Download The Times (and Minds)

The Times (and Minds),
They Are A’Changin’
“Reform” Proposals for the
Nonprofit Sector and Philanthropic
Infrastructure
King McGlaughon
Chief Philanthropic Officer
Wells Fargo Wealth Management
December 2010
What is the Environment Today?
 Increased and evolving regulations, oversight, and potential liability of
officers and directors
 Increasing competition for donors, other funding dollars.
 Basic capitalization and fiscal challenges at the institutional level
– Diminishing endowments and reserves (-30%)
– Adoption of UPMIFA in most states by 2009
– Stresses on federal, state and corporate funding and grantmakers (2010
and forward)
 Financial stress on individual donors
 Nonprofits face increasing pressure for accountability and sound
management from
– Government
– Donors
 New donor demographics
 Increased use of technology, expansion of the “local community” of
nonprofits and donors
The Current Regulatory Environment
Changes in overall federal tax regime
•2010 as year of “no transfer tax” (maybe)
•2011 as year of “reversion to ‘old transfer tax’”
(maybe) – the “stepped-up basis” conundrum
•Projected increases in Income Tax (and Capital Gains
Tax) rates
•Interest in income tax deductions will increase as
tax rates climb, especially capital gains rates
(collectibles currently at 28%)
Changes in overall “charitable giving”
infrastructure
• Gifts from IRAs and other “tax-benefitted” tools
The Current Professional and Business Environment:
Philanthropy
Increased scrutiny of nonprofit management,
marketing, and business strategies
• Governance and board leadership challenges
• Increased complexity and sophistication in areas of
financial management, investment management, etc.
(Sarbanes-Oxley, for example)
• Increased potential liability and perceptions of risk on
the part of nonprofit board members and leaders
• Heightened expectations and possible regulatory
intrusions into fundraising and donor development
activities
With this comes increased opportunity for
partnership, collaboration and professional
services
Independent Sector Recommendations
 1. Federal and State Enforcement— Effective oversight of the charitable sector requires vigorous
enforcement of federal and state law. Congress should increase the resources allocated to the
Internal Revenue Service for overall tax enforcement and oversight of charitable organizations,
and it should create a federally funded program to help states establish or increase oversight
and education programs for charitable organizations. Congress should also eliminate statutory
barriers that prevent the IRS from sharing information about investigations of possible
wrongdoing with state charity officials.
 2. Disclosure of Performance Data— Every charitable organization should, as a recommended
practice, provide more detailed information about its operations, including methods it uses to
evaluate the outcomes of programs, to the public through its annual report, website, and other
means. The Form 990 returns are not useful as a tool for reporting complex program evaluation
information. Congress should not require charitable organizations to report more detailed
statements of program evaluations or performance measures as part of their Form 990 series
returns.
 3. Donor-Advised Funds— Laws and regulations governing donor-advised funds should be
strengthened to ensure that donors or related parties do not receive inappropriate benefits from
these funds. Congress should amend tax laws to define and regulate donor-advised funds,
including requiring sponsoring charities to make minimum distributions of 5 percent of
aggregate donor-advised fund assets and enforcing minimum fund activity requirements.
Congress also should prohibit sponsoring charities from making payments to a private
foundation or directly or indirectly to the fund’s donors, advisors, or related parties. Further, tax
deductions for contributions to donor-advised funds should be allowed only if the donor has a
written agreement with the sponsoring charity clarifying these restrictions. Penalties should be
imposed on donors, advisors, and managers who violate these prohibitions.
IS Recommendations (cont’d)
 4. Abusive Tax Shelters— Congress should make clear that all tax-exempt organizations, including
those not currently required to file tax returns, are subject to the same requirements as taxable
entities with regard to reporting their participation in potentially abusive “listed” and other
“reportable” tax shelter transactions, and should impose penalties on organization managers for
failure to report if they knew or had reason to know that the transaction was a reportable
transaction. Congress should impose penalties on taxable participants and material advisors who
fail to notify tax-exempt participants that they would be engaging in a reportable transaction, and
should ensure that appropriate sanctions are imposed on tax-exempt entities that knowingly
participate in abusive tax shelters.
 5. Structure, Size, and Composition of Governing Boards— To qualify for recognition as a 501(c)(3)
tax-exempt organization, an organization should generally be required to have a minimum of three
members on its governing board. Further, to qualify as a public charity (rather than a private
foundation), at least one-third of the members of the organization’s governing board should be
independent: that is, individuals who have not received compensation or material benefits directly
or indirectly from the organization in the previous 12 months, whose compensation is not
determined by other board or staff members, and who is not related to someone who received such
compensation from the organization. Every charitable organization should be required to disclose
on its Form 990 series return which of its board members are independent. Individuals barred from
service on corporate boards or convicted of crimes related to breaches of fiduciary duty should be
prohibited from serving on the boards of charitable organizations.
 6. Conflict of Interest and Misconduct— As a matter of recommended practice, charitable
organizations should adopt and enforce a conflict of interest policy consistent with its state laws
and organizational needs. The IRS should require every charitable organization to disclose on its
Form 990 series return whether it has such a policy. Charitable organizations should also adopt
policies and procedures that encourage and protect individuals who come forward with credible
information on illegal practices or violations of adopted policies of the organization.
IS Recommendations (cont’d)
 7. Charitable Solicitation -- The Internal Revenue Service should enforce firmly the current legal
prohibitions against private inurement, private benefits, and provision of excess benefits,
particularly in the context of charitable solicitations.
Other “Recommendations”
 Senate Finance Committee: “While college and university annual investment returns
have averaged around 15.2%, colleges and universities have only been spending about
4.6% of their endowment assets each year.” This has drawn the attention of the
Senate Committee on Finance, which recently held a hearing regarding the
accumulation of endowment income at colleges and universities and debated
whether endowments should be taxed or regulated (for example, by the use of the
minimum distribution requirement that applies to private foundations).
–
Discussion items: Should endowments in excess of $x.00 become fully taxable as to
earnings?
 Various Congressional committees, nonprofit sector task force groups, etc:
–
Donor-Advised Fund regulation – mandate a minimum 5% distribution requirement at the
individual DAF level (different from IS recommendation above).
 The “Deficit Commission” and various Congressional bodies and committees:
Proposed revisions and/or changes to the “charitable tax deduction” infrastructure.
–
–
“Tax Credit” versus “Tax Deduction” proposal – 15% tax “credit” would replace current
income tax deduction, with IRS making a “grant” to the recipient charity to “make up the
balance of the donor’s charitable gift.” (For a $100 gift, donor would donate $85 and IRS
would pay $15 to the charity.) [Bipartisan Policy Center committee chaired by Pete Dominici
(R) and Alice Rivlin (D).] Proposed in interest of “fairness” to lower income donors and
smaller nonprofits. Committee points to British “Gift Aid” system as an analogous scheme.
Limited Deductibility of Charitable Gifts under Traditional Scheme – Deficit Reduction
Commission Allow deductibility of charitable gifts only when they exceed 2% of AGI.