Gover ,lm<:'llt C omr3.ctln~ and Grants' fUr-bar 

Coiiabol'ative, NG,emU2( 2() I 0 F~lnr!r~'sll1b SUOc-l 20 I 0 

U~~II'.Jl.'t:! ~~~.:2~r 2~/L(...t'Q!.!:<:~lf._jV~x":'(' &.!l('~:.k'-=.3j 11 ~ CatholiC Cha~lt;cs USA, 2009 Amual Survey ::inal Rcpcrt, 2009. 

P..esP?IHh 1'1 the Unlverqly, Vy'ash'ngt0n, DC, Julv 20 I O. 
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As the Comrn~ttee looke; ahead rtnd prepares fOI" tax I'"'EJOlnl, it ;'fHy also be instructive to look ba(~ 

to the Ta,-,ff Act of 1894. which fwst exempted from federal income tax organizations opet-ated for 

charitable pUI-poses, and the Revenue Act of 1917. which first made domtlons to charitable 

organiz<::.tlons tax deductible, In :Joth instances, Congress erllbraced t:le entire range of social 

purposes and im~orlant cau:,es that citizens Individually or col!ectlvely might choese to pUI-sue 

thl-ough chantable organizations. Whcthel- focused on the dric;, SOCIal c;ervllcs, scientific resedlTh, 

or spiritual matters. this great American tradilion has sparked innovation, saved lives, and enriched 

our con Imunlt:es, Through lhe wisdom of these deCisions, COrlg,ess eswblished cenlury-old 

policies that have stimula.ted charitable glvine, dnd ma.de it clear that our gover.lrl'ellt 311d our 

society value tile contributions made by every chantable organization, 

Good Govemance: Importance and Background 

Charitable nonprofit organizations understand that continued support from Amencans who give of 

their time and monf'Y depends upon the high level of public trus"! in our sector, dlld th3t erosioll of 

that 1(lJst Will ultirn:.lteiy hdml those we serve. We are therefore deeply rommitted to ensunng 

that public charities and private foundC'!tions are govemed effectively and transparent!y, maintair 

maximum accountability, demonsll-ate the highest levels of ethical conduct, and fully comply with 

the law, 

Independent Sector has long been at the forefront of effolis to prornote good govemance dnd 

ethical practice among tax-exempt cha~itable organizations. In October 2004, we convened the 

Panel on the Nonprofit Sector with the written encouragemr:'nt of Congressiollal leaders of both 

pal'tles, The Panel undeltook a compr-ehensive review of governance and other aspecls or 

chal'ltdbie sec-:'or plCidice in or'deri.o develop r-elornnenddtions ror action by COl1gress, the IRS, 

dnd the sector itself chat would help chalit2ble olganizations IY1dilltain the higl1est possible 

standal-ds of ethical condLct 

The 24-membel- Panel conducted extensive outreach to solicit input and comments fmm the 

blDJGer chantable commoJnlty. This outreach included the creation of SIX COrlrnlttees I that met 

regularly; phone calls with thousonds of paliicipants; two public comment penods; and 15 field 

hedl-Ings that gave more than 2,500 people III communities langlng from Des MOlnes to Dallas the 

opportunity to provide illPut on ~he Panel's work The Panel ultimately ;scued a rinol eeport to 

Conwess and the NOflprotit Sector ill JIJIle 2005, wh:ch contained an integl"atcd package of more 

than 120 I'ecommendations for improvements within the sector, more effective government 

oversight, and changes in the law. 

The Panel's Advisory Committee on Self-Regulation was charged With examining the slate of selfregulation in the nonprofit commuility and recommending improvements. In Its earliest 

deliberations, the Committee agreed that self-t-egulat'on was necessalY fa I- OlW community to 

encoultlge strollg govemance, financial oversight, and 2ccountability. A number of :'he Panel's final 

recomrnencia1lons, as well as the subsequent Principles {OJ Good Governance and ELhlcol Practice 

4 
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focused on steps exempt o(ganizatiollS couid take to improve their own nccountibility, 

transparency, and ethical standards, 

These Parei recommendatlollS for il'lproveo self-regulation included: 

Board I"cview of the Fain', 990 pnor to filing, as well as pel"iodie bOiwd review of governing 

I,lstruments, financial transactions and compensation policies; 

80dl'd approval of ceo com!)en:,ation; 

IJlSclosure of donor advised funds owned: 

• Adoption of pol:cies governing t:avel re;mbursement, and a pmhibltlon on re:mbul-sement 

fOI- spou:,es. dependents, or otirel-s trrlveliing with d board member, 

• Adoption of conillct of interest policies and whistleblower- pmtectlons, and 

Discourdging the compensation of bo~rd lIierlbel:i. 

Many of the Panel's ieglslative and regulatory r~commendatiolls were incorpol-ated ~nto the 

Pension Pmtection Act of 2006, widely considered to be the most comp,-ehellsive refoml of the 

chantable sector since the 1969 Tax Reform Act. Amon~ the key Panel recommendations 

adopted by Congress we:'e: 

Doubling the excise taxes foc [hal"ltLes, social welfal'e 01);aI1Iz2tlons, pr"vate loul1dations, and 

exenlpt orgall!zation nldllagers found to be particiDating in abusive tax shelters; 

Requij~i"g exempt organizations with annL'al gros5 receipts less than $25.000 to file an 

annual notice with the IRS cO'ltainlng baSIC contact ard finanCial information; 

• ClarifYing that assets i.l dcnor advised funds may not be L.:sed in wJ.Ys that confer 

substantial berefits on donol-/advisors: 

RemOVing barriers that prevent Information shanng ~etween state charity offiCials and the 

IRS; and 

Improving the ap~rrtisal pmccss to ensure more accUI-ate deductions for donated property 

Additionally, Panel recommendatioos wel"€ an important part of the nonprofit coml'1unlty"s Input 

Il1tO the major I'ede>tgn of the Form 990 subseqL,ently undel'Laken by the IRS The IRS wOIKed 

(los~ly with hdf'renrl~nt Sector ctlld cor-Gucted extensivp ou+reach to mernbel s of tile ch(':Int?lble 

community dLmng the redesign proceS', P<lncl recommendations teat wel"e u~lmately "dopted by 

the IRS 01' incmpOI'ated In the Form 990 redesign included: 

• The mandatory revocatior of exempt status fOI- orgdnizatior,s thdt fail to file an appropriate 

Form 990 for three consecutive ye2.rs: 

expanded ['orm 990 compensation reporllng, to ",elude listing names and reporting 

compensation forthe organlzati01's five most highly compensated employees: 

Requir'ng ~dciltloml information, inelue'n? a summalY and state11ent of purpose on the fil'st 

page, disclosure of which voting board members are independent and disclosing tne total 

amount of donor adVised funds: and 

• Asking whet~er::n ol-ganlzatlon hJ.s a wn'.ien con"lict of interest poliCY 

The IRS's solicitation of input fmm the tax exempt sectol' on the Fon" 990 redesign did not end 

with the release of the new form fOI tax year 2008, which had been designed with substal-Itial 
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input from the charitable community Indeed, as the IRS has continued worl<ing to Imrrove the 

FOI'm 990, tee has continued to seek outside Ir,pl't [)unng a p.Jbllc comment penod lost 

summer on several of concem that had come to the attention of the agency, Independent 

Sector conducled an online forum to gdt:lel~ Input from exempt organizat:ons, and we ultlmJtely 

',ubmltteo a nurrber of speCinc recornmendaLior.s to Lhe IRS, inc!udin):,: 

• Revising Pali VIII of the Fonll 990 10 better' capture the full extent of government revenue 

received by nonprofit organizations by clarifying that government pay-'ol--serv!ce contrdcls 

J!so qualify as govem11ent contributions. and ~y w'cluding lines to '~ecord revenue received 

fmm Medicaid and Medicare payments: 

• Adding lines to the FOlTn 990 to inquire whethel- audited "nancial statements are made 

available lo the public, and w,etl,er the audit Includes an unqualified, qual.fied, adverse, or 

dlscl,lImer of opinion; and 

Expanding mandatory electmnlc filing ofthe FOI-m 990 to include more org~nizations, 

With re~pe(L to Lhe last l-eco,nmenddt!Oll, cUITel~Lly only dbout 30 pe,Te!lL of charitaole 

ol~ganizations tdke arivdntage of the option to file the FOlm 990 electronically Wh:le we ,uprort 

expanding the scope of organi::-:ations that 2re required to flip clc>ctronic(Jlly. we also believe that 

more ca" acd should be done to encourage electronic filing, r 0 that er,d, a gcoup of chantable 

ol'ganlz2.tions, lee by the Naolonal Cenler' lor Chantable StatistiCS al the Urban Ins~ilute and joined 

by Independent Sector, has initiated an ellmt to beHer understand and ovel'come the ban'iers to 

filing electmnically, and to look for ways to encourage or incentivize additional electmnic filing, We 

believe that Increased eI~ctmnic filing willlmrrove the quality and accuracy of tre datil aVililable to 

the public and for IRS and state regulato,!, purposes, T;", Will fur1her pmmote accountability and 

tlonsparency by exempt organizations, and In the long run save donors, nonprofits and the 

government time and money 

We also sec great value in cncQunging the IRS to continue to -CVICW Form 990 requilTments to 

determine whether' particular items are necessary and add value, and look forwal-d 1O similar 

IIlItialives wilh I'egal'd to the FOI'nI 990PF, which ~nvale foundat;ons musl file, 

As a publicly rtccessible doculT'ent. the FOlnl 990 has become an illCrertslngly Impol-tanl '001 for 

yolunteers and donors to determine the accountability and transpal~ellcy of charitable ol-ganlzotions 

they wish to suppoli, Indeec, the form is also used by ol'ganizations that assess ar-;d rank 

public based on their governance policies, stewar-dsilio of assets and ethic2-: practices. It is 

therefore not surpnsing that we are Interested In not only ensuring that the form collects 

the most useful IIlfolTNt,on possible, but thac the process fOI' cOl'lpliance by exempt 

ol~aniz2.tions and subsec:uent use of collected data by the govemment and the American public IS 

as effective and efficient as pOSSible 

The chal'itable sector's deep commitment to accouniabil:ty. transpa~'ellcy and good govemance 

sterns from ('In understanding tha.L dOing so enhances OUI' errectlveness dnd uitlmai_ely rrnproves our 

ability to better serve indlvidua!s, families and communities. In thnt spirit. Independent Sector, In 

palicel'Ship with GJideStar and BBB Wise Glvicg Alliance, has led the development O,~ Charting 

Impact 3n important tool that encoul~ages nonprofit organizations to eng2lge :n re4ee:ion, learning, 

and lornmurllcation dbout what matters Lhe mosl- resulLs 
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The Current Environment: Govemment Oversight of Exempt Organization Govemance 

The IRS has all'Carly begun to usc data fmm the I'evlscd Form 990 to develop nsk models and 

gUide the development of Its anllual work plans. One example that may be of particular' Illterest to 

Lhe Subcommitlee is a recenL effort Lo test the pmposition that good govern~nce leads to beLter 

tax law complia.nce. The IRS designed a. "govemance cnec:( Sheet" that I'etlects the 26 governance 

questions on the ForTYl 990. Accol'ding to IRS offiuals, this check sheet has been completed by IRS 

agents at the end of every 50 I (e)(3) public ehallty examination since Octobel' 2009 - more than 

1,300 exarT'S 

At the fifth annual Issues In Nonpmtit Go,ernQnce confel'ence, held last month dnd cosponsored by 

Independent Sector. the IRS. and Georgetown UllIVet'Slty. IRS Exempt Organizations Drvision 

Drrector Lois Lerner r'epo,ted that a prel'minary analySts of the data shows a statistically si~nlficant 

POSitive correlation between a number of govemance practices and t.Jx cornplirtnce. Specl~cally. 

they reported finding that tax (ompllancc i':> higher dmong organizations that: 

Have a written mission statenoent; 

• Always use comparability data when making compensation deCisions: 

Have procedures in place for the proper use of challtablc assets; al-;d 

015tl ibule their Forn 1 990 fOI reView by t: Ie entire bOdrd of dwecLor; ~riOI to ~Iing. 

Conversely the analYSIS showed that organizations In which cOl'trol is conc..entl-ated In one 

individual or a smal" select group of individuals are less likely to be compliant. The IRS also found 

no correlation between -':ax compliance and cert::tin other governance practices, including the 

adoption of confiret Of intel~est polieie, or' v/hether voting board membe:" have a fnnily and/ol' 

outside business relationship With any other ciil'ector, officer. lrus'lee or key empioyee of the 

organizalron. (1\ 15 ililpoitanl to lIote thdc wllile lhese spfxi~l practices mdY not I,dve beet) found 

to impact an orsallization's tax COlnpildnCe, they 21'e still vltdl govemance tools that promote 

greater transparency, Cl.ccountabll:ly and ethical cor>dL!ct. and we continue "to ul-ge their adoption by 

chantable exempt organizations.) 

Lois I erner further repoltcd that the IRS i'ltends to verify these im~ial findings with a statistically 

repl~esentative sample of exempt organizations, whreh will provide a better understanding of the 

most useful govemalKe questiol,s to include on the r arm 990, while also sUP:Jorting cont,nued 

cumpllanle by exempl orga'lILatlon5 

The Current Environment: Sector Comm~ment to Good Govemance 

The maiol'rty of America's 1.3 millron rharrtable organizations al'c. 2nd "Iways h,ve been, 

responsible, ethical and accountable in the conduct of thetC programs and the management of thew 

assets." The public entrusted us wit'l more than $290 billion ir clrrcct charitable contl'ibutions in 

'::'.In <1 study of m3.licaSar-lce by ch2-I"ltab.e fidL.cIClnes. ;t was lou'xJ that between 1995 3'lC 2002, iCJC'aI'les 0," or;l; 152 

- ou~ 0' il possible 1.4 milllo:l - wel-e accused of civ:1 0,- c:iml'lJ.1 Mel"IOn R. F,'p,me,t,S,p'lh 

AndrJ.s Kosaras, \'''/rcngdo:ng bf eft,'eers lJIlC Ct(petJI,,) Char,tffs A 5u,','e,' i>1 P'P".qPUOITS. f 995 2002 

7 
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20 I 0,'3 wit" lodividllals giving over $234 billion while the nation's p"ivate foundat:ons and 

corporato giving prograMs provided $56 billion to SLIp port charitable endeavors." 

We are always nrmdful of the need to earn and procect the public trust, and to that end, the Panel 

on Lhe NonproGt Sectol' also issJed Th( for Good Govei ;lOnce arlcJ Elrlleoi PmctKc A Guide: 

fry ChG'rities arid Foundations, whic~l outlined prillciplcs for self-regulation, grouped into four 

categories: 

Leg(-:I compliance and public disdosu·ne: 

EHective govemar.ce: 

Stmng financial oversight: and 

Responsible fundl'aislng practices. 

To date, more than 184.000 COplCS of the princio'es have been downloaded from the Independent 

Sector website by chantable organizations and the experts who adVise them. and in iO I I, 

Independent Sector launched an online fZesoul'ce Centel' for Good Governance and Ethical 

Practice. Built around the PrinCiples ou'~ online "'eSQUI-CE' center Inc!uoes a ccrnprehensive 

collection of tools for chantable and rhilar.throplc organlziltions to help them enh;mce the 

accountability alld transparency of their ope(ations and ensure that t:1CY opel-ate ethically. 

NontJwfit chal"itable ot~l]:anizatlotls have used the PI"inClpies to gUide their strategic pianning, 

develOp key Internal govemance pOlicies, Institute new procedures, rtdJust board ~oles and 

responsibilities, and hil'e adcltional staff In a recent hdependent Sector sUlvey of organizations 

who reported L'sing the Pnnclples, nan)' no~ed their value as a tool to ergage and educate board 

members on matters of com~liance a'ld tV'':lnsparency, thereby instll!ing confidence In and 

cornrnitmellt to the Ot-g..-lrlIZdtioll'S operdtions 

We have also leal"ned that nonprofit or~atlizatlons are uc:ing the Principles to develop and instilll<ey 

core values throughout their organizations and assoClaoed members. The y, for example, has 

developed for Its mtior,al networl< of 20,000 full-time employees and 500,000 volunteers five best 

practices, focused on tl'.e philanthropIC and strategic leadership of the boal'd, strengthening board 

stl-ucture and compOSition, eVdlu;Jting boCtr d effecJ:lveness, meeting regulatory ;'1r;d legal compliance 

standards, and providi:Jg strong financial oversight. Simila.rly, the Land Trust Alliance has used the 

Pril1Ciples to establish stand(irds and an (iccreditation program for Its 1,700 member affiliates. 

Taken together, the actions outlined throughout my testllnony - legislative, regulatory and 

voluntary - have strengthened govemance and Improved the oversight of exempt organizatIons. 

And pe.'haps ncost importa:1tly they have helped au. secoor to maintain the pubrc trust Indeed, at 

a tirre when puollc trust in gover'lment and for-pmfit institutions has reached an ali-time low. 

among people wl'o give to and volunteer In the non~rotlt sectol' - people who shouid know best 

13 The Center or 

Year 20; 0, GIving USA 

;.jlbid 
27 

f 

Chairman BOUSTANY. Ms. DeStefano, you may proceed. 

STATEMENT OF JOANNE M. DESTEFANO, VICE PRESIDENT 

FOR FINANCE AND CHIEF FINANCIAL OFFICER, CORNELL 

UNIVERSITY, TESTIFYING ON BEHALF OF THE NATIONAL ASSOCIATION OF COLLEGE AND UNIVERSITY BUSINESS OFFICERS, ITHACA, NY 

Ms. DESTEFANO. Thank you, Mr. Chairman, Ranking Member 

Lewis, Congressman Reed, and Members of the Subcommittee, 

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28 

tioned, my name is Joanne DeStefano, and I am the vice president 

for finance and chief financial officer at Cornell University. 

Today I am testifying on behalf of the National Association of 

College and University Business Officers, known as NACUBO, 

which represents more than 2,100 public and private nonprofit colleges and universities. 

NACUBO’s mission is to promote sound administrative and financial management at institutions of higher education. Cornell 

University is among the top research universities in the world with 

nearly $3 billion in annual revenue and expenses. 

But today I am here to represent my colleagues at institutions 

across the country who are responsible for ensuring compliance 

with Federal Tax Code regulations and interpretations. 

I want to stress to you three points today. First, many if not 

most institutions have long had institutional policies and practices 

in place reflecting a commitment to stewardship, accountability, 

and the highest standard of compliance with Federal and State 

laws and regulations. 

Second, both public and private institutions had well established, 

sound, and effective governing structures prior to the IRS linking 

good governance to strong tax compliance. 

Finally, although sometimes less visible to the public and to students and families, compliance with tax and other Federal rules, 

regulations, and requirements by institutions is a factor in our cost 

for education. 

Cornell received the compliance survey and just completed a 2- 

year audit. We closed the audit in March of 2012 and had no findings on our 990 return and just one immaterial adjustment to our 

net operating loss carry forward on our 990–T. 

I believe at Cornell we have two of the Nation’s best tax experts 

in house, and we have a growing tax compliance office. However, 

as the requirements for reporting and compliance are ever more 

complex, the university has engaged the services of an external 

auditor to review and sign both the Form 990 and the Form 990– 

T, even though these forms are completed internally. The costs are 

in addition to managing our in-house expertise. 

Many large institutions like Cornell are organized similarly. The 

IRS is requiring not-for-profit organizations to report more and 

more information on the 990–T. NACUBO has had a history of 

working with the IRS to ensure its efforts add value and increase 

understanding, rather than merely increasing administrative costs 

and creating confusion. 

With that in mind, I would like to raise a new concern with Form 

990 regarding the (k)(1). This is a new requirement to report income and expenses and balance-sheet items related to partnership 

investments based on schedule (k)(1) information. Historically, 

partnership information on the Form 990 was reported consistent 

with all other financial data based on the organization’s books and 

records. This new requirement will create a number of inconsistencies and add substantially to administrative burden. The IRS 

has even recognized the concerns and actually took a step back for 

fiscal year 2011 and allowed the reporting to be voluntary. We 

strongly encourage the IRS to eliminate this proposed requirement 

that income on the 990 be reported based on (k)(1)s. 


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In conclusion, as stewards of Federal education, research, and 

student aid funding, as large employers, as significant operators of 

massive physical plant operations, and as home to our Nation’s college students, institutions of higher education take very seriously 

their approach to compliance with a host of Federal rules and regulations, including those by the IRS. We understand the privilege afforded by Congress for tax-exempt entities. We understand and 

commend the objective of transparency to enhance information 

available to the public. We urge the Congress, the IRS, and all regulatory bodies to understand that all their respective and many 

times redundant requirements become a cost of delivery of services. 

In our case, it is the cost of education. 

Ultimately we hope the IRS uses all of the information it has 

garnered as part of the compliance project to continue to explore 

smart, sensible, and valuable approaches to streamlining reporting 

and requirements. Thank you again for my first opportunity to be 

a voice for all of the colleges and universities at this hearing today. 

Chairman BOUSTANY. Thank you Ms. DeStefano. 

[The prepared statement of Ms. DeStefano follows:] 


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TESTIMONY OF JOANNE M. DESTEFANO 

VICE PRESIDENT FOR FINANCE AND CHIEF FINANCIAL OFrICER 

CORNELL UNIVERSITY 

ON BEJIALF OF TIlE :-.rATIONAL ASSOCIATION OF COLLEGE AND UNIVERSJTY 

BUSINESS OFFICERS 

BEFORE THE 

SGBCOMMITTEE ON OVERSIGHT 

HOUSE WAYS AND MEANS COMMITTEE 

UNITED STATES CONGRESS 

MAY 16,2012 

IN REGARD TO OPERATIONS AND OVERSIGHT OF TAX-EXEMPT ORGANIZATIONS 

Chairman Boustany, Ranking Member Lewis, and members of the Subcommittee, thank 

you for the opportunity to testify today on the ovcrsight and operations oflax-exempt 

organizations. As Vice President for Finance and Chief Financial Officer at Cornell University, I 

am herc to present the \ic\\ s of public and priYatc nonprotlt colleges and univcrsitics on behalf 

ofthe National Association of College and University Business Officers (NACUBO). 

NAClJHO, a nonprofit professional organi/ation, represents more than 2,100 chief 

financial officers and nonprofit institutions of higher education and was established in 1962 to 

promote sound financial management in higher education. NACUBO, for 50 ycars, has been 

providing its members and othcrs infornlation and technical assistance in the ficld of higher 

education management ancl tinuncial administration, 

Cornell University is among the top research universities in the world. based on research 

expenditures, faculty quality, and reputation. It is located in Ithaca, N.Y" ",ith campuses or 

programs in New York City, including Weill Comel! Medical College and Cornell NYCTech, 

home of the Technion-Cornell Innovation Institute; Geneva, N.Y.; Appledore bland, Maine: 

France: England; Italy; Singapore; India; China; Tanzania; Qatar and elsewhere, is the largest 

ancl most comprehensive school in the Ivy League and is the land-grant university "fthe Slate of 

~ew York. Founded in 1865, it is composed of 10 privately endowed and tour state contract 

colleges, including seven undergraduate colleges and seven graduate and professional units. Our 

fOllr contract colleges are units of the State University of New York (SUNY). Enrollment is 

approximately 20,000, with students from every state and more than 120 countries studying 

under an intell1ationally renowned faculty. Farly Nobel Prize winners have been affiliated with 

Cornell University as alumni or faculty members, and three Nobel laureates currently arc on the 

ta(;ulty. in chemistry and physics. 
31 


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THE AUDIT EXPERIENCE 

Cornell is a large research university with ucarly S3 billion in operating revenues and 

expenses during the last fiscal year. Cornell received the Internal Revenue Sen ice (IRS) 

compliance sW'vey for colleges and universities and completed and submitted the 33-page 

questionnaire in February 2009. In the fall 01"2010. the IRS notified us that Ule), would bc 

auditing our Forms 990 and 990 T for the liscal year that ended June 30, 2008. The initial 

conference with the IRS team also occurred in the Call of20] O. During the audit, our pdmary 

IRS contacb included the overall manger of higher education audits, t,,·o on site auditors, a 

computer specialist, and a valuation specialist. We closed the audit in March 2012. 

The IRS audit oftbe University's Forms 990 3l1d 990 T was in process for well over two 

years and absorbed significant stafftime; each infonnatioll reguest was com pIe" and onen 

required engagement by multiple staff members and documentalion from numerous oftices 

across the university. 

The primary focus of the IRS audit was to cnsure that all necessary information was 

comprehensively and completely reported on the 990. During the audit, Cornell provided CDs to 

the IRS computer audit specialist containing cnonnau, data files with every transaction for the 

fiscal year under audit. The computer audit specialist worked with the staff of the University 

Controller and the IRS auditors to ensure that the 990 as Ii led was complete: the data were 

reconciled to our audited financial statements and our 990. The computer audit specialists also 

used these files to pertl)rrn some additional data mining exercises. 

The approach of requiring 100 percent of our transaction detail and using computer 

analysis and key questions and reconcjliations was time consuming, but Cornell found it to be a 

strong and commendahle audit step on the part of the IRS. In reviewing our 990, bOlh parties 

were confident the audit examined the available universe of information. 

Cornell also provided extensive documentation in response 10 at least 50 sepamte 

information documentation requests (lDRs). 111is included: 

Documentation in support of governance (e.g. board minutes and copies oftarmal 

policies regarding ethics, organization of subsidiaries). 

Documentation in support of compensation (e.g. hoard minutes, benchmarking stlldies 

a11<1 ad,isory information fi'om uubide consulting firm,). 

Documcntation in support ofUnrdated Business Income (\')BI) as reported on 990 T--

including review of well owr 100 K-Is from investments in Cornell's endowmcnt that 

generate UBI and are reported on 990 T. 

A walk through campus and other document requests to evaluate whether there were 

other "business related activities not repOlied." The IRS concluded there were none. 

The IRS undouhtedly has a better understanding of higher education after undeliaking the 

Colleges and Universities Compliance [>rojec!. NACUBO expects thaI the responses to the 
32 


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questionnaire, the subsequent audils of colleges and universities, and the final report [rom IRS 

will relkct that: 

Many colleges and uni~ersities have long had institutional policies and practices 

in place reflecting a commitment to stewardship, accolUltability and the highest 

,tandard of compliance with federal and state la"s and regulations, 

Institutions of higher education are locused on teaching, research, and community 

sen icc. 

Both private and public colleges and universities had well-established, sound and 

effective governing structures prior lO IRS linking good governance with strong 

tax compliance and introducing gl)\'ernance-relnted questions to the Form 990. 

Although sometimes less visible to the public and to students and families, 

compliance with tax and other federal rules, regulations. and requirements by 

institutions is a part ofth" cost of a college education. 

OVERSIGHT AND COMPLIANCE 

Speaking on behalf of college and university business officers, our sector has markedly 

increased our internal etIorts on ta" compliance over the last 20 years. Beginning in the early 

19()Os, we hegan to ,ee the appointment of campus tax directors at large research universities. 

Now it is not unusual for a large institution like Cornell to require a tax compliance department, 

with staff members trained to stay abreast of tax compliance requirements. 

Cornell's approach throughout the 1990s was to ensure compliance with sutlicient 

stafling and appropriate experience and on-going training. Cornell established a dedicated tax 

compliance ofllce in 1'193 and stalTed that oftlee with a Certified Puhlic Accountant (CPA) "ho 

had over ten years' experience exclusiyely in tax administration and compliance. Hut as the 

requirements for reporting and compliance are ever changing and ever more complex, 11,e 

University has also incurred additional costs and burden by engaging 11,e serv ices of an external 

auditor - a major CPA firm - to revie\\ and sign both the form 990 and Form 990-T -lhough 

most ufthes0 Forms are "prcpanxr' internally. The Gosts of engaging em e'Xternul Hccmmting 

tinn is in addition to the costs of maintaining in-house expel1ise. 

Cornell also seeks to be a yoicc within higher education La encourage the IRS to de\'elop 

cffecti~e approaches to meet the needs ofthe Service, the puhlie, and higher education in a 

reasonable and cosl effective manner. We responu, most often as a member ofa larger 

profe"iollHI group like NACUI30, to the IRS' request' tix responses to their proposal>. 
33 

f 

Chairman BOUSTANY. Mr. Regier, you may proceed. 

STATEMENT OF MICHAEL REGIER, SENIOR VICE PRESIDENT 

OF LEGAL AND CORPORATE AFFAIRS, VHA INC., WASHINGTON, D.C. 

Mr. REGIER. Good morning Chairman Boustany, Ranking Member Lewis, and Members of the Committee. I am Michael Regier 


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34 

and I am pleased to be here on behalf of VHA, a national network 

of more than 1,400 not-for-profit hospitals and more than 23,000 

nonacute health-care organizations. Based in Irving, Texas, we at 

VHA exist to assure the success of nonprofit health care, and we 

do this through 47 regional offices—through 15 regional offices that 

cover 47 States and the District of Columbia. 

This morning I wanted to speak to you primarily about two topics: the new requirements that are applicable to nonprofit hospitals 

under the Affordable Care Act, and then what we at VHA believe 

matters most to tax-exempt hospitals in the context of more comprehensive tax reform. 

As I am sure you know, the Affordable Care Act imposed new 

statutory requirements that have to be met by all hospitals that 

seek to obtain or maintain income tax exemption under section 

501(c)(3). These requirements are in addition to and not in lieu of 

the existing requirements already applicable to those organizations. 

We recognize the significant increase in the scope of responsibilities assigned to the IRS under the Affordable Care Act and we respect the good work the IRS has done to improve oversight of our 

Nation’s tax-exempt organizations. However, during the more than 

2 years since the Affordable Care Act was signed, the IRS has 

issued various forms of informal guidance and has revised the 

Form 990 annual information return filed by tax-exempt organizations, but has not yet issued any proposed or final regulations to 

implement most of the new requirements that are already applicable to tax-exempt hospitals and health systems. 

Along with many other stakeholders VHA has worked with the 

IRS to provide feedback on the informal guidance that has been 

issued so far and to express our concerns about the potential compliance burdens associated with these new requirements, as well as 

how they will eventually be implemented and enforced. 

And as an example just of the burdensome nature, I brought 

with me this morning the blank Form 990 with the schedules that 

must be completed and the instructions every year by tax-exempt 

hospitals. This is the blank form and instructions. In particular, we 

have expressed some serious concerns about the way the revised 

Form 990 Schedule H was issued in February 2011, which we and 

many other organizations saw as supplanting the ordinary notice 

and comment rulemaking process. 

We also expressed our reservations about the overly prescriptive 

nature of the more recent draft IRS guidance that relates to the 

community health needs assessment. We expect that hospitals will 

have a number of challenges complying with these new requirements, especially given the increasing financial challenges that 

they are facing. Now more than ever before, we at VHA believe 

that Congress should ensure that hospitals can direct their limited 

resources to actually meeting their community’s most significant 

health care needs rather than spending them to document the process that they used to identify those needs. 

We support the goals of transparency and accountability, VHA 

supports the efforts to make the Tax Code fairer, simpler and more 

efficient, and particularly those provisions that apply to our Nation’s nonprofit health-care organizations. 


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And as the Ways and Means Committee continues its effort toward comprehensive tax reform, we urge the committee to avoid 

any action that would jeopardize the followings three key benefits: 

first, the income tax exemption for charitable hospitals; second, 

tax-exempt financing for hospital facilities; and third, the deductibility of charitable contributions and bequests for hospital donors. 

Nonprofit hospitals and health systems need all three of these 

key benefits to assure that they can serve their communities well, 

whether that is through charity care or other financial assistance 

on behalf of the uninsured or underinsured, through subsidized 

health services, through community health improvement services, 

through community building services and activities, or through research and education. 

Every day in communities throughout the United States, not-forprofit hospitals and health systems provide essential services compassionately and efficiently. Their work to further their charitable 

missions significantly contributes to the public good and lessens 

the burdens on government. In view of the expected cuts to Medicare funding under both the Affordable Care Act and the Budget 

Control Act and in light of the great financial demands that face 

the many State Medicaid programs, nonprofit community hospitals 

and health care organizations are going to be challenged to do more 

than they have ever had to do before to maintain access to quality 

health care for all Americans. 

We have long encouraged our members to take their community 

benefit obligations seriously and will be working with our hospitals 

to facilitate their compliance. As we do so, however, we will continue working to assure that the implementation of the new requirements is not unduly burdensome or overly prescriptive and 

does not go beyond congressional intent. We look forward to working with the Oversight Subcommittee as well as with the IRS to 

meet these goals. Thank you. 

Chairman BOUSTANY. Thank you Mr. Regier. 

[The prepared statement of Mr. Regier follows:] 


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STATEMENT OF VHA INC. 

OVERSIGHT SUBCOMMITTEE OF THE COMMITTEE ON WAYS AND MEANS 

UNITED STATES HOUSE OF REPRESENTATIVES 

IN CONNECTION WITH THE HEARING ON 

"TAX-EXEMPT ORGANIZATIONS: OPERATIONS AND IRS OVERSIGHT" 

May 16, 2012 

Submitted by Michael J. Regier, Senior Vice President of Legal and Corporate Affairs 

VHA Inc. 

220 Las Colinas Blvd. East 

Irving, Texas 75039 

VHA Inc. (formerly Voluntary Hospitals of America) appreciates the opportunity to 

deliver this testimony on the current operations and challenges of tax-exempt 

community hospitals, the impact of the new statutory requirements for hospital tax 

exemption enacted as part of the Accountable Care Act, and certain concerns and 

policy priorities of nonprofit hospitals regarding comprehensive tax reform 

My name is Michael Regier, and I am senior vice president of legal and corporate 

affairs, general counsel and compliance officer for VHA Inc. In this position, I am also 

responsible for overseeing VHA's public policy office Prior to joining VHA in 2007, I 

served for twelve years as senior vice president and general counsel of the Seton 

Healthcare Family, a non-profit hospital system based in Austin, Texas 

Founded in 1977, VHA is dedicated to the success of nonprofit, community-based 

health care. VHA is a national alliance of over 1,400 not-for-profit hospitals and more 

than 23,000 non-acute health care organizations. VHA helps its members deliver safe, 

effective and cost-efficient health care through both national and local support. VHA 

has 15 regional offices covering 47 states, as well as a public policy office in 

Washington, D.C. 

For many years, VHA has undertaken a leadership role in the field of community benefit 

for not-far-profit hospitals. VHA supports its members in their task of assessing and 

meeting community health needs by providing tools, best practices and other resources. 

The Guide for Planning and Reporting Community Benefit, developed through VHA's 

longstanding collaboration with the Catholic Health Association (CHA), has become an 

industry standard resource for non-profit hospitals and health systems Most recently. 

VHA and CHA have developed a new community benefit planning resource entitled 

Assessing and Addressing Communilv Health Needs. VHA has also provided its 

members with resources and best practices in the areas of corporate governance and 

whole hospital joint ventures. 
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Introduction 

Under federal tax law prior to its amendment by the Affordable Care Act, tax exemption 

for nonprofit community hospitals was governed by a handful of Internal Revenue 

Service (IRS) administrative rulings and judicial decisions. In the context of enacting a 

cornprehensive health care reforrn bill, Congress deterrnined that specific statutory rules 

and more oversight by both Congress and the IRS were appropriate. 

Prior Law Governing Hospital Tax Exemption 

Since 1969, the IRS used the "community benefit" standard for determining whether a 

hospital is charitable.' In Revenue Ruling 69-545, the IRS ruled that community benefit 

included: 

Maintaining an emergency room open to all persons regardless of ability to pay; 

Having an independent board of trustees composed of representatives of the 

community; 

Operating with an open medical staff policy, with privileges available to all 

qualifying physicians; 

Providing charity care; and 

Utilizing surplus funds to improve the quality of patient care, to expand facilities, 

and to advance medical training, education and research" 

In 2009, the IRS began requiring hospitals to submit detailed information on their 

community benefit activities and expenditures on their annual information returns filed 

with the IRS. 3 VHA, working together with other hospital associations and industry 

groups, advised the IRS on the development of the new Schedule H (Hospitals). 

Overview of New Tax-Exempt Hospital Provisions 

The provisions enacted as part of the Affordable Care Act include the following: 

Section 9007(a) of the Act added new statutory requirements that must be met 

by all hospitals seeking exernption from federal income tax and other tax benefits 

as 501 (c)(3) organizations4 These requirements are now contained in new 

Internal Revenue Code ("Code") Section 501(r). 

Section 9007(b) added a new penalty excise tax (new Code Section 4959) to 

help enforce the new requirements. 

Section 9007(c) mandated IRS review of each 501 (c)(3) hospital and its 

community benefit activities at least once every three years. 

I See Rev. Rul. 69~545 1969-2 G.B. 117 and the Restatement (Second) Trusts (1959). See generally Bruce R. 

Hopkins, The Law of Tax-Exempt Organizations, sec. 6.3 (discussing various forms of health-care providers that may 

qualify for exemption under section 501 (c)(3)) 

2 Rev, Rul. 69-545. 

3 See IRS Form 990. Schedule H (Hospitals). 

4 Organizations qualifying for federal income tax exemption pursuant to Code Section 501 (c)(3) are eligible to receive 

tax deductible contributions, have access to tax-exempt financing through State and local governments, and are 

generally exempt from State and local taxes. 

2 
38 


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• Section 9007(d) imposed new reporting and disclosure requirements on 

501(c)(3) hospitals filing the annual information return known as the IRS Form 

990. 

The requirements are entitled, "Additional Requirements for Section 501 (c)(3) 

Hospitals," and the legislative history makes it clear that the new requirements are in 

addition to, and not in lieu of, the requirements otherwise applicable to 501 (c)(3) 

organizations. As detailed below, new Code Section 501(r) imposes the following new 

requirements that a hospital must satisfy to obtain or maintain its status as a 501 (c)(3) 

organization: 

• prepare and widely publicize a community health needs assessment ("CHNA") 

every three years, and adopt an implementation strategy to meet the health 

needs in the CHNA 

• adopt, implement and widely publicize a financial assistance policy (providing for 

free or discounted medical care for those who qualify) as well as a written policy 

for the provision of emergency medical care 

• abide by a limitation on charges for medical care when such care is provided to 

those qualifying for financial assistance 

refrain from engaging in "extraordinary" collection efforts before making 

reasonable attempts to determine whether a patient qualifies for financial 

assistance. 

The new requirements are generally effective for taxable years beginning after March 

23,2010. Thus, for a calendar year hospital, the new requirements became effective on 

January 1, 2011. However, the new CHNA requirement is not mandatory until taxable 

years beginning two years after March 23, 2010. Thus, for a calendar year hospital, the 

CHNA requirement must be fulfilled in the taxable year starting on January 1, 2013. 

IRS Guidance Related to the new Statutory Requirements under Section 501 (rl 

Since Section 501(r) was enacted in 2010, the IRS has issued no proposed orfinal 

regulations, but it has issued various forms of informal guidance (specifically, Notice 

2010-39, Notice 2011-52, Announcement 2011-37 and Notice 2012-4). It has also 

amended the IRS Form 990 Schedule H to incorporate over 20 new questions with over 

60 different subparts. These new questions are principally found in Part V, Section B 

(Facility Policies and Practices) and must be filled out separately by each hospital 

facility that is subject to the new statutory requirements. While most of these questions 

are designed to measure hospital compliance with the new requirements, the IRS has 

stated that some of the questions are merely informational in nature. 

In Notice 2010-39, 2010-39 IRB 24 (June 14, 2010), the IRS described each of the new 

tax-exempt hospital requirements and solicited public comment on how they should be 

interpreted. Other than setting forth the statute and legislative history relevant to each 
39 


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requirement, Notice 2010-39 did not provide guidance to the hospital community on the 

new requirements. 

VHA, like all of the major hospital groups and other stakeholders, submitted comments 

to the IRS on July 21,2010. VHA's comments on Notice 2010-39 are available on its 

website at: 

;)-"!!2~c:i!',~-"'!'{-','c!li!.Si(1.!L0J&\<t:{:j6l.~~'j\£q~~dn,\~~_q~a!2sl"~;l.0'_1~~!~jJ~$!£QJQ!lf''''§ 

. VHA...C"mr"e..':L~P;->f'.CA--2rQvisi"ns 0U.L.2C ;Wf 

Release of Revised Schedule H. After soliciting initial comments from the hospital 

community on the new requirements as well as conducting several meetings with 

hospital representatives in 2010 and early 2011, the IRS on February 23, 2011, 

released a substantially revised version of the Form 990 Schedule H along with revised 

instructions to Schedule H. Much to the surprise of the hospital community, the 

revised Schedule H appeared to incorporate or predetermine many of the issues 

relating to the new requirements on which the IRS had sought public comment through 

Notice 2010-39. Several hospital membership organizations and associations 

protested that the numerous detailed revisions to the Schedule H appeared to supplant 

the process of issuing regulatory guidance pursuant to notice and public comment 

standards. Initially, the IRS responded that "nothing in it [the revised Schedule H] 

depends on the regulatory process that we are currently engaged in with the 

community ... " See "Schedule H Implements Tax-Exempt Hospital Guidance Before 

Rules are Out, Some Say," 54 BNA Daily Tax Report G-7 (March 21, 2011) (quoting 

IRS Tax Exempt and Government Entities Commissioner Sarah Hall Ingram). 

Announcement 2011-37,2011 IRB 27 (July 5,2011). After the tax-exempt hospital 

community continued to press its specific concerns about the new Schedule H, the IRS 

announced that it "decided to make the entire Part V, Section B [of the revised Schedule 

H] optional for the 2010 tax year to give the hospital community more time to familiarize 

itself with the types of information the IRS will be collecting related to compliance with 

section 9007 [of the Accountable Care Act] ... and to address any ambiguities arising 

from the extensive revisions of the form and instructions." The IRS also stated that it 

"continues to invite comments on how to improve the clarity and reduce the burden of 

reporting the information related to these additional requirements on the Form 990 and 

Schedule H." An IRS Memorandum attached to Announcement 2011-37 stated that 

"the Service does not intend the new Schedule H to serve as a substitute for any 

regulations or guidance that may be necessary to carry out the provisions of Section 

501 (r)" It also contended that "many of the questions asked in Section V and 

responses elicited are informational in nature, and thus a "negative" answer should not 

be interpreted as indicating non-compliance with speCific reqUirements under Section 

501(r)." 

Following the release of the revised Schedule H, VHA continued to work actively with 

other hospital groups, such as the American Hospital Association (AHA) and the 

Healthcare Financial Management Association (HFMA) to identify ways in which the 

Schedule H could be revised to eliminate redundancies and reduce burdensome 

paperwork. VHA, AHA and HFMA also identified for the IRS those questions on the 

4 
40 


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revised Schedule H that appeared to reach beyond the scope of the statute or were 

inconsistent with Section 501(r) and its legislative history. See VHA-AHA-HFMA Joint 

Letter to IRS Commissioner Sarah Hall Ingram (April 20 2011), posted at 

t,-~~ljjyytH.:...qt'~QT-9L~(b~~a~~L~~~~~~1?Jl~Q11Ll1S~'!.£O-=-cJ:.~_cll~jl!±i!iT. Subsequently, 

VHA joined AHA and HFMA in developing line by line comments on the Schedule H. 

See VHA-AHA-HFMA Joint Letter to IRS Commissioner Sarah Hall Ingram (August 24, 

2011), posted at bJlp:liv/IW:.Clh" 0'>ti£.d·J0C<!£y-isslIes/letleri2'lJ...1!..UO&24-'&'-2t18-hflT'''c 

Vh:3-3!~~df. 

Notice 2011-52, 2011 IRB 30 (July 25, 2011) set forth in significant detail the guidance 

that IRS is considering with respect to the specific requirement that each hospital 

conduct a community health needs assessment (CHNA) at least once every three 

years. While VHA has consistently urged its members to conduct regular assessments 

of community health needs as a critical component of community benefit planning, VHA 

expressed serious concerns about the overly prescriptive nature of the IRS guidance 

relating to CHNAs. It lodged particular objection to the many procedural requirements 

described in the Notice 2011-52. some of which IRS has already incorporated into the 

questions in Part V, B of the revised Schedule H. VHA's articulated concerns about 

IRS's proposed approach include the following: 

Requiring each hospital facility in a multi-hospital system to issue a separate 

written report on its CHNA, as opposed to allowing the system to issue a 

consolidated report. 

Imposing excessively detailed mandates regarding consultation with public 

health agencies and representatives of specific populations within a community 

(Le., populations with chronic health needs). 

Imposing excessive CHNA documentalion requirements, particularly those 

focused on the process of conducting the CHNA (e.g., describe the process 

and methods used to conduct the assessment (including sources and dates), 

specify how and when the rospital consulted with community leaders 

(including specific names and titles of individuals consulted, and whether such 

consultation involved meetings, focus groups, interviews, surveys or written 

correspondence), and specify "information gaps" that may have affected the 

hospital's ability to assess community health needs). 

Requiring each hospital to attach its most recently adopted CHNA 

implementation strategy to its Form 990 (as opposed to allowing the hospital 

the option of either attaching the strategy or reporting how the hospital is 

addressing the health needs identified through its CHNA--as the statute 

requires). 

Hospital challenges in complying with the new requirements 

VHA expects that hospitals will have a number of challenges complying with the new 

requirements, particularly in light of current health insurance trends and reimbursement 
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shortfalls. At the same time, VHA believes that Congress needs to make sure that 

hospitals are able to direct their limited resources toward meeting their communities' 

most significant health needs as opposed to complying with excessively burdensome 

paperwork requirements. 

Some of the specific areas which VHA has identified as needing further guidance from 

IRS include the following: 

• Applicability of the statutory requirements to hospital joint ventures (including 

those not operated as charitable hospitals generating exempt income) 

• Calculating permissible charges in compliance with the limitation in Code Section 

501 (r)(5) on amounts hospitals may charge for emergency or other medically 

necessary treatment provided to individuals who qualify for financial assistance 

(Le., did Congress intend this requirement to apply and be calculated on a 

procedure-by-procedure basis or may hospitals calculate an average effective 

discount rate received from each commercial insurance company across all 

covered procedures and services?) 

• Whether hospital reporting of delinquent patient accounts to credit agencies is to 

be considered an "extraordinary collection" measure 

• What constitutes "reasonable efforts" to determine whether an individual is 

eligible for financial assistance 

Some of the areas that IRS has already clarified--at least through the informal 

mechanism of the IRS Schedule H and its Instructions--including the following: 

Defining what type of "hospital facility" is generally required to comply with the 

new requirements and to report its compliance on the Schedule H 

Describing what is involved in "widely publicizing" the required financial 

assistance policy 

• Clarifying that the "best" commercial rate means the "lowest" rate for purposes of 

the limitation on charges 

Defining the scope of the mandate to provide emergency medical care without 

"discrimination" 

What matters to tax-exempt hospitals in the context of comprehensive tax reform 

VHA supports efforts to make the tax code fairer, simpler and more efficient. We agree 

with the many members of this Committee who have recognized that the economy loses 

substantial amounts of productivity each year because of our burdensome tax system. 

Even tax-exempt organizations are not exempt from having to spend millions of dollars 

to comply with IRS documentation and filing requirements. These requirements, some 

6 
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of which have not been mandated by Congress, appear to have grown exponentially in 

recent years. A good example is the redundant and overly prescriptive Schedule H. 

Not-for-profit health care organizations playa critical role in community health needs, 

and more is being asked of them every day because of the growth in our uninsured (or 

underinsured) populations. Federal tax benefits are important in helping such 

organizations carry out their missions and meet their needs for capital. 

As the Ways & Means Committee continues its efforts toward comprehensive tax 

reform, it should avoid taking any action that would jeopardize the following core 

benefits: 

-- income tax exemption for charitable hospitals 

-- tax-exempt financing for hospital facilities 

-- deductibility of charitable contributions and bequests for hospital donors 

All three of these are needed by nonprofit hospitals in order to provide the maximum 

amount of community benefit, including charity care and other financial assistance on 

behalf of uninsured and low-income persons, subsidized health services, community 

health improvement services, community building activities, research and education. 

The exemption from income tax of charitable and other not-for-profit organizations is 

longstanding. While most nonprofit hospitals operate on very slim margins and thus 

have little net income subject to tax, the exemption permits not-for-profit organizations 

to retain earnings for future capital improvement. It also provides a uniform foundation 

for many state tax exemptions, including exemption from sales and property taxes. 

A second tax provision is the exclusion for tax-exempt bond interest. Charitable 

organizations like hospitals have significant capital needs and rely on tax-exempt 

financing to obtain much needed capital. Since not-for-profit hospitals by law cannot 

raise money by issuing stock to investors, debt and retained earnings are their only 

sources of capital to make the investments in staff. facilities and technology that are 

required to deliver the safe, high-quality care their communities need and deserve. 

While the markets for tax-exempt financing by hospitals are fairly well established at 

present, many hospitals and other not-for-profit entities would be severely hampered in 

obtaining debt financing at all if these markets were disrupted through significant 

changes to the tax treatment of interest paid on tax-exempt bonds. 

A third tax provision that directly benefits charitable organizations is the deduction for 

charitable contributions. In the health care context, both individual and corporate 

contributions are essential funding sources for medical research and education, capital 

improvements and community health activities and organizations. The Obama 

Administration has proposed a reduction in the value of charitable contribution 

deductions for taxpayers in the 33 and 35 percent brackets. VHA opposes any such a 

limitation, and believes that it would have a particularly negative impact on significant 

gifts by individual donors. 
43 

f 

Chairman BOUSTANY. Mr. Hopkins, you may proceed. 

STATEMENT OF BRUCE R. HOPKINS, SENIOR PARTNER, 

POLSINELLI SHUGHART, KANSAS CITY, MO 

Mr. HOPKINS. Thank you. And good morning, Mr. Chairman, 

Ranking Member Lewis, and the other Members of the Subcommittee. 

My task as a private practitioner in the exempt organizations 

area is to spend some time talking with you about the basics of the 

law in this area and then also identify what I believe to be the current developments in the field. 


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By my reckoning there are 67 different categories of tax-exempt 

organizations. Obviously I lack the time to take you through all of 

those. But what I have done in my prepared remarks is focus first 

on 501(c)(3) entities, charities, religious organizations, educational 

organizations, scientific entities, to give you a feel for the detail 

and the criteria for exemption under each one of these categories. 

For example, in the paper I note that under the concept of ‘‘charitable,’’ there are 15 different ways that an entity can qualify as a 

tax-exempt charitable organization. Aside from a 501(c)(3) there 

are a number of other categories of exempt organizations, as I mentioned, and I highlighted in my paper the ones that I think should 

be and are a primary concern to you: 501(c)(4) and 501(c)(6). And 

so I have got some material in there about social welfare organizations, the whole concept of what it means to promote social welfare, 

what it means to serve a community, and, in the context of business leagues, discuss the rules about operating to promote a common business interest, a line of business, and the rules dealing 

with not performing particular services for individual persons. 

There are plenty of other exempt organizations that could be 

talked about: political organizations, social clubs, fraternal organizations, labor groups, qualified health insurance issuers. But I 

wanted to put in the material at least a summary of the law dealing with what I consider to be the main categories. 

And then on the last page of my prepared remarks, I have given 

a simple list of what I believe to be confirmed developments in this 

area. I don’t have time to go down the entire list. But as you can 

see, items like governance, which you have already heard about, 

and the Form 990 you have already heard about are at the top of 

the list. This isn’t necessarily a prioritized list, but certainly those 

two are on the top of any type of list like this. The whole IRS enforcement fees, compliance checks, the whole matter of political 

campaign activity, particularly the involvement of charitable entities and social welfare organizations in that; the pending regulation projects and other initiatives of the Internal Revenue Service 

of which there are a lot; and then, of course, the status of tax extenders legislation certainly impacts this field, and the whole matter of tax reform obviously interrelates with the law of tax-exempt 

organizations as well. 

So with that I think I will end my oral remarks and will be 

happy to take whatever questions the subcommittee might have. 

Chairman BOUSTANY. Thank you, Mr. Hopkins. 

[The prepared statement of Mr. Hopkins follows:] 


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U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON WAYS AND MEANS 

HEARING BEFORE THE 

SUBCOMMITTEE ON OVERSIGHT 

OPERATIONS AND OVERSIGHT OF 

T AX-EXE:vIPT ORGANIZATIONS 

Testimony of Bruce R. Hopkins 

Tax-Exempt Organizations Law Basics 

and Current Developments 

May 16,2012 

Bruce R. Hopkins 

Polsinelli Shughart PC 

700 West 47th Street 

Kansas City, Missouri 64112-1802 

816-753-1000 

bhopkins@polsinelli.com 
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TAX-EXEMPT ORGAMZA TlOl'iS LAW BASICS 

AND ClJRRENT DEVELOPMENTS 

Chairman Boustany, Ranking Member Lewis. and other Members of the Subcommittee on 

Oversight, thank you for this opponunity to testify before you on the law of tax-exempt 

organizations and cunent developments ill thi~ field. I have been a practitioner in this area for 

over 42 years. I am counsel to n wide range of tax-exempt organizations, including universities. 

hospitals, other public charities, private fOlllldations, ard associations, This practice includes 

representation of e.\.empt organizations before the Intcl11ai Revenue Service. 

I have written several books about nonprofit law, including The La-H' '?f Tax-Ex(!mpt 

Orxanizations, TIO\V in its Tenth Edition. I write a monthly neVvsleHer about nonprofit law 

de\'elopments, titled Bruce R. !lopkins' Nonprofit COllnse/. 

What follo\vs is an ovcrview of the federal tax law applicable to certain tax-exempt 

organizations. 

CHARITABLE ORGANIZATIONS 

The Ccderaltax law definition of a charitable organization comains at least 15 diffcrcl11 ways for 

a nonprofit entity to be charitable. These characteristics, found in the income tax regulations. IRS 

nllings., and federal and fltate court opinions., include relieving the poor or distreStsed or the 

underprivileged; advancing religion, eciuc<'Ition, or s~ience; lessening the burdens of gm,emment; 

heautifying and maintaining a community; preserving natural beauty; promoting health, social 

\\elfarc, environmental conservancy, arts, or patriotism; cUling for orphans or animals: 

promoting. ad\ aocing, and sponsoring amateur sports: and maintaining public confidence in the 

kgal system. ThObe most widely claimcd are discussed in the discussion that follows. 

The relief of poverty is perhaps the most basic and historically founded form of charitahle 

acti\ity. Originally, it meant largdy the distrihution of money or goods to the poor. [n 

contemporary time&, particularly as government has assumed some of this function, it meant::. 

more the provision of serVIces. This type of charitable enttty might feed the homeless or provide 

them shelter. operate a counseling center, proyide vocational training, supply employment 

assistance, provide low-income housing, or offer transportation scrvices. 

The relief of the distressed i, a considerably mi,understood way to be charitable. Too many 

associate distressed with impoverishment. To be sure, one way to be distresst..::d i~ to bt..:: 

financially distressed (although one can be only temporarily tinancially distressed). All 

individual can, however, be physically or emotionally distressed. The confusion as to the scope 

uf the cuncl:pl of distre~sed wa,:" most unfortunately, displayed in the atlcrmaili of the terrori~t 

attacks against the LJ .S. in 200 L when there was a huge ontcry and battle as to who was entitled 

lo relief fllllds--and pur'llantto "hat criteria. While the law tends lO precisely define the lerm 

poor, the concept of the term distressed is largely ullde[jned and expan,ive. 

Th~ advanl:em~nt of religion. as a charitable activity, fJ'cquently pertains to collateral al'tjvitics or 

ChUfCh0S. For 0xampk, charitabk organizations of this nahlr0 may maintain church buildings, 

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monuments, or cemeteries; distribute religiom. literature; or supplement salaries. These 

organizations may conduct programs umque to a particubr religion, openlle n retreat center, or 

maintain a reEgious radio or television stJtiol1. 

The advancement of cducalion. as a charitable activity, includes providing student assistance: 

advancing knowledge through research: or disseminating knowledge by means of publications, 

seminars, lectures, and the like. This type of charitable timction may be a satellile activity 01' a 

particular educational illStitlltiol1, ~Llch as a llniver~ity, lihrary, or museum. 

The promotion of health is a separately recognized charitable purpose; in this context. public and 

mental health are included. rhis function includes the establishment and maintenance of 

institution" and organi7ations such as hospitals. dinics, homes for the nged. and similar Lre<ltmcnt 

or residential centers. Other illustrations ofhealth-proyjding (or health-promot.ing) organizations 

are health maintenance organizations, drug abuse treatment ccnters, blood banks, ho::.pices, and 

home health agencies. The advancement of medical and similar knowledge through re,earch, 

and, generally, the maintenance of conditions conducive to health are included. Clas~itication of 

an organization as a tax-exempt hospital or a medical research organization is an automatic 

pathway to avoidance of private foundation status. 

The promotion of social welfare is one of the most indefinite categories of charitable endeavors. 

In the law of trusts, the concept of promotion of social welfare can include such purposes as the 

promotion of tempenmce or national security or the er.::ction or maintenance of tombs and 

monuments.. In the federal tax law context. the term cmbraces activities designed to accomplish 

charitahle purposes. lessen neighborhood tensions, eliminate prejudice and discrimination. 

defend human and civil rights secured by 1a\\!, and combal cOlllmlllllty dCl.Crioration alld juvenile 

delinquency. 

EDUCATIONAL ORGA'IIZATlOi\S 

Educational organizations include schools, colleges. universities, libraries, museums, and similar 

institutions. To be a IIfonnal" educational institution, an organization must have a regularly 

scheduled cUITiculum~ a regular faculty. and a regularly enrolled bod) of .students in attendance 

at the place where the educational activities are canied 011. 

fhae can be a fine line of distinction between an educational activity and a taxable-business. 

Sometimes it is diflicult to distinguish between an educational undertaking and one that amounts 

to propagandizing-the zealous endorsement of a particular idea or doctrine in a manner that is 

not reasonably objectIve or balanced. It IS otten impossIble (and unnecessary) to ditferentiate 

bet\\'een organizations that are charitable because they adv~mce education and those that are 

educational. 

RELIGIOUS ORGANIZATIONS 

Religious organizations arc the oldest i(lrm oftax-cx~ll1pl organiLation. Unlike other areas urihe 

Im\ of tax-exempt organizations, rdigiolls organizations defy definition. This is due in large part 

to the Fjr~t Amendment to the U.S. Constitution, which bars Congress from making any law that 

would establish religious organizations or prohibit the free exercise of religion. 

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There are many kinds of religious organizations; the most common form is referred to a~ a 

church (including synagogues and mosque~). But, here again, the federal lax law lacks a crisp 

definition of the word church. The [RS has infom1ally defined a church as an organization that 

satisfies at least some of the following criteria: a distinct legal eAistencc, a recognIzed creed and 

form of worship. a definite and distinct ecclesiastical government. a formal code of doctrine and 

discipline, a distinct religious history. a membership not associated \"vith any other church or 

denomination, a complete organization of ordained ministers ministering to their congregations 

and selected alter completing prescribed courses of study, a literature of its own, established 

places of \vorship, regular congregations, regular religious ~cl\"iccs, Sunday schools for the 

religious instruction of the young, and schools for the preparation of its ministers. 

Otht!r typ\:s of religious organizations, for tax purpos\:s, include conventions of churches. 

associations of churches, integrated auxiliaries of churches, religious orders. apostolic groups, 

missionary organi/.ations, bible and tract societies. and church-run organiL'alions, such as 

schools, hospitals, orphanages, nursing homes, publishing entities, broadcasting entities, and 

eemderies. 

SOCIAL WELFARE ORGANIZA nONS 

Traditionatty, a social welfare organization is one that. in the language of the tax regulations) 

functions to advance the "common good and general weltare," and ~eeks "civic betterments and 

sodal improvcmcllts." This type or organiL.;atiol1 is expected 10 engage in activities that bendit 

the community in its entirety, rather than merely its own membership or other select group~ of 

individuals or organization'l. 

A contemporary usc orihe social wdfare organiL<Hion is as an advocacy entity. The term social 

we1t~lre can be broader than the term charitable (eyen though, as discussed prt:viollsly. the 

concept of charitable includes the promotion of social welfare). Social "elfare organizations can 

engage in an wllimitcd amount of lcgis/atiyc activity without endangering their tax-c!...empt 

statlls, and they can permissibly engage in some political campaign activity. Consequently. some 

charitable organizations link up with rdated social welfare organizations as a means or engaging 

in more lobbying m:tivities than the charitable orgunizations are al1m;ved to UIll.1ertake directly. 

Like many other tax-exempt organizations, social welfare entities may not engage in transactions 

that constitute private inurement and may not operate unrelated businesses as a primary activity. 

The only type of sodal welfare organi7:ation to which conn·ibution~ arc deductible is a veteransl 

organization. 

BlTSINESS LEAGUES 

I\. busincs1) league is a group of persons (an association) who have some common business 

interest; the pUl-po::.e of the league is to promote that common intcrt!st.lts acti\itics (ifit b to be 

tax-exempi) are directed to the impron::ment of business conditions of one or more Hnes of 

business, as distinguished from the performance of particular services for individual persons. 

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49 

f 

Chairman BOUSTANY. Clearly the tax-exempt area is a growing 

and increasingly complex sector of our economy, and that is why 

we feel it is important to have this oversight hearing as a starting 

point to get a better understanding of the sector as we contemplate 

fundamental tax reform. And all of you have raised important 

questions and concerns. 

I want to focus for a moment on the Form 990 specifically. This 

question is for the entire panel, but I would like to start with Ms. 

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The IRS has just completed a revision of the Form 990. It took 

several years to complete and according to the IRS has been redesigned to enhance transparency, promote tax compliance and minimize the filing burdens. As part of this effort, the form was reorganized and filers were given more opportunities to explain their taxexempt activities, but were also required to provide more information regarding key issues such as executive compensation and other 

things. 

How is this process working from your perspective? Ms. 

DeStefano, you can start. 

Ms. DESTEFANO. Thank you for the question. We share our 990 

before it is filed with our audit committee of our board of trustees. 

There are approximately 12 members of the audit committee. And 

I can say 3 or 4 years ago, we would have in-depth conversations 

about the data and material within the 990. Today the form is so 

complicated that our committee of our board of trustees do not 

know where to begin. And I would say we have less than one or 

two questions on the 990 today than where we were 3 years ago. 

Chairman BOUSTANY. Okay. Do you think that the form meets 

the criteria set forth initially by the IRS? 

Ms. DESTEFANO. I think there is too much information. And if 

you could streamline to the key points, and if executive compensation is an area that Congress feels is very important, keep that. 

We have some schedules, if you don’t mind, if I could just highlight that we feel are redundant. Schedule F, which relates to foreign activity; Schedule I, which is subcontracts; and Schedule K, 

which is tax-exempt bonds. They require a tremendous amount of 

information and we are not exactly sure of the value. 

And I would like to point out, if I could zero in on Schedule I, 

which is the subcontracts. It requires information on grants and 

other assistance from organizations, governments, and individuals 

within the U.S. Cornell’s response is 20 pages long. And it consists 

almost entirely of subcontracts through the Federal Government as 

part of our research enterprise. 

OMB already has a single audit act, with OMB A–133 that audits States, local government and not-for-profit organizations. If we 

could eliminate all of the reporting that already goes through another phase of what is being audited, we estimate this one change 

would save 40 hours of work preparing our 990 plus 20 pages of 

reporting data. 

Chairman BOUSTANY. Thank you. Mr. Regier. 

Mr. REGIER. Mr. Chairman, to go back to the first question, I 

think our members would say the form does make much more information available. I don’t think that they would agree that it promotes efficiency or that it has lightened the filing burden. The form 

has expanded significantly. That is why we brought it this morning. 

I think the experience in most tax-exempt hospitals is very similar to what Ms. DeStefano outlined. This is not a form that, despite 

your best efforts and expertise inside of your organization, that you 

really can afford not to engage an outside advisor to help you with, 

whether that is your outside tax counsel, your outside auditors, or 

specialized tax consultants. 


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Chairman BOUSTANY. I thank you. Any other members of the 

panel want to comment? 

Mr. HOPKINS. Mr. Chairman, I think one sentence might sum 

it up. The Form 990, the new Form 990 has greatly enhanced my 

law practice. 

Chairman BOUSTANY. Others? 

Mr. COLINVAUX. Well, I think one little bit of context, which 

is where we were before the new Form 990. Which was, the IRS 

was under a lot of pressure to revise the form because the form 

was seen as very outdated and not providing enough information. 

So it took years for them to come up with the new form. 

I think the other thing that is important to keep in mind is the 

value of the Form 990 as an enforcement tool. One of the difficulties here is that there is not a lot for the IRS to enforce. And one 

of the things that—one of the ways that we can keep oversight over 

organizations is through the disclosure of information which is 

made public on the 990. 

I think one of the problems that is being highlighted here is the 

too-much-information problem. And I recognize that is a problem. 

But I also think that it is a problem that the IRS is trying to work 

out by continuing to revise the form in discussions with stakeholders to find out what the most relevant oversight information is. 

And finally, I would say that the complexity of the form is absolutely correct. The instructions are, you could say, monstrous because they are so big. But what is going on here is that the complexity is reflecting the complexity of the sector. The sector is not 

a simple thing. And so the form is getting more complex as the IRS 

learns how complex the sector is. So there are a lot of issues at 

play here. 

Ms. AVIV. Just a very quick comment. The Form 990 is the only 

vehicle through which the public, donors and volunteers, or people 

seeking jobs can actually find out what is going on in an organization, or quite a lot about it. Now, there may be some parts of it 

that are too detailed, but this revised form has provided the first 

opportunity to get a really good picture of the charitable sector. So 

as we go forward with this, let’s be mindful of the benefit of the 

public being able to see into these organizations as well. 

Chairman BOUSTANY. Thank you. Just a follow-up question, 

Mr. Colinvaux. Obviously this is a very complex and growing sector. Should there be—should we disaggregate to some extent or 

should the IRS disaggregate in terms of trying to get certain types 

of information from one sector of the tax-exempt area versus another? 

Mr. COLINVAUX. Well, I think that is what is happening. I 

mean the IRS has been under a lot of pressure in recent years, in 

part because of the scandals that have happened at organizations. 

And so I think what the IRS is doing is they are educating themselves and they are saying there are two very big elephants in the 

room; it is namely the hospitals and big colleges and universities. 

They take up most of the assets and the revenues of the sector. 

And so there is disaggregation going on not only in terms of exemption standards passed by Congress but in terms of enforcement, so 

new compliance initiatives are launched, we look at the hospital 

sector, they look at the colleges and university sector. So 


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disaggregation is happening and it is happening on the Form 990, 

as well as more tailored questions, depending on what you do, are 

surfacing in the 990. So you can show the whole form, but a lot 

of that form isn’t relevant to a lot of organizations. 

So, yes, I think the disaggregation is happening. It is one of the 

facts on the ground, and it is something that policymakers are 

going to continue to wrestle with. 

Chairman BOUSTANY. Anybody else want to comment on that 

issue? No. Mr. Colinvaux, the Ways and Means Committee, as you 

know, is currently focused on comprehensive tax reform, and we 

are definitely reviewing all areas of the code, including provisions 

that apply to tax-exempt organizations. You have recently looked 

at the tax-exempt sector over the last 10 years and were on the 

Joint Committee on Taxation in 2006 when the Pension Protection 

Act was enacted, which contained many new provisions related to 

tax-exempt organizations. Are there any lessons from the last few 

years we should keep in mind when considering tax reform proposals in this area? 

Mr. COLINVAUX. Well, one lesson based very much on my experience is to continue conducting hearings such as this, which is I 

think a really important form of oversight, because it calls the sector together and it reminds the sector that they need to do good 

and perform a public benefit. So I think this is a very important 

form of oversight that really does lead to better behavior. So that 

is one lesson. 

Another lesson is—what struck me about the Pension Protection 

Act was that it was very much focused on correcting abuses. And 

there are and always will be abuses in any sector. One of the challenges going forward, which was not addressed in 2006, really goes 

to the role the Federal Government has with respect to (c)(3) organizations. So we can take the anti-abuse path, which is the path 

that we are on, continue to write rules that go to abuses, or we can 

start to ask harder questions such as which organization should get 

which benefits, do we expect certain public benefits to occur from 

our (c)(3)s? Those are questions that were not really asked in the 

lead-up—they were asked in the lead-up to 2006 but weren’t really 

answered. So I think those are—the lessons are we still have those 

questions, maybe. 

Chairman BOUSTANY. Thank you. I appreciate that. I am now 

pleased to yield to the ranking member, Mr. Lewis, for questions. 

Mr. LEWIS. Thank you very much Mr. Chairman. And again I 

would like to thank each member of the panel for being here and 

for your testimony. 

Mr. Hopkins, you are a noted expert on tax-exempt organizations 

and you have worked in this area for over 42 years. I don’t believe 

you worked there that long. Apparently someone violated the child 

labor law and some law firm hired you at an early age, but I don’t 

want to get into all of that. 

Now, the IRS has fewer than 900 employees to monitor more 

than 1.8 million organizations. Can you tell the Members of the 

Committee how you feel the IRS is doing in the oversight of these 

organizations? 

Mr. HOPKINS. Well, Congressman Lewis, I think based on the 

resources the IRS has, I think the IRS overall is doing a very good 


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job. I have never worked for the IRS so I am not familiar with the 

internal workings. But based on what I see and certainly based on 

my years of practice working with the IRS, both on the examination side and working with the IRS with organizations that are applying for recognition of exemption, the IRS I think is doing an excellent job in reviewing entities, screening entities. 

I would note that almost every week there are a number of private letter rulings that are issued by the IRS. I review each one 

of those, and almost all of them are adverse to the nonprofit organizations that are applying. So the IRS is being very aggressive, 

very active in applying the law and determining which organizations comply and which ones don’t. So my impression overall is 

that the Agency is doing a good job, a very good job actually with 

the resources that it has. 

Mr. LEWIS. Now, I noticed someplace that you provide a monthly newsletter? 

Mr. HOPKINS. That is correct. 

Mr. LEWIS. Do you get feedback from the private sector? 

Mr. HOPKINS. I get a lot of email as a result of some of the 

things that are mentioned in the newsletter, yes. 

Mr. LEWIS. Are people pretty satisfied with what they get from 

the IRS? 

Mr. HOPKINS. Well, I think it depends on what kind of entities 

you are talking about. I mean, I hear a lot from organizations that 

are unhappy that they have been audited and/or been denied recognition of exemption. But I think on balance, probably the IRS position was correct. And then, of course, I hear from organizations 

that are very happy with the situation that they are in. So I think 

it just depends on how the nonprofit organizations have fared with 

the IRS. Some complain and some don’t. 

Now, I am talking now about compliance with the criteria for exemption. This discussion about the Form 990 is a totally different 

matter. I hear in my practice daily complaints about the Form 990 

overall, not just Schedule H but the parts of it as being—and we 

have heard some of these words this morning—burdensome, redundant, overreaching, and that kind of thing. So there are lots of complaints about the Form 990; but leaving the Form 990 aside, not 

a lot of complaining about the IRS. 

Mr. LEWIS. Thank you. Ms. Aviv, you noted that charitable organizations have struggled financially during the economic downturn. How has the demand for service increased and what do people need? 

Ms. AVIV. Congressman Lewis, people need help. The economy 

hasn’t recovered. The demand for service has grown. And the ability of these organizations to get additional funding has been diminished. Individual donor giving is down, and public funding has certainly not increased, particularly State funding. And the ability of 

these organizations to charge greater fees means that the people 

who are at the bottom of the economic scale, who have nothing, 

wouldn’t pay more because many organizations charge fees on a 

sliding scale. Some of these organizations have coped by doing 

more with less, but there is only a limited amount of time that you 

can do that. 


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For the most part what we are being told is that these organizations are finding themselves turning people away. And with your 

permission, I just want to share with you a story that was shared 

with us by Catholic Charities. They said that in the fourth quarter 

of 2011, a snapshot survey of 44 local Catholic Charity organizations located in 29 different States that served about 31⁄2 million 

clients annually, found that the 44 responding agencies each maintained a waiting list or turned away individuals for services during 

the fourth quarter, with the greatest areas of unmet needs being 

in emergency financial assistance and utilities assistance. Even the 

most basic needs are going unmet in some communities. Three 

agencies reported turning away at least 1,750 individuals that 

came to them seeking food. 

So what we are seeing is that organizations are not able to keep 

up with the increased demand. 

Mr. LEWIS. What more can Congress do to assist these organizations, not just to do well in the entire private sector, but also to 

do good? 

Ms. AVIV. I mentioned in my remarks, and in my written testimony, that immediately passing the tax extenders, particularly the 

IRA charitable rollover and the other provisions that affect the 

charitable community, would be a big help. 

When Congress first passed the IRA charitable rollover, some of 

us had concerns that the only organizations that would benefit 

were those who were attached to high-income individuals, and that 

that might be universities, it might be cultural institutions. But in 

fact what we have found is that many different kinds of organizations, including health and human services organizations, are the 

beneficiaries of those kind of funds. That provision was not extended at the end of last year and we are concerned that it still 

hasn’t been extended. It is an easy fix and it is certainly one of the 

ways to help these organizations. 

Mr. LEWIS. Thank you very much. Mr. Chairman, I yield back. 

Chairman BOUSTANY. I thank the ranking member. I now recognize Mrs. Black. 

Mrs. BLACK. Thank you, Mr. Chairman. Let me go to you, Mr. 

Regier. In your testimony you noted that VHA has worked with the 

IRS in its design of the new Schedule H; yet you express concerns 

regarding the clarity on the form. And I know that the chairman 

talked about the 990. How receptive has the IRS been with working with you and your organization and your other members about 

your concerns? 

Mr. REGIER. I think in our experience the service has been very 

open to receiving input, and so they have in many ways requested 

input and solicited input in advance of issuing their formal guidance. And I must say the IRS did agree with the request that we 

made to make certain provisions of the Schedule H optional for certain filers for a year. Those are questions, however, that are information gathering items in the Schedule H which we believe makes 

the schedule confusing. We did ask the IRS to extend that and 

make that voluntary or to eliminate it. We did not get a favorable 

response there. I would say we have had some success in shaping 

the form to the better as we see it for our membership, but we 

would like to see more. 


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Mrs. BLACK. Well, other than the category you just spoke of to 

make it voluntary, what other specific concerns do you have on 

that schedule? 

Mr. REGIER. I think the new Schedule H compared to the 

former one has now expanded significantly in its length and detail, 

so there is now I think more than 60 subparts to the schedule. We 

saw the adoption of it as a pretty significant increase in the filing 

responsibility for the exempt organization. 

Mrs. BLACK. Let me go to your testimony where you state that 

many of the documentation requirements related to the community 

health needs assessment are burdensome. And as you know, these 

requirements are designed to ascertain whether each tax-exempt 

hospital is truly providing the requisite community benefit to qualify for tax exemption. So given this weighty task, do you propose 

an alternative method of demonstrating to the IRS that every taxexempt hospital is meeting those requirements? 

Mr. REGIER. I think the concern that we have is not about demonstrating that the requirements have been met, it is more about 

the way that one—the process that is being prescribed for the 

needs assessment. The guidance that has been issued by the service so far for the community health needs assessment is very detailed in what you have to do to document what you have done. So 

for example, to list by name, by organization, the persons that you 

consulted with who you thought were public health experts; to list 

by name, and their indication of their community or status, the 

persons that you consulted with that represent low-income or specific disease populations. Leaving aside the question of privacy concerns, that is a level of detail about and prescribed detail about 

what you must supply and report about your process of assessing 

community need that we think really misses the point; the point 

of which is, here are the needs that are present in the communities 

that we are serving. 

The other concern I would say we have about the guidance so far 

really is the question of how this kind of assessment and planning 

is done in particular in multi-hospital systems. So multi-hospital 

systems that may extend through a State or across many regions 

typically plan on a systemwide basis and there are efficiencies to 

be obtained from that. The reporting scheme, however, that is set 

up, which is driven by the statute, is very siloed, so it is requiring 

reporting to be done on a hospital-by-hospital-by-hospital basis, 

along with an implementation plan that would be separate for the 

hospital-by-hospital-by-hospital basis. We would love to see something that would allow a system to have a greater degree of flexibility, to show within the report how the individual hospitals are 

meeting needs without having to do this kind of siloed hospital-byhospital kind of approach, which is how we see the guidance shaping up so far. 

Mrs. BLACK. And I think you make a very good point there. In 

certain hospital systems, you may have one hospital in an area 

that provides a great deal of community needs and maybe in another sector of that same system not so much so. But if there could 

be some coordination there, so the silo effect. 

Is there anything else that you would like to offer in this testimony to say how you think this could be made better on that? 


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Mr. REGIER. I guess the overall concern I have is that today we 

are asking health-care organizations to become much more accountable in different ways to help manage and promote the wellness of 

the community. We want to keep people well, keep them healthy 

and be rewarded for that, or that is what government seems to be 

telling health-care providers. The community health needs assessment could be a very powerful tool to inform that work. I am concerned and we are concerned that it won’t be if we ask our providers and multisystem providers to look on this siloed hospital-byhospital basis. We don’t achieve population health and wellness in 

that way, we don’t achieve and meet the needs of communities and 

regions in that way. So that is the only thing I would say. 

Mrs. BLACK. Thank you for your testimony. I yield back. 

Mr. BOUSTANY. Thank you. Ms. Jenkins, you are recognized. 

Ms. JENKINS. Thank you, Mr. Chairman. Thank you for holding 

this hearing, and thank you all for joining us. 

Mr. Colinvaux, in your testimony as well as in your recent article 

in the Florida Tax Review, you raised the issue of the distinction 

between public and private charities. You stated that the distinction is one of form rather than substance and that the distinction 

is beginning to collapse from its own weight. As an example, you 

mentioned the different standard that applies with respect to selfdealing between a charity and the insiders. Can you just elaborate 

for us on the distinctions in law between a public charity and a private charity? 

Mr. COLINVAUX. Sure. Thank you for the question, Ms. Jenkins. By saying that the distinction is one more of form than substance, what I mean by that is that we take a public charity and 

a private foundation. Well, what makes a public charity public and 

what makes a private foundation private? Well, the private foundation is private not because of what it does but because it is funded 

really by one person or by a family, not because of its underlying 

charitable activity. And so Congress has looked at that shape, the 

form of the foundation, and said that shape is more likely to result 

in abuse because it doesn’t have a donor community making contributions to it, it also doesn’t have a service community so that 

there is no base to effectively oversee the foundation. So the form 

of the foundation is then disfavored relative to the public charity. 

So that is why it is a distinction of form and not substance. 

Why I think it is starting to collapse is because when Congress 

made that distinction in the law in 1969, it was very much an antiabuse focus. That is, we said certain forms of charity are more subject to abuse, so they should be subject to the private foundation 

anti-abuse regime. What we have now seen in recent years has 

been more abuses at public charities, and one of the congressional 

responses, then, is to look to the private foundation rules, say here 

we have a set of rules that regulate abuse, why don’t we apply 

those rules to public charities? And so the self-dealing rules are an 

example of that. 

The private foundation approach to self-dealing is quite harsh. It 

says if there is a transaction; that is, if there is a loan between the 

charity and a disqualified person or a sale of property between the 

charity and the disqualified person, then it is self-dealing. 


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The approach under the public charity rules is different. You 

have to decide whether there has been an excess benefit. So it is 

a very different analysis, and by saying it is collapsing, I am saying 

that the more we use the public—the private foundation rules to 

regulate abuses, the less distinct these two types of charities become. 

Ms. JENKINS. Okay. So did I just hear you say that you believe 

that the anti-abuse rules that pertain to private charities should 

apply to public charities? 

Mr. COLINVAUX. Well, not across the board. What I think 

would make sense is to look at the types of abuses we have identified. So there are a number of abuses: Self-dealing, excess business 

holdings, the expenditures for nonexempt purposes. We should look 

at those abuses, decide whether those abuses, first of all, still matter. Some people would argue that we don’t—we are not worried 

about some abuses anymore. We should look at the abuses, decide 

if they still matter, and if they do, then maybe apply the private 

foundation rules not based on whether you are a public charity or 

a private foundation or not but just apply them because we want 

to regulate the abuse. 

Ms. JENKINS. I see. You also mentioned in the Florida Tax Review article that a largely unexamined facet of the charitable sector 

is the ownership by public charities of for-profit enterprises. Given 

that is an area that has remained largely unexamined, can you just 

elaborate on some of the reasons why a tax-exempt organization 

would own a taxable, for-profit enterprise and how prevalent this 

practice is? 

Mr. COLINVAUX. Well, I can’t really comment on how prevalent 

it is, but I know it is fairly common. There is no rule against it. 

So, first of all, there is a rule against it for private foundations. 

Private foundations cannot have excess business holdings. Public 

charities may, and because they may, they do. So why? Well, I 

think one of the reasons is because they want to do more than just 

the charitable work. They want to do other activities that may be 

related to the charitable work. So they set up a for-profit business 

and separately incorporate it. There is no rule against it. It is not 

necessarily bad, but it is something that we haven’t thought about 

a lot as to whether we want to encourage it or not encourage it. 

Ms. JENKINS. Okay, thank you so much. I yield back. 

Mr. BOUSTANY. Mr. Reed, you are recognized. 

Mr. REED. Thank you, Mr. Chairman. Ms. DeStefano, if I could 

ask you a question in regards to your testimony, and I do appreciate you being with us today, you had mentioned in your testimony and when I read your testimony the compliance that you had 

with the Form 990, and you had mentioned something in your 

verbal testimony today about the K–1 and the side issues. I wonder 

if you could elaborate for me a little bit more in detail exactly what 

you are referring to in regards to that additional requirement. 

Ms. DESTEFANO. Currently the 990 is an informational return, 

and it reconciles with our financial data and our balance sheet of 

our audited financial statements. K–1 data typically will be used 

for institutions like Cornell that have large endowments where we 

are invested in partnerships, and we receive K–1s. The K–1 data 

is not part of our official university records. If we are required to 


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now take a return full of data that reconciles with our financial 

statements and have financial statement data and other data commingled, the reconciliation issues and the amount of time to validate the accuracy of the reporting expands exponentially. So we are 

recommending that for the informational return that we stay with 

financial statement data that is already audited and can tie to 

something that someone else has already reviewed. 

Mr. REED. Well, that makes sense to me, and that is a really 

a good common sense suggestion. Is there any way, in your mind, 

that you could quantify the type of burden that you would have to 

comply with if we went down—— 

Ms. DESTEFANO. I don’t have the answer, but I can speak with 

my staff—— 

Mr. REED. I would appreciate that. 

Ms. DESTEFANO [continuing]. And provide a response back. 

Mr. REED. And obviously any resources that you allocate to this 

compliance issue is taking away from your educational mission, 

correct? 

Ms. DESTEFANO. Exactly, it is additive. 

Mr. REED. And from your experience with the compliance audit, 

could you offer any insights to us as to what worked, what didn’t 

work from your perspective in dealing with the IRS? 

Ms. DESTEFANO. So we spent 2 years going through the compliance audit. We had approximately 15 staff members involved. 

The IRS looked at every single transaction for fiscal year 2008. We 

spent a significant amount of time educating the IRS on the higher 

ed industry. I think that the auditors after 2 years now understand 

our industry. The one thing, though, that we felt might be helpful 

is apparently the 990 and the 990–T did not provide sufficient data 

to determine what should be audited, and as a result, the IRS created a questionnaire and at Cornell we felt that the way the questionnaire was, the questions were phrased, and that is what determined what is to be audited, the IRS should seriously take a look 

at what those questions were phrased, was sufficient to determine 

areas of audit if the return itself didn’t identify the areas that they 

should come in and take a look at the survey questions, perhaps 

they were more effective. 

Mr. REED. Very good. I appreciate that testimony, and I look 

forward to receiving your additional material and that estimate of 

impact on your K–1 compliance requirement. 

With that, Chairman, I would yield back. 

Ms. DESTEFANO. Thank you. 

Mr. BOUSTANY. Thank you, Mr. Reed. 

Mr. Kind, you are recognized. 

Mr. KIND. Thank you, Mr. Chairman. I want to thank our panelists for your testimony here today. I appreciate this opportunity to 

have this hearing on tax-exempt organizations. Mr. Colinvaux, I 

think you are right, I think we are going to have to maintain lines 

of communication and learn more before we are ready to dive into 

comprehensive tax reform and help us to do that. But listening to 

almost all of you here today, I am being left with the impression, 

especially with the 990 form, that the IRS has not been all that responsive in receiving feedback or suggestions on how we might be 

able to streamline or simplify the 990 form. 


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Is that the impression that you have or have they been responsive to feedback that various organizations have been giving them 

on how they can help simplify the 990 form? Mr. Regier, do you 

want to take that first? 

Mr. REGIER. Sure. And I don’t want to leave the impression 

that the IRS has been unresponsive. They have not been. Through 

our dialogue, we have clarified some pretty important issues related to the Form 990 and the Schedule H, so, for example, they 

have been helpful in clarifying just what kind of hospital facility 

is required to comply with the new requirements in helping to define what it means to widely publicize your financial assistance policy. So I can point to, you know, four or five areas in particular 

that we think have been very helpful clarifications that have come 

out of that dialogue. 

That said, there is still at least that many or more where we believe there is some further help that is needed, and the biggest degree of help would be if we were able to get actual proposed or final 

regulations related to these new requirements, most of which have 

been in effect since the Affordable Care Act was signed in 2010. 

Mr. KIND. Anyone else have an opinion on how responsive the 

IRS has been? Ms. Aviv? 

Ms. AVIV. Mr. Kind, our experience is actually quite different 

from what the question might suggest. When the Pension Protection Act was passed, we worked closely with the IRS on the reform 

of the 990 the first time, and we found that they invited us in and 

many other organizations in to talk to them about what the concerns were, what the changes needed to be. When we offered our 

comments during the public comment period, they followed up with 

us. When they put in place the Pension Protection Act requirement 

that organizations that failed to file would lose their tax exempt 

status they went out of their way to provide notices across the 

board and on their web site to make sure that everybody knew 

when a number of organizations got caught in that that still existed. The idea was to clear out the inventory of those organizations that no longer existed so we have an accurate count of how 

many organizations there actually are. They worked assiduously to 

try and get those organizations reinstated. We found them responsive to our concerns, including questions, in a serious way. I think 

that is different than the question of the burdensomeness of the 

990 form which many organizations feel is beyond their capacity 

and the expense capability and takes away from programs. 

Mr. KIND. I am sympathetic, too. And obviously we get testimony from the IRS themselves. It seems as if as a body we are asking them to do more with less, and these things are becoming more 

complex every year, and yet we are asking them to render good, effective service and responsive service to all of you, too. 

Mr. Hopkins, let me turn to you real quickly on a different line. 

Obviously, we have seen a real growth in (c)(4) activity off of the 

social welfare organizations, and we are also noticing stepped-up 

political involvement with a lot of the (c)(4)s out there. Is that an 

area that the Congress should be paying a little bit more attention 

to or even the IRS paying attention to, in your mind? 

Mr. HOPKINS. Well, absolutely. Certainly the IRS is paying attention to it now. The IRS, as you probably know, has gotten a subVerDate Mar 15 2010 23:35 Apr 29, 2013 Jkt 080259 PO 00000 Frm 00063 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80259.XXX GPO1 PsN: 80259

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stantial number of applications from organizations that want to be 

501(c)(4)s, and some of them have a substantial amount of political 

campaign activity planned, and the position of the IRS is that if 

that is the entity’s primary purpose, it can’t qualify under 501(c)(4). 

There has been, for example, a recent ruling, the first ruling of the 

current batch was adverse to an entity that wanted to be a 

501(c)(4). The IRS decided that 80 percent of what it wanted to do 

consisted of political activity. So the IRS is right now processing a 

lot of applications in that area. 

Mr. KIND. Well, what is your opinion on requiring disclosure of 

contributions to (c)(4)s? 

Mr. HOPKINS. Well, that of course is not the law at the present 

time. 

Mr. KIND. Right. 

Mr. HOPKINS. And we do have the alternative, the 527 political 

entity, and that kind of an organization does have to make its donors public, and public charities have to disclose their donors but 

only to the IRS, and private foundations have—— 

Mr. KIND. It just seems that a lot of the (c)(4)s are being used 

in order to allow these anonymous contributions to be made for, in 

essence, political activities. 

Mr. HOPKINS. That is one of the principal reasons, frankly, that 

(c)(4)s are being utilized in this regard is so that the donors do not 

have to be disclosed. So if the question is—and this is purely a 

matter of policy. Should donors or at least large donors have to be 

identified to 501(c)(4) entities? I mean, that is obviously well within 

the prerogative of Congress’ decision making, and certainly that 

rule could be enacted. 

The question to me is, you know, what would be the consequence 

of that? Would it be to discourage contributions, political contributions to (c)(4)s? Probably to some degree. And maybe that is what 

is desired. But certainly as a matter of transparency I personally 

don’t have any problem with having that sort of a rule, although 

probably as a matter of fairness if that kind of rule were to be enacted, maybe some other categories of exempt organizations ought 

to have the same rule, (c)(5), (c)(6)s, for example, but as a matter 

of transparency on balance it is probably a good idea. 

Mr. KIND. Right, right. Thank you. Thank you, Mr. Chairman. 

Mr. BOUSTANY. Thank you, Mr. Kind. We will go next to Mr. 

Paulsen. 

Mr. PAULSEN. Thank you, Mr. Chairman, also for holding the 

hearing today. 

Mr. Colinvaux, let me just shift back to something I think you 

referenced in your testimony before about the enforcement problems that are faced by the IRS than being due to a lack of positive 

requirements for tax-exempt status. Can you elaborate a little bit 

on that point, and do you agree or do you believe that this is not 

an enforcement problem that can be resolved simply by increasing 

the IRS budget to audit charities? Is there more to it? 

Mr. COLINVAUX. I do think there is more to it. I think a lot 

of what we are hearing about the 990 and the information burden, 

what is driving a lot of the information question to me really goes 

to what we mean when we say compliance, what do we mean by 

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cerned about is whether or not an organization is providing a public good. Well, there is no legal requirement, really, that the organization provide a public good. They just have to be organized for a 

good purpose. So we want all this information in order to assess 

a substantive question, which is, is the organization doing good. 

But there aren’t really legal requirements to back that up. Rather, 

the legal requirements are more you may not pay excess compensation, you may not engage in campaign activity, you may not engage 

in substantial lobbying. 

So a lot of the enforcement efforts are tailored to that sort of 

compliance, and one quick note which I think is very significant, 

the governance initiative, we have talked a lot about governance. 

One of the reasons I think the IRS is looking at governance is because if the IRS can decide that good governance means better 

compliance, that means you will have a better run organization, 

fewer abuses, and maybe also more public good is being produced. 

So it is something the IRS can do. It is something they can look 

at. I think part of what they are doing with the 990 is gathering 

information to see what information works and what helps them 

oversee the burden. 

Mr. PAULSEN. You also noted that the new hospital requirements are a recent example of Congress imposing a positive requirement on organizations in order to support their tax-exempt 

status. Do you think that this type of sort of anti-abuse positive requirement structure would also be useful in other areas of the taxexempt sector? 

Mr. COLINVAUX. I think potentially yes, although with hospitals in a way the new rules fall short of a strict positive requirement, and that is where some context is useful there, too, because 

leading up to the new Section 501(r), the question was whether an 

affirmative duty of charity care should be imposed on hospitals, 

and Congress didn’t go that route. Instead they went the route of 

requiring more process-based requirements; namely, more paperwork, more proof of the community benefit without actually defining what the community benefit is. So I think partly you are seeing 

more process being layered on community and charitable organizations as a substitute for requiring some affirmative duty. 

Mr. PAULSEN. Thank you, Mr. Chairman. I yield back. 

Mr. BOUSTANY. I thank the gentleman. Mr. Becerra, you are 

recognized. 

Mr. BECERRA. Mr. Chairman, thank you very much, and let me 

congratulate you on this hearing. This is something that we should 

be doing quite a bit more, I hope, and it is great to have the testimony of all the witnesses. 

Ms. Aviv, a pleasure to see you again, always a pleasure. 

Let me make sure about something, and Mr. Colinvaux, maybe 

this is a question I should direct at you. Close to two million taxexempt organizations, at least that was a 2008 number, and my 

understanding is that in 2008 there were some 7,900 audits by the 

IRS performed of these tax-exempt organizations. So if my quick 

math is correct, less than 1 percent of organizations that qualify 

for tax-exempt status are audited by the IRS. Is that about right? 

Mr. COLINVAUX. It sounds about right. 


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Mr. BECERRA. I actually know something more than you do on 

this; okay, that is good. That is a good way to start. At least those 

are the numbers I have, which to me is perhaps one of the reasons 

why we do have these issues, that there isn’t enough oversight, and 

with these fuzzy rules on who qualifies and who doesn’t, it is not 

surprising that we have so many entities applying to become taxexempt organizations. Many of them do great work. We are finding, 

unfortunately, that some don’t. And the sector, because it probably 

doesn’t do as much as it can to police itself and because the IRS 

hasn’t focused on doing more enforcement and oversight can’t do it 

either or hasn’t done it either, it seems that there are a lot of entities operating here that perhaps would not qualify, and the result 

is that a lot of American taxpayers are watching their taxpayer dollars go for noncharitable, nonpublic good purposes. 

Let me ask, Mr. Colinvaux, a question to you because you focused on this issue of enforcement, and having more effective enforcement would include having brighter lines, more positive requirements you have mentioned. Give me a sense, give me something tangible in terms of brighter lines. For example, what would 

you qualify, having, for example, a tax-exempt organization have to 

provide some information on its outcomes and activities that it is 

engaged in to have that status? 

Mr. COLINVAUX. Well, it is very hard for me to judge, but in 

part yes. I think what I am trying to argue is that our current system is one that is based on purposes which, as you suggest, means 

a lot of organizations can qualify, and once they qualify they tend 

to remain exempt. So in terms of looking at more positive requirements or brighter lines, one of the things I think we ought to be 

thinking about is whether we should shift away from just purposes 

and also towards activities, which is to look at the activities of an 

organization, maybe require a certain threshold of an activity, 

maybe do more work in terms of defining what a charitable purpose is. I also think it is important to remember that we don’t have 

to view all of the tax benefits together. Right now we do. We put 

everything under 501(c)(3), and deductibility and tax-exempt financing flow from that. We don’t have to do that. We could look 

at 170, the charitable deduction, and say are there certain eligibility requirements we want to impose on donations, on certain 

types of organizations that can receive donations? Do we want to 

prioritize certain types of charitable purposes over others? Those 

are the sorts of questions I think we should be asking. 

Mr. BECERRA. And that would help people understand where 

those tens of billions of dollars that—well, actually even more 

money that is being contributed by Americans to these nonprofits, 

how it is being used and how it is that they are—those entities are 

now getting to shield those resources from taxation. So you make 

a charitable contribution, you get to write off that on your taxes, 

the organization has tax-exempt status, doesn’t have to pay taxes 

the way a for-profit entity would have to pay. Therefore, it is in a 

better leveraged position than that for-profit entity. So taxpayers 

should be entitled to some sense of what is being done with the 

money since at the end of the day it is taxpayers who are covering 

the cost of giving these entities this tax-preferred status. 


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Mr. COLINVAUX. Yes, I generally agree with that, and that is 

why I think looking at 170, the charitable deduction in particular, 

that is where the Federal interest is quite strong. 

Mr. BECERRA. I do have a concern with these 501(c)(4) organizations, these welfare organizations. We are finding more and more 

how they are going into the political side of things and, Mr. Hopkins, you testified to that. But I know my time is about to expire. 

Mr. Chairman, I know you are planning to have more hearings 

on this issue. I hope we do. I hope we have the IRS here. I believe 

that the more we do to examine this sector, the better off those 

that are doing phenomenal work will be able to have contributions 

made by Americans because they will know, in fact, that their 

money is going to great purposes, and so I hope we get on this. 

Thank you, Mr. Chairman. 

Mr. BOUSTANY. Thank you, Mr. Becerra. 

Mr. Marchant, you are recognized. 

Mr. MARCHANT. Thank you, Mr. Chairman. This question is for 

Ms. Aviv. As part of its Good Government Initiative, the independent sector has identified 33 principles in its Principles for 

Good Government and Ethical Practice Guide to help tax-exempt 

organizations with operations and transparency. Are any of the 33 

principles reflected in the revised Form 990? 

Ms. AVIV. Mr. Marchant, I would have to get back to you on 

that, and I will check and do in writing to make sure that they are 

there. Let me say that the general point of these principles was for 

them to be applied to ourselves by ourselves. This was a set of voluntary principles that we put forward. We said that in order for 

this not to be a government compliance area, we need to step up 

to the plate and support standards of good governance and ethical 

practice that we impose upon ourselves. So the purpose was not to 

encourage further government action in this regard, believing that 

there were whole areas of governance that organizations themselves have a responsibility to fulfill. That is why we are so pleased 

that so many organizations have stepped up, downloaded this document, and are using it in order to improve their practice. We believe the more we step up, the less need there is for government 

to step in. 

Mr. MARCHANT. Are there some principles not incorporated in 

the form that you think should be? 

Ms. AVIV. I will have to get back to you on that in writing. I 

would be happy to do that. 

Mr. MARCHANT. Well, thank you. Thank you very much. 

Welcome to Mr.—how do you say it? 

Mr. REGIER. It is Regier. 

Mr. MARCHANT. Regier. Welcome. Your offices are in my district on Las Colinas. 

Mr. REGIER. Yes, absolutely. 

Mr. MARCHANT. It is good to see you here today. 

I have a couple of questions for Mr. Hopkins. Can you briefly describe the distinction between a 501(c)(4) and a 527? 

Mr. HOPKINS. I can do it. Whether I can do it briefly or not is 

another matter. 

Mr. MARCHANT. Well, in the amount of time that I have left. 


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Mr. HOPKINS. Let me put it this way, they are both discrete 

categories of tax-exempt organizations. The 527 entity has as its 

primary purpose political campaign activity. The flip side is a 

501(c)(4) cannot have that as its primary purpose and must have 

as the promotion of social welfare its primary purpose. So the primary purpose test takes those two organizations in different directions. 

We have talked about the donor disclosure rules. They apply to 

527s. They do not currently apply to 501(c)(4)s. The 527 organizations are taxable on all of their revenue from nonexempt functions 

whereas a 501(c)(4) would be taxable only on its unrelated business 

income. And the only other item that I can—or element that I can 

think of that would differentiate between the two is that the reporting for political organizations is far more complex and frequent 

than is the case for the 501(c)(4) organization. 

Mr. MARCHANT. Well, there has been a lot of recent activity 

out in the country among some of our activist groups that are complaining that the IRS is putting an incredible paperwork burden on 

them to prove that they should have the status that they have, and 

I am assuming that these are 501(c)(4)s that are—the accusation 

is that they are doing 527-type activity; is that correct? 

Mr. HOPKINS. That is absolutely correct. 

Mr. MARCHANT. And the IRS, I am getting a lot of complaints 

from my constituents that feel like that they are perfectly justified 

and are following all the rules under 501(c)(4) but that the IRS has 

singled them out for audit, for hundreds and hundreds of pages of 

forms, and has this always been the case or is this a recent phenomena? 

Mr. HOPKINS. This is a recent phenomenon in my judgment for 

two reasons. One, 501(c)(4)s, of course, do not have to file to begin 

with, and so the practice in many, many instances up till recent 

times has been for an organization to form as a 501(c)(4) and just 

go forward and not even go through the application process. Why 

there has been this upsurge in application activity is not entirely 

clear to me, but the impression I have gotten based on the limited 

amount of experience derived from my own practice is that for 

some reason the IRS does seem to be asking for a lot more detail 

in this context than they might otherwise. 

Mr. MARCHANT. I would hope, Mr. Chairman, that at some 

date we will have the IRS here so that we can specifically ask the 

IRS, you know, why is there this sudden new focus on these 

groups. Thank you. Thank you, Mr. Hopkins. 

Mr. BOUSTANY. Thank the gentleman, and I share his concern. 

This concludes all the questioning. I want to thank each of you 

for coming here today and being witnesses and for your testimony. 

I want to remind you all that members may have some additional 

written questions that they might submit to you, and your answers 

to those as well as the questions would be made part of the official 

record. 

This has been a very helpful hearing. The information you provided to us has given us some good guidance as we look at this 

whole area of tax-exempt organizations. This hearing is now adjourned. 

[Whereupon, at 11:30 a.m., the subcommittee was adjourned.] 


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[Submissions for the Record follow:] 

American Association of Museums 


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creating a disll1centive for the most generous taxpayers. This is especially harmful at a 

time when charitable organizations are facing enonnous financial challenges stemming 

from Ihe economic downlurn. The Giving USA Foundalion recently reported that in 

2008, the decline in tolal charitable giving "as the greatest since the organization began 

tracking charitable donations in 1956. 2009 was just as devastating for some charities, 

which after years ofpublic service, closed their doors for good. Studies indicate that 

donors give for many reasons -incentives such as tax deductions being among them. 

While Americans do not make charitable gifts only for tax reasons, tax incentives make 

more and bigger gifts po>sible. This has been recenlly demonslrated: During times of 

crisis, such a> the natural disasters like Hurricane Katrina, the 2008 'vlid"est Oooding, 

and earthquakes in Haiti and Chile, Congress has passed charitable giving incentives to 

make it easier for Americans to give donations and support to the nonprofits serving 

individuals. families and communities in need. The president has proposed to reduce the 

value of itemized deductions for charitable contributions in his FY 13 budget. Under 

current law, a gift generates a tax dcduction that is equal to the tax rate. for example. a 

taxpayer in the 35% bracket ",ho givcs $1,000 gcts a tax sav ing of $350. Under the 

president's proposal, the same gift would generate a tax saving of $280. In elfect, this 

means that a portion of donated income is taxed. It is estimated that charitable gifts would 

fall by about $7 billion annually ifthe proposal is approved. 

IRA Charitable Rollover -- We urge Congrcss suppOli a permancnt cxtension ofthc IRA 

Charitable Rollover. This tax incentive allows individuals aged 70Y, and older to donate 

up to SIOO,OOO from their Individual Retirement Accounts (IRAs) and Roth IRAs to 

public charities without having to count the distributions as taxable income. Since 

enactment in August 2006, the IRA Charitable Rollover has generated a signitkant 

amount of new charitable giving. Congress has temporarily extended tbesc giving 

incentives in :he waning days ofthe calendar year for the past few years, making it less 

effective as a mechanism for the public to make charitable conlributions, and 

unfortlUlately let it lapse at the end of 20 I!. We support the effort by Reps. Wally 

Herger (R-CA) and Earl Blumenauer (D-OR), as specified in H.R. 2502, the Public Good 

IRA Rollover Act of2011, to make the IRA Rollover permanent, remove the arbitrary 

$100,000 cap, and reduce the qualifying age to 59 y,. 

Arti,!-Museum Partnership Act-- We urge Congress !o allo" artists to deduct the rair 

market value of dona ted works. Living artists, writers, scholars, choreographers, and 

composers - many of whom cam very little - have no tinancial incentive to donate their 

works. because they cannot claim a tax deduction for the works' fair market value. 

Rather, they can dcduct only the valuc of ma!erials. such as paper. ink, paint. and canvas. 

As a result, works of local, regional, and national significance are sold into private hands 

and are never made available to the public. Small and mid-sized mUSeums - which often 

do nO! have tile same financial resources and SlIpport a, larger instintlions - rely 

especially upon donations Irom creators (0 build and enhance their collections. We 

support the Artist-Museum Partnership Act of2011, H.R. 1190. introduced in the HOllse 

by U.S. Representatives John Lewis (D-GA) and Todd Platts (R-PA). The bill provides 

that a deduction equal to fair market value shall he allowed for charitable contributions of 
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American Bankers Association 


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May 16, 2012 

Statement for the Record 

For the May 16 Hearing on 

Tax Exempt Organizations 

on beha/tollhe 

American Bankers Association 

btforc the 

Oversight Subcommittee 

q/lhe 

Committee on \Vays and Means 

United States House of Representatives 

Chairman BOllstany, Ranking Member Le\vis and members ofthe Subcommittee, the 

American Bankers Association (ABA) appreciates the opp0l1lmity to submit a statement for the 

record for the hearing on tax-exempt organizations. The American B~mkers Association 

represents banks oral! sizes and charters and is the voice for the nation's $ 14 trillion banking 

industry and its two million employees. 

\\lhiIe the hearing focused on compliance and reporting requirements for universities and 

hospitals, our comments focus on the compliance and reporting issues for another, tax-favored 

sector: credit unions. Originally credit unions were created and granted their tax exemption to 

serve people ofmode~t means. I-!ov ... 'ever, many of these tax-exempt organizations have now 

l110rphcd from serving "p(:ople of small means" to become full service, tlnancially sophisticated 

institutions that compete head-to-head \vith local taxpaying hanks. 

ABA commends the Subcommittee for its plans to hold a series of hearings on tax-exempt 

organizations. We encourage the Committee to hold a hearing specifically on credit unions as 

tax-exempt entities. Credit unions represent a significant tax expenditure: since 200 I they h<.p,e 

enjoyed the privilege of not paying an eMimated $20.5 billion in federal corporate income 

taxes. They have almost twice the assets as tax-exempt institutions in higher education and 

fifteen percent more assets than tax-exempt hospitals. The size and taxpayer benefits conferred 

certainly make them worthy of cardul Congressional investigation lo assure this large tax 

expenditure is directed \vhere Congress intended. 
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May 16, 2012 

Many of to day's credit unions are a far cry from the small, traditional credit unions that 

served distinct groups of "pcopJc of small means," which Congress sought to assist when it 

provided tax ~ubsidjes to credit unions in the 1930s. There arc nov.' ! 83 credit unions that have 

more than S 1 billion in assets each: these credit unions hold 48.6 percent of all credit union 

assets but represent only 2.5 percent oCthe total number of credit uniuns. These /83 large cret/it 

unions are larger than 91 percent of all banks, and nearly indistinguishable from taxpaying 

community banks. Indeed, these credit unions compete for the same loans as their community 

bank counterparts. but credit unions pay no taxes, Credit unions were not intended to he slmply 

lax exempt banks. 

Credit Union Tax Subsidy 

Benefits Largest Institutions 

77% of Industry Profits Held by Less Than 6% of Credit Unions 

Number of Credit Unions; 7,240 

Total Assets of: 

• Over $1 B 

'$500 M - $1 B 

* $100M -$500 M 

Under$100 M 

5,a08 

As Congress examines the affordabi!ity of tax expenditurt:s in the face of rising debt levels, 

it should target the credit union tax expenditure. The need for the credit union tax exemption has 

all but disappeared. 

In this ~tatement ABA's comments \vil1 fOCllS on three key points: 

" Transparency requires credit unions to successfully demonstrate service to people of 

modest means to assure taxpayers their tax suhsidy is being properly employed. 

2 
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May 16, 2012 

y Federal credit union corporate governance disclosures should mirror those of most tax 

exempt institutions. 

}- The credit union tax exemption should be eliminated, particularly for credit unions that 

have ~trayed from their missiun of service to people of modest means. 

I. Credit Unions Should Be Required to Demonstrate Service to People of .Modest Means 

Tax exempt institutions should be required to demonstrate to taxpayers that the tax subsidy 

is being used as Congress intended. Credit unions have no requirement now to do so. 

The exemption in the tax code for credit unions was created in the early 20th Century to 

ineent more consumer lending, especially to people of modest means, because a1 that time there 

wefC fewer options to obtain credit. This was reartirmed when Congress passed the Credit Union 

Membership Access Act of 1998: 

[C]redit unions, unhke many other participants in the tinancial services 

market, are exempt [rom Federal and most State taxes because they are 

member-owned, democratically operated, not-t(x-profit organizations 

generally managed by volunteer boards of directors anti because they have 

the spec~fied missioll of me£'ting the credit and saving.~ needs (~f COl'5"umers, 

especial(v persons of mode.'it means, [emphasis added] 

Credit unions ~teadra~tly refuse to define "modest means:' thus evading the simple 

determination of whether they are fulfilling their missiol1. Available evidence shO\vs that they are 

not. According to data trom a 2006 study by thc U.S. Govcmmcnt Accountability omcc (GAO), 

credit unions scrvc propmiionatc!y more upper income customers than hanks and fc\over 1m\,-

income customers than banks. The GAO found that ''"14 percent of credit union customers were 

oflow-income and 17 percent were of moderate-income, compared with 24 percent and 16 

percent for hanks.''! Moreover, GAO t<')und that 49 percent of credit union customers were upper 

income compared to 4! percent for banks. 

IUnited State:, Go\ernmem Accountability Of11cc. Credit Union:,: Greater Transparency Needed on \Vho 

Credit Unions Serve and on Senior Lxecuti've Compensation Arrangemenl", November 2006, UAO-07-29, p20. 

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Moreover, credit unions' ovm surveys suggest that their image of serving moderate and 

lower income people is no longer valid. The typical credit union member has higher than average 

income, more years or edw:atlon and is more hke!y to own a home than non-credit union 

members.2 Thus, the credit union tax expenditure is subsidizing financial services to indi\iduals 

who do not need it and who otherwise have access to basic banking services. Ba~ic transparency 

\\ ould surely shine light on this discrepancy. 

More concrek demonstration ofscrving people armadest means is needed. Thb was what 

the GAO recommended in two studies, one in 2003 and the 01her in 2006, sugge~ting that NCUA 

develop more tangible indicators to dckrmine whether credit unions have provided greatcr 

access to sen/ices in underserved areas or fulfilled their tax-exempt mission. The 

recommendations have not yet been fully implemented. 

At a hearing in 2005, former NCUA Chairman D'Amours cxpressed his frustration O\'cr 

past efforts to have credit unions add to their business plans how they intend to reach out to lowincome people. He ~aid he had been told by the credit unions during his tenure that '''credit 

unions ,vcre never really intended to serve an)1hing but the middle class."}-(e also said that his 

agency's effort of more than three years I,.vas "'fiercely resisted." He said at that time: 

It is amaLing that we can't get a definition of what "modest means" amounts 

to. But the truth is that that is not happen stance; they want it that way ... I 

hope that this [hearing] ... vvill result in something positive coming fromlhe 

U.S. Congress. As I said earlier, if it doesn't come ITom Congress, it is not 

going to happen. 

With the privilege of federal income tax exemption and a mandated mission of serving 

persons of modest means or those with moderate and !ov\ er incomes, crcdit unions must bc more 

transparent with those definitions and their application. The current amorphous definition leaves 

credit union members, taxpayers and tax policy decision-mak~rs without clear and fundamental 

information to understand ho\,.v credit unions meet their congressiona!ly-defined mission. 

) CL~'NA National Memher Suney, 200~ 

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May 16, 2012 

II. Credit Union Corporate Governance Disclosures Should l\'lirror That of Other Tax 

Exempt Ol-ganizations 

Credit unions must be more transparent in the infonnation about expenditures, such as 

executive compensation and charitable donations. Most tax-exempt organizations, including 

universities and hospitals, must disclose the compensation of senior officials to the Intcmal 

Revenue Service in the Form 990----- a form that has become an Important tool for determining the 

transparency and accountability o[tax-cxempt organizations.~ By publicly disclosing this 

information, the Form 990 fosters good corporate gOvernance as it attempts to ensure that the tax 

expenditure is being appropriately cmployed,4 

State-chartered credit unions are required to file a Form 990, but federal credit unions are 

not. Since federal credit unions are cooperatives, the member-owners have a right to knmv the 

total compensation paid to senior officials. For example, if Public Service Credit Union of 

Denver had been a federal credit union (rather than state-chartered), information regarding the 

$9.8 million base compensation of its CEO and President v.'Ould not have been disclosed. Hi", 

2010 pay package was almost 20 times the average for comparable sil.:ed credit unions according 

to press reports. ~ 

Fcderal credit unions should be required to file Form 990 information just like ~tatechartered credit unions and most other tax-exempt institutions. Expanding the public's 

opportunities to revicw executive salaries would promote imprO\'cd corporate gO\'cmance and 

greater credit llnion accountability. It 11-'ou/l.1 inform Congref;s, ta.'(payer,\·, and cretlit union 

member.fi aboat whether this valuable lax subsidy i.\· going toward ... the credit union mi.\·sion or 

is subsidizing credit union management. 

NCUA. as the primary supervisor over thesc federal tax exempt organizations. has the 

authority to require al! federal credit unions to file this Form 990 infoll11ation. The GAO 

suggested this in 2006: "NCUA could require all federally insured credit unions to include 

Ji\eeording to dat:.! compiled flOlll the Urban Im,tilUte's Nation:.!] Center For Charitable Statistics, around 

eighty percent ofrcgrstcn:d higher education organi,r.ations and ho,,"pitilb tile the form . 

. If'-orm 990 filers are also required to descrihe the organiL'al!on's program sen ice <l.c()omrlishmeng f()l" each of 

its thlee large"t program se!Yi<.:~s. 

< According to a Denver Post aliic!e, the credil union sabry data is from Lxecutive Compemation Solutions. 

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May 16, 2012 

compensation and benefit data for senior executive oflkers in the call reports that are submitted 

on a quarterly basis-an option that NCUA otlicials indicated was under current consideration." 

NCUA has lailed [0 act. 

In fact, NeUA i~ moving even further 3\Vay from en:)uring transparency by eliminating its 

charitable contribution mle. Now, any federal credit union can make donations without the prior 

approval or its board of directors and \vithout regulatory restrictions as to recipients. This makes 

credit union management less aCCOWltable to its members. Congress should insist that NeUA 

take action for greater transparency and accountability_ 

III, The Credit Union Tax Exemption Should Be Eliminated 

Over the last 75 years, credit unions ha\'c changed and for many credit unions their tax 

excmption is no longer appropriate. Crcdit unions' expansion into new bUE.incss activities and the 

liberalization of1heir fields of membership--which has allo\ved credit unions to serve e\'crlarger geographic areas-has made them indistinguishablc [Tom banks. in fact, credit unions are 

secking additional authority to make commercial loans, further moving them mvay from thtdr 

mission of serving consumers of modest means. 

fhe evidence suggests that the credit union tax exemption is fueling the rapid growth of this 

industry. Some credit unions arc using their tax-exempt status to sponsor college bowl games, 

build multi-million dollar headquarters or to buy the n:.uning rights to stadiums and arenas. While 

many credit unions remain true to their original mission, a growing number of credit unions have 

abandoned their roots and inappropriately taken advantage of their tax-exempt ~tatus to gain 

ever-increasing market share. 

Moreover. basic economics tells us that this tax expenditure puts credit unions at a 

competitive advantage relative to other financial institutions providing identical services, 

because it distort~ economic beha\'ior and the allocation ofresourc~s within the financial 

services sector. The Congressional Research Service said that credit union grmvth in assets in the 

1980s, 1990s and through 2009 was morc rapid than other depository industries.b In 2005, therc 

were about 260 credit unions \V'j1h assets over S500 million and a little over 100 with assets 

"Cnited State~ Congresqional Research Sen ice, Should Credit Unions Be Taxed?, May 2010,97-54R, p.17. 

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American Hospital Association 


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American Hospital 

Association 

Statement of the American Hospital Association 

before the 

Subcommittee on Oversight 

of the 

Committee on Ways & Means 

ofth. 

U.S. House of Representatives 

Hearing on Tax Exempt Organizations 

May 16,2012 

On behalf of our more than 5,000 member hospitals, heallh systems and other health care 

organiLations, and our 42,000 individual members, the American Hospital Association (AHA) 

appreciates th~ opportunity to submit this statcm~m for the record as the Subcommittee on 

Oversight ofihe Committee on Ways & Means examines the operations and oversight oftaxexempt organizations. 

Tax-exempt hospitals support the rnternal Revenue Service's (IRS) goals for a reporting system 

to enhance transparency. demonstrate compliance and accountabihty, and minimize burden. 

Since the inception orthe Form 990 Schedule H for hospitals in 2007, the hospital field has 

offered assistance and recommendations to the IRS to devdop a tonll that \vould provide 

meaningful inlonnatioI1. Arter Congress enacted ne\v requirements for tax-exempt hospitals in 

2010 (Section 501(r) oflhe Internal Revenue Code), the AHA and its members continued every 

cffoli to work with the IRS to achieve a rcp0l1ing system that would provide meaningful 

information to Congress, the lRS, our communities, and the broader public. 

THE REVISED IRS SCHEDULE H TO IMPLEMENT THE NEW 501(r) REQtTIREMENTS 

A hospital must satisfy each of the nev,r requirements in order to maintain its tax-exempt status 

under Section 501 (c)(3) of the Internal Revenue Code. Unfortunately, the revised Schedule H 

does not meet the goals that the fRS set and tax-exempt hospitals support. Attached please find 

OUf most recent letter to the IRS and the TreaSUI)' Department, which addresses the concerns of 

hospitals regarding both the process in issuing the form and the substance of the changes. It 

reiterates the significant conccms we have raised with the IRS since 501(r) was enacted. 
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Association for Healthcare Philanthropy 


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Statement for the Record 

HOUSE WAYS AND MEANS COMMITTEE 

SUBCOMMITTEE ON OVERSIGHT 

"HEARING ON TAX EXEMPT ORGANIZATIONS" 

May16,20lZ 

Submitted May 30, 2012 by: 

William C. McGinly, Ph.D" CAE, president, chief executive officer 

Association for Healthcare Philanthropy 

313 Park Avenue, Suite 400 

Falls Church, VA 22046 

(703)532-6243 • ahp@ahp.org • www.ahp.org 

Chairman Boustany, Representative Lewis, and distinguished Members of the Subcommittee, the Association for 

Healthcare Philanthropy (AHP) respectfully submits this statement on behalf of the nearly 5/000 development 

professionals that raise funds for nonprofit hospitals and health care organizations in the United States. We thank you 

for this opportunity to share our concerns and st:ggestions regarding oversight of tax exempt organizations. The 

comments below relate to the philanthropic work of nonprofit hospitals. With the challenges facing health care delivery 

and the definite need for philanthropic support, 't is crucial that the role of the development office and its operation 

supporting a tax-exempt organization is fully understood so as not to thwart fund raising efforts and erode the public 

trust of nonprofit health care providers. 

Who WeAre 

The Association for Healthcare Philanthropy represents the fundraising professionals who are responsible for the 

management of foundations and fund raising departments that raise funds for nonprofit hospitals and health care 

providers. Of its nearly 4,000 professional members in the United States, AHP represents approximately 2,000 nonprofit 

hospitals and health care organizations. Our members' mission is to support local communities through health care 

facilities and the medical services and the community outreach programs they provide, which contribute to the health of 

our nation. 

AHP's members represent fundraising professionals in all sectors of health care including: community hospitals, medical 

centers, children's hospitals, specialty hospitals, teaching hospitals and medical institutions, long-term care facilities and 

hospices. 

Health care organizations such as these have come to rely on the generosity of grateful patients and members of the 

communities they serve to help underwrite operations that can no longer be funded through diminishing operating 
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margins; as well as support charitable care, community benefit programs, facility improvements, medical research, 

essential equipment upgrades and the acquisition of new health care technologies. 

Most, if not ail, nonprofit hospital and health organizations routinely factor in to their budgets a significant level of 

philanthropic support. In FY2010, philanthropic support of nonprofit hospitals and health care organizations reached 

$8.264 billion in the United States, according to AHP's most recent giving survey report, representing an increase over 

the prior year, but still almost four percent lower than 2008 giving levels.' 

Introduction 

AHP commends Congress' historical and ongoing efforts to encourage charitable giving through tax incentives. America's 

nonprofit hospitals and the communities they serve have benefited significantly from these provisions. Nonprofit 

hospitals provide essential services to their communities, maintaining medical departments and offering services 

deemed unprofitable by many for-profit hospitals, and managing community programs and outreach efforts that make a 

critical difference in the health of individuals and our communities. H 

The intrinsic value nonprofit hospitals play in the health of Americans goes far beyond charity care. As just one example, 

in the state of Georgia, based on FY2010 IRS Form 990 Schedule H reporting, nonprofit hospitals contributed dose to a 

billion dollars in community benefit. While much of that support was dedicated to indigent and charity care, a sizable 

portion was for funding of community health programs seeking to proactively address health issues and to reach those 

individuals most at risk and most in need, and for critical research and training of health professionals.'" 

The current demands on nonprofit hospitals from the un- and underinsured continue to grow as a result of the recession 

and prolonged economic downturn. In addition, nonprofit hospitals are struggling to operate under diminishing returns 

as a result of reduced state and federal funding and ever-mounting capital and operating expenses. In a Moody's 

Investors Service Special Comment released May 8, 2012, Moody's reports that downgrades for nonprofit hospitals are 

expected to outpace upgrades in 2012 as nonprofit hospitals face demands to deliver higher-quality service with lower 

reimbursement rates. IV 

Philanthropy plays a critical role in the health of our country's nonprofit hospitals, not only as a vital source of direct 

funding, but also in the ability of hospitals to obtain private financing. Investment firms now consider philanthropic 
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support and a strong fundraising department or supporting foundation a key component in their financial analysIs of 

nonprofit hospitals. v 

While philanthropic support of nonprofit hospitals and health care organizations is headed back in the right direction, 

the gains since the recession have come at a cost. Quite simply, it takes more money and more donors to raise the same 

dollars today than it did prior to the recession, which is why, now more than ever, incentives for giving are essential as 

they contribute to the health needs of local communities. 

Tax-exempt Status 

As policymakers review 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 fundraisers are currently working 

within to fully grasp the importance of their institutions' tax-exempt status. Although health care reform is intended to 

alleviate some of the burden for nonprofit hospitals, most stIli will exist and present financial challenges 

These challenges fall into three main categories: long-term 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 

elltltlement 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, medica Is 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 onethird 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 and underinvested in their infrastructure. They need to address 

deteriorating facilities, but futly 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. 
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In these challenging economic times, charities and non profits already are finding it difficult to fulfill their altruistic 

missions because of reduced donations and resources. Yet, in times of economic trouble, it is charities and nonprofits 

that do much to augment the work of the federal, state and local government in meeting the needs of the American 

public through their vital programs and services. In fact, nonprofits currently are being asked to provide even greater 

levels of assistance. 

Conclusion 

AHP is confident nonprofit hospitals are providing substantial charity care and community benehts - and many are doing 

this while not even achieving a 3 percent operating margin. Government officials and legislators need a better 

understanding of phijanthropy. 

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 tax-exempt status. With the challenges facing health cafe 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 public trust of nonprofit health care providers. 

In summary, 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. We welcome 

your questions and ask for a response to these comments as they relate to the philanthropic work of nonprofit hospitals. 

Ene.: AHP Statement of Professional Standards and Conduct 

Donor Bill of Rights 
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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 Hea!thcare 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: 

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 with 

equality 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 information 

gained in the pursuit of their professional 

duties; 

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 of 

professional conduct; and, 

b. antitrust laws in the United States 

prohibit 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; 

Their pledge to adhere to this Statement of 

Professional Standards and Conduct, and to 

encourage others to join them in observance 

of its guidelines 
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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-far-profit organizations and causes they are asked to support, we 

declare that all donors have these rights: 

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. 

II. 

To be informed of the identify of those 

serving on the organization's governing 

board, and to expect the board to exercise 

prudent judgment in its stewardship 

responsibilities 

VI. 

To be assured that information about their 

donations is handled with respect and with 

confidentiality to the extent provided by law. 

VII 

To expect that all relationships with 

individuals representing organizations of 

interest to the donor will be professional in 

nature. 

III. VIII. 

To have access to the organization's most To be Informed whether those seeking 

recent financial statements. donations are volunteers, employees of the 

organization or hired solicitors. 

IV. IX. 

To be assured their gifts will be used for the To have the opportunity for their names to 

purposes for which they were given be deleted from mailing lists that an 

organization may intend to share. 

~ ~ 

To receive appropriate acknowledgment and To feel free to ask questions when making a 

recognition. donation and to receive prompt, truthful and 

forthright answers. 

DEVELOPED BY 

American Association of Fund Raising Counsel (AAFRC) 

Association for Hea!thcare Philanthropy (AHP) 

Council for Advancement and Support of Education (CASE) 

National Society of Fund Raising Executives (NSFRE) 

ENDORSED BY 

(in formation) 

Independent Sector 
83 

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84 

Catalogue for Philanthropy 

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85 

Cause of Action 


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STATEMENT FOR THE RECORD 

COMYllTTEE 01' WAYS Al\D MEANS 

U.S. HOlJSE OF REPRESENTATIVES 

May 16, ~012 

Hearing 011 Operatiuns ()nd Oversight a/Tax-Exempt Organi=<ltiol1s 

1100 Longworth House Office Building 

Chainnan Charles W. Boustany Jr.. MD (R-LA) 

Mary Beth Hutchius 

Communications Director. Cause of Action 

Thank you. Chairman Boustany, for the 0ppOliunity to submit this statement for the 

record to the Committee on Oversight and Governmel1l Rei'Olm at the U.S. House of 

Representatives. My name is Mary Beth Hutchins and I am the Communications Director at 

Cause of Action.' Came of Action is a nonprotit. nonpartisan organization that uses public 

advocacy and kgal rcfonn strategies to ensure grcater government accountability llild protect 

taxpayer interests and economic freedom. 

One of ways Cause of Action ensures accountability in the federal government is 

requesting investigations ",hen we see a potential of waste or fi'aud oCtaxpayer dollars. Given the 

recent indication by the Internal Revenue Service (IRS) that it is investigating the abuse of 

charitahle organi/.ations and deductions, we requested that the IRS investigate the Alliance of 

Californians for Community Empowcrment (ACCEl, and want to offcr you the infonnation we 

haye uncovered about this organization as you consider the oversight oftax-exempt 

organizatiol1s.2 

GENERAL PRINCIPLES m' FISCAL SPONSORSHIP 

I WCBSITE, ('.\1 iSE or ACTIO~. ami/able at wv.'W.causeoiaction.org. 

2 Palll Streckfus, Lmail UjJdatc 2012-3/, LO 1 AX J .. (Feb. 1"7,2012), citing IR-20J 2-23 ("LRS examiners continul: 

to uncover the intention[ll ahLl~c of 501 (c)C~) organizJtions, including arrang.ements that improperly shit!ld income ()[ 

a~sds from taxatiun i:md attempts by donors to mailltain control over donated as~et~ or the ini.:ome from donated 

pwpcrty. fhc LRS is investigating scheme" thM involve the donation of non -cash assets -- inchldmg ~itl!<ltlOn<; m 

"" hich several organintions claim the full value of the same non-cash comribution. Ofkn thc<;e donation" are highly 

overvalued or the orgiillizallon n;cei\ Ing the donation promis~s tiMt tht.: dmlOr can repurcllase Ihe itt.:ms later (11 a 

price ~et hy the donor. fhe ~cll.si(ln Protection Act of 2006 i..mro::.cd incr~ascd penalties for inal.:curatc appraisals and 

set new standards for quulified appraisals.") 
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As the IRS has stated, a "liscal sponsorship" occurs "when one or more charities eboos" 

to financially support another charity or nonexempt project."] According to Gregory Colvin, a 

leading exempt organizations attorney who is counsel to the Alliance of Californians for 

Community EmpOWenllCtlt CACCE"), the rebranded California ACORN chapter: these 

arrangements "typically arise \\hen a perSOll or group (we will call this a project) \\anb to get 

support from a private IOWldatioll, a government agency, or tax-deduc!ible donations [rom 

individual or corporate donors," and "[b)y lawaI' preference, tbe funding source will only make 

payments to organizations with 501(c)(3) tax status,'" Fiscal sponsorships have also been known 

as "liscal agents," hut practitioners disagrec on the proper nomenclature,6 

A tiseal sponsorship relationship can be etlectively and lawnJlJy utilized in a variety of 

situations where a person or group intending to engage in charitable activities wishes to attract 

tax-deductible contributions without having official exemption by the IRS under § 501(e)(3) of 

the Internal Revenue Code,7 For example, "[niseal sponsorship is often temporary, used for that 

period before a new organization obtains its owo tax exemption, Other variations oCCLIr when" 

,mall )01(e)(3) group needs a larger 501(e)(3) organi7ation to manage its tinancial aHairs or 

seeks IRS cJassitieation as a public charity based on its relationship with the sponsor'" 

While the IRS has yet to produce concrete guidance on the issue, it has indicated 

approval oOiscal sponsorships hy 50 l( c )(3) organiLations only if certain conditions arc satislled. 

Specifically, a 501(e)(3) organization is allowed to accept tax-deductible funds on bellalfofa 

non-501(e)(3) entity if the following three "onditions are satisfied:" 

L The project heing eon-ied out hy the non-50 I (c)(3) organi/.atilln is "in furtherance 

of[the 501 (c)(3),sl 0\\11 exempt pmposes"; 

2. The 501 (c)(3) organi7ation "retains control and discretion as to the use of the 

funds'"; 

3. The 501(e)(3) organization "maintains records estahlishing that the funds were 

used for scction 501(e)(3) purposes," 

The IRS has providcd examples of appropriate uses of liscal sponsorships: 

L C, an individual, de,ireo to start a tutoring program in the inner city but 

does not bave sufficient resource, or the sophistication needed to apply for 

tax exemption, C snbmits a grant application to X Community Foundation 

for iloancial support [or the tutoring program, X approves the grant, 

'9~ TNT 71-~6 

~ Matthew V:.tdum, ACORN s Cul(jornia Makeol'tlr, A \ILRICA..l'\ SP1CTAfOR. (Jan. '21, lU10), aWl//able al 

http://spcctator.org/archi\es/2010/01'21/acorns-california-111nkco\'er. 

, G-RU-,ORY I.. COl VIN. r IS('tI,J. SP0N"'()RSH1P: (, WA YS ro Do [1 R!GH r. 3 (1993) [hereinafter 'COLVIN"I 

(] fd For clarity, we will refer to <;uen alTangements a, fi<;cal "pon'lor<;hips. 

TAX ELON. CHAR. GlVING § 3.02 

8 COl VIN, wpm note 5 (It 4. 

9Rcv.Ru1.6~-4R'J, 1968-2CB.210. 
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establishes a fund called the C Fund, and solicits contributions for this 

fund. X is C', fiscal sponsor. 

2. X community loundation approaches S Private Foundation soliciting lor 

C's fund. S makes a grant to X designated ±In' the C Fund. S, in the 

instrument of transfer, gives X full control over the investment decisions 

eonccming the grant and full di,crelion in determining how much and 

whell distrihutint1s hom the fund wil! be made. 

3. X Community Foundation receives a grant request from Z Charity. X 

reviews and approves the request. X establishes the Z Fund, and solicits 

contributions for this li.1nd. 

Tn each of the ahove situations, X acts as a liseal sponsor; notice that in the second situation, S, a 

private foundation, is relieved of exercising expenditure responsibility because it gave X full 

control over the grant's income and corpus. 'O 

MI'USJ.: OF FISCAL SPONSORSIIIP 

Several legal experts huve opined thatliscal sponsorship can be misused by organizations 

wishing to skirt various Federal laws. I'or instance, such arrangements em] be uscd as a 

'·passthrough. or conduit, or laundering arrangement where the (e)(3) is really doing no more 

than receiving moncy from a donor or foundation and passing it on to a per~on or an organization 

that docs not have (c )(3) status."" Jolm Edie, a leading nonprotit tax attomey, described a tiseal 

agent as a "laundering agent," and added, "[i]fyou're going to use a fiscal agent, to me you're 

saying, 'Well, I'm going to launder the money through somebody. ,,,1' 

According to Lee Sheppard. an editor at Tux Ana/hits, "[aj fiscal agent is a money 

laundry. People who want to linanec projects that would not, if separately incorporated, ha, c a 

charitable purpose often form an exempt organization ... to act as a conduit[ 1 for tbe money 

used to linance the project so that its hackers can elaim a charitable deduction."t3 Sheppard 

noted that "fiscal sponsorship ... is a common practice, and one that the IRS should shut 

d "I. own. 

Even GregllfY Cohin, a leading pmpollcnt of lis cal sponsorship relationships, has \oiced 

concerns over their misllse: "rilfthe control mechanisms are not administered properly, [a fiscal 

sponsorship arrangement] can collapse into a 'conduit" or 'step transaction' in which the IRS will 

disregard lhe role of the sponsor and declare that the funding source has, in effect, made a 

payment directly to a non-50 1 (c)(3) project:,t5 

'" 9~ TNT 7t-46. 

11 CrHJNCIL ON FOlI"\OAl [ON<>, Top TEN \\- A YS POlJNDA"1 fO:-"S GLl r... l() TROT'HLF (2008). arailahle at 

http://wl,vvv.Vvashingtongrantmaker').urg/s_ \Va~h/jmagcs/cljcllt/TopTcnTroub1c.pdf. 

n Trunsrl'lpt nfthe Wimer .1BA EO ('ummtttec Mectmg' Panet Sfy: The the and MII'1{sl! ()j Fir:;cal 'lponsorship 

Armn:;enu:nts, '7 EXEI\1PT ORG. TA X REv. 570, 571 (1992). 

u Lee ShepPdrd, Charifahie lWulley Launderillg, 8 [Xl.:,ivWl ()R( . TAX Rev. 645 tI(93). 

l'f It.l. 

15 COl VIN, supra Hote 5, at 28 
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Distressingly, Iiscal sponsorships can and have been used as conduits for political 

activity. I.R.C. S 501(c)(3) pwhihits (c)(3) organizations from engaging in political activity." 

However, the IRS itsc1fhas recogni7ed the potential for misuse of!iscal sponsorships, 

particularly by using a 501(c)(3) organization as a conduit for an improper transaction, and has 

provided potential examples: 

1. X. a philanthropist. ",ants to give to Z. an individual who is poor. X knows 

that a transfer directly to 7 lack, the necessary public benefit to be 

considered charitable. X would not be entitled to a charitable tax 

deduction. To avoid this result, X donates money to Y Community 

Foundation with instructions to distribute it to Z. Y has no discretion as to 

the distribution orthe funds. Here. Y is nothing more than a conduit. X is 

not entitled to a deduction. 

2. C, a private foundation, wishes to support a nonexempt charitable project. 

(A nonexempt project, as used in this context, is a charitable activity of an 

organization that docs not have an IRS determination letter.) C does not 

want the burden of exercising expenditure responsibility, hut wishes to 

mail1lain continuing supervision of the project. C gives the money to Y 

Community Foundation afler Y has agreed that C will maintain continuing 

control and that the money will be used solely for the project. 

3. S, a fledgling organization, is struggling to maintain public charity status. 

T, a wealthy donor, wants to give S a large contribution. 1fT gives it 

directly to S. the contribution will be subject to the two percent of total 

support limitation and S would fail the puhlic SUpPl1l1 test. To avoid this, T 

"earmarks" the money for S and runs it through the Y Community 

Foundation. Y has no discretion but to distribute the money to S. 

ln the preceding three c"amples, Y Community Foundation has no control over lhe donations. Y 

is acting as a mere conduit in a transfer betwcellthe dOllor and the ultimate recipient. The donor 

and the recipient are the only beneticiaries in these transactions." 

According to Professor Frances Hill, 501 (cl(3) organizations can be attractive for 

political donors because ufthe tax deduction they provide. She wrok, "the lJlost likely 

[corporate-candidate] conduit, and the one offering the greatest benefits, is a 501(e)(3) 

organintion that is absolutely prohibited from supporting or opposing candidates for public 

ofticc."" As Professor Hill noted, 501 (c)(3) organizations are attractive due to lax reporting 

standards: "Because 501(c)(3) contains the absolute prohibition, 5Ul(c)(3) organizations arc not 

subject to the tax reporting reqUirements imposed on other 501(c) urganlzations by 527 and they 

16 St:c l.H.(', ~ 501(1,;)(3) (1986) (prmiding that an urganization quallfic~ for c'Xcmption only if it "doc') not 

parti~ip~lk in, or int~I\'ene in (including the puhlishing or di<;triouting of statemenls) .:my political C'.1mp~lign 

on behalf of {or in opposition to) any candidate for public ofttcc.") 

17 9-+ TNT 7 J -46. 

l~ Frances R. I-rill. lorporate Philanthmpv and Cumpaign Fin,(J1ce: Exempt Or[!.onizations Aj CurporateCaIJdidule Cunduill, 41 J\.Y.L SCH. L REV. RR1, 927 (1997) 
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are not required to register with and repOlt to the F EC.,,19 In other words, a donor wishing to 

engage in political activities could funnel his money through a 50 I (cl(3) fiscal sponsor to a third 

organization and still potentially receive a tax deduction for his contribution. 

ORGANIZATiONS Ii\: CAUSE OF ACTION'S INVESTIGATION INTO FISCAL SPONSORSHIP 

The Alliance ufCalifornians for Community Empowerment (ACCE) is either a nonexempt organization or a 50 I (c )(4) exempt organization and Community Partners is a SOl (c)(3) 

charitable fowldatioll that acts as ACC!"s fiscal SPOllSOr. As we show herein, Community 

Partners may have laundered money on behalf of ACCE. Of the $712,938 in grants given by 

Community Pamlers to other organizations in ilscal year 2010, $447,495, or approximately 

sixty-three percent of grant expenditures, '''as awarded to ACCE, purportedly for "California 

Alliance Summer 2010 Voter Engagcment Progranls" and an "Education and Training 

Progrmn .. ,20 

ACCE is a self-professed community organizing "non-profit" organization that lights for 

"social, economic, and racial justice."" While tiscal sponsorships are legal, it is not legal lor a 

50 I (c)(3) organization, sllch as Community Partners, to give any money to an organization that 

engages in political activity. Moreover, it is not legal tor a 501(c)(3) organization to ghe such a 

substantial portion of their grants in fiscal year 2010 to an organization that lobbies. With 63% 

of its grants for the fiscal year 20 I 0 being sent to a single organization that may engage in 

activities outsille the bounds oIthe Internal Rcvenue Cude's (IRC) tax excmption rule" 

Community Partners should lose its 50 I (c)(3) tax-exempt status. Additionally. if ACCE is a 

501(c)(4) organization - which Community Partners did not indicate on their 20 I 0 Form 990 and 

Cause of Action has been unable to verify - it must lose its 50 I (c)( 4) tax-exempt status as well 

due to the overt political naturc of the organization. 

Additionally, the Applied Research Center (ARC), an affiliate of the Association of 

Community Organizations for Retorm "my (ACORN)," served as a tiscal sponsor ofthe 

Alliance ofCalifomhU1s for Community EmpoWemlenl.2J While ACCE has pre,iollsly posted 

its tax information on Guidestur.org, identifying itselfas a 501(c)(4) social welfare 

organi/ation," ACCE 110 longer has its ta,,-exempt in[onnation publicly available. Instead, a 

SOl (c)(3), the ACCE Institute, located at the same address as ACCE, is identitied on GlIid~slar, 

althoLlgh no Form 990 is available." j 

We are concerned ARC might be improperly fiscally sponsoring ACCE, which does not 

appear to be engaging in (c)(3)-excmpt activities. To illustratc this concern, ACCE has recently 

19 I J. at 917-92R, 

~n II/jra note ~2. 

11 Mission Statement "About" CaJorganize.org. last accessed Feb. 14, 20' 2, avai/ahle at 

ht Lp:l Iw INV\' .i;(ilorgan iLe.org' ahUlit. 

2:: Sec ACORl\T AHiliate List, available al hltp:l/ww\\ ,(.;onsl;fv8.Livc.org/wp-contcnt/upllluds:'10 I O/07/ACORNOrgalllzation~.pdL 

~_\ Sce FnRM Q90, -\PPT TED RESF \RC'H CFNTFR. at 2, uvailuhlc ut 

hLtp:llww\o\ .guidestar.orglFmDocumcllts/20 I 0/9411759/20 1 0-942759R79-0783f45~-9.pdf. 

24 See e.g. BlI~ine ... s EnLity ~ear('h, California ~~CreLalJ ofSWte \VebsiLe. ol'uilahie ul http'//kepleL~os.cu.gov 

(sl:an.:h "Alliancl: of Californians for COU1tnWlit) empowerment', (Entity ;..Iumher: CJ23S)28 l. 

15 See GUfDEST AR WEllSlTE. ul't.J.ilahle at w\\ "".glliJ~staLorg ("ACCE InsLilute" in ,>caTch). 
90 

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91 

Charity Navigator 

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92 

CharityWatch 


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May is,1012 

Attn: Chairman David Camp, Hous(' CommWc,' 011 'Vays and Means 

Re: Hearing on Tax-Exempt Organizations 

From: Ihllid nor!Jchon~ President of the CharifyWatch 

CharityvYatch \\V\<\'vv.!"~harjty\vatch.org), a rating and cV(11u~Hion organization i.kdicatcd to hdping 

donof:', rnake lHC'lre 11lfonn-c,:J giving decis~ofls~ offers the foJ[()\ving. ('omment:~ on rcd~sjgnjng the 

IRS Form 9'.10. 

L CharityVVlItch calls for jlublk disclosure of the name, and EtNS offoreign grantees on 

the Form 990. 

CharityWakh ,lrongly believc's thal nonprotlt organi/dti0l1S should b<, requir0d lP publidy 

disclose thl.~ lw.m~~ lind FINs offoH'ign gnwtc~'s. It is very ;"'<,Tong that t~-lX-I.>\!"-;mpl organizations 

can distribute hundreds ofmilli\)l1S of dollars ()faitL in rflRny C3S~S the va~t majority 0.frhclf 

budget>, ulld ica\'e the public entirely in the dark about what sp,,,,ific pl:<)ducts were donated and 

An (1\,,;couniability black hok e.\bts ",villI respect to how dwrilics ar~~ aHowcd to rcptxt 

intcnwtiona! aid dis.tributioD.';;': on theif tax tlxms. \.vh~·ll }l charity makes a gr::uH or distributes aid 

within the u'S, worth 55,000 or more it is required to disclose the name and add!"('ss "ithe 

()rganization that recc'"ived ~t on its IRS tl.xm Q90 SI.'IH:"dule L Ho\vever, a charity di$tributing 

intl:rnatiunaJ aid is ali(i\\'cd in its public disclo~urcs tl) hide lhe nanle and addr('~s of the foreign 

t\--::cipient and only dis~;los~-; the lw~or rl:;gi()n ofthl:~ \vodd, fi.Jr I::xarnple. Africa, StJuth /\lnl.:r1r(l. Of 

Ewy)pe, where it is distributed. Such :.lid is described by charities in cmly 'l:ery general knns such 

<1S "mt>dical suppb . .'s," "household & edlH..'atiund items,f' or "building rnatt'rials.!! This lack of 

dbclosure is very convenient. t~w any charity that v,-ants to exaggenn~ the '/aine of its forelgn 

grants, p<lrt!(:ubrly if aid i~ in thE: f()rm of donated g~)ods (It giih-in·kind (GIK) b~\.'aL:.st: il kn(l\v~ 

there are no public records thM <"In independent \.vatchdog or donor can Ht;e H.'l determine \.vhetber 

its valuation ~)[ J.D in-kind grant is rcasonable {'If was even rCl"c-l'VcJ by the n:ported recipient. 
93 


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f\;r example, one charity rcp0rtcd an intcrnat10nal grant of nvcr :l mi Ilinn dollars in mcdical 

-:;upplies and 'vyakr purific~Hion ttYSklHS on iRS kmrl 990 S(;b..':duie L \\'hidl is (Jrdiml.rily u5{.,d to 

r,:pdrt grants to organizations in the United States, Ht:C3-11Se t.h,; gnmt r,;cipient's name and UN 

nHmb~r \:\/ere reporteD We bad ,.1 rare opportunity to ;:lttempt to verify an 1ntern3tiun,.d (i-! K gnmt 

Upon (;ontacting the <.xganizativnal f:rant [t':cipknt \.ve found out that it had not received th(: grant 

and had never heard of the charilY tha1 dairned 10 have made the d()nation. 

Tn undcr8land rnorc ahQUl hLl'',.. 111(111)" \JlajOl' eh3rili~:" hav~~ beer! lakillg advantag>..> of lh(' lack of 

discloSHrl: ('If intern3tiollnl grants tn \ .... iilHy <)\'erstatc their \vork (b-y ne3dy ~,5!)O{,;" in the case of 

one clnrit)·), ple~I~C fead CharityvV~~tch's rect':nt anick~, The Alice in Wondedand Vv'or/d cd' 

Ch ... !rif)' Vaiwlfion. at hltp://charltywatch.org,'articles/vaJucin'v\'onderb:;H1.htn11, and Vi(;ll' Through 

tht' Lf)okinK (/II£s.\', at btLP;{/s::b~[iJj~~qt!2!1,qrg:\i(Ljl;!~50:'q00f(~rJ Ji,lJ).gXY~Y;1h~Ml~\n_s!!FTJ)l, Thi~ is i;; 

a sc:ri0us InaUer b~l'aus(: it aHQ\vs groups that ovcrs!ate in-kind international grants to appear to 

be more eflkient and aHracti\'210 ljon(lr~ th.an gr~.lup:) that more reas~m(jbJy and honestly r~purt 

their vnlu(:~, thus (',Elsing ,1 s~riou;.: misa!1ocati0!1 of f ... merl..::a's charitable n.~:-'('w\.'cs< 

Chant:y\VtJtch l1a,::; qHe~;tioned the IRS in the past ahout why it \:vonld ask for disclosure of 

domestk grant recipi(:nt:-. but not ioreign ones_ The rtsp!...m~e \-ve [t': ... Tived fi-Gn1 an IRS offie-ia! 

\vas that charities wen;.' (:nnCt~lT!.ed thm this In{ixrnation could ledd W klTnrist attucks against a 

charily or ib gnml recipients, ChnrityVvmch :}ppr~c!ates thnl some charitic~ operate; in dangerous 

areas sLlch ,J.:-' in iraq!...)f Somalia where it might b..::: advisable W c!...x1c0al the iJ0ntit) !...)Cgram 

n.'cipiz':'nts. But iL~ charity i& providing did to org,mizurion& in .bp:JfL Halt! Dr (lthel' non-lz~1Tori~t 

hl)tbeds. Char1ty\V:.Hch hdieve~ public disdo::;ure of r~(,lpient l~rganizatil)nS sh<.'uld b~ required, 

It is important that lhe deci~ion reg.arding: the discln~ure r:ifimern(ltion~1! ,g.rants nor he based 

soldy on The \\lshes of non pm fits and th(:lf associatiuns. Nonprofils. like f(}["profits. 'ixant tel 

avoid public scrutiny e\'l-n if it helps to ke(~p them honest nnd operating \\'('ll. If the IRS \\'cn.? to 

ask nonpf()rits \vhl.~th('r thl.~Y thought thl.~ entire J R S i{xm ~NO 8hl.)u~d b(' abohsb~:d, many \\,ou1d 

rl:.'adlly say yes, Charities could L'un1( up \\'ith many re<'isons to eliminate the form 990 such as 

n:cord b.:Gping Hnd reponing bunh;ns) how {he in fonnat ion could b~ miseollstru~;d. de " So it is 

und~rst3nd3bk that many nonproflts endor.se elirnimning a s~~J1t'dule of lheir inten.wtioD31 grants, 

~ven if doing. ~o is nnl in the publil:'~ best interest 
94 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 68 here 80259.068

Ih..:; U.S. g0\'ernment requires charities th3t r..:;~eive funding frum USAJD tn piaster Gid hoxes 

"ilh 2 red, ",bite and blue logQ and ,he words "USAID from [he Anwrican P.»plc" when 

uper3.ting in tne:wy areas, induding tb-c dangerous bordt:r beh·veen Paki\ian and .1\ fghdnistan. 

Surely, this is lTI0rc dangerDus to aid \v0rkers than gnlllt disclosures on n charity"s tax form that 

afe fll.)i e\",:~n publicly' a'dJ.ilaL'th,., on lh(' tlllernel until a year or mOfe (ln~'~r the 13rt. An an!iAmerican tcrrori::-.t ur violent aid thief is far mon.) likely to !cam uf a U.S. eharityls presence in an 

an.~~.1 from it.s very publicly visible operations or by blknving fiJn.'ign aid v</orh")[s ath.,t tb.'Y 

arrive or !eavt; korn the ailvorl. or other transpor!ution hub, than from a char1ty's wx funn 

dist.'losurc of i1~ prior year g.rams. 

The jl.-h.~t th~t \\e h\,c in a dangcn)us world is not d. kgitirnalc fea.'on to allovv nonprufits to 

cUl1ce:d all of their intcrna.tionai grants. This line: of n .. 'a~oning could lead to nondisdosure of 

gnmts ;-0 domestic un)",.-::rsitics, comrnunity centers, yonth camp;.; and other places \~,;h~n:- t~lTorist 

~\;enls hav{'~ 0C(:UITCt1, Nonprofit urganizatiuns that operate in potentiajjy I..h-l.ngen)Us p1~lC(,S b(!ih 

in the tLS. and abr(l~ld l;Jk~ prec(JHti{~ns such as hiring: priv<1h:" secHrily to prokl~t \vorkt'"r~ and 

prog,nlnl participants. !\/Ian.y intcmatiunal charitic .... r<:L:civ(; prdtcctiun [rum th-.:: U.S. militm'Y or 

lornl rnlil..~e. Other charities decide thal it is too d~.mgerolls to \','ork in ;.;ome l-wt SPl)tS. R('quired 

disclosure oi'international grant recipients could even serve tf) decren.:-:e tern,>risrn funding. A 

nonprofit that i~ unwillingly pro\'iding aid h) a charity that is. op;"T:.tting as a. H.'rforist front 

I..wganizat.ion could more easily b.~ discO)/en.·d if the names ofilS graH!e~~s art,.> reported on f(~rm 

990. 

The I.)vendl b!;;;'l1~tlts 0f sunlight un the internatlumd <h:t1Vit1eS of charitit:s flir ,>lit\Vi;;igh tht: small 

chance that a terrnriSl act \vould be \,.~(lnH1llttt'd because or a tax f!.Jrm disc leisure that u U.S. 

charity is operating in their I..~ountfy. H<lthl~r than giving a blanket ('s.emption {{)f Honprofits to 

avoid ail dis('losure of its international grantc·cs, V'';C should lonk to USAID"s c:-;.~rrl1pk and grant 

l~,\\.~eptions only in c(lses where <: cl~~ar t\.~JTorist or other lhreat to a dJ<lrity exists. It is ... ital th("lt 

'vve do not ,JUn\\, the fear uften\'trism tu destroy the 8CCOlH1H.lbility and lranSpi.lfency of our 

113.tiun·::; charities. 
95 


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Z.cha"i~yWakh calls for the enforcement of IRS reportiog ruks with regards to the 

disdosure of dumestic grants. 

Lack of discJu:-:.ufe is not just H prohlem \\ ith fon:i,Q"n tlnmkes. but also domesli..:: ones, ~v(:n 

thuugh it is in clrar vil)lutlon of iRS reporting rule'::>. Charity\\iatch is Ending more and mUre 

poorly perf'Z-;rrning nonpro!it5 getting 3\Vay \'<ith H\ojding. discl0stlfC ofba~ic infenn3t!on about 

their Jumt.:stic grantsj as f~qujn::J by iH.S reporting ruks. For instanc(:, :-.t'rnc dmrities \vjj{ repurt 

t.he total amount ofcL,'i!med donk~~tic grants ~)n the "Uth~,;r t'XT-'H.>HSI..~<' litll~ nfthc iRS FOrTn 990, 

Part IX, "'Stakml'nt ur Functional Exp~nsc:-i.'" rather than on til...: '''Grams dnd nth.:r a~slst3.l1l'C' to 

governments and organizations in the US·' line, <:1':l a 'vay to aV0id disclosing \vhat th~y are 

aetHally disl,-ibut~ng and v;hat groups are the re.:ip1enrs or gr~mtees< 

Charity\Vatch is Vf.'l')' concern~~d that some charil.j;,=;s :<In.~ getting eredH ~)n their tax forms f)t 

distributing huge <:Jm0Lmts UfUllJisd(!s(:'l.1, tls(:k:-.s stun: Failure to enf0rcc prop..:r rCl"l(lrting 'Ji' 

grunts, both donw5tic and fon,>ign, <:1.110\\'5 charities to avoid the kind of snutiny neCCSS;Jry tu 

keep them hc;nest and accolJnt3.hle. 

3. Chadt~ \'\latch calls fur more disclosure \vith respect to {'n.mpensathm of chadty on1{'ers~ 

directors, trustees, and kq employees. 

'rh~ IRS's 2(l08 redesigned Form Q{)(l and .sllbstx!ucnt rc\-isions have b...:en \'cr')' helpbi 1n 

prcYyiding .... \'atchdogs like Cl1Jrity\V~Hch and the broader pllblic- '.\lith more d0taikd information 

".-m \"harities' {lllUlH+~l nt,.;ti\ iti("'s. \Ve npprr.:ciat0 thr.: opp,,-xhmity to pnn'ldc the Hous~~ C\nHmiHt'e 

on \;\lays rwd Means with ~npw on a vet)' important disclosure that we believe is centr31 to 

maintaining donors' connd<..'Hce aHd trust. Curn.'nt IRS ruks allov/ cbnrl1.if.'s to hi(l:i.: from tht, 

puhlic certain payments made to a nonprotlf.-: individual offkcrs, din.:x.:h>fS, lru:-,tees. and key 

employees (ODTKEs} V\ie bclieve this i:-; \\Tung on scvefhllTonb ,md hupe that the H.ouse 

Co,.nrniU.e~~ 011 VV'(Jys and fvleans 'vvm help close this <lcc~)lmt3bi1j1y gap in its revision~") to the 

current t:lX Forn) Q00. 

l.rnder current Fmm 900 reporting rules. cb.aritie::. are required to break out crnnpen;:;e.tl0n paid to 

each indh1idual unletf', diredoc lru~t0(;, 1)1' key 0mplny~e. Schl'du!e J pro\ id0.\ !~)f additional 

comrx.:n:-;ation disck)SHreS of bighty paid OD'!'K !~s. On :-.chl..'duie [, charities mH~t report other 
96 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 70 here 80259.070

transa('tit)DS t"lenveen the charity and its ODIKEs, induding k)dnS to or fr0l.1l the organization. 

grants l;;) dose bmily member::> of ODTK [s, as y,:dJ a~ ('xI..'css b(':wflt tranSD.ctions bCl\v(;~n the 

chanty and its 00' !'KEs. Sucb dlsclosurc's of compensation and related party tn:msacti011S arc 

vitally imp0ftant to keeping !..:!urilks und tn(::ir (::x0cutivc;:;. hUllest by (kterrin~ those who have 

signi.ikant control O\\~r a nonproiir Ih')ll1 using it for }:'{'rsonal benefit, rJ1GSt: \vho might 

organl7~ a chat'lly primarily f(lr persona! gain ar.:; al-;o dckrred b)/ thc:-;c n.:pt1rting r0l.-}L1if('mlT!b 

\\'llidl highlight for public ~cnltiny lht' 1rans<-ldio:ts L't,t'v'/een a rJ-.I<:lrity anti lht' rh~\)pk \\'hl) control 

it. 

t;nlzlrtunatdy, IRS n:pcwtiug wles still alk}'vV for a HHljor Jupse in trallsparenc), with resp.:ct to 

compensation I)[':.l cbarity's OD fKEs, Under current rulc:-., OD rKE~ c~m nxeive certain 

payments from their t.'hnrity \vithul.lt su(;h payments b~ir.g reponed as I.'0l11pulSation tu the 

jndj\iduals \\<ho rece!Hxl thcrn. F<x (;x<'lmplc~ the pr~sjdent ora ehftrity might receive $30(!,OO{J 

in sabry ::md n.'tircnH.'nt b(;ncilts frum. hi~ urganizJ.tion annually. Such cumpensa1ion is required 

to be hrokt:n out in P,Et VI l of the Fonr! 990, and r~ported in even gn:,1ter ddail <.>n Schedule J. 

lfthis. ch3rlty executive, ft1tll~r tl1<1n receiving compensation d1fectly from the chnrit)\ bs.tc3.d 

Sds up a fix-profit ('umpany and lTCclVCS this same amo!ult ot\:ompeHsmion in the t~)rm of 

consulting payr:ncnts to his cornpany, s.uch (:ompensati0n i:;. not uniformly required to be broken 

out as salary I.)r bendit-; to this individual offic(,f on t11c charilY';.; lUX form. Instci.l.d. thte charily is 

a1Jov ... \~d to hide such payrn~;nis to indi\'idu~d ()DTKE~,> hy reporting lhi:.'::n a~ Jump SitJrlS pald w 

the I.:on::;uiting company. Al1o\ving nondiscio:.::ure of such. c0mpensation to individuals simply 

h('calJ~K' paymems w\~n~ rn~H.i~~ indir~~('tly is at best arbitrar:/, and nt \.vorSl depri\\~s the puhli!..; nl 

the inf~)nnatioll it flced:'l to determine \\"hethcr the tota~ .:umpen~ation paid to any individual 

()DTKE by their ... hal'lty is n~.'Hsollah!c f1.)[ the ~ef\"i(;es .111\)\ ided, 

Lap:-C's 1n c(>r(Jpen,}J.t~ot1 rq)ofting that amount to looplwlc:-. ar~ t10t hdpfu! t()f maintHining 

donors' trust ill the 'jeeh.g, SHeh lapses ,in.' als() highly urd~lir to thlJSe I..'harities and charity 

c:,\ecul1vt:S \\ho art: transparent about cOlnpt:nsation in their tinanc:bJ reporung hi the public. It is 

not fair that the president \)1' OTIC charity can brag about taking zero salary IT\)m his nonprofit 

v"llik n~cei\iing. large pJ.ynteHb through hi:.. cunsulting or n,mliraiqiug cprnpally, when the 

president of at10ther charity has his feet held to the fire by donors tor honestly reportin~ his 

individual salary on the cbarlty\; ta;." form. Uw:.kr SUdl;J system. otherwise honest (;haritic~ nI:!y 
97 


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red pressured to hide compensatiun frum the public so thcy 3..1'C not unbidy >...:omp3..l"cci tu other 

ch3.dtil.~s that may, in f~d, l-'~).y high~.")f compensation to th,)lr l:Xl:(;lltiV('S but an.> not n.'quin::d to 

hr~3,k il ouL !t f:-. ne~es~Hry to l~vd the playing fieJd by requiring d13.ritit's to repun total 

compcDsati<..)n paid h) individu81 ODTKE~. rcgnrdk.s.-::. of \yhcthcr such cnmpvl1sation is paid by 

the charity dlredly as sabry and bt!ndits, ur iw.iirel:d:,' thruugh \Hl1~ide comp:.mit;;:;. 

Donors art! a1 Urn..::s lOt> J(Kl1sed on what they pac..::lve as the high It!vds orc\.}mp-=n~8tinn 

fcct.:i\·cd by som-: charity executives. \Vc 3.( Charity\Vakh try to put charity c>,.ccutives' ~H13.ric~ 

in perspective for donors \\'ho rnay Hot undt,:rstand that nonprorits eornp,';le ,,\ith the private secwr 

frH' qualified employeeS and must o11e( reas~-'n<lble ~xm~pensati0n relative to the skilh-. educm.i0n, 

and kVl.'ll){'('xp{.'rkn~l.:: required fur a :-.pccifh: positiun. Such ~crutjny fhml dc>nor~ rnmh·aks 

Sdme chmity eXc;cutive:3 to come up \~'ith creative ways L<> hide their compensation. Vihile we 

l.mJerstand that it 15- Hot ah;vays comf{xhl.hh: or easy to ju.s.tify to donors \vlly a high level (If 

compensation may be approprink for a specific ()DTI~E. thi.s .should nN pr.:;t'tude tJw puhlic: 

from knowing the amoum of U>. sub.s.iJizl'd doHars u~cd to pay an indiv idu,d chcl.rity (;xel'utivc, 

An improved rule rt:quiring charitie::. to disclose all compensatiC>lI p,1id to [my indh·idual ODTKE 

should fcquin,-, linh., additional dTnn by \,\'cll-fun organilations lh~t aJrcHdy track persormo:.>] ('o·sts 

inkrnally. Any charity v,:ith good governanc~ practices is GODGerned ahou1 gi\ing the 

appearance of a (:onniet (If interest \vhen it hires ,1 company that emrdoys or is o\vned hy one or 

Ib ODTKEs. and lhen:fj.Jn.' rt~gtdarly lnoni:..r:.rs such LnJ.HS3.Ct1011S. The gov~xnance and 

manag'::TIwllt practices lJ1'charities thEll do not kd'.'p det:liled records (,;" regularly !TIOnitlJr 

p.'rsl.Hmet costs ·will bl~ impr~.)ved by an IRS di':<<;.'loslIre ruk that l'cquin:':> th~m h) do 80, 

Charities :.dre~tdy keep (kwi!t~d n:cords of I.~mpt\'yn' t:ompen:-;a:.]oll h} !lH,:ct report:::lg 

requircrnenis f(w federal and ~.:tatc crnp!oy:-ncnt tu'{: \vnrkcr:-,' cnrnpcnsHtion and IJlhcr iH~Hr~1ll.::e< 

i:.wd Form 990 dis,.;!nsures. Th0Y also ke..;p track of paymenb mack tu independent contractur~, 

t20nsulting companies, rroll~~~hm<1J fundr(!is~rs and other~ for Forms 1099 and 990 reponing 

purposes. as "\.\'dl a~ to comply \\'ith state level :-;olicitation rules. Th0 recordkeeping and 

reponing burden G charity roight incur to provide the public with a breakout ()f a charity 

CX.ccutlve\; total compensation is minirnal relative to the benefit that C01TJ~S frrml giving demors 

and t<npayen; the infonnati,Jl1 they n.l~rd tv hold ch8rities accountable for thdr do!lar~, 
98 

f 


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99 

Community Catalyst 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 74 here 80259.074

Cf.T.'l.LY,r 

Testimony of Community Catalyst 

submitted to the 

Subcommittee on Oversight of the Committee on Ways and Means, 

U.S. House of Representatives 

Hearing on Tax Exempt Organizations 

May 30, 2012 

Submitted by 

.Iessica L. Curlis . .I D 

Director. Hospital Accountahility Project 

Community Catalyst 

30 Winter Street, 10'h Floor 

Boston. MA 02108 

617.275.2859 
100 


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Pag..: 2 T..:stilllony :;uhmiucJ tOl.lIe Iluw .. c Way::. & ,\1ellib Subcoll11nitl.:e 011 O~..:rsjghL, \1ay 2Ul2 

Community Catalyst appreciates the opportunity to submit written testimony to the 

Subcommittee on Oversiglll oflhe Committee un Way~ and Mean~ or tile Unikd States House of 

Representatives. in particular. v. e thank Chairman ChClrte~ w. HOllstany 1r. for calling this 

hearing to examine the operations and oversight of tax-exempt organizrlt1()TIs. 

Community CJtal) st is a national, nun-profit consumer adyocacy organiLation dedicated to 

ensuring quality, affordable access to health care for all. We work with state advocacy parhlers 

ami a 'Variety or other stakeholder groups including hospitals in approximately 40 statc~ on a 

variety ofdifTerent issues n.:Jated to health care, focusing all Ylllncrahle gwups such as seniors, 

low-income children and ramilics, immigrants. racial and ethnic minorities_ and people living 

with chronil: illness and ~pecial hcahh care needs. 

For mallY) car~, Community Catalyst has worl-:cd .:ollaborativdy on a range of issllcs with nonprofit hospitals, critical intlotitutions for om- hcalth can.:: sal(;ty net. As part orthis vvork, we have 

advocated ror strong community benefit programs. Along with our stale partners, Community 

Cataly~t worked on the dc\clopment and impkmcntation or state laws relatcd to community 

benefit programs ano individual hnspital facility agn.:emcnts, studied existing state laws and 

standards, and de\'clopcd tools to enable community groups to collahoratc with hospitals and 

others on community benefit issues. 

In addition. we worked clo~cJy with Memhers of Congress in calling for the nc"", requirements in 

Schedule H and creating 26 U.S.CO * SOl (r) for tnx-exempt hospitals. The provisions in 50 I (r) 

stn.:ngthcn the requirements around \\ hat non-profit hospitals must do to mecllhcir community 

benefit obligations. 

Community Catalyst strongly concur~ with Chairman nou~tnny's statement that it is important 

that the IRS have the information it nel.:d~ 10 ensure tm,-excmpt orgnni;:atiotls are operating in 

fUJ1herance of their ch<lritahlc purpose and maximizing benefits prmided to the community. This 

is precisely why we believe the new Schedule H reporting requirements are so important and 

why additional transparency measures in 501 (r) arc also \ ital and need to be implemented 

expeditiously. 

As recent press accounts, such as those appearing in the The ,Yew York Times, t. ~ Charlotte 

OhSf!lTer,~ and St. Paul Pioncer Press,l make clear, the current practices or at least some oonpfClfit hospital facilities are failing to mcet this standard. Schedule H and the new rC4uiremcnts in 

Scdion 501(r) are designed to remedy this by requiring beility level reporting on financial 

as~istancc and l.:ommwlity hcndit. public disdosurc of what assistance is available, development 

ora community benefit plan in consultation wilh the communily and e~tablishjng slandard~ for 

billing and collection actions. We firmly believe the~c new provisions arc an integral part of 

ensuring much-needed transparency and accountability [or non-profit hospitals. 

The data requested in the revised Schedule H serves an imporhmt funclion: it givcs policymakcrs 

and th~ puhlic a cl~arer picture ofllle "alu~ individual tax-exempt ho~pitab hring io th~ir 

communities. Each year, local. Slate and redef<ll government~ rorego billion~ or dollars in tax. 

Community Catalyst IS a national non-profit advocacy organization bUilding 

consumer and community leadership to transform the American health care system 

~'~~.~:!-,,~n!,.~ity";~~~.:l.s.t,.,,~q 
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rc'Venues \\lith the under~tallding that tax.-c.,\ernpt hospitals <Ire pro'Viding care to finallcially needy 

mt:mhers in their communities. While we havc worked with many dedil:att:d hospital 

pr0t"!.:ssionals who have used c0ll1munity benefit r~sourc.:s inno\alivdy and t:ffectivdy to 

improvc access to care for yulncrable populations, many hospitals lag bl.:bind. Non-profit 

hospituls should demonstratc how their tax exempttons are cleurly bcnefitting their communities. 

We believe reporting indiyidual hospital data ,yorks to hospitals' benefit, as wcll, enabling them 

to shu\\" the \,alm; they bring to communities in a particularly difficult time for local, slute and 

lederal budget •. 

1n 20Of~, the IRS reformed Form 990, induding introducing Scht:duk H lor tax-exempt hospitab. 

One of the guiding prinl:iples oflho~c changes was to enhance transparency: about hospital 

organizations' operations, providing the IRS and others, including the cornmunities served by 

lax-ex-.:-mpt ho:::,pitals, comparable ill/ormation about 1h-.:- ways hospital::; choose to conduct their 

business. From a community per~pccti\lc, Part Y, Section B build:::, on this goul by providing 

invaluable infonnalion about individual hospital practices: information about the way local 

ho~pillil facilities, as oppo~ed to hospital systems, choose to serve their commlillities. The 

communities served by indiy idual hospitals within a hospital sy~tem are likely to diner 

signilicantly with regard to economic status. unmet health needs and resources, cultural and 

linguistic prclerences, and priorities. It foUO\vs that the need lor financial assistance, billing and 

debt colledion. anJ communit) benefit programs \\ ill also difTer aeros:::, communities. IIospitals, 

including those that are part of larger sY5tems, "hould take these factors into consideration and 

use them to tailor policies to meet the unique needs of their local communities. The information 

found in Part Y, Section B is unique becau~c it provides communities with unprecedented insight 

into their l(lcal hospitals· prdcticcs. This intormalion, we note, is not repeated ebc\\'hcrc in 

Schedule H, and certainly not to the bel ofdelilillcund in Parl V, Section R. 

Researl:h hus S,hO\\ll that tl10 inronnation n.:quc::-.tcd in Part V, Section B regarding financial 

assistance. billing and dcbt collection is simply not consistently a'vailahle to ht1spitals' 

community members and to patients in need, despite the hospital industl)"S assertions to the 

contrary, and espl.:cially without acliye govemmcnt oversight. 

Moving 10rward, \\c strongly cncourage thl.: IRS to retain Part Y, \\ith ~01l1(: improve1l1l.:nts. and 

require all hospital facilities to report it. Induding this data in Schedule H reponing will provide 

a vahwble - and Olherv"ise unavailable - baseline ()1' qualitative and quantitativI.: dala ahow 

hu.;;pitClI perfonnanct:. Hospitals have haJ (lmple tim.: to come intu eumplianl:c. even without 

additional guidance, and should be able to answer the questions found in Schedule fl, Delaying 

the reporting requiremcnts could unintentionally keep communities and individual consumers 

from gaining timely infornlalion about financial assist::lnce program~ and tllir billing 

requirements. 

Financial Assistance 

Though tax-exempt hospitals may lace additional rep011ing and may need to adjust their policies 

to comply with the requirements of 50] (r), wc should never [orget that the brwl1 of the burden or 

inadcquat~ I"lnancial assbtanc~. billing and community bcnefit praCliccs ralls on conSWlh::rs. A 

Community Catalyst IS a national non-profit advocacy organIzation bUIlding 

consumer and community leadership to transform the American health care system 

~'~~.~:!-,,~n!,.~ity';~~~':ls_t,.,~q 
102 


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Pag..: 4 T..:stilllony :;uhmiucJ tOl.lIe Iluw .. c Way::. & ,\1ellib Subcoll11nitl.:e 011 O~..:rsjghL, \1ay 2(J]2 

March 2012 report from the Centers lor Disease Control and Prevention (CDC) found that, in the 

tln,t si;., month~ or 2011, one ill tlve pcopk were in a family struggling 10 pay a medical bill, 

with one in ten rcporting their family carried medical hills they were unable to pay at all." A~ thi;, 

data suggests, medical billing and dcbt collection practices do not solely atlcct the patients who 

received treatment, but the economic well-being oftheif families and greater communities. 

Hospital bills can be particularly devastating: on a\ eragc. l1ninsured families can afford to pay 

only 12 percent of the total amount huspitals charge l'or a hospital slay.1l 

Because Section 501(r) requires hl1spitals to make their financial a~siSlance policie:o. publicly 

availabh.: and work \vith patient~ to determine whether they ljualify, it can oGer peace of mind to 

the millions of Americans SlUC!\. in precisely the position described by CDC who arc uninsured or 

underinsured due to job loss, inadequate insurance coverage, chronic illness, and other 

cin.:umstan~es beyund their control. 

For many individuals, hospital financial as~istance progmms are the only viahle link to health 

carc. but rcliable information about thcm has been difficult to (ome by in many communities, 

despite assurances from industT) stakeholders to the contrary. \Vhhollt this information, 

communities havc no real gauge l'or understanding the value their h()spilals hring, and individual 

patients lack timely acel::ss to information that would help them seck necessary care \\-ithout 

incurring medkal deht. Sedioll 50 I (r) addresses this by rC4uiring hospitab to report lUli/onn 

information about their financial assistance programs. 

Community Engagement 

Solid community henefit practices, which include forthright public reporting on hospit::tl 

practices and decisic)J1-making and meaningful community I.!"ngagemcnt, encourage a stronger, 

~marler. more l1cxihlc usc of health care resomces that remove barrier~ to care at the local level. 

The new requirements that ho~pi1als engage community memba~ and public health expe11~ in 

researching, devdnping and implementing a community health needs assessment and plan 

incentivizes hospitals to "swim Llpstrcam"--that is, to collaborate with other proyidcrs, experts 

and community members to address the is~ues that lead to poor heulth and drive improper 

emergency room usc. Thcse programs can ultimately help hospitals and communities drive down 

hurgeoning health costs t'or all payers and improve community health. 

Fair Billing and Collection Practice~ 

The teml "rca~ollable effort" for determining eligihility for Gmmcial assistance in the context or 

a hospital's debt col1ectinn practices needs further delinition. Vle helieye that having strong. 

unitorm, fair tinancial assistance policies and upfront notification procedures - as described 

abovc is both wholly "reasonable" within the meaning of the law and ncc0ssary to achie\ (! its 

aims ofprolecting conSlllller~ from avoidable medical debt. 

In addition certain debt collection acti\ itie~ should be prohibited outright. 7 For cxample, patients 

\\/ho qualify for 11nancial Cl%istanee or arc eligihle for public programs such a~ MedicClid should 

he exempted from debt collection activity. In general, hospital debt~ should not he rerent:d to 

collection agencies or reported to credit bureaus until the patient is screened for financial 

assistance or publk programs. Pradices su~h as selling patient debt to third parties or charging 

interest on outst::tnding path:nt debt.,,; should be prohibited outright. Many collections practices 

Community Catalyst IS a national non-profit advocacy organIzation bUIlding 

consumer and community leadership to transform the American health care system 

~'~~.~:!-,,~n!,.~ity";~~~.:l.s_t,.,~q 
103 

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104 

Credit Union National Association 


ccoleman on DSK8P6SHH1PROD with HEARINGInsert offset folio 79 here 80259.079

~ ... - ... - ... ~ 

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~;;:;" >;~; ~;Mn~ 1o. 2012" 

::~.. ". ::'--::'''::'''. - . . . . . 

, . :-}:-}:-} ~ ~Thc Hom)rable charles W. Housta!ly:-Jr. tvlD~ 

.:} :-} :-} :-} ~ C~Jialrnlan.· .. !" Ir !" Ir !" Ir • S~rbcQmll}itte~'on, Ov~rsighl " 

:::-- :::-- :::--:-. ". Cbmluitlc(": on.Vvrays dnd !Y1cans 

t} :-} :-} ~_ UnitdJ Statcs:Housc 6rRepr6enfativcs 

: ~ ~} ~} ~) ,:. \\:':lsh}~lg~~n, ~~c ?:05 ~ ~ _ lr"Ir" .. "1r ' , , , , , , 

":. -,. ::: -,. ::: -,. ::: I~ar <-:'hai~aT1 BqusU!ny:_ , !" Ir !" Ir !" Ir !" ~ . ~ ..... ,. ..... ,. ...... ,. ..... 

~-: ~-: ~-f.\1i ,t>,halfof(he Creqit U)lioqNa.tionpl A,so,iatiQll ((.'Ut>A), I aQl "Tiling in.tcspolls,·lo.a 

":" ::" ::1~ur.:~0l{rec~in.::d from the hldcpcndcnt Conimuh..ityBanKer~DrArn0ric~:qICBAtlhal . 

~ .. ~ .. ~ ~Ctl~est~d-yoti hokl a hearing bn the "growing~lax~exemp(crdlit u~lion se6tor.~· CUNA is'· 

the lat'ge~-ad\>ocacy @1-gUll"izaol.ion'[11 the Ulli11j.l! St<ite~- ref\ll"esfI:llting m.'~lrly -90!;'-'o or 

Amerlca's-7,3HO state" ancl-fcd"erallv charten.:d·cre<.111 unions and th'eir 96 l1;illi(~n nielllhers.--

we;, r~<;()b~iz~ thabh~ ~red)t l~io~~ ta~ .statps i~ Bert. th~ .suhject 9f Y9U; _he~ng Jod-qy; '. ' 

hbwc\"cr, ~thc iCB'A le:ttcr~contains inaccutatc'and'misicading 'assCiiions regarciing.cn.:dit 

tltrion,,' thot deserYl: a ri.:spdnsc: 

The IXtnks assert that ~'crodil unions are becoming harder and 'harder to distinguisll from 

ta.\.pay·ing. ba~ks ~'ith~wh';h 1~ley ~omJ)ea:.··' l:lO\"':cvc~, th~ st~lct~ral ~fiff~rem;e bt?i\\'~cn '. 

c~eJit, uni;tTIs ,;md,hanf"S h~ nrt cranged ~inc~'cr~dit \mio!ls' inl:eptiotlin ,thi! .Hni,ed ~tat~~ 

mQre than.! OO.years ago, ll,nd ·the practicaI.diffcrcnces .bct\ycen cre.dit \inion"! a!ld bank;;; 

have beert enhanc.cd by tlu: cv.cnts ofthe last sCYL-'tal y.cars. A's tht ecbnol'ny r'ccotcrs'frorh 

thl> gr;~atcst firlandall,:l·lsi.';sitll:e the G·rearDc.pres.~iotl~ cr~aiL.LlniQils ate nuw"jnor~ thun , 

ever, a. crlt~cal.altemati\ c 'for Consumers and small hus.tncsscs· I;ceking acc'ess to affordable. financial serv1ces~ , , , , , >. >. >. >. >. >. >. , , >. , , , 

As- YQll kDOW1 -cre,dit t~nior-s arc l11.cmQcr~Qn.n~d, T~ot~t[1r-wofi!"fin[lTIc(al q:mp!trati:--'cs;, 

bc~au·s.c ofthi·s. structure, tbe Attotney .General in '1.917., and latl"f CC'I1g.ress., granted credir 

llhion~ an'.cxeJnpt'ion fron'l federal income: ta:.(whh.:h has bcen~in e:1TcCl. siri\:e their'. 

inception! and'which 11as heen'reaffinlle(bevci'al lime.'., inCiuJing. in 1935: I '116. X937~ 

19·51,·anJ·.199X. (her.the·years, credit U1ilDn~.; lik€ other financiai.illte.rme-diarics,"hav€ 

evolved a'nd havc'·tnnev3t'ed: how~ver,. the.strtl.cll1r~. \v.hie~ is \he ~cd~ck~~ft'.ongres~' 

ra,tion.tlle tor ttle t~x l)?,'emption, lws r~matfled~unct13nged_~ Cn;dit ,-miQns ~xist:tod~y, ~s 

. they \lid rrror~ tha.rr 1 Q0 y~Jrs,ago, TI.S tmaQt:iat 'coQpcr[ltivp, a..nd ttrcir,l1ot .. ;for-profit, ttlX- , . 

'. ex~mp.t ~th.tus·hclp..s to.assUre thatlhey.fulfill tbeir" rolc.ofpro\'iditig \luhlc.ch6ices..in the 

'. fihancial inarketplace'. Tnis c'oophati.ve S1ruclure~sets: creuit unioIls apati 'from other' 

. fi~1an~ial ~~n/~l:es'J)f()~ ldC!·s. . . . . . . . . . . . . . . 

, , , , , , 

.'1" 1. ~', '-.J' ":.1 "'~J" ". ... ~ .. I .. ,. '~ .. I' ~.~I ";'. ,t '\,j . :,i" '\-,r ":. < "t::..> ,.,. 
105 


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The Honorable Charles W. Boustany, 11'. MO 

May 16,2012 

Page Two 

In recent years, credit union~ have distinguished themselve" from hanks even further. The 

for-profit financial services sector was responsible for the greatest financial crisis since the 

Great Deprcs5ion. requiring taxpayers to provide banks a signiticant amount of assistance 

through the Tl'Oubled Asset RelidPl'Ogram (TARP). In April, the Special Inspector 

General ofTARP released a quarterly report regarding TARP operations and oversight, 

and it was particularly critical of small bank husiness lending, noting that taxpayers are still 

owed $llg billion from TARP, including $15 billion owed by small banks, and many of 

which banks have missed quarterly payments. I However, llle American Bankers 

Association reports "[an industry] net income of,26.4 billion in the fourth quarter lot' 

2011 J, an increase of$4.9 billion (23.1 %) Irom a year earlier. ... Almost two-thirds of all 

institution~" (63.:2%) reported improved earnings, and many inslitutions were profitable 

(81.1 %). "- If [he banking sector is making so much money, why are bankb not repaying 

their obligations to ta:\.pa) ers? 

Credit unions did not calise the financial crisis, and did not need a taxpayer-Iunded TARP 

bailout to survive. One ofthe reasons that this has been the ease is that the not-for-profit 

credit union ownership structure is fundamentally dilferent than the for-prolit bank 

owner'lhip structure. Credit unions generally operate in a more conservative manner. 

taking fewer risks with their members' money than banks may take with their 

stockholders' investments. For credit unions, the goal is not to mal(c a profit for 

shareholdas, but rathl!f pro"v ide atfordable financial services to thl:ir member~. As a result, 

credit w1ions have proven to be safe and sOllnd tinanciC'lI institutions, which hm e endured 

financial crises from the Great Depression to the Great Recession without needing a 

taxpayer bailout, in clear conlrast to the f'or-prolit banking sedor. 

The leBA also notes that the credit union tax status has received Cl budget score; however, 

their letter cites a private-sec'lm analysis which is significantly higher than any government 

score. Rcganllcst-., the analysis cited by the leBA and the various governmcnt aSt-.essments 

fail to take into consideration the fad that 1110St credit union income is pa~sed through to 

credit LU1ion members as "diyidenJs" on which those memhers pa) taxes; or the t;lct that 

Americans receive considerable benefit from having credit unions in the market place. 

\\Then looking at all the facts, it becomes crystal clear that the benefit of having credit 

unions in the marketplace under their cutTent ta.'\. treatment outweighs the cost to the 

govemment. 

Virtually every American heneflts from the credit union tax exemption, whether or 110t he 

or she belongs to a credit union. We estimate the annual benefit to communities to be morc 

than $10 billiun, compared to the approAimatel) $1 billion score the eAemption has 

recently received. These benefits manifest tht:msclves in SC\ eral ways - in low~r interest 

1 Department of Treasury. Special Inspector General for Troubled Asset Recovery Program Quarterly Report 

to Congress. April 2012. 29. 

2 American BanKers Association. Condition of the Banking Industry. Fourth Quarter 2011. 
106 

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107 

Jewish Federations of North America 


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Testimony of 

William C. Oarol1' 

Vice President for Public Poliey & 

Director of the Washington omce of 

The Jewish Federations of North America 

House Ways and Means Subcommittee on Oversight 

Hearing on 

Tax-Exempt Organizations 

May 16, 2012 
108 


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Testimony of 

William C. Daroff 

Vice President for Public Policy & 

Director of the Washington Office of 

The Jewish Federations ofl'iorth America 

House Ways and Means Subcommittee on Oversight 

Hearing onTax-Exempt Organizations 

May 16,2012 

rhe Jewish Federations of North America applauds the House Ways and Means 

Subcommittee on Oversight for holding thL tirsl in a "~rics of hearings focusing on issues 

related to tax-exempt organizalion~, including recent crJorb by tax-exempt organiLations 

to design and implement good governance standards, taxpayer experiences with the 

newly-redesit,Tfled Form 990, and recent legislative changes to the tux code dealing with 

tax-cx(;mplorganizations. 

Background:lhe Jewish Federations of North America C"JFNA") is the national 

organization that represents and serves over ISO Jewish federations and 300 independent 

Jewish communities in more than 800 cities and to\\,In5 across North America. In th~ir 

communitjes, the Jewish federation and ~et\vork volunteers (collectively, the "JFNA 

Sy~tem") are the umbrella Jewish fundraising org3nizations and the central p13nning and 

coordinating bodies for an exten,i,-e network of Je"ish heolth, education and social 

services. With thousands of affiliated agencies and schools, the JF~A system is one of 

the United States' largest and most effecti\ e social sen ice pro\ iders, serving \vell over 

one million clients each year in both the lewish community and the generni population. 

Collectively, the Jl'NA system mises approximately $2,5 billion each year, roughly $1 

billion through an annual fundraising campaign and $1.5 billion from planned giving 

activities. The vast majority oflhe $1.5 billion raised through planned giving represent 

contrihutions to donor advised funds and supporting organizations, often referred to as 

2 
109 


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"participatory funds." These fllnds are critical fundraising tools for the JFl'A system, 

comprising approximately 60 percent of the over $12 billion in endowment assets held by 

federations. Annual grants and distrihutions from such donor advised funds and 

supporting organization represent 80 percent or just over $1 hill ion of the $1.25 billion in 

grants made annually from federation endowment assets. Annual distributions tl-om the 

federation donor advised funds and supporting organizations nonnully range from 15 to 

20 percl~lt of their comhined assets at the prior year-end. In addition, as discussed below, 

participatory funds provide the JFNA system with the opportunity to regularly interact 

""\lith donor'! to qtrengthell our o\'em.tl philanthropic mission. 

Good governance and Transparency: JFl'A firmly believ'es that good governance 

policies and ethical practices represent bedrock principles that are essential if nonprofit 

organizations are to demand pllblic confidence in their operation. \Ve have long 

advocated lor the establishment of good govcmam:e procedures through prudent self--

regulation rather than the imposition of government mandates of rigid, one-size-fits-aU 

standards. Boards of charitable organizations must instituk and maintain policies and 

procedures to enSlITC that it manages and invests its funds responsibly. Federation boards 

of directors and investment committees fulfill a duty of care to make sure that 

endowment assets arc inV'Cstcd wisely and prudently. Along with concomitant duties of 

loyalty and to minimize costs, investment committee members hav..: fiduciary 

responsibilities to investigate asset managcmt..:nt decisions and develop stralcgie'3; 

appropriate for the fund and charilY. 

Federations follow established good govemancc procedures that in~ure proper 

stewardship orthc funds raised within our communities. Such steV\ardship reaches all 

levds of opermion and includes formalized mission sUllements, well articulated rol~s and 

responsibilities for boards of directors, officer, and other key personnel, rigid conflicts of 

interest policies, preparation and review of tax and accounting forms and statl'mcllts, 

among others. We take pride in the system-wide training alTered by JFNA to federations 

in various aspects of operations including implementation of investment procedures that 

develop asset allocation strategies, prepare and maintain lnYestment policy statements, 
110 


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implement investment strategies, monitor and supervise implementation and apply 

procedures to control and account for expenses. A variety of governance policies are 

documented, reviewed and substantiated 011 a regular basis, by hoth internal committees 

and independent outside allditors. Such periodic review includes veritication of 

adherence to written policies and procedures related to investment allocation, conflicts of 

interest, organizat10nal changes, and due diligence questlonna1res, among others. In sum, 

tcdcration internal gov~null1ce proceuw-es and oversight ar~ designed to avoid ~onl1icts 

of interest and ensure transparency in order to preserve financial resources and trust for 

our comnumjty today and in the future. 

The Jewish Federations and the Form 990: In the fall of2007, JPNA provided 

extensive comments to the IRS regarding the redesign of the Fonn 990. We applauded 

the IRS attempts to revise the fonl1 to increase transparency of nonprofit organizations 

through promoting compliance with the tax law and regulations and minimizing reporting 

burdens where possible. Although we supported the underlying principle that the Form 

990, WI like other tax reporting f0I111S, needs to provide meaningful illfol1natioll on the 

operations and structure of tax-exempt organizations, especially for those with detailed 

compensation arrangements. related entities, and complex trammetions, we did express 

concern that many tax tilers within the JfNA system would face increased repol1ing and 

compliance burdens bel.:Guse their size. structure tmd breadth of activities \\ (lulJ require 

the compktion of sevl.:ral of the ddaikd nc\\ schedules that accomp::my the new I.:orc 

form. Tn addition, smaller federations and agencie~ \vilhin the system would find that the 

new fonn would greatly increac;e the cm,t of compliallce and add burdensome 

recordkeeping and data collection requirements, We urged that the IRS carctilily balance 

the benefits from increased transparent:y that can be achie\ ~d through \ oluntary 

compUancc v-,:jth the costs l'rom expanding reporting requin~mellts that will be imposed on 

the nonprolit sector. 

As noted above, our comments on the revised Form 991l emphasiLed our commitment to 

good government policies implemented through a self-regulatory approach. Specifically. 

in regard to the govel11anee questions added to the Form 990. JFNA noted that the 

4 
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instructions to form began with the statement that "(a)1I organizations must answer each 

question in section 111 even though certain policies and procedures may not be required 

under the Internal Revenue Code." .lfNA has actively supported "good governance" 

measures for nonprofit organizations for many years and was a major partidpant in the 

important work oftbe Panel on the Nonprofit Sector. organized in response to the 

recommendations of the Senate finance Committee staff Our comments to the IRS 

reneeted our belief lhat to the extcnl lhat certain praclices arc mandated by federal or 

state la\\-, it is appropriate that such practices "must" be followed by tax-exempt 

organizations. To the extent that sllch practices are recc'Illll11ended to advance ethical and 

ellecti,," behavior, il is appropriate that such p!ineiples '·should" be fo1lowed hy stich 

organi7ations. We suggested that the lRS make clear that certain governance practices 

and policies listed on Form 990 represented recommendations and were not required by 

the tax code. Vle also noted that certain questions that asked for simple ""yes" or "'no" 

responses needed 10 be expanded to provide supporting explanations that could provide 

the user with a better understanding of the reporting organization's response and 

behavior. 

In summary. JFNA believes that the new Form 990 does provide both the lRS and the 

general rubJic with additional lisen!1 information as the ovcra1l operations of tax-exempt 

organizations. Il should be noted, however, the overall compliance burden and related 

professional costs for preparation and revie\\ have riscn significantly for virtually every 

organi7ation within the JFNA system. Because of the added complexity ofdaw collected, 

as well as the sensitivity of matters contained on sections of the revised form, many 

federations ha\ e cn)ated separate committees tasked with a detailed re\ ie\\ of the new 

Form 990. We continue to work wilh the IRS to refineu portions 'U1d schedule, oflhe 

Form 990. l-<'or example, W0 recently raised the question of duplicative I'eporting of 

foreign grants by domestic organizations that make non-earmarked grants 10 other 

domestic org,mizations that can ultimately be granted overseas with thc IRS. '\Ale 

apprecjate lhe cooperation that \ve have received from the agency in consideration of our 

ongoing to minimize unnecessary or burden~ol11e reponing on tax-exempt organizations. 
112 


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Recent legislath'e changes on tax-exempt organizations: The Pension Protection Al:t 

or 2006 ("PPA") provided significant new rules for donor advised !lmds and supporting 

organizations. As noted above, the::,e participatory funds arc essential fundraising tools 

for the JFNA System and hme been a vital source of the health, education and social 

sen ice programs of agencies of our agencies. 1n addition to providing linancial resources 

for critical human sl!rvjccs in the local Jewjsh and general communities, these charitable 

,'ehicles also adyanee the values and goals of the JFNA System through nurtUling 

relationships bcfficcn Jev.ish philanthropists and federation lay and professional 

leadership, building leadership and social capital in the Jewish cumOluniLy, establishing 

prioritie,:, that consider the future needs ofth~ Jewish community, and reinforcing the 

positiYe perception of the federation as a philanthropic partner within the larger 

community, 

Many of the provisions contained in the PPA provided needed statutory delinitions and 

operational rules for participatory funds as well as a penalty tax framework that can be 

applied to Jiseourag~ unwanantcd act~ of~elr .. dcaling. Howcvl:r, JFNA continues to 

believe that it is in the public interest to provide incentives for donors to contrihute assets 

to vehic1es in which a public charity maintains ultimate supervision and control, such as 

is the case with participatory funds, 

We are exceptionally proud that agencies within the JfNA System employ the highest 

ethical standards of se1f-regulation in governance and operation of participatory funds 

and regularly share expertise with other chmities and policy makers outside the Jewish 

eommunit) on a variety of charitable giving issues. To help tederations meet these high 

standards, appropriate rules and best pr:Jctkes were set forth in two separate JFNA 

publications, Qonqr A~lvis_ed f:unds: !\ Gujde for J:ewi;:;h fede(atio)l El)do""meJlt 

PrQfes~o1l'!ls,_and kfaruibQQk Q!l SJlPPQrtil}g FQun@tiQils, ror lise by the JFNA System. 

These publications have been revised to rellect the new requirements of the PPA. 

JFNA believes that well-administered donor advised funds and sllpponing organizations 

that have policies and procedures in place to assure that qualitled grants are made and 

6 
113 


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impermissible material benefib to donors are not present greatly adds to overall tax 

administration. This oyersight function performed in federation planned giving and 

financial departments throughout the country is all important component of the overall 

tax compliance system that operates in concert with the goal offllrthering philanthropic 

endeavors, 

We need to note however, that this o\ersight function docs not come \\1thout cost. 

Virtually every federation no,\, faces increased costs in administering their grant-making 

function Irom participatory funds. To prevent an unwanted chill on the philanthropic 

endeavors or donor advised funds and supporting organl:lations, it is essential that 

charities that administer such funds not he burdened with unnecessary procedures and 

requirements \\hen they accept gifts, approve grants or make distributions in the nannal 

course. Tn this regard, we have met with rcprcsentalivl! ti:om the Treasury Department 

and the IRS on ~everal occa~jons to urge that rules and n:gulations interpreting the PPA 

provide bright-line tests for donor advised funds that could be easily understood by 

donors and readily administered by llmd managers and grant rccipients. This clarity 

would improve compliance as \VelJ a~ foster philanthropy. For ..:xampk, w..: continue to 

urge that 1reasury and the IRS make it clear that donor advised funds are not pennitted to 

make a grant if the donor to the donor advised fund is receiving more than an incidental 

benefit in rdurn for such grant and that an impermissible bcnciit lor purposes ofth~ 

donor advised fund provision is the same as a benefit that would preclude a donor to a 

public charity from meeting the definitional requirement for a charitable deduction under 

11ltemai Revenue Section 170 for such contribution. 

Summary: .TFNA ,upports the efforts ufthe Subcommittee on Oversight to as;me that 

tax-exempt organi,ations fultill their mandate to the public. We support efforts to assure 

that such organizations meet the highest standards of good govemance and transparency. 

We will continue to work with the IRS to balance the goals of increased reporting 

without imposing unnecessary or "onc-slze-fits-nll" rules a::. it pertains to the Form 990. 

In addition. we will continue to \\Iork with the Treasury and the IRS to assure thm thl..! 

implementation of rules interpreting the PPA permit p<-lIiicipatory funds such (:1<'; donor 

7 
114 

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115 

National Association of Federal Credit Unions 


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May 15,2012 

The Honorable Charles ROllstat1y. Jr. MD 

Chairman 

H011se \rays and Means Committee 

Subcommittee on Oversight 

u.~. House of Representatives 

Washington, D.C. 20515 

He: Hearing on Ta~ Exempt Organizatiuns 

The Honorable John Lewis 

Ranking Memher 

House Ways and Means Committee 

Subcommittee on Oversight 

U.S, House of Representatives 

Washington, D,C, 20515 

Dear Chairman Boustany and Rank.ing Member Lewis: 

On behalf of the National Association of Federal Credit Cnians (NAFCC), the only trade as~ociation 

exclusively representing the interests of our nation's federally chartered credit unions, [write today in advance 

of tomolTow's subcommittee hearing and in response to the recent false propaganda of the various banking 

trade a~sociatii.ms. Credit llnions are in a unique position 10 reach tmditionall) dh,lres:..ed <lrea~ across the 

coumry, they and their 94 milli0n member-owners welcome the 0ppOliunity to dis1rm desperate arguments the 

banking. trades h3ve fabricated in an attempt to extend COllgressional o\'ersight hearings to credit unions. 

As you know, not-for-protlt credit unions ha\'c been statutorily exempt from corporate federal income taxes 

since 1934. Today, nearly 94 million Alnerican:.- ret: on their local credh llTlinn tll mt:et tile;r linancial sen ke 

needs. De~pite whrlt the banking trade~ ll1HY wrlnt you to helievc, the institutional framework. l'rcdit unions 

operate within is ya~tly ditfcrcnt from that of hank~ and thrifts. Credit unions arc not making daily $2 hillion 

trades like the mega-banks. Credit unions are not-for-profit member-owned cooperatives. Every dollar earned 

at credit Wlions is returned to members through enh,mced services including lower fees, higher rates 011 

savings and/or lo\\er rates on loans. Simply ptlt the differences between credit unions and others who 

operate in lhe banking sector extend far hcyond la:-.. treatmcnt. 

Thl.: banking lrades continue to ignore the fact Ihat many for-praHt banks slill rely on massive amount~ of 

taxpayer funding in the wake of the tinancial crisis. Still, record bank failmes continue despite the billions in 

taxpayer dollars from multiple bJilouts that the banking industry has taken. According to a report releJsed last 

month by the Special Inspector General for TARP, ~ar!!4Q!J I!:!lIk~stills!I'uggie !Qr"1l.LTA~PluJllls 

l\J!h~I!IiQ!l!tctLl!~Le!lt'ill'~t~ on the tJble. To quote the report, "the status of those banks is one of the 

major issues facing TARP nearly four year& after the financial crisi&." This is even after many hanks were 
116 

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117 

National Council of Nonprofits 


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Statement of the National Council of Nonprofits 

Before the 

Subcommittee on Oversight 

House Committee on Ways and Means 

Hearing on Tax Exempt Organizations 

May 16, 2012 

The National Council of Nonprofits welcomes the Subcommittee's inquiry into the nonprofit 

community's l'ffort~ to design and implement good governance standard~. 

America's community-based charitable nonprofits have long been dedicated to earning and 

maintainjng public trust. They under'itand that whether people are seeking assistance from 

nonprofits or contributing their time or money to them, the public feels more comfortable 

supporting nonprofits that demonstrate principles of sound and ethical practice. As the 

Subcommittee wi111earn during this hearing, the story of the sector's commitment to earning 

and maintaining pub1ic trust is remarkable. 

At the outset, we note that while the Subcommittee has invited testimony from large 

institutional nonprofits such as hospitals and universiti~s, the vast majt1Tity of America's 

charitable nonprofits are small to midsized loc.:d community-based groups. More than 9S out of 

100 (95.9';-0) of charitabl~ nonprofits have income under $5 million, and almost 9 out of every 10 

charitable nonprofits (89.1 %) have income of less than $1 mil1ion. l That same 95.9S~, of these 

community-based charitable nonprofits took in less than 10% (9.5%) of the entire revenue for 

charitable nonprofits. By comparison, only 2.5% of charities had income of more than $10 

million cacho 

The lypes of organizations among the vast majority of charitable nonprofits '\vith revenues less 

than $5 million cover a broad spectrum of activities at the locallevel in communities in every 

congressional district. They range from domestic violence shelters, community theatref" and 

recreational groups, to religious congregations, food banks, and preschot1l programs. They 

include independent groups, as well as local chapters and affiliates of large national 

organizations, be they Boys & Girls Clubs, Girl Scouts, rlabitats for Humanity, Junior Leagues, 

PTA" United Ways, YMCAs, and countless others. 

1 IRS Exempt Organizations Business Master File, as posted by The Urban Institute, Nellional Center for 

Charitable Statistics, bttp:/!n.:c~ddtc1\'y('b.uTb~n.ur~";/ (Number of Organizations Filing Form 990). 
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The commitment to earning and maintaining public trust is exhibited daily by the State 

Associations of nonprofits. Each of the State Association members of the National Council of 

Nonprofits maintains written conflict of interest policies for their volunteer board and staff and 

are committed to modeling good governance in all other vvays for the their more than 25,000 

charitable nonprofit members. As members of the National Council of Nonprofits, each State 

Association also agrees as a condition of membership to adhere to the governance practices 

referenced on the IRS Form 990 or to the even higher standards or principles of practices 

adopted by that State Association for use by nonprofits in its state. Additionally, integral to 

their role as leaders and resources for charitable nonprofits in their state, the State Associations 

of nonprofits offer extensive training throughout the year to volunteer board members and 

nonprofit employees on topics that reinforce good governance practices. 

Starting in ]994 with the adoption of the initial edition of f}:L\~~ipk~_~\:l~LFX~~~J;iS'!;lt'!JQrJ~:l!o~J:U~~Qnt 

~;:'S~ll~'Xl\\~ by the Minnesota Council of Nonprofit.">, a movement began among nonprofit State 

As~odations to identify and promote principles of sound and ethical practice for the nonprofit 

community, state by "tate, Over the past two decades, 19 of our State Associations of non profits 

have embarked on a thoughtful process, in conjunction with nonprofit leaders in their states, of 

identifying and recording guidelines and principles by which non profits in their state should 

operate. Some State Associations have adopted not only principles of practice, but also 

workbooks and training curricula for use in raising mvareness among board and staff members 

about the principles for good governance that apply to nonprofits in their state. All 37 State 

Association members of the National Council of Nonprofits offer training throughout the year, 

in-person and via internet·based tedmologies, for volunteer board members and paid staff on 

topics addressing legal; sound, ethical, and accountable operations. Through the State 

Association's leadership role and work to "build the capacity" of charitable nonprofits in their 

states, these principles of practice, and associated training programs and other resources are 

available to countless llonprofits, just as they are to anyone who visits the websites of the State 

Associations or searches for the phrase: "nonprofit principles and practices." 

The following State A"sodation members of the National Council's Network have devdoped 

prjnciples and practjces programs for the nonprofits in their states:'.: 

• Alabama I Standa.rds [01' fc\,cdk>l1('t';~) 

• Arkansas I The ArLm~a~ Diamond 5tand,-lrJsT~i 

• Colorado I PriTlcipi<:'s and Pr.1ctlces f"-11' \jonpnJfit E\ct,jk'n,,-'(' in Coloradu 

• Connecticut I f'rin..::iplc; and Practic{~s for NOfll--'">rofit Ex..:eHence in Connecticut 

• Delaware I St"n ... 1cwds f:;)r Ex ... x:,Il(:'Il(\";'J!1 

• Illinois I IHint",is NI.).npf'ofit PriltCiple::. .:md Best f'rJ...:b.:e::. 

• Iowa I Inv,l c) PrinciplQs <Jnd PtJ(Jkl':.'s fot Ch .. wit.lbj", N,mpr()fil. r:~'\ceJh,,:nl~e 

• Kentucky I F'rirh:ipks 6:::: Pr.;;ctices for Nonprofit E>..ceHence in Kentu('ky 

• Maine I Cuiding Frjrh.'iph~s &: Pr,KtiG'S fo]' Nonpr ... )fit ExcdknG:' in \t:1i':dne 

2 Links to these and future postings of principles and practices can be found at 

btl p:/ ~\ V'/VI,' .COl me ih,{nonprofil s.<..,rgi re';;OlJ rres/!t'f!Ol !r\~t's-l opic/prJ nci pll?f!-<md-p LKtice,;;, 

2 
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• Maryland I The Standards fOf 1: )...(vllcncp@ 

• Michigan I Principks and I?rilctic!:_:s Cukie for ~onprnnt ExcdJer.o .. : in J\ilkhigdn 

• Minnesota I Pfincipl,,--,~~ ~lnd PI.:h'b_'es ft.lf N<.1nprnfit E"cpllpjw~' 

• Mississippi I Prii1dp]~~s and PractiD;::S for Nonprnfit ?vbnJgG,:o~nt E}..\~ellenG:: 

• Montana I Principle<, and PnlcUce~; fot Nunprofit L\o .. dlenc(' in ]\,luntdna 

• Nebraska I Guiddincs .::mct PrindpJes for Nonprofit Excellence in \Jf..'bJ';]ska 

• North Carolina I Prindple:.> & Practice~; for No:n~"\rofit Excellence 

• Oklahoma I Sti1nd,lrd~ .f~)r E'(((.'llen~·c':f{; 

• Pennsylvania I Standards for L\cdknce® 

• South Carolina I Cniding firinciplf.'s and Bf..'st P'r~Kt-h'CS 

In addition to the body of work developed by the State Associations that demonstrates the 

nonprofit community's embrace of self-regulation, in 2007 the Panel on the Nonprofit Sector 

(conven~~d by "lndependent Sector) introduced 33 Principles for GO(ld G(lverntl1lce {l1ld Ethical 

Practice for use by nonprofits as well as any philanthropic organization as a guide for 

strengthening effectiveness and accountability. The 33 Principles fcn' Good Govenumce and Ethical 

Practice: Reference Edition provides background on the legal guidance relied on to craft the 33 

Principles (~f Govd Gvvenu1nC[' and Ethical Practice with comparisons to other standards and 

systems of self·regulation in the nonprofit sector. 

vVe conclude by stressing that there is no single set of "best practices" that could apply to all 

nonprofit organizations across multiple states. Chi]fitable nonprofits can range from 

organizations that are small aU-volunteer groups serving a local community to those that 

employ hundreds of employees and v.rork all over the world .. 1\1any nonprofits are regulated by 

special additional federal, state, and/or local regulations, such as those organizations providing 

healthcare, food services, interacting with youth, or housing, \·vhile many others comply with 

accreditation standards applicable to their subsector (such as museums and hospitals). Still 

others choose to follmv recognized principles of good practice on a voluntary basis, out of a 

desire to be soundly operated, accountable, transparent, and ethical organizations. 

Tt is our vie\v that the nonprofit sector is so diverse that a national standard applicable to all 

charitable nonprofits would not be practical or ad visabJe. ThE.'refore, the State Associations of 

nonprofifs have committed themselves to best governance practices and ~ound ethical 

standards by way of their own conduct - by leading by example - dnd INhere applicable, by 

setting the bar in their states to '..vhich all nonprofits in their states can strive to exceL 

The National Council of Nonpl'ofits, the nation's largest network of nonprofit organizations 

with more than 25,000 member nonprofit organizations, works through its member State 

Associations to amplify the voices of America's local community-based nonprofit organizations, 

help them engage in critical policy issues affecting the sector, manage and lead more effectively, 

collaborate and exchange solutions, and achieve greater impact in their communities. 

3 
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121 

The Community Foundation for Greater Atlanta 


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~ '~ The Cornmunity Foundation 

SO Hurt Plaza! Suite 449 

Atlanta, GA 30303 

404,688.5525 MA!N 

404.688.3060 FAX 

info@cfgreateratlanta.org 

May 18.2012 

RE: Hearing on Tax Exempt Organizations 

House Ways and Means Committee 

Suhcommittee on Oversight. May 16, 2012 

Dear Chairman Boustany, Representative Lewis and members ofthe Committee: 

My name is Ahcia Philipp and I am the President cfone ortlle nation's largest 

community foundations, The Community Foundation for Greater Atlanta. We are a 

philanthropic foundation that holds nonprofit status, Our i{)Undation has more than 

700 indiviuual and family donors who have created 1,126 donor-advised funds. In 

20 II, we accepted approximately $72 million in gifts to new and existing funds 

with the majority of gins coming fTom our donors through their donor-advised 

funds. In addition, \ve have several unrestricted, competitive grant-making 

programs. These funds arc distributed among nonprofits in our 23-county 

metropolitan region. 

In 2011. the Community Foundation granted an estimated $73 million to nonprofit 

and faith-based organizations. These grants are primarily made via donor 

recommendations through their donor-advised funds. our unrestricted, competitIve 

grant programs and through multiple community initiatives. More than 850;;) of the 

$73 million in grants v .. ere made via donor-advised funds, Our unrestricted and 

field of interest competitive grant-making programs prioritize general operating 

support and nonprofit governance, accountability and transparency. The grants 

range from small awards to church sponsored food pantries in rural Morgan County 

to larger grants to organiLations such as the Visiting Nurse Health System 'which 

pro\ ides care medical care to thousands in the region. 

I'd likc to spcak on t\\O issllcs. First, is my strong appeal that the IRA charitable 

rollover be permanently extended and expanded to remove limitations on the 

age of donors, the size of gifts and the inclusion of donor-ad"ised funds, 

supporting organizations and private foundations. 
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123 

MATERIAL SUBMITTED FOR THE RECORD 

Questions for the Record: 

Ms. Diana Aviv 


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