- TAX-EXEMPT CHARITABLE ORGANIZATIONS

[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]

TAX-EXEMPT CHARITABLE ORGANIZATIONS
=======================================================================
HEARING

before the

SUBCOMMITTEE ON OVERSIGHT

of the

COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

__________

JULY 24, 2007

__________

Serial No. 110-55

__________

Printed for the use of the Committee on Ways and Means

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COMMITTEE ON WAYS AND MEANS

CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

Janice Mays, Chief Counsel and Staff Director

Brett Loper, Minority Staff Director

______

SUBCOMMITTEE ON OVERSIGHT

JOHN LEWIS, Georgia, Chairman

JOHN S. TANNER, Tennessee JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts ERIC CANTOR, Virginia
XAVIER BECERRA, California JOHN LINDER, Georgia
STEPHANIE TUBBS JONES, Ohio DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey
JOSEPH CROWLEY, New York

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.

C O N T E N T S

__________

Page

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

WITNESSES

Steven T. Miller, Commissioner, Tax Exempt and Government
Entities Division, Internal Revenue Service.................... 10
Stanley J. Czerwinski, Director, Intergovernmental Relations,
Strategic Issues, Government Accountability Office............. 26
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations, Government Accountability Office............... 47
Diana Aviv, President and Chief Executive Officer, Independent
Sector......................................................... 73
Steve Gunderson, President and Chief Executive Officer, Council
on Foundations................................................. 84

SUBMISSIONS FOR THE RECORD

Alliance for Justice, statement.................................. 114
American Association of Museums, statement....................... 116
American Bankers Association, statement.......................... 118
American Bar Association Section of Real Property, statement..... 120
American Bar Association Section of Taxation, statement.......... 128
American Institute of Philanthropy, statement.................... 134
American Society of Appraisers, statement........................ 136
American Society of Association Executives, statement............ 137
Association for Healthcare Philanthropy, statement............... 139
Association of Art Museum Directors, letter...................... 142
Association of Blind Citizens, statement......................... 143
Association of Fundraising Professionals, statement.............. 144
Atlanta Union Mission, statement................................. 146
Baton Rouge Area Foundation, statement........................... 149
Capital Region Community Foundation, statement................... 150
Chapman Trusts, statement........................................ 151
Community Foundation of Western Massachusetts, statement......... 157
DLA Piper, statement............................................. 158
Dr. John M. Templeton, Jr., statement............................ 159
Ewing Marion Kauffman Foundation, letter......................... 161
Food Donation Connection, statement.............................. 163
Foundation For The Carolinas, statement.......................... 167
Grantmakers Without Borders, statement........................... 168
Greenlining Institute, statement................................. 171
High Museum of Art, statement.................................... 174
Independent Sector, statement.................................... 174
Karen D. Krei, statement......................................... 177
Kenneth H. Ryesky, statement..................................... 180
Lester M. Salamon, statement..................................... 185
Lettie Pate Evans Foundation, letter............................. 194
Marin Community Foundation, statement............................ 197
Nancy E. Tate, letter............................................ 202
National Cattlemen's Beef Association, statement................. 203
National Christian Foundation, statement......................... 204
National Committee for Responsive Philanthropy, statement........ 209
National Committee on Planned Giving, statement.................. 213
National Council of Nonprofit Associations, statement............ 214
National Multiple Sclerosis Society, statement................... 215
New York Community Trust, statement.............................. 216
Ohio Grantmakers Forum, statement................................ 220
Ohio Osteopathic Foundation, letter.............................. 221
PGA Tour, statement.............................................. 222
Putnam Scholarship Fund, statement............................... 224
Robert M. Hearin Support Foundation, statement................... 225
Rodrigues, Horii, and Choi, LLP, statement....................... 229
Samaritan's Purse, statement..................................... 232
Schwab Charitable Fund, statement................................ 233
Senator Byron Dorgan, statement.................................. 235
Goodwill Industries International, statement..................... 236
Stewart Mott Foundation, statement............................... 237
Studio Museum in Harlem, statement............................... 239
The Meadows Foundation, letter................................... 239
Una Chapman Cox Foundation, letter............................... 242
United Jewish Communities, statement............................. 248
Wisconsin Alumni Research Foundation, statement.................. 255
Zimmerman-Lehman, statement...................................... 262

TAX-EXEMPT CHARITABLE ORGANIZATIONS

----------

TUESDAY, JULY 24, 2007

U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:05 a.m., in
room 1100, Longworth House Office Building, Hon. John Lewis
(Chairman of the Subcommittee) presiding.
[The advisory of June 12, 2007 requesting written comments
follows:]

ADVISORY

FROM THE
COMMITTEE
ON WAYS
AND
MEANS

SUBCOMMITTEE ON OVERSIGHT

CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
June 12, 2007
OV-4

Lewis Announces Request for

Written Comments on Provisions Relating to

Tax-Exempt Organizations in the

Pension Protection Act of 2006

House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA) announced today that the Subcommittee is requesting written
comments for the record on the provisions relating to tax-exempt
organizations contained in the Pension Protection Act of 2006 (P.L.
109-280).

BACKGROUND:

On August 17, 2006, the Pension Protection Act of 2006 (Act) was
enacted into law. The Act contains over thirty provisions relating to
tax-exempt organizations, including charitable giving incentives and
exempt organization reforms. Certain provisions were intended to
improve accountability among donor advised funds and supporting
organizations. Most of the provisions were never discussed on a
bipartisan basis, nor the subject of Committee hearings, during the
109th Congress.

The Subcommittee is interested in the tax-exempt community's views
on the impact of these recently-enacted provisions on charities and
foundations. The Subcommittee is particularly interested in how these
new rules affect, or will affect, charitable efforts and the
difficulties that have arisen in implementing these provisions.
Further, the Subcommittee requests comments on the provisions scheduled
to expire on December 31, 2007. The deadline to submit written comments
is Tuesday, July 31, 2007.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``110th Congress'' from the menu entitled, ``Committee Hearings''
(http://waysandmeans.house.gov/Hearings.asp?congress=18). Select the
request for written comments for which you would like to submit, and
click on the link entitled, ``Click here to provide a submission for
the record.'' Once you have followed the online instructions,
completing all informational forms and clicking ``submit'' on the final
page, an email will be sent to the address which you supply confirming
your interest in providing a submission for the record. You MUST REPLY
to the email and ATTACH your submission as a Word or WordPerfect
document, in compliance with the formatting requirements listed below,
by close of business Tuesday, July 31, 2007. Finally, please note that
due to the change in House mail policy, the U.S. Capitol Police will
refuse sealed-package deliveries to all House Office Buildings. For
questions, or if you encounter technical problems, please call (202)
225-1721.

FORMATTING REQUIREMENTS:

The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
Committee by a witness, any supplementary materials submitted for the
printed record, and any written comments in response to a request for
written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.

1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Submitters are advised that the Committee relies
on electronic submissions for printing the official record.

2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.

3. All submissions must include a list of all clients, persons,
and/or organizations on whose behalf the submission is made.

Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.

The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.

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

ADVISORY

FROM THE
COMMITTEE
ON WAYS
AND
MEANS

SUBCOMMITTEE ON OVERSIGHT

CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
July 09, 2007
OV-5

Lewis Announces Overview Hearing on

Tax-Exempt Charitable Organizations

House Ways and Means Oversight Subcommittee Chairman John Lewis (D-
GA) announced today that the Subcommittee will hold an overview hearing
on tax-exempt organizations, which will focus on charities and
foundations described in Internal Revenue Code section 501(c)(3). The
hearing will take place on Tuesday, July 24, 2007, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 10:00 a.m.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. Invited
witnesses will represent the Internal Revenue Service, the U.S.
Government Accounting Office, the Independent Sector, and the Council
on Foundations. However, any individual or organization not scheduled
for an oral appearance may submit a written statement for consideration
by the Subcommittee and for inclusion in the record of the hearing.

BACKGROUND:

There are approximately 1.6 million tax-exempt organizations
described in the twenty-eight categories listed in Internal Revenue
Code section 501(c). Two-thirds, or more than one million, of these
organizations are described in Internal Revenue Code section 501(c)(3).
Currently, the assets of section 501(c)(3) organizations exceed $2.5
trillion. They have annual revenues of nearly $1.2 trillion and spend
approximately $900 billion on program services. Section 501(c)(3)
organizations continue to grow each year with more than 350,000
organizations granted tax-exempt status since 1997.

Internal Revenue Code section 501(c)(3) describes organizations
that are organized and operated exclusively for religious, charitable,
scientific, educational, and certain other specified exempt purposes.
These organizations include, among others, public charities and private
foundations. They are eligible to receive tax-deductible contributions
and are subject to operating restrictions, including a prohibition on
engaging in political activities.

There have been a number of recent legislative and administrative
developments that relate to section 501(c)(3) organizations and may
affect their operations. These developments include the enactment of
the Pension Protection Act of 2006 (P.L. 109-280), the release of the
redesigned draft Form 990 (Return of Organization Exempt from Income
Tax), and the activities of the Exempt Organizations Office of the
IRS's Tax Exempt and Government Entities Division.

In announcing the hearing, Chairman Lewis stated: ``The volunteers
and organizations that make up the charitable community work day after
day providing services to our communities that are critical to all
Americans and essential to the well-being of our Country. The Congress
and the public must continue to support this community. I look forward
to beginning a dialogue about the important role charities play in
American life. The Subcommittee will continue its review of tax-exempt
issues throughout the 110th Congress, including charities' efforts to
assist diverse communities and other specific areas of concern.''

FOCUS OF THE HEARING:

The Subcommittee will undertake a broad overview of section
501(c)(3) charitable organizations. The Subcommittee will review the
overall state of this sector, including activities and measures for
ensuring public accountability and good governance.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Written statements submitted to the Subcommittee
pursuant to the June 12, 2007, Subcommittee Advisory, OV-4, soliciting
comments on tax-exempt provisions contained in the Pension Protection
Act of 2006 will be included in the submissions for the record on this
hearing and do not need to be submitted again. Accordingly, only one
statement in total is necessary for any individual or organization with
respect to comments on the Pension Protection Act of 2006. Any
person(s) and/or organization(s) wishing
to submit for the record must follow the appropriate link on the
hearing page
of the Committee website and complete the informational forms. From the
Committee homepage, http://waysandmeans.house.gov, select ``110th
Congress'' from the menu entitled, ``Committee Hearings'' (http://
waysandmeans.house.gov/Hearings.asp? congress=18). Select the request
for written comments for which you would like to submit, and click on
the link entitled, ``Click here to provide a submission for the
record.'' Once you have followed the online instructions, completing
all informational forms and clicking ``submit'' on the final page, an
email will be sent to the address which you supply confirming your
interest in providing a submission for the record. You MUST REPLY to
the email and ATTACH your submission as a Word or WordPerfect document,
in compliance with the formatting requirements listed below, by close
of business Tuesday, August 7, 2007. Finally, please note that due to
the change in House mail policy, the U.S. Capitol Police will refuse
sealed-package deliveries to all House Office Buildings. For questions,
or if you encounter technical problems, please call (202) 225-1721.

FORMATTING REQUIREMENTS:

The Committee relies on electronic submissions for printing the
official record. As always, submissions will be included in the record
according to the discretion of the Committee. The Committee will not
alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
Committee by a witness, any supplementary materials submitted for the
printed record, and any written comments in response to a request for
written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.

1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Witnesses and submitters are advised that the
Committee relies on electronic submissions for printing the official
record.

3. All submissions must include a list of all clients, persons,
and/or organizations on whose behalf the witness appears. A
supplemental sheet must accompany each submission listing the name,
company, address, telephone, and fax numbers of each witness.

Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.

Chairman LEWIS. Good morning. The hearing is now called to
order. The Subcommittee on Oversight is holding its first
hearing on tax-exempt organizations. Today, we will take a
broad look at charities and foundations, and review the current
state of the charitable sector.
These organizations play such an important role in our
country. Charities and foundations make up the very fiber of
our communities. They know the deepest human needs of our
friends and neighbors. They know the solutions that work.
Often, at critical times, charities and foundations are the
leaders that show the government the way to care for our
citizens. We must listen and learn from you.
Last year, these organizations spent over $1 trillion on
directly serving those in need. These services touch every
corner of life in our communities--education, the arts, and
medical research. They also serve those who need our help the
most by feeding the hungry, caring for the sick, and lifting up
those who live in poverty, those who have been left out and
left behind.
The Government alone cannot address these important and
unmet needs. We count on charities and foundations to fill this
gap. The need for these programs creates a special tie between
charities and the Government. As we move forward in this
Congress, we must work together for the common good of our
communities and our Nation.
The question today is whether we can do more. Can we really
do more with what we have? Can we touch more lives and uplift
more people? We must strengthen the nonprofit sector so that we
can deliver more service to more Americans. They are counting
on us. We must not fail them. We invite this sector to work
with us toward this goal.
I am pleased to recognize the distinguished Ranking Member,
my dear friend from Minnesota, Mr. Ramstad, for his opening
statement.
Mr. RAMSTAD. I thank my friend, the distinguished Chairman,
for yielding. He is both distinguished and a good friend. Thank
you for yielding and for holding this important hearing, Mr.
Chairman, to give our Members an overview of the tax-exempt
charitable sector.
I think it is helpful to review present law as well as the
crucial work that charitable organizations are doing across
America. This will certainly help us evaluate proposed
legislation in this Congress.
I am truly fortunate to represent a State with such an
active and vibrant community of charitable organizations and
foundations. Minnesota's charities and our volunteers are
feeding the hungry at record numbers; sheltering the homeless,
also record numbers; and providing protection, hope, and
opportunity to the most vulnerable Americans.
Over the last 25 years, I have served on the boards of no
fewer than 12 charitable organizations. I am proud to be a co-
founder of the Greater Lake Country Food Bank, which is one of
Minnesota's largest independent food banks. My family and I
still volunteer regularly at Sharing and Caring Hands in
Minneapolis, as well as Interfaith Outreach and Community
Partners in our home community of Wayzata.
Recently, several of us helped launch a public/private
partnership to end homelessness in Minnesota called Heading
Home Minnesota. The governor was the leader of our group, and
another example of good work being done by the charitable
sector. I think Minnesota's charitable organizations are truly
a model for the Nation, and I am proud to be associated with
them and grateful, certainly, for all they do.
As I look out at the witness table, Mr. Chairman, and I am
sure you have the same feeling, it is like old home week here
in the Committee on Ways and Means room. I know you join me,
and he will be introduced by our distinguished colleague Mr.
Kind, but it is great to see Steve Gunderson back, who is now
president and CEO of the Council on Foundations; also to see
Steve Miller of the Internal Revenue Service (IRS), who has
joined us on previous occasions, has always been responsive to
our inquiries and helpful to the Subcommittee.
It is just a good thing that these types of cases are more
the exception than the norm, but where there are cases of fraud
and abuse, they should be rooted out so the reputations of 99.9
percent of the charities in this country that do good work are
not tarnished, and Americans can be sure their donations are
put to good use.
Finally, Mr. Chairman, it is also good to welcome Diana
Aviv of the Independent Sector. Most of us on the Committee are
familiar with the good work her organization does. I also want
to welcome--not to exclude anybody, certainly--Stan Czerwinski
of the Government Accountability Office (GAO), who is
testifying, I think, for the first time in several years.
Welcome back to the Subcommittee.
Mr. Chairman, just let me conclude by saying this. We know
our charities do extremely important work across the country,
and Congress should promote, should help facilitate, their good
deeds. We need a vibrant charitable community in our country,
and also, at the same time, must guard against those who would
misuse their tax-exempt status and abuse the public trust.
There are few things worse in the public arena then that type
of abuse. So, we must protect the vast majority of charities
that in good faith do work, perilous work, for our communities
and help so many in need.
I again, Mr. Chairman, thank you for holding this hearing
today. I know we can work together in a bipartisan way to
continue protecting the hardworking, honorable charities and
the public's trust in them because to do otherwise would fail
the American people.
So, I thank the Chair, and I yield back.
[The prepared statement of Mr. Ramstad follows:]
Prepared Statement of The Honorable Jim Ramstad
Ranking Member, Subcommittee on Oversight
I thank my friend for yielding and for holding this hearing to
provide our Members with an overview of the tax exempt charitable
sector.
It's helpful to review present law, as well as some of the crucial
work charitable organizations do in our communities. This will help us
evaluate proposed legislation this Congress.
I am truly fortunate to represent a State with an active and
vibrant community of charities and foundations.
Minnesota's charities and our volunteers are feeding the hungry,
sheltering the homeless and providing protection, hope and opportunity
to the most vulnerable Americans.
Over the years, I have served on the boards of 12 charities. I am
proud to be a co-founder of the Greater Lake Country Food Bank,
Minnesota's largest independent food bank. My family and I still
volunteer regularly at Sharing and Caring Hands in Minneapolis, and I
recently helped launch a public-private partnership to end homelessness
in my State, called Heading Home Minnesota.
Minnesota's charitable organizations are truly a model for the
Nation, and I'm proud to be associated with them and grateful for all
they do.
Mr. Chairman, as I look out at the witness table, it's like old
home week! I know you join me in welcoming our former colleague from
Wisconsin, Steve Gunderson, who is now the President and CEO of the
Council on Foundations. Steve, it's great to see you again.
I also welcome back Steve Miller of the IRS, who joined us on
previous occasions and has always been responsive to inquiries from us
and our staff.
I also thank the Chairman for including Greg Kutz of GAO, who does
great nonpartisan work for the Ways and Means Committee. Mr. Kutz will
testify on an investigation GAO performed at my request on tax-exempt
organizations that owe the Government nearly $1 billion in payroll and
other taxes.
For example, one entity owed more than $15 million in taxes, while
its top official received more than $1 million in annual compensation
and benefits and made several hundred thousand dollars in cash
transactions at banks and casinos. Obviously the organization did not
fail to pay taxes due to a cash flow problem.
Fortunately, these types of cases are more the exception than the
norm, but where there are cases of fraud and abuse, they should be
rooted out so the reputations of countless charities that do good work
are not tarnished and Americans can be sure their donations will be put
to good use.
Mr. Chairman, I also welcome Diana Aviv of the Independent Sector.
Many of us are already familiar with Ms. Aviv and the good work of her
organization.
Finally, I would like to welcome Stan Czerwinski of GAO, who is
testifying before the Committee for the first time in several years--
welcome back, Stan.
Mr. Chairman, we know our charities do extremely important work
across America, and Congress should promote a vibrant charitable
community.
On the other hand, we must always guard against those who would
misuse their tax-exempt status and abuse the public trust.
We must protect the vast majority of charities that in good faith
work so tirelessly for our communities and help so many in need. That
means we sometimes have to ask tough questions and consider legislation
to ensure the public's trust in our charitable community remains
unblemished.
This public trust in our charitable community has led to an
estimated $295 billion of charitable giving in 2006.
The American people deserve our thanks for their generosity, and
charities deserve our gratitude for the countless acts of kindness they
deliver every day.
We will continue to protect those hardworking charities and the
public's trust in them. To do otherwise would fail the American people.
I thank the Chair and I yield back.

Chairman LEWIS. Let me thank you, Mr. Ranking Member, for
your fine opening statement.
Would any other Members like to make an opening statement
or have any opening remarks? At this time, Ms. Tubbs Jones is
recognized for her opening statement.
Ms. TUBBS JONES. Thank you, Mr. Chairman, Mr. Ramstad,
Ranking Member. Good morning and thank you for hosting these
hearings. My name is Stephanie Tubbs Jones, and I hail from the
great city of Cleveland, the home of some of the oldest
charitable foundations in the country, places like the
Cleveland Foundation, the oldest and second-largest community-
based foundation, with assets over $1.6 billion.
I also am the home of the Gunn Foundation, and the home of
several other, like Jewish Community Fund and Jewish Community
Federation. That is why I am so happy that you have chosen
today to host the hearings in and around tax-exempt
organizations. At a time last year during the 109th Congress, I
was worried that some people were moving to push tax-exempt
organizations over or, as the kids say, kicking them under the
bus. So, I am so pleased today that we have this opportunity.
Other nonprofits in my congressional district work toward
making sure that people have housing available, like the
Cleveland History Network, Mount Pleasant NOW, and the list
goes on.
Finally, Mr. Chairman, I want to say that I am proud to
have begun or started a new caucus in the Congress. I am co-
chairing the Philanthropic Caucus with my colleague, Robin
Hayes. As we move through these next months and years here at
the Congress, we want to be able to focus in on issues that are
important to philanthropic organizations.
So, again, I would applaud you, Mr. Chairman, and you, Mr.
Ranking Member, for the work you are doing in this area, and
know that you have a stalwart Member ready to go to work on
these issues.
Thank you, Mr. Chairman. I yield back.
Chairman LEWIS. Thank you, Ms. Tubbs Jones, for your fine
statement.
Now I am pleased to recognize my friend from the great
State of Wisconsin, Mr. Kind, for a statement.
Mr. KIND. Thank you, Mr. Chairman. I want to thank you for
holding this important hearing. I would also like to thank our
invited guests for your testimony here today on such a timely
topic. I especially will be interested to get some feedback on
the consequences and unintended consequences of the pension
format that I was heavily involved in just a couple years ago.
I know some of you have some thoughts to share on that.
Basically, I wanted to welcome a good friend of mine, my
predecessor in this congressional district, Steve Gunderson,
who is the current president and CEO of the Council on
Foundations. Those who knew Steve and worked with Steve had
great respect and admiration for the work that you did around
here. That was equally true for the people that you represented
back home.
It is respect and admiration that you still garner, not
only in this place here on Capitol Hill but especially back
home in the Third Congressional District of western Wisconsin,
and given the important work that you are doing right now at
the Council on Foundations.
I am especially excited in previous conversations to hear
of the efforts now on what we can do with these organizations
for rural economic development opportunities. I know you are
planning a conference in August, coming up shortly, one that I
have a scheduling conflict now about but I will get back to you
on later, which could be very helpful in introducing some new
ideas and some new concepts in a very underserved and
underrepresented region of our country.
So, Steve, I thank you. Welcome back to Capitol Hill. I
look forward to hearing your testimony.
Thank you, Mr. Chairman.
Chairman LEWIS. Thank you very much, Mr. Kind, for your
statement.
Mr. Pascrell, my friend, my wonderful and great friend from
the State of New Jersey.
Mr. PASCRELL. Mr. Chairman, just very briefly, I am looking
to see whether there is a balance between the private and
public philanthropic organizations--easy for me to say--and
what experiences the IRS is having.
Finally, Mr. Chairman, I am interested to know: Basically,
the Treasury Department asserted recently that nonprofits are a
significant source of financing to terrorists and terrorist
organizations. I think we need to take a look at this very
carefully so that we do not paint with a wide brush, which we
are apt to do in the Congress. I am very interested in that
area.
We have got a distinguished panel, so let's get on with it.
Chairman LEWIS. Thank you very much, Mr. Pascrell, for your
statement.
We are at that point now where we hear from our witnesses.
I ask that each of you limit your testimony to 5 minutes.
Without objection, your entire statement will be included in
the record. I will have all of the witnesses give their
statements and then the Members will ask questions of the
panel.
It is now my pleasure to introduce and present our first
witness. Steve Miller is the Commissioner of the IRS Tax Exempt
and Government Entities Division. Mr. Miller, welcome.

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

Mr. MILLER. Thank you, Mr. Chairman. Good morning, and
thank you for the opportunity to appear. As you mentioned, my
office at the IRS is responsible for charities and other tax-
exempt entities. We cover a great deal of ground. We have more
than one million 501(c)(3) organizations we are aware of, and
they hold assets in excess of $2.5 trillion.
I will begin with two observations. First, I believe the
charitable sector deserves our respect and gratitude. It does
wonderful things for society. There is no question. Second, I
believe the vast majority of the charitable sector complies or
attempts to comply with the tax law.
While we have seen problems, and some are serious and some
involve major charitable institutions, the problems don't
appear to be widespread. We are working to keep it that way.
Our job at the Service is to maintain a balanced program for
regulating the charitable sector.
Such a program ensures that congressional intent is met. It
helps maintain public confidence in the integrity of the
sector. It prevents erosion of the tax base by ensuring that
those who would prey upon innocent contributors and misuse the
privilege of tax-exempt status are identified and are stopped
from doing so.
Our compliance program has three components. First is our
determination letter program. We work individually with new
organizations to ensure that they understand and comply with
their responsibilities. The second component is a strong
education and outreach program. In person and online, we help
existing charities stay compliant and alert to their legal
requirements.
Finally, we have an increasingly robust examination program
to follow up on how organizations are actually operating. We
have changed the way we examine organizations, adding staff and
office to allow us to react flexibly. Last year we examined
more than 7,000 returns, up 23 percent from 2003 and the most
we have examined since the year 2000.
Our determination and examination programs allow us to
identify areas of concern. I have outlined those in detail in
my written testimony, but I will touch on a few here.
Our first concern is the overvaluation of charitable
contributions, especially noncash donations. We pursue these
cases, but decisions are difficult where the recovery is likely
to be less than the significant cost to audit, appraise, and
litigate.
The second area of concern is with charities established to
benefit the donor rather than the public. In these cases, a
donor claims a deduction but maintains control over the
contributed assets, and often uses them for personal gain.
Certain donor-advised fund arrangements and certain supporting
organizations may fall into this category.
The third area involves the blurring of the line between
the tax-exempt and the commercial sectors. The line grows
fainter as the tax-exempt sector grows larger, wealthier, and
structurally more complex. Concerns in this area usually
involve the movement of commercial enterprise into the
charitable sector, and difficulties in calculating and
reporting the unrelated business income tax.
The fourth area is excessive compensation. High
compensation based on fair market value is fine. Excessive
compensation is not.
Finally, we have a concern over political activity.
Charities cannot intervene in political campaigns, but in every
election cycle we see reports of charities supporting or
opposing particular candidates.
How will we address needs and other problems into the
future? Well, first we need to continue to strengthen our
compliance programs. We are improving front-end compliance by
upgrading our determination letter process. We continue to
create innovative and interactive educational opportunities on
the web. We have increased our enforcement presence in the
community, with more examinations and taxpayer-to-IRS
compliance contacts.
Our second priority is to enhance transparency of the
nonprofit sector by requiring better data and making that data
more publicly available. Transparency is the linchpin of
compliance, but when the structure and operations of charitable
organizations are visible to all, the possibility of misuse and
abuse is reduced.
Our transparency initiatives include the wholesale redesign
of the Form 990 and expanded electronic filing. We are also
working with the sector to raise standards of governance and
accountability, and we salute the sector's leadership in the
area, including that of the Council on Foundations and the
Independent Sector.
We appreciate the support the Subcommittee has given to us,
and we appreciate your support of the 2008 budget, which
contains a nice increase for my function as well as enhanced
electronic filing. Thank you, and I will be prepared to take
questions at a later time.
[The prepared statement of Mr. Miller follows:]

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Chairman LEWIS. Thank you very much, Mr. Commissioner, for
your statement.
Our next witness is from the Government Accountability
Office, so, I am pleased to welcome the Director of the
Strategic Issues, Mr. Stan Czerwinski. Welcome.

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

Mr. CZERWINSKI. Thank you, Mr. Chairman and Members of the
Subcommittee. We appreciate your holding this hearing, which as
many of you noted in your opening statements, is on a very
important topic.
GAO has done a lot of work looking at nonprofits over the
years. Typically, our work has been specialized, focusing on
specific topics, programs, events, and issues, especially tax-
related issues. For example, Greg Kutz, our Managing Director
for Forensic Audits and Special Investigations, will be
speaking next about a review that he and his team have just
completed.
Late last year our Comptroller General spoke at the
independent sector conference. When he returned from that
conference, he asked me and my team to do some background work
to determine if the sector as a whole merited GAO's attention.
We have just completed our initial background review, and our
answer to the Comptroller General is a resounding yes.
We are pleased to share with you the initial results of our
review today. Specifically, I would like to address three
topics: one, the sector's role in the economy; two, its
partnership with the Federal Government to provide key
services; and three, some issues that we believe need further
scrutiny.
As you know, the nonprofit sector is defined by its tax-
exempt status. To qualify, organizations must not distribute
the profits to the members, but instead must plow it back into
the organization's charitable purposes. Also, those purposes
themselves are dictated by what is governed in law.
My statement today will primarily focus on public charities
known as 501(c)(3)s for the section of the code that governs
them. Public charities make up about 60 percent of the 1.8
million organizations in the nonprofit sector as a whole. Also,
as a whole, the nonprofit sector plays a key role in the U.S.
economy. It represents about 11 to 12 percent of GDP. Nine
percent of the nation's civilian workforce is employed by
nonprofits. The sector is growing also. The number of
organizations has tripled in the last two decades.
The data tell us a similar story about nonprofits' role in
delivering Federal services. However, it is important to note
that the data are quite limited. What we have today is a result
of a herculean effort from a small band of dedicated
researchers. Elizabeth Boris, Marian Fremont-Smith, Alan
Abramson, Lester Salamon, and Gene Steurle are the most
noteworthy, and all provided input to our work.
About $200 to $300 billion in Federal funds flow each year
into nonprofits. That number is growing. For example, the
researchers estimate that the dollars going into nonprofits has
increased over 200 percent for the last two decades.
If anything, we see this trend continuing as the Federal
Government is increasingly faced with fiscal constraints and
looks for partners to help them shoulder that burden.
Nonprofits offer key advantages in doing so. They exist for the
sole purpose of providing the service they were created for and
dedicated to. They are typically very expert in the needs of
their clientele, the geographic region, and they offer greater
flexibility than their Government counterparts.
In times of constrained Government resources, we
increasingly look for ways to reform the way we do business and
to look for additional partners. A good example of this is
welfare reform. As you know, AFDC used to be a checkwriting
service. It was an entitlement, and dollars were unlimited.
AFDC underwent reform and was replaced by TANF, which is
service-based and the funding levels limited. TANF provides
such services as job training, job search, and child care.
These services are pretty much provided by the nonprofit
sector.
As we increasingly rely on nonprofits, it is important to
know about them, both to know how to help them and also which
ones need further scrutiny. The primary source of information
in the nonprofit sector and for oversight of it comes from IRS
through its tax-exempt status. However, IRS lacks the capacity
to do this job the way that we would need from a full policy
perspective, and to be fair, it is not IRS' central mission. As
we know, their job is to collect taxes.
As I pointed out, the definition of nonprofits hinges on
the tax-exempt status, but that hardly defines them. The role
of the sector is far greater than that. They are important to
the economy. They are key partners in the Federal Government.
It is in our interest to ensure their vitality, their
capacity, and their integrity. That begins with the attention
provided today, the support that they need, and oversight. What
the Subcommittee is doing today is a first step in the right
direction. We look forward to helping you as you continue your
agenda and your approach.
That concludes my statement, Mr. Chairman. I will be glad
to respond to questions you may have.
[The prepared statement of Mr. Czerwinski follows:]

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Chairman LEWIS. Thank you very much, Mr. Director, for your
statement.
Our next witness is from the Government Accountability
Office. So, I am pleased to welcome Greg Kutz, Director of
Forensic Audit and Special Investigations. Welcome.

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

Mr. KUTZ. Mr. Chairman and Members of the Subcommittee,
thank you for the opportunity to discuss exempt organizations
with tax problems.
Over the last several years, I have testified that
government contractors, Medicare physicians, and Combined
Federal Campaign charities were abusing the Federal tax system.
At the request of Ranking Member Ramstad, we have expanded our
investigation of tax abuse to exempt organizations. My
testimony has two parts: first, the magnitude of unpaid taxes,
and second, examples of fraud and abuse.
First, we found that 55,000 exempt organizations had $1
billion of unpaid Federal taxes. Charitable organizations
accounted for 85 percent of this amount. Most of the unpaid
taxes relate to 1,500 organizations that each owed over
$100,000.
The amount of unpaid taxes I reported here is substantially
understated because it encloses things such as nonfiling and
under-reporting of tax liability. We also found that more than
1,200 of those with unpaid Federal taxes received $14 billion
of direct Federal grants. One thousand one hundred fifty of
those were charitable organizations.
To put a face on this issue, we investigated 25 of the
exempt organizations with the most significant amount of unpaid
taxes, including 23 charities. For all 25 cases, we found
abusive and criminal activity related to the Federal tax
system. All 25 cases had unpaid payroll taxes. Willful failure
to remit payroll taxes to the IRS is a felony.
The 25 case studies had $105 million of unpaid taxes,
ranging from $300,000 to $30 million. The executives of these
organizations have made careers out of failing to pay their
Federal taxes. For example, rather than fulfill their role as
trustees of payroll tax money and forward it to the IRS, these
executives diverted the money for other expenses, including
their own salaries.
Based on our investigation of the lifestyles of the
executives of these 25 cases, we found that many were doing
very well. The posterboard which is on my right shows examples
of the assets we identified, including multi-million-dollar
homes and luxury vehicles. As you can also see on the board,
the executive director of this nursing home was paid $1
million.
These cases in our past investigations have shown that
failure to pay Federal taxes isn't the only problem that these
individuals have. For the most part, we found that the
individuals behind these case studies are fraudsters. This
point is further supported by five investigative themes, which
are shown on the second posterboard on my right.

First, we found substantial Federal payments. By not paying
their payroll and other Federal taxes, our case studies
benefited from tens of millions of dollars of Medicare and
other Federal payments.
Second, substantial other debt, including State and local
taxes and individual income taxes for executives.
Third, suspicious cash transactions, including cash
withdrawals and gambling by executives.
Fourth, numerous related party transactions, including
millions of dollars of management fees paid by charities to
entities affiliated with the executives or their relatives.
Fifth, prior convictions, including assault, attempted
bribery of an IRS official, and running an illegal gambling
operation.
In conclusion, the good news is that the vast majority of
exempt organizations pay their Federal taxes. However, our work
has shown that individuals behind thousands of these
organizations have taken advantage of the opportunity to avoid
paying at least $1 billion of Federal taxes. Case studies show
the enrichment of a select few being bankrolled by the Federal
Government and donors. Charities are supposed to be helping the
poor rather than lining the pockets of these select few.
I believe that the IRS should take more aggressive criminal
and collection action against those that are abusing the
current system.
Mr. Chairman, this ends my statement. I look forward to
your questions.
[The prepared statement of Mr. Kutz follows:]

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Chairman LEWIS. Thank you very much, Mr. Director, for your
statement. I am sure there will be a lot of questions.
I am pleased to welcome the President and the Chief
Executive Officer of the Independent Sector, Diana Aviv.
Welcome.

STATEMENT OF DIANA AVIV, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, INDEPENDENT SECTOR

Ms. AVIV. Thank you, Chairman Lewis and Ranking Member
Ramstad and Members of the Committee. Thank you for inviting me
to testify.
Independent Sector is a national nonpartisan organization
with approximately 600 members who represent tens of thousands
of public charities, private foundations, and corporate giving
programs. America's nonprofit community includes more than 1.5
million organizations, large and small, committed to improving
lives. Its impact is a result of the talent and dedication of
millions of volunteers, and a workforce of 11.7 million paid
employees, 9 percent of the entire national workforce.
Twenty percent of the sector's funds are from voluntary
contributions, 31 percent from government grants and contracts,
and 38 percent from fees for service. Together, charitable
organizations spend nearly $1 trillion annually to serve
communities here and abroad.
These vital organizations face tremendous challenges.
Corporate giving has declined, and Americans of modest means
are finding it more difficult to give because of rising prices
and difficult economic conditions in many regions.
Additionally, organizations that rely on government grants and
contracts, particularly those that serve the most vulnerable
members of our society, have been hurt by funding cuts and
changes in priorities.
To provide some relief, Congress acted last year to allow
older Americans to make charitable contributions from their
Individual Retirement Arrangement (IRA) funds without suffering
adverse tax consequences. This new incentive has already
resulted in small and large contributions totaling millions of
dollars to support counsel- ing for at-
risk youth, housing for homeless families, and much more.
Many of you are cosponsoring legislation to expand and
extend this provision, which is set to expire at the end of
this year, and we are committed to working with you to ensure
that legislation is enacted.
Nonprofits are also facing human resource challenges. Many
leaders are baby boomers who will be retiring, and there is a
much smaller pool to replace them. There have also been some
declines in the number of Americans who are able to volunteer.
On another front, there have been a number of stories in
recent years concerning troubling practices at some nonprofits.
Many in our community were concerned about these stories, and
we brought together leaders of charities and foundations to
explore needed changes.
At the urging of key leaders in Congress, we formalized our
efforts in the national Panel on the Nonprofit Sector. The
result constituted the most comprehensive review of governance,
regulations, and operations of the charitable community in more
than three decades.
The panel offered a strong, carefully integrated package of
over 130 recommendations for action that lawmakers, the IRS,
and the sector itself could take to improve governance and
accountability. We worked closely with congressional leaders,
and are pleased that much of the panel's work was reflected in
the reforms passed last year with the Pension Protection Act
(PPA) (P.L. 109-280).
The panel has continued its work and this fall will release
a set of 33 principles for good governance and effective
practice to guide charitable organizations. The IRS has also
drawn on the panel's recommendations in implementing the
Pension Act reforms and developing the draft Form 990 that was
released last month.
Our field is now providing feedback to improve that draft.
The revised form will increase transparency and facilitate
compliance, but its implementation will require significant
educational efforts and adjustments in nonprofit accounting and
recordkeeping practices.
We have asked Congress to increase funding to the IRS. We
also believe that the best way to improve enforcement and
transparency is to require mandatory electronic filing of
nonprofits' information returns.
There is another way Congress can help strengthen the
operations of our charitable community. Many individuals create
or come to work for charitable organizations with passion and
commitment, but insufficient knowledge of the legal
requirements and skills necessary for success.
Like their counterparts in the small for-profit community,
these leaders could benefit substantially from the planning
services, financial and legal advice, and management training
provided by the Small Business Administration. We stand ready
to work with Congress to create a Small Nonprofit
Administration to nurture and train leaders of charities in the
skills necessary to ensure that we can all benefit from the
vital services their organizations provide.
Thank you, and I am pleased to answer any questions.
[The prepared statement of Ms. Aviv follows:]

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Chairman LEWIS. Madam President, I thank you for your
statement. I am sure there will be some questions.
I am pleased to welcome the next witness, our friend, our
former colleague. It is good to see you, the Honorable Mr.
President, in your new role as head of the Council on
Foundations. To Ron Kind, I am not so sure, Steve, whether Ron
really introduced you when he made his opening statement, but
you can get a second introduction. You haven't forgot how we
act here in the Congress on this Committee when a good, a dear
friend returns. It is really good to see you. You are looking
good. There is life after Congress.
Mr. GUNDERSON. There is life after Congress.
Chairman LEWIS. I believe it. Thank you.
Mr. KIND. Thank you, Mr. Chairman. I did introduce and
welcome Steve to the Committee before. It is a delight to have
him back up here. I don't know if I ever shared this with
Steve, but as a new Member in my first term, getting to meet my
colleagues around here, inevitably they asked, ``What district
are you representing? Who are you replacing?'' When I told them
it was Steve Gunderson's seat, they had nothing but high praise
for you. I can't tell you how good that made me feel as a new
Member of Congress, to hear the type of work you were doing.
So, welcome back. Glad to have you today.

STATEMENT OF STEVE GUNDERSON, PRESIDENT AND

CHIEF EXECUTIVE OFFICER, COUNCIL ON FOUNDATIONS

Mr. GUNDERSON. Well, thank you very much to you, Mr.
Chairman; to my colleague, friend, and successor, Mr. Kind; to
my friend on Northwest Airlines back and forth, Mr. Ramstad,
way too many times; to Mr. Becerra, where we toiled on the old
Education and Labor Committee; and to our distinguished co-
chair of the Philanthropic Caucus. Thank you very much, Ms.
Tubbs Jones, for doing that. I do feel like I am coming home,
and I really appreciate the opportunity.
The Council on Foundations is a membership organization of
more than 2,000 grantmaking foundations and corporate giving
programs worldwide. We promote responsible and effective
philanthropy. We gather today at a unique time in American
history. Thanks to the combination of demographics and personal
resources, we are looking at the most significant generational
transfer of wealth at any time in history.
Whether we can use this moment to create new philanthropic
resources committed to enhancing the public good depends on how
well we--you the Congress and those of us in philanthropy--can
partner to create the tools for a new generation of service.
More than 71,000 grantmaking institutions contributed over
$40 billion in 2006. Collectively, these institutions hold
approximately $550 billion in assets. That is a lot of money,
but a word of caution: Philanthropy can never replace
government's role.
However, foundations can and do play a vital role in
strengthening and sustaining our communities. For example, in
your home city, Atlanta, Mr. Chairman, the Arthur Blank Family
Foundation holds that promise for every child ought to be the
mantra of that city. The foundation awarded $23 million last
year for students who attend Atlanta's new schools at Carver,
the Southeast's first small high school campus, and is helping
children in some of Atlanta's toughest neighborhoods get a fair
start in life by funding early learning and family support
programs.
As much as philanthropy does, we can and should do more.
The council is partnering with our members to act as a program
leader for a coalition funding workforce investment; to conduct
a national study to determine how we can better respond to
national disasters; to hold a conference next month, creating
an agenda for philanthropy in rural America; to grow
philanthropy's role in addressing the social challenges facing
our neighbors in Latin America and the Caribbean region.
Our growth depends upon our ability to earn and maintain
the public trust. Our growth and our service also depend upon
policymakers becoming our partners in creating the environment
and encouraging that growth. There are times when legislation
and regulation are appropriate and necessary, but we must be
partners in this effort in ways that achieve the proper
balance, both in the environment we create and in the
regulations we impose.
The council will continue steps toward effective, credible
self-regulation. We have established standards for every sector
of our membership. We have significantly enhanced our ethical
review process. We take self-regulation seriously.
Last year's Pension Protection Act includes the first-ever
regulation of donor-advised funds, and substantially increases
regulations of supporting organizations. The council supported
many of those provisions. However, in a couple of those areas,
we believe the legislation might have gone too far or it might
have had unintended consequences.
We were disappointed by the last-minute exclusion of donor-
advised funds, supporting organizations, and private
foundations as eligible recipients of charitable distribution
from IRAs. We ask the Congress to extend the IRA rollover
benefit, but we also ask that you allow donors to freely choose
where they will direct those funds.
This morning I want to underscore that donor-advised funds
democratize philanthropy, giving ordinary citizens the chance
to become philanthropists. Six donors from Mr. Ramstad's area,
the Minneapolis Foundation, recently recommended grants of
$16,000 from their donor-advised fund to support ending
homelessness.
We at the council want to fix certain provisions of the
Pension Protection Act, but we also want a positive agenda, not
only expanding the IRA rollover with appropriate fixes, but we
want to provide program-related investments by private
foundations to facilitate urban and rural economic development,
to extend the PPA's incentives for gifts of qualified
conservation property, and to make tribal governments qualified
recipients of charitable contributions of food by businesses.
Mr. Chairman, this is all about partnerships. We seek your
help to create the environment encouraging the growth of
philanthropy in order that we might all better partner in
serving the common good.
Thank you very much.
[The prepared statement of Mr. Gunderson follows:]

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Chairman LEWIS. Thank you very much, Mr. Gunderson.
Mr. Miller, in your written statement, you discuss
compliance in the sector. Is the charitable sector generally
compliant with the tax law?
Mr. MILLER. I think that is a fair statement, Mr. Chairman.
Chairman LEWIS. Will you go further to say that it is very
compliant?
Mr. MILLER. I believe that probably remains correct. As we
try to quantify the level of compliance, the only comment I
would make is we have not yet done a national research program
to truly baseline the level of compliance here, but in our view
and in our findings throughout our examination process, I would
hazard that very compliant remains correct.
Chairman LEWIS. Mr. Czerwinski, your testimony indicates
that the number of charities has grown 30 percent in the past 6
years. Has there been a 30-percent increase in the number of
employees and volunteers?
Mr. CZERWINSKI. That is a very good question, Mr. Chairman,
because we don't have precise data on these. What it points out
is the limitation of the understanding that we have of this
sector. Obviously, those numbers have grown, and that is one of
the things at GAO that we would like to be able to do, is to
try to get a more precise handle on that.
Chairman LEWIS. Why has Government been increasingly
partnering with nonprofit organizations? Do you think this
trend will continue in the future? If so, why?
Mr. CZERWINSKI. Oh, absolutely, Mr. Chairman.
Chairman LEWIS. This is local, county, State, and Federal;
government at all levels.
Mr. CZERWINSKI. Yes, Mr. Chairman. What we see is a
delivery mechanism that more and more involves all levels of
Government and other players such as nonprofits. As the Federal
Government is facing a fiscal condition of deficit, it looks
for more partners to help with that burden, and nonprofits have
proven themselves to be very effective players in that.
So, this is a trend that we have seen going on for the last
number of years, and it will probably increase and accelerate.
Chairman LEWIS. Ms. Aviv, your testimony states that it
would take nine million employees to replace the service
performed by volunteers. Has this been increasing over the past
few years? What challenges are charities facing in finding
volunteers?
Ms. AVIV. Mr. Lewis, I think what I was trying to convey in
my testimony is that there are the equivalent of--the number of
volunteers there are the equivalent of nine million
professionals. I think the charitable sector depends on both
the work of full-time professionals, part-time professionals,
and volunteers. It was just one way to quantify what the value
was and how many volunteers we depend on.
What we have seen, though, in numbers that are of concern
to us is that the number of volunteers volunteering in
charitable organizations is going down. In 2004, it was 64.5
million, in 2005, 65.4, and 2006 61.2. While we see that from
time to time the number of volunteers may increase in response
to a crisis, the overall numbers are going down. We are a
little concerned about that.
Chairman LEWIS. Mr. Gunderson, I applaud the work of
foundations. I have seen the good work in places all across
America, but especially in my city of Atlanta. I know the
foundation you mentioned, the Arthur Blank Foundation. They
help create unbelievable opportunities for children, for young
people, to get an education.
How do your members determine the needs of a community?
Mr. GUNDERSON. Very carefully and very strategically. In
most cases, especially at our community foundations, they would
have boards. Their boards, first of all, are chosen from the
community, so they seek to represent and reflect the community
that they serve.
Many foundations, including our private foundations and
even many of our corporate giving programs, have created their
own advisory committees that will allow them to better hear
from the community, especially the areas in which they choose
to serve.
For example, some foundations will fund just education.
Some will fund health care. Some will fund recreation or the
environment. They try to specialize and bring in those kind of
resources in ways that best reflects the needs of the community
they seek to serve in conjunction with the mission of their
foundation.
Chairman LEWIS. Mr. Kutz, let me ask you, do you have any
idea what is the best way to promote self-regulation? Is this a
question that they should be responding to in the private
sector?
Mr. KUTZ. I wouldn't have any opinion on that, no.
Chairman LEWIS. Thank you. Let me now yield to the Ranking
Member for questions.
Mr. RAMSTAD. Well, thank you, Mr. Chairman. I want to thank
all the witnesses again.
Mr. Kutz, I must say I was blown away when I first learned
about the 55,000 exempt organizations that are delinquent in
taxes and owe nearly $1 billion. Then you say in your testimony
that those numbers are understated. At the same time, you
conclude, which I think speaks well for the sector, for
nonprofits generally, that the vast majority of exempt
organizations pay their taxes, to quote you.
First of all, how many tax-exempt organizations are there
in this country?
Mr. KUTZ. I believe in the database of active ones for IRS,
there was 1.8 million.
Mr. RAMSTAD. 1.8 million. So, of the 1.8 million, 55,000
exempt organizations are delinquent?
Mr. KUTZ. That's correct.
Mr. RAMSTAD. Well, you also state that more aggressive
action is needed by the IRS. You alluded to the need for some
criminal investigations. Do you think any changes in law, in
Federal law, are also necessary?
Mr. KUTZ. No. I think the more aggressive criminal action
is necessary on the payroll tax cases. We have referred several
hundred of those over the last 5 years to the IRS related to
government contractors, Medicare providers, et cetera. We do
believe some aggressive action, making some examples of those
people.
On the collections side, I also think that with these types
of people, who are real fraudsters--these aren't your average
American taxpayers--more aggressive seizures and levying of
asset sources should be done.
Mr. RAMSTAD. So, it is not different from any other
problems. A few bad apples, unfortunately. Well, I think it is
important to point out the vast majority of exempt
organizations pay their taxes, are contributing a great deal to
this country, to the people in need in this country, as has
been pointed out, as we all know.
So, I just hope that the headlines coming out of this
hearing don't just concentrate on the bad apples because that
would diminish the good work that is being done, but at the
same time, I also think your recommendations that the IRS needs
to take more aggressive action against the bad apples is well
taken.
Let me ask you, Mr. Miller, do you have a mechanism in
place to identify officials at exempt organizations who aren't
paying their taxes? Are there some actions taken against them
or for those executives otherwise abusing the Federal tax
system? Why aren't you being more aggressive and taking action
against these bad apples?
Mr. MILLER. Well, if I understand the question, Mr.
Ramstad, we generally don't, as a part of our determination
letter process up front, do tax checks on key individuals. That
would be fairly burdensome on the organization and fairly
burdensome on the Service, and would slow down an otherwise
already pretty slow process of pushing through determination
letter requests.
On the enforcement side, when these organizations do get
into trouble, I think it is important to say that exempt
organizations, in terms of collection, in terms of most
employment tax issues, are remarkably similar to the balance of
our taxpaying public. That is, there are some bad apples out
there. They go into the collection queue, and they are treated
like other taxpayers at that point.
So, some do sit in the queue too long, and that is a
function of resources.
Mr. RAMSTAD. But whatever percent 55,000 is of 1.8 million
is about proportionate to the broader----
Mr. MILLER. I don't think I can say that. I think I could
look at--I have got to get back to you on that if I am correct
on that, but our sense is that the exempt organizations'
function, that those organizations are roughly equivalent in
terms of getting into problems as other small businesses, or
large business, for that matter.
Mr. RAMSTAD. Well, let me conclude before my time runs out.
I want to get back to Mr. Kutz for one question.
In your written testimony, you indicated that 1,200 of the
delinquent tax-exempt organizations received over $14 billion
in Federal grants. I would like to see this money going to
those that pay their taxes. That just doesn't make sense.
Can't the granting agencies--isn't there some way to
identify applicants that have a Federal tax debt before issuing
the grants?
Mr. KUTZ. It is a self-reporting process. There is a form
that is filled out. It is SF-424. It has a box that says, ``Do
you have other Federal debt?'' Five of our 25 case studies said
no on the box. Even if they had said yes, I am not sure there
is a mechanism for the agency, such as the Department of Health
and Human Services (HHS), for example, to validate that. So,
right now it is a trust but do not verify system, and so
people, grantees, who have significant tax problems get Federal
dollars.
Mr. RAMSTAD. Again, I thank the panel. I yield back.
Chairman LEWIS. Thank you. Now turning to Mr. Pascrell for
questions.
Mr. PASCRELL. Thank you, Mr. Chairman. I would like to
associate myself with your questions and the Ranking Member. I
think they go to the heart of much of what we are going to be
talking about today.
Mr. Gunderson, if you would, the Treasury Department
asserted recently that nonprofits are a significant force of
financing terrorists and their organizations. Do you agree with
that assessment, and what is the COF's view of the Treasury
Department's voluntary anti-terrorist financing guidelines?
Mr. GUNDERSON. Thank you for the question because this is
an area of great concern for us, especially at a time in which
international grantmaking is rising because of the concerns
about people all over the globe.
Out of hundreds of thousands of U.S. charities and billions
of dollars given in grants in material aid each year--listen to
this--only six U.S. charities are alleged to have intentionally
supported terrorists. Thus far, Treasury has not identified a
single case of inadvertent diversion of funds from a legitimate
U.S. charity to a terrorist organization.
The principle difficulty that we and our sector has with
the Treasury guidelines is that they call on charities to
collect a prodigious amount of information about their
grantees, much more than legally is required, and there is
simply no evidence that legal charities or legal foundations
are in any way engaged in funding terrorist actions.
As a result of that, we have asked as a part of a coalition
that Treasury withdraw those guidelines in order that we might
sit down and work together to try to resolve the concerns that
they may have and that we have about appropriate administration
in this area.
Mr. PASCRELL. So, we painted with a wide brush about
certain organizations, particularly in terms of international
events. Yet there has not been a single example? Why, then,
does the Treasury point to certain organizations if they are
not willing to come forward with specific examples?
Mr. GUNDERSON. That might be a question we have to ask
Treasury because it is one we are also trying to find out. The
Council on Foundations leads this coalition trying to work with
Treasury. We have had numerous meetings. They will admit we
have had meetings. We continue to offer them various
suggestions for remedial action. Thus far, they haven't
responded to any of that.
As you may or may not know, and I will share for the
record, we have recently submitted a letter to the Senate,
Senator Lieberman's Committee, asking that they take some
action on our behalf to try to stop what we believe has been
the nonresponsiveness of Treasury on this whole area.
Mr. PASCRELL. What are the six organizations?
Mr. GUNDERSON. I would have to provide those for the
record. They were six domestic Muslim charity organizations.
Mr. PASCRELL. There is no examples or proof that you know
of, anyway, that any of these six are engaged in very specific
activities which are contrary to the constitution and contrary
to this U.S. Government?
Mr. GUNDERSON. No. If I understand, part of the issue has
been that when you make international grants in certain areas,
they automatically become suspect, certain regions of the
country.
Mr. PASCRELL. Right.
Mr. GUNDERSON. Nobody supports the abuse if there is direct
funding. We don't believe that is the case. Now, we are not
saying that there hasn't been a violation. We are saying the
American charitable sector is not engaged in this.
Mr. PASCRELL. What are the key indicators, Mr. Gunderson,
to measure diversity in philanthropy, and how can we use these
indicators to hold foundations more accountable to all
communities?
Mr. GUNDERSON. You should know, Congressman, that we have
made the increase in diversity a major focus of my leadership
of the Council on Foundations. I think I can speak for Diana.
The two of us jointly are making this a major initiative in the
nonprofit sector.
Our board has just approved a major initiative that will
include not only the hiring of a director of diversity and
inclusive practices--the person has already been hired and will
be on board as of August--we have approved an agenda which
includes a philanthropy corps, emerging philanthropic leaders
fellowship program, an education program, even an international
area, and research in this area.
What are the indicators? I would suggest that you need to
look at a series of them. You need to look at the diversity on
our boards. The diversity on our staffs. You need to look at
diversity in grantmaking, but of course, the metrics you use
for that are not easily defined. We are certainly working with
Greenlining and other organizations to try to determine what is
the appropriate metrics to use in this area.
Mr. PASCRELL. Thank you. Thank you, Mr. Chairman.
Chairman LEWIS. I thank Mr. Pascrell for his questioning.
Now, Ms. Tubbs Jones is recognized for her questioning.
Ms. TUBBS JONES. Thank you. Thank you, Mr. Chairman. We
only have a few minutes, so I am going to ask everybody that I
ask questions to be short, like when I was in court as a
prosecutor.
I am going to start with Mr. Kutz. Mr. Kutz, I am a former
district attorney and a former judge. Looking at these numbers
you threw at us--55,000 exempt organizations--it would have
made a great TV ad for me as prosecutor until you told me that
that's only 55,000 out of 1.8 million organizations. I am not a
good mathematician, but it comes up to about 3 percent.
So, don't you think it would have been as good in your
report and summary to tell us that there are 1.8 million exempt
organizations before you threw out this 55,000 that you
prosecuted? All due respect to you doing that, but don't you
think that would have been a good thing for you to do for
Members of Congress?
Mr. KUTZ. We have done that in the past when we have done
government contractors. The problem here was that denominator
of 1.8 million. A lot of those entities don't have any tax
responsibility. So, we had a hard time determining whether it
was 3 percent, 2 percent, or 5 percent, but I think that is a
good point, and it is several percent, but it is very similar
to government contractors, Medicare physicians, and other
things that we have looked at.
Ms. TUBBS JONES. Right, but the point being that you are
Managing Director of Forensic Audits and Special
Investigations. As a forensic auditor, it is your job to be
able to get the numbers running. Right?
Mr. KUTZ. Correct.
Ms. TUBBS JONES. Thank you.
Let me go to you, Mr. Miller. Can you tell me it was the
IRS' recommendation that nonprofits not be able to receive tax
exemption from donor-advised funds?
Mr. MILLER. I am not sure that is an IRS recommendation.
Ms. TUBBS JONES. It is the law. Maybe it wasn't an IRS
recommendation, but what do you think about it?
Mr. MILLER. I think, generally, donor-advised funds are
permitted to be 501(c)(3) organizations. I would agree----
Ms. TUBBS JONES. It is not that they would not be permitted
to be 501(c)(3) organizations. It is the fact that the money
that comes from donor-advised funds is not permitted to be
given as a charitable contribution.
Mr. MILLER. Under the IRA rollover, you cannot give--they
are excluded from the IRA rollover rules. Is that----
Ms. TUBBS JONES. Yes. That is what I meant.
Mr. MILLER. Yes. I got you, ma'am. I can't speak to why
that is. I would say that there probably was some concern on
the Hill and otherwise about what was happening in some of the
areas with supporting organizations and donor-advised funds.
I would also note that, actually, that particular
delineation, the difference between donor-advised funds and
supporting organizations, existed pre-Pension Protection Act
when we had a different rule for the Katrina and New York
victims as well, I believe.
So, I can't speak--really, Congress spoke to that. It was
not a Treasury-inspired rule.
Ms. TUBBS JONES. You know Congress doesn't speak to
anything until we have an opinion from the Treasury or the IRS,
or we have a hearing and we get all this background
information, and somebody says to us this is what we ought to
do.
So, what I am asking you, Mr. Miller, is as we think about
rethinking that decision, are you willing to try and take a
look at whatever you have oversight of and give us some good
advice and counsel as to how we can get additional dollars into
charitable organizations in a much smoother process than
currently exists with the IRA rollovers, et cetera, et cetera?
Mr. MILLER. Absolutely.
Ms. TUBBS JONES. Thank you very much. I think I am--oh, I
got time. I got time. Okay.
How would you suggest, Ms. Aviv, that we work on increasing
philanthropy in the United States? The statistics say that back
in the day, people had lots of money and they gave to a lot of
organizations. That seems to be diminishing. I am almost out of
time. Give me some suggestions of what we could do.
Ms. AVIV. Well, one very quick way that we have been
talking about is to expand and extend the IRA rollover so as to
enable people not only to----
Ms. TUBBS JONES. I already made that point. Come up with
something else.
Ms. AVIV. One of the other issues that I raised in my
testimony related to these and the Small Nonprofit
Administration. One of the reasons that we see that charities
don't fare well in response to the GAO study is not only
because there is bad intent but also because there is ignorance
or people simply don't know or are unaware of what they are
supposed to do.
So, to the extent to which we can educate people to
understand how to run their operations, how to fundraise, how
to do all of the things to make them more effective, I think
that we will be able to increase philanthropy and nonprofit
organizations.
Ms. TUBBS JONES. Thank you. For the record, Mr. Chairman, I
just want to be clear that I think that we ought to prosecute
those who abuse the process. I don't want anybody to think that
I am not supporting that. I just know that when we do that, it
has an impact on the other organizations that are doing a great
job.
I thank you, Mr. Chairman, for the opportunity.
Chairman LEWIS. I thank the gentlelady for her questioning.
I now turn to Mr. Becerra for questioning.
Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for
your testimony and getting to see many of you again.
Let me first say I think the work that many of our
charitable organizations do is just phenomenal, and I hope that
we do everything here in the Congress to incent the
establishment of other charitable organizations that will
continue to do that good work, and that we continue to have
organizations that will abide by the tax rules and hopefully
help make sure that they understand, and especially the smaller
organizations, which may not have the sophistication to get out
there and make sure that they are on top of every single change
in the tax laws. I hope that you will help us make sure that
the Congress is constructive in that regard.
Having said all that, I would like to now focus on just a
couple of issues of concern I have with regard to the
charitable work that some of these organizations do. I would
like to first find out, having experienced some of this myself,
and Ms. Aviv and I have gone through this a bit with the
Smithsonian Institution, if you can tell me whether or not
there is anything in current law that restricts what a
501(c)(3) tax-exempt charitable organization can do with regard
to employee compensation.
Mr. MILLER. Perhaps I can start, sir.
Mr. BECERRA. Mr. Miller, also, as Ms. Tubbs Jones said, if
you could just try to be straight to the point. Otherwise I
will run out of time.
Mr. MILLER. That is difficult, but I will try.
Mr. BECERRA. I will probe. If I need more, I will probe.
Mr. MILLER. For public charities, there is Section 4958,
which states very specifically that compensation, high
compensation, is fine. Over fair market value compensation is
not, and gives rise to an excise tax and potential revocation.
Mr. BECERRA. Fair market value is some----
Mr. MILLER. Similar compensation to other like
compensations.
Mr. BECERRA. In similar organizations?
Mr. MILLER. Similar organizations, for-profit or nonprofit,
however.
Ms. AVIV. Congressman, what most large nonprofits do--
smaller ones, it is maybe harder for them to do--is to hire
outside consultants to take a look at similar organizations,
like size, region, budget, work, and so on, try and do it
within the sector even though they have the right to do it
outside of the sector, and then compare to see that it is
reasonable.
Mr. BECERRA. Understood. What about for private
foundations? Is there any restriction?
Mr. MILLER. A similar rule would apply.
Mr. BECERRA. Would apply?
Mr. MILLER. A different statutory basis, but a similar
rule.
Mr. BECERRA. So, in either case, public charities or
private foundations, there is this reasonableness test that is
used?
Mr. MILLER. Yes.
Mr. BECERRA. Okay. Thank you. What about with regard to
expenditures by the organization?
Mr. MILLER. I am not sure where you are going with that
one, Congressman, so----
Mr. BECERRA. I see a great-looking BMW in that photograph
down there.
Mr. MILLER. If it is being provided as compensation or it
is being provided to someone and would be treated as
compensation, it would go into the matrix of determining
whether that was reasonable.
Mr. BECERRA. But what if it is being used by the charity to
dole out food to the poor?
Mr. MILLER. That becomes a more difficult sort of test.
Mr. BECERRA. So, how do you decide if a BMW should be a
vehicle that is used to dole out food to the poor?
Ms. AVIV. Congressman, we think that the responsibility of
boards is immense. If boards aren't minding the store, we have
a serious problem. In a case where a board is allowing for a
BMW or a car of that nature or a car that is very expensive to
be used when that money can be used in a different way, I don't
think that that board is fulfilling fiduciary responsibility.
Mr. BECERRA. Other than the laws that require fiduciary
responsibility to be assumed by the board members, is there
anything else that can be done under law to try to prevent that
type of activity?
Ms. AVIV. When it comes to the area of compensation, we
have argued and----
Mr. BECERRA. Not compensation, but just in the utilization
of tax-exempt dollars for carrying out the purpose of the
charity in terms of expenditures. How can we make sure we have
got a grip on that?
Mr. MILLER. If I could jump in, Congressman, two things.
One, I agree 100 percent with Diana in terms of we need to
ensure that the boards are managing appropriately and are
accountable. Part of that is making sure that sort of
expenditure, which is an obnoxious type of expenditure, shows
up somewhere for the public to take a look at. So, that can be
a reaction.
Mr. BECERRA. Some form of transparency.
Mr. MILLER. Correct.
Mr. BECERRA. Maybe some type of audit team. Maybe a
periodic audit team might help.
Let me ask one last question. How do you decide what is
charitable? Helping the poor? Helping children? Housing for
disadvantaged people? Opera? Is there any way that we track
what is being given charitably to different types of entities?
Ms. AVIV. Congressman, there are a lot of stats--and I will
be happy to provide them to you--on the tracking of what is
given to charities. In fact, we have seen a change in
individual donations over the last few years in which, in the
last year, the reports that we have are that the funding going
to low-income organizations from individuals is much lower than
the funding going to arts and culture institutions and higher
education institutions.
So, when we see even the money being flat or slightly going
up, that doesn't tell the full story until we look beneath the
surface to see. One of the reasons why organizations serving
low-income people are so concerned is partly because of
individual donations not coming in their direction, and partly
for concerns that other government priorities are not allowing
public funds to flow to them so that the needs of their
constituents or their members are rising, and there isn't the
funding to support them.
Mr. BECERRA. Thank you. Mr. Chairman, I will conclude by
saying I hope that as we continue to do hearings on this, we
will explore what Ms. Aviv has just pointed out a little bit
further. I do believe that while we want to support charitable
giving, that we want to make sure that it really is serving a
public purpose. I thank all of you for your testimony.
I yield back, Mr. Chairman.
Chairman LEWIS. I thank the gentleman for his questions.
I turn to Mr. Neal for questions.
Mr. NEAL. Thank you very much, Mr. Chairman.
I don't know if you are familiar with the series that the
Boston Globe did a couple of years ago about what was happening
with some of these old-line families and what they were doing
with the money. In fact, they had given little if any of it
away. Upon further examination, they were paying themselves
some pretty good salaries.
What was striking about it is that frequently those are the
people that preach sacrifice and hard work for the rest of us.
The series, as you know, highlighted not only the fact that
they were paying themselves pretty good salaries, they were
paying other family members pretty good salaries. In fact, it
gave new meaning to the term ``the leisure class.''
Mr. Miller, what is the overall compliance rate by tax-
exempt entities as being made comparable to taxpayers?
Mr. MILLER. We don't have--as I mentioned in a discussion
earlier with the Chairman, we don't at the current time have a
baseline, a compliance baseline. Part of the 2008 budget, in
fact, is to fund the beginning of exempt organizations research
program to try to get that baseline. So, it is a hard thing for
me to give you a precise answer to.
Mr. NEAL. So, it is hard to suggest that we should create
more oversight without overburdening the majority of charities
that do the right thing?
Mr. MILLER. I think we need to be careful in those areas we
choose to act in.
Mr. NEAL. What type of feedback have you received on the
Form 990?
Mr. MILLER. The new form has received a world of feedback,
and I expect that to continue, much of it positive. All of it,
so far, in my mind is constructive. Even though individuals
have differing ideas as to what we should put into the hospital
schedule, for example, or onto the summary first page they have
been very constructive in their comments.
So, it is all positive to date, including a discussion we
had late last week with the Independent Sector. I expect those
discussions to continue with the Council on Foundations as
well.
Mr. NEAL. How many of you read that Boston Globe series?
Would you like to comment on it, Ms. Aviv?
Ms. AVIV. Sure. I think that the Boston Globe series was a
wakeup call to the charitable sector of our responsibility to
take a look at existing law and see whether existing law
covered those kinds of practices, and whether this was an issue
of inadequate oversight and enforcement or whether in fact
there were gaps in the law that would allow unscrupulous
individuals to come into our sector and take advantage of the
charitable sector's tax-exempt status to enrich themselves.
As a result of that work, Independent Sector convened a
group of 24 leaders, including the Council on Foundations, to
come together to think about these issues. We worked closely
with Congress to take a look at what needed to be done. The
leadership on the Senate side invited us to--encouraged us to
form a panel on the nonpublic sector. We came up with over 130
recommendations of how to engage in better oversight that both
Congress, the IRS, and the sector itself should do to deal with
this.
We took those issues very seriously, and notwithstanding
the fact that it was only a small number of people, since we
depend on the public trust to do our work, if in fact the
public believes that this is the kind of thing that is allowed
and going on, it undermines the integrity of all organizations.
For that reason, we saw this as we are each other's keepers,
and we were quite public about it.
Mr. NEAL. A small number of people but a lot of money.
Ms. AVIV. A lot of money and a lot of concern because if
that is what the public is reading about the charitable sector
and not about our good works, that won't help us raise the
kinds of funds we need to serve the needs we have.
Mr. NEAL. Mr. Gunderson, you seem very anxious to answer as
well.
Mr. GUNDERSON. It is probably my worst nightmare in this
job. There are 71,000 foundations in America. There are
probably ten that you and I can name that have been the focus
of exposes in the Boston Globe, the Washington Post, the L.A.
Times, et cetera. Those ten right now are defining the public
trust, the credibility, and frankly, the regulation of our
sector.
What we have to do, as I said in my testimony, is find that
balance. The organizations that were exposed in the Boston
Globe, it would be easy for me to come here and tell you they
are not members of the Council of Foundations. They are not.
That doesn't solve the problem.
The general public reading that says, they are a
foundation. They created the problems that led to not only the
panel, they led to the recommendations that you passed in the
Pension Protection Act. We need to find that balance to get at
the intentional abuse of the public trust while finding the
balance that doesn't thwart the 70,000-plus foundations who are
engaged in what is a noble effort of enhancing the common good.
How do we find that balance? It has to be a partnership on
both sides of this dais.
Mr. NEAL. Thank you, but Ms. Aviv, she mentioned--she said,
look. This has been unscrupulous behavior. Are you suggesting
that unscrupulous behavior could go on for decades?
Mr. GUNDERSON. That it has gone on for decades?
Mr. NEAL. Yes.
Mr. GUNDERSON. It has, and unfortunately, I think it will.
The reality is it is no different in the nonprofit sector than
all of society. There are always people who try to get around
the law.
What we have at the Council on Foundations, in order to
become a member of the council, you have to sign a code of
ethics statement to become a member. That gives us a carte
blanche ability to go in and investigate. We have done so. We
investigate any charge, anybody--the press, an anonymous
complaint, a Member of Congress. Anybody can file a complaint
against a member foundation.
We will investigate that charge to see whether there is
cause. If there is cause, in our own internal ethics
procedures, we will then turn that over to a formal ethics
process and sanctions process within the council. So, we go
beyond the law to deal with what we call immoral, inappropriate
conduct.
For example, the Getty. The Getty didn't necessarily
violate the law, but by gosh, what they did was certainly
inappropriate. We put them on censure--excuse me, on
probation--at the Council on Foundations until they cleaned up
their act. They cleaned up the governance that Diana was
talking about earlier.
So, we take this public trust very seriously.
Ms. AVIV. Congressman, can I just add one point on that?
The Panel on the Nonprofit Sector is about to come up with 33
recommendations of how we can better regulate ourselves. We had
an experience--Congressman Becerra knows this experience very
well--with the Smithsonian, where when the issues were raised
publicly about the Smithsonian, the governance committee took
those 33 draft principles and looked at their own practices
relative to the set of standards that we had.
At the same time, they had an independent review committee
looking at some of the practices. The governance committee,
looking at the 33 principles and the gaps between their own
practices and those principles, then came up with a series of
recommendations of how they need to change.
Those recommendations were virtually identical to what the
independent review committee did, which suggests to us that if
organizations move forward and embrace a broad set of
principles supported by the sector as a whole, we may not need
additional legal oversight, Federal oversight, of the kind--or
additional laws to get there because we can get there
ourselves. It is up to us, though, to step up and do that.
Mr. NEAL. I thought the Globe series was most enlightening,
and I must tell you, it raised eyebrows across much of the
Northeast.
Thank you, Mr. Chairman.
Chairman LEWIS. Thank you for your questioning.
It is my understanding that, Mr. Becerra, you may have a
question, and Mr. Pascrell. Okay. Mr. Pascrell?
Mr. PASCRELL. Thank you, Mr. Chairman.
Mr. Kutz, I don't want you to get the opinion today from
the questions that any of us are not interested in examining
not necessarily lifestyles but certainly the records of chief
executives who draw down a tremendous amount of dollars to
themselves. You have investigated many areas, and knowing your
other backgrounds and other committees, I know you have done a
great job.
None of us are minimizing what you are doing, although we
would all conclude, I think, that this is a very small
reflection of what is going on out there in philanthropy
throughout the United States. Would you agree with me?
Mr. KUTZ. Yes. I would agree with that.
Mr. PASCRELL. Mr. Gunderson, the current IRA rollover--and
you explained to us what that means in and of itself--but that
incentive certainly does not prohibit donors from making
distributions to community foundations. They just can't make
the distributions to donor-advised funds or supporting
organizations.
How am I doing so far?
Mr. GUNDERSON. You are absolutely correct.
Mr. PASCRELL. What makes the donor-advised funds and
supporting organizations so essential that we should remove
that particular limitation?
Mr. GUNDERSON. That is really a great question because the
initial question is, why wouldn't they just give to the
community foundation?
Mr. PASCRELL. Right.
Mr. GUNDERSON. Every donor has an interest. They have a
passion--education, children, health care, the parks,
recreation, et cetera. Through a donor-advised fund, you are
able to advise your funds without setting up your own private
foundation and having all of the rules, regulations, legal
work, and the costs of administering that foundation.
So, there is a real--it is that perfect blend. It is what I
call democratizing philanthropy. It allows people with a little
bit of money--most community foundations in America will take a
donor-advised fund of $10,000. Some will go less than that. So,
people can give to this that don't have super-wealth, but they
can target the direction of it.
They can't have total control. Once it is given, they have
lost that control. That is why we have the charitable incentive
at that point in time, but they can say, this is the focus,
rather than just saying, here is the money. Use however you
wish.
Obviously, a donor has a passion. This is that vehicle to
meet the passion, but to also increase philanthropy.
Mr. PASCRELL. So, you would not remove the limitation?
Mr. GUNDERSON. Oh, I absolutely would.
Mr. PASCRELL. You would?
Mr. GUNDERSON. I plead with you to remove it. Let me tell
you why. We are at that unique moment in time where over the
next 10 to 20 years, we are going to see a significant transfer
of wealth. There is a study by the Nebraska Community
Foundation.
Mr. PASCRELL. Yes. You mentioned that in your presentation.
I want you to define what you mean by that transfer of wealth.
Mr. GUNDERSON. Transfer of wealth? It is literally the
transfer of whatever our assets are. We now have the World War
II generation and the baby boom generation both beginning to
transfer their wealth. As Mr. Kind can tell you, we come from
rural America. In my home county, the average transfer of
wealth is only $48,000. That is what the projection is. It is
not rich. It is not a lot.
That times every citizen in the 25- to 30,000 people living
in that county becomes real money. If we could just get them to
say 5 percent of that transfer of the value of my farm or my
home when I die will go to the community foundation, imagine
the resources that we could capture to use over and over again
for the public good.
That is what we are talking about here. The Nebraska
Community Foundation did a study in Nebraska that in 25 percent
of the counties in Nebraska, the maximum transfer of wealth
will occur in the next 6 years. That is because of the aging
population in rural America. We will either capture some of
this transfer of wealth today or we will lose it.
It is our only opportunity, that window of opportunity.
That is why I get so passionate and urgent about it. It is sort
of like a now or never kind of thing.
Mr. PASCRELL. I think--I am sorry.
Mr. GUNDERSON. Go ahead.
Mr. PASCRELL. I think we could have a panel and discussion
and a hearing just on the transfer of wealth--its
ramifications, how the tax structure over the past 30 years has
changed in terms of taxing income and assets. Certainly the
poor and the middle class are not in as good a position as they
were 30 years ago percentage-wise. A very dangerous situation,
but interesting, and will have implications on charitable
organizations throughout the United States of America.
Mr. GUNDERSON. I really want to work with you on this,
Congressman, because the experts--and I am not one--suggest
that if you are going to start a private foundation, you really
ought to have at least $5 million to make it efficient and all
those kinds of things. I don't know if that is right or wrong.
That is what other people say.
A donor-advised fund, $10,000. Just look at the difference.
If you want ordinary people to have the chance to give
something to philanthropy, you have got to open up the donor-
advised fund as that giving opportunity.
Mr. PASCRELL. Thank you.
Chairman LEWIS. Thank you. Mr. Becerra?
Mr. BECERRA. Thank you, Mr. Chairman.
Mr. Miller, let me ask a few questions about the efforts of
the IRS to obtain compliance by the charitable organizations. I
know that your budget request submitted to the Congress by the
President increased your funding, not just IRS' funding the
funding in particular for purposes of compliance and
enforcement on the charitable organizations side, by a pretty
good amount, and that a good portion of those dollars would be
allocated to the examination program and determinations
program.
Can you give me a sense of how the determination program
when this entity is first applying for this tax-exempt status
helps ensure that we actually do have a not-for-profit that
will be formed that really will conduct a public purpose?
Mr. MILLER. Absolutely, Congressman. We receive about
55,000 new organizations into us annually, about 86,000 pieces
of work into the determination stream but 55,000. The vast
majority are 501(c)(3) organizations.
Again, for the vast majority of those organizations, it is
the only time we will ever have a real one-on-one conversation
with them. That is our chance to educate and get them on the
right path. That----
Mr. BECERRA. But if it is a family foundation, as my friend
from Massachusetts pointed out, where we have seen some
problems, what are your folks looking for in assessing these
family foundations and at that determination stage?
Mr. MILLER. They would be looking to see how it was
operated or how it was proposed to be operated and how it was
organized.
Mr. BECERRA. Do they have to state at that point what their
compensation package will look like for employees?
Mr. MILLER. In some detail, not in great detail. They have
to set forth their proposed budgets for 3 years, and they have
to give us enough information that we can see that there is not
an immediate problem.
Part of that is explaining to them what the rules are. With
respect to a family foundation, there is a wide array of rules.
The private foundation regime is much more restrictive in what
you are permitted to do than the public charity.
Mr. BECERRA. Now, under the examinations program, your
testimony says that in fiscal year 2006, you conducted 7,079
examinations of returns by tax-exempt charitable organizations.
That includes the public charities and the private foundations?
Mr. MILLER. That includes both--that includes our
examination program out of our Exempt Organizations function.
It does not include, however, our new compliance contact
program, which is about 5,000 more organizations.
Mr. BECERRA. Let's stick to this for just a second. I want
to make sure. Seven thousand seventy-nine tax returns of what
universe? Is that the 71,000 foundations that Mr. Gunderson
mentioned, or is it the 1.8 million tax-exempt organizations
which I think were identified?
Mr. MILLER. It is of the 1.8, but quite frankly, it is
actually of--the Internal Revenue Service--and where you are
going is coverage, I suppose.
Mr. BECERRA. Yes.
Mr. MILLER. Our coverage rate is half a percent or
something like that. It is not enough.
Mr. BECERRA. So, one-half of 1 percent of all the tax-
exempt charitable organizations might find themselves examined,
having their tax returns examined?
Mr. MILLER. Right.
Mr. BECERRA. How does that compare to the taxpayer auditing
side?
Mr. MILLER. On the for-profit side, it will depend on the
particular type of return. Individuals are higher, but not by
much. Large corporations much higher. It will really vary. It
is on the low end. Let's put it that way.
Mr. BECERRA. Is the money you have and the resources you
have sufficient to provide the deterrence that we need to make
sure that more of these organizations are doing the good work
that would make Ms. Aviv and Mr. Gunderson proud?
Mr. MILLER. I think we are getting there, Congressman. You
mentioned at the beginning the 2008 budget. The 2008 budget
gives 6.3 percent to the IRS generally. My function, Tax Exempt
and Government Entities, gets a 7.3-percent increase. Actually,
Exempt Organizations gets 9.7 percent.
It would be hard for us to take much more than that in a
given year, but we are building up the number of people we
have.
Mr. BECERRA. I hope you will continue to give us ideas on
how to make this work better because we are not interested in
going after or causing heartburn for those organizations that
are doing tremendous work out there. Obviously, when you do
this in an objective manner and in a random manner, in some
cases, you catch the good folks and hopefully they are able to
survive an audit without too much hurt.
I think it is necessary for us to uphold the good name of
charitable giving, and for us to be able to then do the best
job of weeding out the bad apples as quickly as possible.
Ms. AVIV. Congressman, that is one of the reasons why we
are recommending and the panel is recommending having mandatory
electronic filing. The IRS is able to do electronic filing of
certain organizations, but need the legal authority to do it
all.
Since we believe that with transparency and the fact that
people will be much clearer about how they have to fill out
those forms, in addition to reforming the 990 forms themselves,
also having mandatory electronic filing will go a long way to
solving the problems.
Mr. BECERRA. Mr. Miller, do you know if the IRS takes a
position with regard to mandatory filing?
Mr. MILLER. We actually--another piece of the 2008 budget
is to increase our ability to require additional people to file
electronically.
Mr. BECERRA. So, would IRS support that recommendation?
Mr. MILLER. Absolutely.
Mr. BECERRA. Does GAO have any problems? Do they see the
value in that mandatory electronic filing?
Mr. KUTZ. I think it would add to the wealth of knowledge
that we need.
Mr. BECERRA. Thank you, Mr. Chairman. Thank you all for
your testimony.
Chairman LEWIS. Thank you.
I will now yield to the Ranking Member, Mr. Ramstad.
Mr. RAMSTAD. Well, thank you, Mr. Chairman. I just want to
make three brief observations by way of concluding here.
First of all, we simply can't overstate the monumental
contributions of tax-exempt charitable organizations. As has
been said repeatedly here today, the Government can't take care
of all the people in need. The charitable sector is essential.
I know I speak for every Member of this Subcommittee, and the
full Committee as well, when we say we appreciate the
incredibly important contributions that the tax-exempt
charitable sector makes.
Second, I want to state categorically that I believe, as
again has been testified to here today, that the vast majority
of exempt organizations are upstanding, are full of integrity.
Thirdly, I want to thank publicly the Council on
Foundations, certainly the Minnesota Council on Foundations as
well as the Council on Nonprofits, because those organizations
really set the tone for the philanthropic community and you do
it exceedingly well.
So, again, I thank all the witnesses. I think this has been
a very good hearing today. I yield back the balance of my time.
Chairman LEWIS. Thank you very much, Mr. Ramstad. I want to
join in also thanking each and every one of you for being here,
for your contribution.
Before we close, I want to ask Ms. Aviv and Mr. Gunderson
whether the foundation community and the Independent Sector
have they the ability to respond in a timely manner when many
of your boards of your different organizations and groups meet
quarterly?
When you have a crisis like Katrina or some other major
crisis, how do you get together and say, we have to do
something in New Orleans, we have to do something in Atlanta,
or something in New York or California. What happens?
Ms. AVIV. Congressman, Mr. Chairman, in addition to the
three or four board meetings that most nonprofit organizations
have a year, and some have less because they don't need them
because of the nature of their business, most nonprofit
organizations have many, many more meetings.
In the case of Independent Sector, we have many committees
that convene all the time. When there is a crisis, we have the
ability--and particularly with technology--to convene a large
number of people or a targeted group of people to come together
to address issues.
The big change that those groups have sometimes is that
they don't have enough resources. They have plenty of ideas,
but they don't necessarily have the capacity to implement all
of the ideas. That is where the concerns about government
funding--since it is easily over 30 percent of the sector's
funding--why the concerns about declining government funding or
declining individual donations is of concern to the sector.
I don't believe at this point the convening capacity and
the responsiveness is the problem. It is more the resources
that are available.
Chairman LEWIS. Mr. Gunderson?
Mr. GUNDERSON. Mr. Chairman, we have looked very carefully
at philanthropy's response to Katrina because to be honest with
you, while it was well-meaning, it was probably as chaotic as
the Government we all criticized. We want to figure out how we
can do that better. We have held some major forums at the
council on this issue. We are now doing, as I mentioned in my
testimony, a feasibility study to do one or two, probably two,
things.
The first thing that we have learned is that what we really
need to do when a disaster like Katrina occurs, we need to be
able to get some of the best experts in our sector on the
ground instantly to do an assessment from philanthropy's
perspective to figure out what is the Red Cross doing? What is
the Salvation Army doing? What is the Office of Emergency
Preparedness doing? What does philanthropy need to do that they
are not doing? So, that they can report back to our sector. So
we are in the process of looking at how we create that
philanthropic team that comes in and does that assessment and
reports to us where and how that money should go.
The second thing we are looking at is that we have normally
had this mindset--and I am certainly guilty of this, being new
to this field--that we said, the charitable sector will do the
immediate rescue and relief. They will go in and respond
instantly. Philanthropy comes in and does the long-term
rebuilding.
You know what we learned in Katrina? There is a middle
ground that nobody was doing. For example, if you look into the
Gulf area, in many cases, in order to qualify for government
funding, they need funding in order to do the planning, the
planning grants, to submit the grant request to the Government.
They don't have that. Nobody funds that. The Salvation Army
doesn't fund that. The Red Cross doesn't fund that. So, all of
a sudden, we have learned through this that philanthropy needs
to come in up front much earlier than we thought we did in this
process.
The third thing we are looking at is whether or not we
ought to capitalize a fund that would be a national disaster
relief fund so that if there is a tornado or a hurricane or a
bombing or whatever that disaster might be, there would be some
money ready available where this team of our experts who went
in could then immediately access some of that money rather than
going back to a community foundation or a family foundation or
an independent foundation and starting to raise that money.
That money would already be there.
We hope by October of this year to have done our
feasibility study on this so that we will be able to take
recommendations to our board to come up with some new
strategies for philanthropy to better respond.
Ms. AVIV. Mr. Chairman, there was one other issue in
relation to Katrina. I recall testifying a couple of years ago
on lessons learned immediately after Katrina in the Senate
Finance Committee. There was an opportunity to look at
earthquakes, California's earthquakes or similar disaster,
floods, all different kinds, the tsunami and this.
What was striking about the experience is that because of
what Steve was talking about, the lack of time and resources to
fund lessons learned and translate them into how to prevent
some of the terrible aspects of what are natural disasters from
occurring again, we don't do that.
The second part was that the relationships that need to be
built in advance of disasters--and we know where the disaster
areas are more or less likely to strike--there need to be much
stronger relationships between local government officials,
national charities and local charities, and charities and these
national organizations, so that in planning, by the time it is
chaotic when the disaster hits, all of their thinking has
already gone into the plan so that the limited resources can be
more efficiently used.
Chairman LEWIS. Again, I want to thank each and every one
of you for being here. Your testimony has been very helpful to
Members of the Committee.
Is there any other business to come before the Committee?
[No response.]
Chairman LEWIS. There being no further business, the
hearing is adjourned. Thank you very much. I want to thank each
member of the staff and all who were involved.
[Whereupon, at 11:41 a.m., the hearing was adjourned.]
[Submissions for the Record follow:]
Statement of Alliance for Justice
Alliance for Justice (AFJ) is pleased to accept this opportunity to
submit comments on the affect of the Pension Protection Act of 2006 on
the tax-exempt community. We limit our comments specifically to the
provisions of the Act concerning expenditure responsibility
requirements for Donor Advised Funds (``DAFs'').
About Alliance for Justice
Alliance for Justice is a national association of environmental,
civil rights, mental health, women's, children's and consumer advocacy
organizations. These organizations and their members support
legislative and regulatory measures that promote political
participation, judicial independence, and greater access to the justice
system.
AFJ's Nonprofit Advocacy Project and Foundation Advocacy Initiative
work to increase nonprofit (including foundation) involvement in the
policymaking process. AFJ supports nonprofit advocacy through plain-
language guides to the laws governing nonprofit advocacy, workshops for
nonprofit organizations, and individualized technical assistance. It
also monitors legislative activity related to nonprofit advocacy,
provides information to the charitable community and lobbies to ensure
nonprofits' continued presence in the policymaking arena.
The Value of Donor Advised Funds
As Congress has recognized in its recent passage of the Pension
Protection Act, DAFs have become a valuable tool for donors and the
charitable community. DAFs are a means to devote the greatest possible
portion of charitable resources to the best possible charitable
purposes. DAFs provide a way to contribute more freely to charity, and
they prevent unnecessary waste of the resources once donated. According
to the Council on Foundations, DAFs made more than $1.05 billion in
grants in 2005 (COF comments submitted to the IRS on April 9, 2007 in
response to IRS Notice 2007-21). Many of these grants went to small
organizations and programs that otherwise would not have been funded.
While it was appropriate for Congress to establish legitimate
safeguards to prevent abuse of DAFs--or any other type--of tax-exempt
organization, it is also important to protect the important role that
DAFs play in ensuring the most efficient use of charitable resources.
This is especially important since, as mentioned in the Advisory
soliciting these comments, ``[m]ost of the provisions [in the PPA
related to tax-exempt organizations] were never discussed on a
bipartisan basis, nor the subject of Committee hearings, during the
109th Congress.''
Expenditure Responsibility and DAFs
AFJ believes that the requirements of ``expenditure
responsibility'' on certain distributions from DAFs imposed by the PPA
are different from the restrictions that apply only to private
foundations. Making such a distinction does not impede Congress' goal
(as stated in the Advisory) of improving accountability among DAFs.
Section 4966 of the IRC, added by section 1231 of the PPA, imposes
a 20% tax on certain distributions of DAFs. All distributions to
individuals fall within the scope of such ``taxable distributions,''
and most other distributions\1\ from DAFs will likewise be taxed unless
the DAF restricts the use of the funds to charitable purposes and
exercises ``expenditure responsibility'' in accordance with IRC section
4945(h).
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\1\ There are exceptions allowing tax-free distributions to the
DAF's sponsoring organization, to other DAFs, or to charities other
than certain types of supporting organizations or charities controlled
by the donor or the donor's advisor.
---------------------------------------------------------------------------
Section 4945(h) states that: . . . expenditure responsibility . . .
means that the private foundation is responsible to exert all
reasonable efforts and to establish adequate procedures--
(1) to see that the grant is spent solely for the purposes for
which made,
(2) to obtain full and complete reports from the grantee on how the
funds are spent, and
(3) to make full and detailed reports with respect to such
expenditures to the Secretary.
Prior to the PPA, only private foundations were required to make
grants under the expenditure responsibility requirements of section
4945(h). Due to concern over the more limited control of private
foundations, private foundations are subject to greater restrictions
than are public charities, including how their funds can be spent.
Federal tax law imposes a tax on certain private foundation
expenditures, including those for lobbying and carrying on, directly or
indirectly, voter registration drives. However, no such restrictions on
grantmaking apply to public charities. In contrast to private
foundations, public charities may earmark funds for lobbying. See, for
example, IRC section 501(h) (permitting limited lobbying expenditures
by charities). Likewise, charities may conduct voter registration
activities. See, for example, IRC section 4945(f) (permitting grants to
certain charities to conduct voter registration activities).
The restrictions on private foundation expenditures were written
into the expenditure responsibility regulations to prevent the use of
foundation funds for prohibited purposes. Treasury Regulation
Sec. 53.4945-5(b)(3) describes four criteria for private foundations to
exercise expenditure responsibility:
(i) To repay any portion of the amount granted which is not used
for the purposes of the grant,
(ii) To submit full and complete annual reports on the matter in
which the funds are spent and the progress made in accomplishing the
purposes of the grant
(iii) To maintain records of receipts and expenditures and to make
its books and records available to the grantor at reasonable times, and
(iv) Not to use any of the funds--
a. To carry on propaganda, or otherwise to attempt, to influence
legislation (within the meaning of section 4945(d)(1)),
b. To influence the outcome of any specific public election, or to
carry on, directly or indirectly, any voter registration drive. . . .
The first three prongs correspond with the statutory definition,
and the fourth prong prohibits the use of funds for certain purposes,
such as lobbying and voter registration activity. When the Joint
Committee on Taxation described expenditure responsibility, it referred
to the first three prongs only (see pages 348-349 of the Technical
Explanation of H.R. 4, The ``Pension Protection Act of 2006,'' as
Passed by the House on July 28, 2006, and as considered by the Senate
on August 3, 2006, JCX-38-06, Aug. 3, 2006 (``JCT Report'')). These
prohibitions included in the fourth prong should not be applied to
DAFs, as they exceed the fundamental purpose of expenditure
responsibility. The expenditure responsibility requirements of section
4945(h) can be met without adding on the prohibitions in the fourth
prong of the regulatory requirements.
Appropriate Expenditure Responsibility Requirements for DAFs
The statute should be amended to clarify that while DAFs must
exercise expenditure responsibility, their grants need not prohibit use
of the funds for legitimate lobbying or voter registration activities.
Based on the limited legislative history provided in the JCT report, we
believe expenditure responsibility was imposed on DAFs to make sure
grants from DAFs were spent as intended, not to prohibit or restrict
how the funds can be spent.
In adding an expenditure responsibility requirement for certain DAF
distributions, the PPA only referenced IRC section 4945(h)--the
requirement that grant funds must be spent solely for purposes for
which the grant was made. The PPA does not reference the restrictions
of 4945(d) nor the Treasury regulations for expenditure responsibility
by private foundations that incorporated those restrictions.
Our fear is DAFs and their advisors who are familiar with (or who
discover) the requirements of expenditure responsibility in the private
foundation context will simply apply the private foundation version of
the regulations without further guidance. If so, DAFs would feel
obliged to make grants that are subject to the terms required by Treas.
Reg. section 53.4945-5(b)(3)(iv), prohibiting use of the funds for
lobbying or voter registration activities. This would needlessly
restrict the use of funds for legitimate charitable purposes.
Already, there has been uncertainty on this point. At the January
2007 meeting of the American Bar Association Tax section's Committee on
Exempt Organizations, a panel including IRS EO Division Senior Tax Law
Specialist Robert Fontenrose and IRS Assistant Chief Counsel Catherine
Livingston was asked ``whether expenditure responsibility for donor-
advised funds will look any different than it does for private
foundations?'' with the questioner noting ``that the reg[ulations]s for
private foundations include a lot of prohibitions that may or may not
apply in the donor-advised fund context.'' (from transcript in Exempt
Organization Tax Journal, vol. 12, no. 1, January/February 2007, at
35).
Similarly, an explanation of the PPA produced by the Council on
Foundations offers the following response to the question of what
``expenditure responsibility'' in the context of the PPA:
While the Council will be seeking guidance as to what expenditure
responsibility means for public charities, the regulations for private
foundations provide some guidance. Charities that make grants from
donor-advised funds to non-charities or affected supporting
organizations for lobbying, nonpartisan voter registration activity or
for regranting should consult with counsel as to how expenditure
responsibility should be handled in those situations.
Council on Foundations, ``Taxable Distributions from Donor-Advised
Funds,'' available at www.cof.org.
For these reasons, we urge Congress to amend the PPA for purposes
of clarifying that the PPA-mandated expenditure responsibility as
applied to DAFs does not require DAFs to impose the IRC 4945(d)
restrictions on grantees.
Thank you for you consideration of this request. We would be happy
to provide any additional information or respond to any questions you
may have about this issue.

Statement of American Association of Museums
On behalf of the nation's museum community, American Association of
Museums (AAM), representing more than 2,700 museums of every type and
16,900 individuals and organizations professionally associated with
museums, would like to thank you for the charitable incentives in
Pension Reform Act, particularly the IRA rollover provision, and for
some of the reforms in that legislation, such as the reforms of the
appraisal process.
With respect to the IRA rollover provision, we strongly encourage
you to extend and make permanent this provision, as noted in
Independent Sector's recent testimony before the Committee and proposed
in H.R. 1419. Along with the rest of the charitable community, museums'
ability to maintain and expand their services to the public has already
benefited substantially from this provision due to expire in December
2007. For example, an early AAM survey of museums, covering the period
from August 2006 enactment to the end of 2006, revealed that about half
of survey respondents had received rollover gifts, from $1,250 to
several gifts of the maximum of $100,000, and that museum staff
expressed concern about the need for more time for donor education and
decisions about major gifts.
We must, however, raise some significant concerns on behalf of the
museum community about the fractional interest provisions in the Act.
We know you have received a letter from the Association of Art Museum
Directors (AAMD) noting problems in this area. AAM wants you to know
that we completely share those concerns, not just on behalf of the
nation's art museums but on behalf of collecting museums of all types.
In brief, here are some of our chief concerns, many of which relate
to creating new disincentives to donors to give, which is a key matter
since about 80% of the collections of American museums that collect
have come from donations:
1. The discouraging effect on donors of the growing disparity
between market value and their subsequent fractional deductions. As you
know, the Act replaces full market value deduction for each fractional
gift with the lesser of full market or the market value at the time of
the original fractional gift. Since virtually all museum-quality
objects appreciate in value over time, the value of subsequent
deductions now decreases over time compared to market value, with each
subsequent fractional gift showing a greater disparity. This clearly
discourages donors, especially those for whom the value of the gift
very greatly exceeds their income in a given year, who are thus not
good candidates for an outright gift of 100% interest.
2. The discouraging effect on donors of requiring that the gift be
completed within 10 years. Under prior law, while museums had, and
usually exercised, the right to hold and exhibit the object, a donor
could keep the object in his or her home for a least part of a given
year until death. The new law, especially where collectors had recently
acquired the object, or collection of objects, discourages donors from
making a commitment in the near term to a museum, thus eliminating both
the short-term access to the object(s) by the public and the likelihood
of longer-term 100% possession by the museum.
3. The danger to certain kinds of objects of mandating movement
without exceptions. There are valid reasons for making exceptions--for
allowing the museum to waive its right to take possession in some cases
until it has 100% ownership--as was already decided in a 1988 court
case, Winocour v. Commissioner. For example, if an object is extremely
large and heavy, as is the case with much modern sculpture, the costs
and difficulty of transportation are very great, and where an object is
extremely fragile, as is the case with some art and other objects, it
is not in the public interest to move it any more than is absolutely
necessary. Similarly, when new collecting museums arise, or museums are
renovated, they will, of course, frequently seek to acquire or continue
to acquire collection objects before the museum building is built or
renovated--before they can house or display the new objects, since
museum buildings frequently take quite a number of years to design and
build--so that when they open or reopen, they will have objects to
show.
It is also important to bear in mind that while the above concerns
most broadly affect the art museum community, the new law, if not
adjusted, creates problems for other types of museums as well.
For example, museums that focus on history and culture, including
the history and culture of ethnically specific groups, frequently find
that the key objects they need for their collections belong to private
collectors. Given the limited or nonexistent funding for collection
acquisitions at most museums, donations are critical in many cases, and
when the objects are mostly acquired by the collector, and when the
museum itself is expanding or under construction, as is often the case
with the new ethnically specific museums, discouraging fractional gifts
can be very damaging.
And in the case of natural history museums, often the key
educational as well as scientific value of objects is in fact that they
are part of a collection of related objects. Where the law tends to
discourage fractional gifts, modest-income donors will be discouraged
from donating an intact collection and have an incentive to break it
up, destroying its educational value.
Changes to the fractional interest provisions of the law as
expressed in the Pension Protection Act could address areas of
legitimate Congressional concern without the unintended consequence of
discouraging generous donors and endangering cultural objects in the
cases noted above. On behalf of the whole American museum community, we
join with AAMD in urging your consideration of such changes and would
be happy to meet with you and your staff to discuss them.
In closing, AAM sincerely thanks you and Ranking Member Ramstad for
your leadership as principal sponsor and co-sponsor of H.R. 1524, the
artist's deduction bill, which would have a very positive effect on
generating new donations of works to museums, and looks forward to
working with you on the fractional gift and IRA rollover issues.

Statement of American Bankers Association
The American Bankers Association appreciates having this
opportunity to submit written comments for the record of the
Subcommittee on Oversight's July 24, 2007, hearing on tax-exempt
organizations.
The American Bankers Association, on behalf of the more than two
million men and women who work in the nation's banks, brings together
all categories of banking institutions to best represent the interests
of this rapidly changing industry. Its membership--which includes
community, regional, and money center banks and holding companies, as
well as savings associations, trust companies, and savings banks--makes
ABA the largest banking trade association in the country.
As the Subcommittee on Oversight (the ``Subcommittee'') undertakes
its examination of tax-exempt issues this year, the ABA would like to
take this opportunity to encourage the Subcommittee to review the
Internal Revenue Service's (``IRS'') regulation of issues relating to
tax-exempt credit unions. In particular, we urge the Subcommittee to:
focus on the IRS's activities relating to the application of the
unrelated business income tax (``UBIT'') to credit unions, and
encourage the IRS to revise its tax-exempt group return regulations to
require credit unions to file individual Form 990s.
Application of UBIT to State-Chartered Credit Unions
State-chartered credit unions are subject to tax on income earned
from trade or business activities that are not substantially related to
the functions constituting the basis for their tax exemption. Credit
unions are self-help financial cooperatives established for the purpose
of promoting thrift and providing low cost credit to their members--
especially to persons with low and moderate incomes--through mutual and
nonprofit operations. When these organizations offer services to non-
members, or undertake activities that stray beyond the exempt purposes
for which they were formed, the income from such activities should be
subject to taxation. In such cases, they are directly competing with
other small businesses in the communities in which they operate.
Over the past year, the IRS has issued a series of technical advice
memorandums (``TAMs'') which essentially hold that UBIT applies to
various activities undertaken by state-chartered credit unions
including, among others, income from insurance sales (e.g., credit
life, disability life, health, group life, and accidental death and
dismemberment), sale of car warranties, and ATM fees for non-member
services.\1\
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\1\ See, e.g., Technical Advice Memorandum 200709072, March 2,
2007; Technical Advice Memorandum 20070903, March 2, 2007; and
Technical Advice Memorandum 200717036, April 27, 2007.
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The ABA is pleased that the IRS has been focusing on this important
issue, because we believe that the ability of credit unions to conduct
business activities unrelated to their core purpose without paying
taxes on the income from such activities creates an overwhelming
competitive disadvantage for the banks that operate in the same
communities. However, we believe that the application of UBIT to state-
chartered credit unions is not an issue that should be determined on a
piecemeal basis through a series of TAMs alone. While TAMs help IRS
personnel resolve complex issues, they generally are not be relied upon
as guidance or cited as precedent by taxpayers other than the specific
taxpayer for whom the TAM was issued.
The application of UBIT to credit unions is an issue that would be
more properly addressed in generally applicable binding IRS guidance,
such as regulations or a revenue ruling that provides clear notice to
the credit union industry of the IRS's interpretation of the law. We
urge the Subcommittee, as it continues to examine issues relating to
the IRS's regulation of the tax-exempt sector, to encourage the IRS to
place a high priority on the issuance of binding guidance on the
application of UBIT to tax-exempt credit unions.
Equally important, under current interpretations federal credit
unions have been held to be exempt from UBIT.\2\ Although this
exemption is based upon a broad reading of the tax exemption provided
under the Federal Credit Union Act (12 U.S.C. sec. 1767),\3\ there is
no tax (or other) policy reason for such a significant distinction for
federal credit unions. When Federal credit unions operate unrelated
businesses, the same detrimental competitive effects that result from
state credit union unrelated activities apply--competing taxable banks
and other businesses in their communities are adversely affected by
their operation of such businesses--and the Federal revenue is
diminished by applying this exemption to business activities beyond the
purpose of the credit union charter. We believe it is wrong for the
broad tax exemption provided to federal credit unions also to encompass
all income earned from businesses that are unrelated to their exempt
purpose, and we encourage the Ways and Means Committee to pursue
legislation to amend Code section 511(a)(2) to subject federal credit
unions to UBIT.
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\2\ I.R.C. sec. 511(a)(2)(A).
\3\ 12 U.S.C. sec. 1767 provides that ``Federal credit unions
organized hereunder, their property, their franchises, capital,
reserves, surpluses, and other funds, and their income shall be exempt
from all taxation, now or hereafter imposed by the United States or by
any State, Territorial, or local taxing authority. . . .''
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Form 990 Filing Requirements for Credit Unions
Tax-exempt organizations generally are required to file annual
information returns (Form 990) with the IRS.\4\ The annual information
return must contain the organization's gross income, receipts,
disbursements, compensation, and other information required by the IRS
in order to review the organization's activities and operations during
the previous taxable year,\5\ and to review whether the organization
continues to meet the statutory requirements for exemption. Only a very
limited number of organizations are statutorily exempted from this
annual information filing requirement. These include churches,\6\
religious orders, fraternal beneficiary societies, and small
organizations with annual receipts less than $5,000.
---------------------------------------------------------------------------
\4\ I.R.C. Sec. 6033.
\5\ I.R.C. Sec. 6033(a)(2).
\6\ I,R.C. Sec. 6033(a)(2)(C)(vi).
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Information returns filed by tax exempt organizations on Form 990
serve important public purposes beyond simply enabling the IRS to
enforce the tax laws. As the Joint Committee on Taxation has noted:\7\
---------------------------------------------------------------------------
\7\ Study of Present-Law Taxpayer Confidentiality and Disclosure
Provisions as Required by section 3802 of the Internal Revenue Service
Restructuring and Reform Act 1998, Joint Committee on Taxation, JCS-1-
00, January 28, 2000, p. 6.

[t]he public has a legitimate interest in access to information
of tax-exempt organizations. This public interest derives from
the tax benefits accorded under Federal law to such
organizations, as well as the nature and purposes of such
organizations. The public has an interest in ensuring that tax-
exempt organizations are complying with applicable laws and
that the funds of such organizations (whether or not solicited
from the general public) are being used for the exempt purposes
---------------------------------------------------------------------------
of the organization.

Congress also recognized the importance of transparent financial
records for all companies by passing the Sarbanes-Oxley Act of 2002.
Many credit unions are profitable, retail financial service
organizations whose activities are indistinguishable from taxpaying
banks. Vital information, such as their sources of income, expenses,
amounts of compensation paid to executives, and activities, should be
subject to public disclosure, both to ensure that they are operating
effectively and with integrity and for the efficient administration of
the tax laws. Moreover, without adequate information, credit union
members cannot understand their organization's exposures and risks and
cannot exercise effective oversight and control over the board of
directors and management.
Despite these recognized benefits from public disclosure
requirements, a majority of state-chartered credit unions do not file
individual Form 9nineties. The IRS ruled in 1960\8\ that state credit
unions were permitted to take advantage of the group return rules set
forth in Treasury regulations.\9\ These rules permit central or parent
organizations to file one group return providing aggregated financial
information for the parent and any local organizations subject to its
general supervision or control. In the state credit union context, this
means that the state regulatory authority that supervises credit unions
within a state may apply for a group exemption ruling and file one
group return that aggregates information from all of the state credit
unions under its control or supervision.
---------------------------------------------------------------------------
\8\ Rev. Rul. 60-364, 1960-2 C.B. 382.
\9\ Treas. Reg. Sec. 1,6033-2(d)
---------------------------------------------------------------------------
At a November 3, 2005, hearing of the House Ways and Means
Committee, Steven T. Miller, Commissioner, Tax-Exempt and government
Entities Division, testified that the IRS received 1360 individual
Forms 990 from state chartered credit unions in 2003, the last year for
which data is available. Mr. Miller also testified that as of 2003, 34
state credit union associations filed group returns, and that 21 of the
34 group returns covered more than two thousand organizations.
Millions of members of state credit unions do not have access to
information on how their organizations are being operated, because such
information cannot be accessed from group returns which contain only
aggregate data. IRS officials have acknowledged that this is a problem
but have so far not corrected the problem. Therefore, we urge the
Subcommittee to look into this matter as part of its examination of
tax-exempt organization issues and to request that the IRS amend its
group return regulations to prohibit state credit unions from filing
group returns.
Again, we deeply appreciate you allowing us to comment on this
issue and share the concerns of our Members. If you have further
questions, please do not hesitate to contact me.

Statement of American Bar Association Section of Real Property
These comments (the ``comments'') are submitted on behalf of the
American Bar Association section of Real Property, Probate and Trust
Law. They have not been approved by the House of Delegates or the Board
of Governors of the American Bar Association and should not be
construed as representing the position of the American Bar Association.
The comments were prepared by members of the Charitable Planning
and Organizations Group (the ``Group'') of the Probate and Trust
Division of the Real Property, Probate and Trust Law section of the
American Bar Association. Principal responsibility was exercised by
Carol G. Kroch of Wilmington Trust Co., Group Chair-Elect, Mary Lee
Turk of McDermott Will & Emery, Group Vice Chair-Elect, Christopher R.
Hoyt of University of Missouri (Kansas City) School of Law, David J.
Dietrich of Dietrich & Associates, P.C., and Jarrett T. Bostwick of
Handler, Thayer, & Duggan, L.L.C. Linda B. Hirschson of Greenberg
Traurig LLP reviewed the comments on behalf of the section's Committee
on Governmental Submissions.
Although members of the Group who participated in preparing the
comments have clients who are affected by the Federal tax principles
addressed, or have advised clients on the application of such
principles, no such member or the firm or organization to which such
member belongs has been engaged by a client to make a governmental
submission with respect to, or otherwise influence the development or
outcome of, the specific subject matter of the comments.

__________

EXECUTIVE SUMMARY
These comments respond to the June 12, 2007 Advisory of the
Subcommittee on Oversight of the Committee on Ways and Means of the
United States House of Representatives requesting written comments on
the provisions of The Pension Protection Act of 2006, Pub. L. No. 109-
280, 120 Stat. 780 (2006) (the ``PPA'') relating to tax-exempt
organizations.
These comments make the following points: (1) the PPA provisions
allowing charitable IRA rollovers for individuals over age 70\1/2\ are
valuable to the charitable sector and should be extended permanently
and expanded to allow gifts to DAFs, SOs and private foundations; (2)
the PPA provisions requiring an S corporation shareholder to reduce the
basis of his or her stock only by the shareholder's pro rata share of
the adjusted basis of the property donated by the S corporation
appropriately treats S corporation shareholders the same as partners
and should be extended permanently; and Congress should also clarify
the permitted deduction when the basis of an S corporation
shareholder's stock is less than the shareholder's pro rata share of
the charitable contribution; (3) the PPA provisions increasing the
percentage limitations for qualified conservation contributions should
be made permanent and the definition of gross income for purposes of
determining whether a farmer or rancher qualifies for the 100%
limitation should be clarified and broadened; (4) an overly broad and
unclear definition in the PPA of a donor advised fund (``DAF'') should
be clarified as it has caused significant administrative costs and
confusion for charities administering both DAFs and other charitable
funds; (5) the PPA provisions applying the excess business holdings
rule to DAFs and supporting organizations (``SOs'') have unnecessarily
curtailed charitable gifts by owners of closely held businesses; (6)
section 1218 of the PPA has not only reduced the income tax incentives
to make gifts of fractional interests in tangible personal property,
but has also created estate and gift tax liability for fractional
contributions of appreciated property that should be eliminated; (7)
the PPA provisions addressing contributions to certain SOs may have a
chilling effect on a charity's access to funds; (8) the PPA may go too
far in its application of the excess benefit rules to DAFs and SOs,
resulting in an inconsistent application of such rules and a departure
from normal commercial practices; and (9) we welcome the PPA's
endorsement of minimum distribution rules for SOs and believe that
minimum distribution rules similar to those currently in effect, when
coupled with increased disclosure, may provide a compromise between the
Treasury Department's need to monitor SOs with the charitable sector's
need for sources of support; however we suggest that Congress
reconsider the necessity for and effectiveness of minimum distribution
rules based on a percentage of an SO's income or assets.
DISCUSSION
I. PROVISIONS SCHEDULED TO EXPIRE ON DECEMBER 31, 2007
As a preliminary comment, we note that it would provide stability
and certainty to the tax law to extend permanently all three provisions
discussed below.

A. Charitable IRA Rollover. Section 1201 of the PPA permitted
individuals over age 70\1/2\ to make lifetime charitable gifts of up to
$100,000 per year in 2006 and 2007 directly from an IRA to a public
charity (other than a supporting organization or a donor advised fund).
1. Importance to Charities. This provision was an important
legislative change sought by the nation's charities and should be
extended permanently. Further, we suggest that Congress consider
permitting donors to make gifts from their IRAs to DAFs, SOs and
private foundations. If the law is made permanent, IRA administrators
and charities will likely take steps to cure the technical problems
they have encountered in implementing the current legislation.
2. Problem In the Year That an IRA Owner Attains Age 70\1/2\. If
the law is extended to future years, the age for eligibility should be
more closely coordinated with applicable retirement plan distribution
rules. Currently the charitable IRA distribution rules discriminate
against people born in the months of May and June. For example, a
person who was born on June 27 will attain age 70\1/2\ on December 27.
All distributions that are made at any time during that year can be
applied toward satisfying the minimum distribution requirement to avoid
the 50% penalty tax for insufficient distributions from an IRA, but
only distributions made on or after December 27 qualify for the
charitable IRA exclusion. The legislation should be changed for 2007
and for future years to conform the charitable exclusion with the
minimum distribution requirements. Thus, if the eligible age remains
70\1/2\, then all distributions should qualify for the charitable
exclusion if made ``within the calendar year that the individual for
whose benefit the plan is maintained has attained age 70\1/2\.'' This
change would simplify the administration of this provision and ensure
that innocent parties are not caught in a tax trap. If, however, future
legislation lowers the eligible age to 59\1/2\ (as is proposed for
deferred gifts in H.R. 1419 and S. 819, ``The Public Good IRA Rollover
Act of 2007''), then requiring qualifying IRA distributions to be made
on or after the date the donor turns 59\1/2\ is appropriate as it would
mirror the 10% early distribution penalty provision of I.R.C. Sec.
72(t).

B. Charitable Gifts of Appreciated Property by S Corps. Section
1203 of the PPA permitted charitable gifts of appreciated property made
by S corporations to have similar tax consequences to comparable
charitable gifts made by partnerships and limited liability companies
(``LLCs''), but only for gifts made in 2006 and 2007. In the past, the
shareholders of an S corporation had to reduce their basis in their
stock by the full deduction for the appreciated value of the property,
whereas the basis in the ownership interest of a partnership or an LLC
was reduced by only the cost basis, consistent with partnership tax
theory. Partnership tax treatment for both forms of enterprise is
important. It is especially significant for an S corporation, since a
shareholder's basis in his or her stock is typically lower than that of
a comparable partnership or LLC ownership interest. Whereas partnership
tax law permits partners and LLC members to increase their tax basis by
their share of the business' debts, S corporation shareholders cannot
increase their basis by their share of the corporation's liabilities.
Many shareholders with a low basis in their stock are under the
impression that I.R.C. Sec. 1366(d)(1) prohibits them from claiming a
charitable income tax deduction that exceeds the basis of their stock,
which discourages charitable gifts from S corporations. In his letter
of June 28, 2007 to Treasury Secretary Paulson, Senator Richard Lugar
stated that ``the intent was that the full benefit of the deduction be
conferred upon those shareholders.'' We recommend that the PPA basis
reduction rule be made permanent and that Congress clarify the amount
of the deduction permitted S corporation shareholders whose basis in
their stock is less than their pro rata share of the amount of the
charitable contribution otherwise deductible.

C. Charitable Gifts of Conservation Easements. The PPA and I.R.S.
Notice 2007-50, ``Guidance Regarding Deductions by Individuals with
Qualified Conservation Contributions,'' expand and clarify the
availability of qualified conservation contributions. However, several
significant questions require clarification.
1. Make the Law Permanent. We believe the expanded deduction
limitations of 50% under I.R.C. Sec. 170(b)(1)(E)(i) and 100% under
I.R.C. Sec. 170(b)(1)(E)(iv) for qualified farmers and ranchers should
be made permanent. The grant of a perpetual conservation easement by a
farmer or rancher is likely his or her most significant financial
transaction short of outright sale; yet the law ``sunsets'' on December
31, 2007. Many conservation easements take the form of perpetual
``management plans'' for agricultural land owners and can take
significant amounts of time to negotiate because of their perpetual
duration. Although the provision does not sunset until December 31,
2007, as a practical matter, it will be difficult for donors who have
not already commenced negotiations even to donate a conservation
easement in 2007.
2. The Definition of Gross Income Does Not Conform to the
Calculation of Gross Income From Farming Otherwise Used in the Tax Code
The definition of gross income under I.R.C. Sec. 170(b)(1)(E) remains
ambiguous. I.R.C. Sec. 170(b)(1)(E)(v) provides that an individual is a
qualified farmer or rancher if the individual's gross income from the
trade or business of farming (within the meaning of I.R.C. Sec.
2032A(e)(5)) in the taxable year of the contribution is greater than
50% of the individual's total gross income for the taxable year of
contribution. I.R.C. Sec. 2032A(e)(5), however, does not define gross
income from the trade or business of farming; rather it provides a
definition of ``farming purposes'' for purposes of alternate valuation
under the estate tax. The agricultural activities listed in I.R.C. Sec.
2032A(e)(5) are significantly narrower than the broad definition of
farming used throughout the Internal Revenue Code to define income and
deductions in calculating gross income from farming. See I.R.C. Sec. 61
and the Farmer's Tax Guide (IRS Publication 225). We suggest that the
taxpayer's ``gross income from the trade or business of farming'' for
purposes of I.R.C. Sec. 170(b)(1)(E)(v) should be the same as gross
income from farming for income tax purposes generally, as shown on Form
1040, Schedule F, line 11 or line 51, with the addition of gross income
(not gain) from forestry and from sales of livestock and other farm
products reported on Form 4797.
3. Other Traditional Agricultural Income Sources Should Comprise
Gross Income.We recommend that rental income and income from caring for
another's livestock, farm program payments, the sale of livestock,
conservation reserve program payments, hunting and fishing and the sale
of farm products not held primarily for sale should constitute ``gross
income from the trade or business of farming'' under I.R.C. Sec.
170(b)(1)(E)(v). Many agricultural operations have established
corporations or LLCs to hold real estate separate from the active
operations conducted by a distinct corporation or LLC that owns the
livestock, equipment and machinery, with a rental agreement between the
two business organizations. Excluding such rental income from the
definition of gross income from farming under I.R.C. Sec.
170(b)(1)(E)(v) effectively removes significant tracts of agricultural
farming and ranching real estate from qualification for the expanded
100% deduction limitation even though the property is actually used for
farming.
4. Reconsider Deduction Limitations for Easements Donated by Non-
Publicly Traded C Corporations. Although I.R.C. Sec. 170(b)(2)(A)
limits a charitable contribution deduction by a C corporation to 10% of
taxable income, under new I.R.C. Sec. 170(b)(2)(B)(i) the deduction
limitation for a gift of a qualified conservation easement is expanded
to 100% of taxable income (reduced by other allowable charitable
deductions) for certain C corporations. The higher limit is available
to a non-publicly traded corporation that is a qualified farmer or
rancher, and which donates an easement restricting the property to
agricultural or livestock production. We note that if the C corporation
fails to meet the gross income test for a qualified farmer or rancher,
it loses the expanded limitation, whereas if an individual donor fails
to meet the definition of a farmer or rancher, an enhanced deduction
limitation of 50% of adjusted gross income (rather than 30%) is still
available. If Congress wishes to encourage contributions of
conservation easements by nonpublicly traded C corporations, it could
consider adopting a similar enhanced deduction limitation for gifts of
conservation easements by C corporations that do not qualify as farmers
or ranchers.
II. DONOR ADVISED FUNDS

A. Burdens on Charities that Administer DAFs and Also Engage in
Other Charitable Activities. The PPA generated substantial
administrative and compliance costs to charities that administer both
DAFs and other charitable funds, especially geographic and religious
community foundations. They, like virtually all non-profit
organizations, use ``fund accounting.'' They record each restricted
gift in a separate fund. Many charities have gone through the extensive
and arduous task of examining each and every fund agreement to
determine whether it is a DAF or not.
Their problem has been exacerbated by the absence of guidance for
ambiguous situations. The definition of a DAF is so broad that it could
potentially include every restricted gift where there is any continuing
donor involvement. For example, one would normally not think that an
endowed chair at a university foundation is a DAF. If, however, the
assets are invested by an investment firm where the donor's son is
employed, is the endowed chair a DAF? A DAF exists when a donor or
related party advises either with respect to distributions or
investments. I.R.C. Sec. 4966(d)(2)(A)(iii).
We suggest that Congress amend the PPA provisions to appropriately
narrow the definition of a DAF or clarify when certain common kinds of
funds, such as those with restricted charitable purposes, are excluded
from the definition of a DAF. We also urge Treasury to exempt from the
definition of a DAF a fund that is advised by a distribution Committee
that is not directly or indirectly controlled by the donor or the
donor's appointee, as is authorized by I.R.C. Sec. 4966(d)(2)(C). We
further suggest that funds established by local governments and
publicly supported charities at community foundations be excluded from
the definition of a DAF. These entities should be able to recommend
charitable grants from such funds with the same freedom as if they had
directly made the disbursements themselves.

B. Repeal of Penalty if Additional Language Missing in
Acknowledgment to Donor. The PPA amended I.R.C. Sec. 170 to deny a
charitable income tax deduction for a contribution to a DAF unless the
charity's acknowledgment to the donor specifically states that the
sponsoring organization ``has exclusive legal control over the assets
contributed.'' I.R.C. Sec. 170(f)(18). Until this provision was
enacted, the law governing every charity's written acknowledgment to
every donor had a uniform standard. I.R.C. Sec. 170(f)(8). The new DAF
provision needlessly complicates the law and the punishment is
excessive. Every completed charitable gift requires a transfer of legal
control, including a gift to a DAF. Furthermore, the definition of a
DAF is so broad (see above) that both the donor and the charity might
not realize that a simple restricted gift agreement fell within the
definition of a DAF. A donor should not lose a tax deduction solely
because the charity's receipt did not contain this statement. We
recommend repeal of this provision, or in the alternative, the
imposition of a reasonable fine on the charity (the party responsible
for issuing the statement) similar to the penalty for a charity's
failure to send a donor a written acknowledgment of any kind: $10 per
contribution, capped at $5,000. I.R.C. Secs. 6115 and 6714.

C. The Excess Business Holdings Rules Have Curtailed Gifts of
Closely Held Business Interests to Both DAFs and SOs. This subject is
addressed in Par. IV C. below.

D. The Penalty for an Excess Benefit Transaction With a DAF Applies
Even to the Portion of the Reasonable Value of Services Rendered. The
PPA classified the entire amount of any grant, loan, compensation, or
similar payment from a DAF to a donor or related party as an ``excess
benefit payment'', whereas normally only the excess over the value of
services is subject to that tax. Compare I.R.C. Sec. 4958(c)(2) and
(c)(1), and I.R.C. Sec. 4941(d)(2)(E). We question why reasonable
compensation is not permitted when both public charities and private
foundations can make such payments to disqualified persons. If a
financial institution seeks to establish a DAF, or if a donor
recommends an investment firm where a family member is employed, an
exemption seems appropriate if the investment firm's fees are
reasonable and comparable to fees that it charges other customers. This
issue is addressed in greater detail in Par. IV D. below.
III. GIFTS OF FRACTIONAL INTERESTS IN TANGIBLE PERSONAL PROPERTY
Section 1218 of the PPA made significant changes to the income,
estate, and gift tax consequences of donations of fractional interests
in tangible personal property to charitable institutions (``fractional
contributions'').

A. Overview of Changes. Under prior law, a fractional contribution
was deductible for Federal income tax purposes, if the donee 1)
received an undivided portion of the donor's entire interest in the
property gifted, I.R.C. Sec. 170(f)(3)(B)(ii); and 2) had the right to
possession, dominion, and control of the property proportionate to its
ownership interest. Treas. Reg. Sec. 1.170A-7(b)(1)(i); Winokur v.
Commissioner, 90 TC 733 (1988). Like other charitable gifts of tangible
personal property, a fractional contribution was valued for income,
estate, and gift tax purposes at its full fair market value at the time
of the gift. For estate and gift tax purposes, fractional contributions
were deductible at the full fair market value, I.R.C. Secs. 2055 and
2522, and for income tax purposes they were deductible at the full fair
market value of the gift, if the use of the property by the donee
charity was related to its charitable purpose, I.R.C. Sec.
170(e)(1)(B), subject to the applicable percentage of contribution base
limitations. I.R.C. Sec. 170(b). We are aware that in some
circumstances donors took advantage of these rules, but we are
concerned that the PPA has not only reduced the income tax incentives
to make valid fractional contributions, but has established estate and
gift tax penalties on fractional contributions of appreciated property.
The PPA established a new regime for fractional contributions,
providing: (i) unique valuation rules for income, estate, and gift tax
purposes; (ii) deadlines for donating the remaining fractional interest
in the property, enforced by recapture and penalty provisions; (iii) a
new requirement that the donee charity have substantial possession of
the donated property, also enforced by recapture and penalty
provisions; (iv) unrelated use recapture rules more onerous and
punitive than those the PPA introduced for non-fractional
contributions; and (v) narrow ownership requirements for donors to
obtain deductibility.

B. New Valuation Rules. In our view, the most serious change is
caused by the new valuation rules. New I.R.C. Secs. 170(o)(2), 2055(g),
and 2522(e)(2) limit the charitable deduction for subsequent fractional
contributions to the lesser of the fair market value of the property at
the time of the initial fractional contribution or at the time of the
additional contribution. Thus, the donor is denied an income, estate,
or gift tax deduction for the value of any appreciation of the property
since the time of the initial fractional contribution. The denial of
the income tax deduction in these circumstances may be a disincentive
to some taxpayers, and it is not clear why the deduction should be
limited if the gift otherwise meets the requirements for fractional
contributions. However, the most severe consequences arise under the
estate and gift tax, as shown by the following example:
In 2007, D contributes an undivided one-half interest in a painting
with a fair market value of $2 million to an art museum providing for
the museum to have possession of the painting for 6 months each year.
D's income tax deduction, based on fair market value, is $1 million. A
similar gift tax deduction applies, so that no gift tax is due on the
fractional contribution. In 2015, when the painting has appreciated in
value to $4 million, D makes the final fractional contribution of the
painting to the museum. Under the new PPA limitations, D's income tax
deduction is only $1 million, even though the value of the subsequent
fractional contribution is double that amount. More seriously, however,
D has made a charitable gift of $2 million, but is entitled to a gift
tax deduction of only $1 million. Under the 2007 gift tax rates of 45%,
D has an actual cost (either a reduction of D's applicable exclusion
amount, a gift tax liability or a combination of both) of approximately
$450,000 for making a gift to charity! Similarly, if D died in 2015 and
made a testamentary fractional contribution, the value of the
appreciation since the initial fractional contribution would be
includable in D's estate.
Denying an income tax deduction for the appreciation in value of
tangible personal property since the initial fractional contribution
reduces an offset against taxable income. Denying a gift or estate tax
deduction for the appreciation results in a tax on a gift to a charity,
which is not only punitive in nature but is an unprecedented departure
from the general transfer tax approach to charitable gifts. If Congress
did not intend such a draconian result, we suggest it be eliminated by
the repeal of new I.R.C. Secs. 2055(g) and 2522(e)(2).

C. Deadline for Contributions of Remaining Interest. The PPA
requires a donor to give the remaining fractional interest in the
donated property before the earlier of 10 years after the date of the
initial fractional contribution (``the 10 year period'') or the date of
the donor's death. If this requirement is not met, the income and gift
tax deductions for the initial fractional contribution will be
recaptured and subject to interest and a 10 percent penalty. I.R.C.
Sec. 170(o) and 2522(e). As a technical matter, if a donor dies before
the end of the 10 year period, and makes a final fractional
testamentary contribution, such gift will not have been made BEFORE the
donor's death. We suggest amending this provision to require the gift
to be made on or before the earlier of the end of the 10 year period or
the donor's death. As a substantive matter, the 10 year requirement may
cause some donors not to make gifts, depriving charitable institutions
and therefore the public of the opportunity to use and enjoy works of
art and other property. We suggest amending the provisions to require
that either a gift or a binding pledge be made within the required time
period.
Under the new PPA provisions, the consequences for missing the
deadline are severe. The full income and gift tax charitable deduction
claimed for the initial fractional contribution is recaptured with
interest and the resulting income tax is increased by a 10% penalty. We
believe that the time when interest starts to run should be clarified.
In our view, interest should not start to run until the event that
triggers the recapture. Otherwise, the results can, at least in certain
circumstances, seem unduly harsh. A gift made the day before the
expiration of the 10 year period does not result in any recapture of
the initial deduction, but a gift made the day after the expiration of
the 10 year period results not only in recapture of the initial
deduction but also a charge of 10 years of interest on the amount of
the deduction--even though the charity ends up receiving 100% interest
in the property. We comment on the gift tax recapture rules in general
in paragraph E below.

D. Substantial Physical Possession and Related Use Requirements.
I.R.C. Secs. 170(o)(3)(A)(ii) and 2522(e)(3)(A)(ii), added by the PPA,
require a charity to have ``substantial physical possession of the
property'' and to have ``used the property in a use which is related to
[its] purpose or function'' for 10 years after the initial fractional
contribution or the donor's death, if earlier. If either of these
requirements is not met, the same recapture rule described above
applies. It would be helpful to clarify the meaning of ``substantial
physical possession,'' particularly in light of the severe consequences
of noncompliance. In addition, we suggest that there be exceptions, for
example, if a painting has deteriorated and would be damaged by
transporting it between the donor and the donee, or if the museum
temporarily does not have exhibit space for the painting. Again, we
suggest that interest should run only from the time of failure to meet
the substantial use requirement, not from the time of the original
gift.
We question why the new related use rules for fractional
contributions are more rigid and punitive than the new related use
rules, also imposed by the PPA, for gifts of a donor's entire interest
in tangible personal property. The new rules in I.R.C. Sec. 170(e)(7)
provide that if a donee disposes of donated tangible personal property
within three years of the date of the donation, the donor must
recapture the difference between the amount of the income tax deduction
taken by the donor and the donor's cost basis in the property, unless
the donee certifies that the use of the property by the donee was
related to the donee's charitable purpose or that the intended use of
the property has become impossible or infeasible. I.R.C. Sec.
170(e)(7)(D). The result of the different related use rules is that if
a donor makes a fractional contribution and 2 years later the donee
disposes of the property, the donor is subjected to a full recapture of
the income and gift tax deduction, plus penalty and interest, while the
donor of a 100% interest in the same situation must only recapture the
amount of the deduction above cost basis but only if the donee does not
certify to the related use or impossibility of use.
If Congress wishes to reconcile the related use requirements
applicable to full gifts of tangible personal property and fractional
contributions, the amount subject to recapture for income tax purposes
under I.R.C. Sec. 170(o) could be limited to the difference between
fair market value and cost basis at the time of the gift without
interest or penalties. If the interest charge is retained for recapture
due to change in use of fractional contributions, we recommend
clarifying that interest runs only from the time of the change in use.

E. Gift Tax Recapture. We suggest that the new recapture rules for
fractional contributions not be applied for gift tax purposes. We are
concerned that the gift tax recapture rules inappropriately penalize a
donor for making a gift to charity. Unlike the recapture of an income
tax deduction which simply restores taxable income to the donor, the
recapture of the gift tax results in an out of pocket cost on a
transfer to charity. This harsh result is at variance with the gift tax
regime, which does not otherwise impose gift tax on charitable
transfers.

F. Narrow Ownership Requirements. New I.R.C. Secs. 170(o)(1)(A) and
2522(e)(1)(A) generally deny income and gift tax deductions for
fractional contributions unless all interests in the property are held
by the donor or the donor and the donee immediately before the
contribution. This requirement may prohibit any fractional gift of
community property. We recommend clarifying the application of this
provision to gifts of community property. We also recommend, as allowed
by new I.R.C. Secs. 170(o)(1)(B) and 2522(e)(1)(B), that the Secretary
of the Treasury adopt regulations that provide an exception to the new
ownership requirements where all persons who hold an interest in the
property make proportional fractional contributions.
IV. SUPPORTING ORGANIZATIONS

A. General Observations. Prior law provided Treasury the means to
combat the abuses intended to be addressed by the PPA with regard to
SOs. The new legal regime results in severe restrictions on a charity's
access to working capital and sources of funding through the imposition
of penalties and sanctions on private foundations, SOs, and supported
organizations. The following comments focus on four key provisions of
the PPA.

B. Contributions to Supporting Organizations.
1. Prohibited Contributors. Section 1241(b) of the PPA places
substantial limitations on receipt of funds by Type I and Type III SOs
from ``prohibited contributors'' (i.e., individuals or entities who
alone or with other specified persons maintain direct or indirect
control over an SO's supported organization). Contributions from such
contributors will result in immediate disqualification of the SO's tax-
exempt status and its reclassification as a private foundation.
This limitation negatively impacts the tax-exempt community because
it arbitrarily prohibits donors and charities from using SOs in
traditional planning situations. For example, donors and charities use
SOs for creditor protection purposes, particularly Type III SOs, the
assets of which are considered separate and apart from those of its
supported organization(s) for legal and creditor purposes. Maintaining
the integrity of gifts separate and apart from the general assets and
liabilities of charities that have higher risk profiles, such as
hospitals, universities, churches, or other service-based
organizations, continues to be a fundamental goal in providing for the
longevity of such organizations.
Congress should consider instead addressing this issue through
disclosure of the relationship between the donor and the supported
organization by the SO and a demonstration on the part of the SO that
it is in fact distributing its funds to or for the benefit of the
specific supported organization to meet the SO's attentiveness
requirements. This can be done through disclosure on the SO's Federal
Form 990. Further, Treasury has a means to police this issue via the
attentiveness test provisions of I.R.C. Sec. 509(a)(3) and the Treasury
Regulations thereunder.
2. Private Foundations. Under section 1244 of the PPA, private
foundations are penalized for certain contributions made to Type III
SOs and, in certain circumstances, to Type I and Type II SOs, due to
the fact that such grants no longer qualify toward a private
foundation's minimum distribution requirements under I.R.C. Sec. 4942.
Such grants will not qualify if made to (a) non-functionally integrated
Type III SOs or (b) Type I, Type II or functionally integrated Type III
SOs if (i) a disqualified person of the private foundation directly or
indirectly controls the SO or a supported organization of the SO, or
(ii) such grant is a distribution determined by regulation to be
``inappropriate.'' Additionally, Section 1244(b) of the PPA imposes
expenditure responsibility requirements on any private foundation that
makes a grant to any of the above-referenced SOs. As a result, SOs and
the charities they support will likely see funds from private
foundations substantially reduced, since the ``cost'' of such a private
foundation's grant is increased by its not counting toward the private
foundation's minimum distribution requirements under I.R.C. Sec. 4942
and because such grants will be subject to expenditure responsibility.
Further, private foundations may be reluctant to make grants to SOs
until Treasury issues regulations clarifying what distributions are
``inappropriate.'' Instead of penalizing private foundations, Congress
should consider addressing this issue by revising the minimum
distribution requirements for SOs to provide that in a year in which an
SO receives a grant from a private foundation, a portion of that grant
should be included as part of the base amount against which the SO's
minimum distribution requirement is calculated.

C. Excess Business Holdings. Section 1243(a) of the PPA amends the
excess business holdings rules under I.R.C. Sec. 4943 by adding a new
subparagraph (f), which requires certain SOs which receive gifts of
closely held business interests to comply with the excess business
holdings rules normally applicable to private foundations, unless
Treasury has provided an exemption to an SO with business holdings on
the basis that such business holdings are consistent with the SO's
exempt purposes. Non-functionally integrated Type III SOs and Type II
SOs that receive contributions from persons or entities which maintain
direct or indirect control over one or more of the SO's supported
organizations are subject to this new regime; Type I SOs are not.
Further, under this regime, a 2% de minimis holdings threshold is
allowed as a statutory safe harbor before the excess business holdings
rules would be triggered.
Under the PPA, private businessowners have lost an important way to
protect the family business from a forced sale on the owner's death.
Additionally, businessowners are no longer able to use their closely
held business interests as a means to fund their lifetime charitable
goals. Further, taxpayers cannot reasonably proceed with charitable
gifts with the hope that Treasury will provide an exemption based on a
determination that the SO's ownership of the business interest is
consistent with the SO's tax-exempt purpose, as there is insufficient
guidance as to what Treasury would consider to be ``consistent'' in
this context to warrant an exemption being granted.
We suggest that Congress consider instead using the existing
attentiveness test and control test regulations to address this
problem. Under such tests, Treasury can assess whether an SO is
attentive to its supported organizations or subject to the indirect
control of the donor. If Treasury concludes that the SO is not
attentive or is subject to too much donor control, Treasury can
reclassify the SO as a private foundation. As reclassified, the SO
would be subject to the excess business holdings provisions of Chapter
42. Lapham v. Commissioner, T.C. Memo 2002-293, is a clear example of
Treasury using these rules effectively to combat an abusive situation.
Thus, Treasury could continue to use prior law to address the problem.
It could also require gifts of business interests to be more fully
disclosed in the first and subsequent years, and then analyze such
gifts on an ongoing basis under the ``attentiveness test.''

D. Excess Benefit Transactions. Section 1242 of the PPA provided
for sweeping reforms to all three types of SOs with regard to any
direct or indirect compensation or other arrangement which violates the
excess benefit transaction rules of I.R.C. Sec. 4958. Thus, under new
I.R.C. Sec. 4958(c)(3), any loan, grant, compensation, financial
arrangement, or other similar payment between an SO and a ``specified
person'' or any loan to a disqualified person will be deemed an excess
benefit transaction and subject to the sanctions provided under I.R.C.
Sec. 4958. A specified person includes substantial contributors
(individuals who have donated more than $5,000 to the SO if the amount
is more than 2% of the bequests received by the SO through the close of
the taxable year), a member of such person's family, or a 35%
controlled entity.
Compensatory arrangements in the non-profit sector must be
``reasonable'' in order to be respected under state and Federal law.
Indeed, even the strict self-dealing rules applicable to private
foundations exempt payment of reasonable compensation to disqualified
persons. I.R.C. Sec. 4941(d)(2)(E). A strict ban on compensating
individuals performing services in official capacities for SOs appears
to be an unreasonable departure from normal industry compensation
standards of the non-profit sector, and the breadth of the provision
may cause unintended results. For example, an employee of a tax-exempt
organization who is also a director of an SO that supports such tax-
exempt organization would technically be considered a disqualified
person to both organizations, requiring the supported organization to
carry out burdensome compliance and reporting to avoid the imposition
of the excess benefit transaction penalties. While combating abusive
transactions in which SOs make loans, grants, or other financial
arrangements with ``insiders'' is appropriate, prohibiting even
reasonable compensation for officers, directors, or employees of SOs,
regardless of their status, we believe is inappropriate.

E. Minimum Distribution Requirements. Section 1241(d) of the PPA
requires Treasury to promulgate regulations modifying the distribution
requirements for non-functionally integrated Type III SOs. Currently,
non-functionally integrated Type III SOs are required to distribute
``substantially all'' of their net income each year, which typically
has meant a distribution of 85% of an SO's net income. Under the
regulations, Treasury is to establish a distribution regime under which
SOs would be required to make a distribution of a percentage of their
income or assets, so long as such distribution constitutes a
``significant amount.''
The current law already requires non-functionally integrated SOs to
distribute substantially all of their net income each year to one or
more of each such SO's supported organizations. Therefore, a minimum
distribution requirement currently exists. The current methodology also
ensures that the SO's distribution pattern clearly reflects the market
conditions in which the SO is operating. Consequently, donors and
charities can manage and maintain budgets and ensure that spending
patterns are in line with the current and future support expected from
the SO.
In addition, there is no guarantee that requiring a distribution
standard based on a percentage of assets, like the requirement imposed
on private foundations, would result in greater distributions to
supported organizations and increased attentiveness. For example, an SO
which holds a closely held business interest worth $1,000,000 that
generates $200,000 in income would, under the current test, be required
to distribute $175,000 (i.e., 85% of $200,000), versus $50,000 under
the 5% of assets test. We suggest that Congress consider using prior
laws (i.e., the attentiveness test) to address this issue. An increase
in attentiveness test audits would provide a significant deterrent to
the manipulation of income and cash flow distributions from SOs. It
would also present the opportunity for Treasury to analyze the nature
of the relationships between the various asset holdings of the SO in
light of the Lapham decision (discussed above) to determine if the SO's
public charity status should be revoked and the entity reclassified as
a private foundation, triggering application of all of the excise tax
provisions applicable to private foundations.
The PPA provisions impose substantial excise taxes and penalties to
address perceived abuses involving SOs. However, Treasury already had
the statutory means to address the problems intended to be corrected by
these new laws, and in fact did so with success when the circumstances
warranted action. The new legal regime results in unintended negative
consequences on the non-profit community by restricting access to
working capital, decreasing sources of funding, and penalizing private
foundations, SOs, and supported organizations with automatic sanctions,
potential reclassification of tax-exempt status, and increased
compliance requirements.
CONCLUSION
We welcome the review by the Subcommittee on Oversight of the
impact on charities of the significant changes made by the PPA. We
appreciate your consideration of our comments.

Statement of the American Bar Association Section of Taxation
These comments (``Comments'') are submitted on behalf of the
American Bar Association section of Taxation (``Tax section'') and have
not been approved by the House of Delegates or Board of Governors of
the American Bar Association. Accordingly, they should not be construed
as representing the position of the American Bar Association.
Executive Summary
The Pension Protection Act of 2006\1\ (the ``PPA'') contained
numerous provisions affecting tax-exempt organizations described in
section 501(c)(3).\2\ On June 12, 2007, the Subcommittee on Oversight
of the Ways and Means Committee of the United States House of
Representatives issued an Advisory, inviting comments on those
provisions of the PPA, including on how these provisions may affect
charitable efforts and the difficulties that have arisen in
implementing these provisions. We welcome the Oversight Subcommittee's
consideration of these issues and their impact on donor advised funds,
supporting organizations, their donors and the organizations they
support.
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\1\ The Pension Protection Act of 2006, Pub. L. No. 109-280, 120
Stat. 780 (2006).
\2\ References to a ``section'' are to a section of the Internal
Revenue Code of 1986, as amended (the ``Code''), unless otherwise
indicated, and references to regulations are to the Treasury
Regulations.
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In reaction to reports of abuses by a few organizations, the PPA
imposed a great many new restrictions and penalties on donor advised
funds and supporting organizations. Most of those reported abuses
violated pre-PPA Code provisions, which suggests that at least certain
of the PPA's changes may not have been necessary. The PPA places
significant new compliance burdens on donor advised funds, supporting
organizations, their donors, and the organizations they support. These
provisions are discouraging many well-accepted and commendable
charitable activities. The PPA also places significant additional
demands on the Service's limited enforcement resources. We welcome the
Oversight Subcommittee's consideration of the need for balance between
correcting abuses and placing additional burdens on legitimate,
nonabusive charitable activities, and commend the Oversight
Subcommittee to do so in a transparent manner through public hearings
and open comments.

Our most significant Comments can be summarized as follows:

1. The PPA imposes new automatic excess benefit transaction rules
on donor advised funds and supporting organizations that are more
stringent than the self-dealing rules applicable to private
foundations, add undue complexity to the tax laws, and are uncertain in
their treatment of section 501(c)(3) organizations as disqualified
persons.
2. The PPA makes it more difficult for charitable trusts to
qualify as Type III supporting organizations and may adversely affect a
significant number of nonabusive charitable trusts.
3. The PPA's new rules distinguishing functionally integrated from
non-functionally integrated Type III supporting organizations are a
source of significant complexity and should be reconsidered. At a
minimum, the effective date of these rules should be postponed until
the Treasury Department issues final regulations clarifying the scope
of these rules.\3\
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\3\ An Advance Notice of Proposed Rulemaking (REG 155929-06) issued
on August 1, 2007 details several factors the Treasury Department and
the Internal Revenue Service (the ``Service'') anticipate including in
proposed regulations, and requests public comment by October 31, 2007.
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4. The PPA's treatment of charitable contributions of undivided
interests in tangible personal property is punitive and affects a great
many nonabusive situations.
5. The PPA's change in the treatment of S corporation charitable
deductions is consistent with longstanding tax policy favoring
charitable contributions of appreciated property, promotes parity in
the tax treatment of S corporations and partnerships, and should be
made permanent.
6. The goal of the PPA's provision requiring the public disclosure
of section 501(c)(3) organizations' Forms 990-T could be achieved more
simply by expanding the disclosure of unrelated business activity on
Form 990.
7. A technical correction appears necessary to ensure that the
penalty abatement provisions apply to new sections 4966 and 4967; and
8. The PPA's changes to section 512(b)(13) should be made
permanent in order to put tax-exempt organizations on parity with
taxable entities.
Comments
In light of the breadth of the PPA's provisions affecting tax-
exempt organizations, these Comments focus on those areas that present
the most significant concerns. The Tax section's views on the PPA also
are reflected in comments\4\ to the Service dated June 4, 2007 in
response to Notice 2006-109,\5\ and comments\6\ to the Service dated
July 31, 2007 in response to Notice 2007-21.\7\ As requested by the
Notices, those submissions commented only on the provisions of the PPA
that affect supporting organizations and donor advised funds and
include recommendations for regulations and other guidance.
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\4\ Comm. on IRS Notice 2006-109, ABA Tax Sec. Comments in response
to IRS Notice 2006-109 on the application of the Pension Protection Act
of 2006 to donor advised funds and supporting organizations, (June 4,
2007).
\5\ Notice 2006-109, 2006-51 I.R.B. 1121
\6\ Comm. on IRS Notice 2007-21, ABA Tax Sec. Comments in response
to IRS Notice 2007-21 on Treasury Study on donor advised funds and
supporting organizations, (August 1, 2007).
\7\ Notice 2007-21, 2007-9 I.R.B. 611.
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1. The Automatic Excess Benefit Transaction Rules Applicable to
Supporting Organizations and Donor Advised Funds

Background. Private foundations defined in section 509(a) have long
been subject to an excise tax under section 4941 that penalizes ``self-
dealing'' transactions with ``disqualified persons.'' section 4941
generally prohibits financial transactions between a private foundation
and a disqualified person, but contains several exceptions, including
one in section 4941(d)(2)(E) that allows a private foundation to pay
reasonable compensation to a disqualified person for services provided
to the private foundation.
Since September 14, 1995, transactions between public charities\8\
and their disqualified persons have been subject to an excise tax found
in section 4958, often called the ``intermediate sanctions'' excise
tax. Prior to the PPA, section 4958 did not prohibit financial
transactions between a public charity and a disqualified person, but
instead subjected them to an arm's length reasonableness standard.
section 4958 penalized only ``excess benefit transactions'' in which a
disqualified person received an excessive economic benefit. Prior to
the PPA, supporting organizations and donor advised funds, which are
classified as public charities, were subject to the intermediate
sanctions restrictions of section 4958 rather than the private
foundation self-dealing restrictions of section 4941.
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\8\ The term ``public charity'' is not defined in the Code and is
used here to mean those tax-exempt organizations described in section
501(c)(3) other than private foundations. section 4958 also applies to
organizations described in section 501(c)(4) and their disqualified
persons.

Comment on Automatic Excess Benefit Transactions. The PPA
effectively establishes a third excise tax on transactions between a
charity and its disqualified persons. It does so by creating a new type
of automatic excess benefit transaction in section 4958(c)(2) and (3)
that applies exclusively to supporting organizations and donor advised
funds.\9\ Section 4958(c)(2) applies to donor advised funds and imposes
the section 4958 excise tax automatically on any ``grant, loan,
compensation, or other similar payments'' by donor advised funds to
donors, advisors, and certain related persons. The Joint Committee
Report states that ``other similar payments'' include expense
reimbursements but not sales or leases.\10\ Section 4958(c)(3)(A)(i)(I)
creates comparable automatic excess benefit transaction rules for
payments by supporting organizations to their substantial contributors
and certain related parties. section 4958(c)(3)(A)(i)(II) creates a
third, broader category of automatic excess benefit transaction for a
loan by a supporting organization to any ``disqualified person,'' not
just substantial contributors and related parties.
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\9\ The PPA also adds new sections 4966 and 4967, which impose
penalties on other donor advised fund activities.
\10\ Staff of the Joint Committee on Taxation, Technical
Explanation of H.R. 4, The ``Pension Protection Act of 2006,'' as
Passed by the House on July 28, 2006, and as Considered by the Senate
on August 3, 2006, at 467 (2006) (the ``Joint Committee Report'').
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The PPA thus establishes new rules for supporting organizations and
donor advised funds that are more stringent than those that apply under
either the private foundation self-dealing rules or the general section
4958 intermediate sanctions rules (both of which allow the payment of
reasonable compensation and expense reimbursements to disqualified
persons). It is not clear why supporting organizations and donor
advised funds should be subject to a more stringent rule. Implicit in
this change must be the view that payments of compensation or expense
reimbursements to disqualified persons by supporting organizations or
donor advised funds are more likely to result in abuse than similar
payments by private foundations. However, we are not aware of any
substantial evidence to that effect.
The PPA also reverses the priorities of section 4941 by prohibiting
the payment of compensation but allowing sales and leases. Congress
previously had determined in enacting section 4941 that sales and
leases were more susceptible to abuse than compensation for services,
but the PPA takes a contradictory approach. The rules under section
4941 already were subject to much criticism for their complexity, and
by prohibiting the payment of all compensation by supporting
organizations and donor advised funds the PPA effectively creates more
traps for the unwary.
We encourage the Oversight Subcommittee to consider whether it
would be more appropriate to apply either the private foundation self-
dealing model or the public charity intermediate sanctions model, in
lieu of these new restrictions which add further complexity to the
Code. If the Oversight Subcommittee concludes that a more restrictive
penalty tax regime on donor advised funds and supporting organizations
is appropriate, we respectfully submit that a less complex approach
would be to subject donor advised funds and supporting organizations to
the self-dealing rules of section 4941, much as the PPA has subjected
them to other private foundation provisions in sections 4943 and 4945.

Comment on Failure to Exclude All section 501(c)(3) Organizations.
The PPA also may establish more restrictive rules for transactions
between section 501(c)(3) organizations. Prior to the PPA, transactions
between section 501(c)(3) organizations were excluded from the scope of
both the private foundation self-dealing excise tax and the
intermediate sanctions excise tax, regardless of whether they were
private foundations or public charities. This exclusion was
accomplished in the regulations by excepting all section 501(c)(3)
organizations from the definition of ``disqualified person.''\11\ The
PPA's automatic excess benefit rule for loans by supporting
organizations to disqualified persons in section 4958(c)(3)(A)(i)(II),
however, creates by statute a limited exclusion that applies only to
public charities described in section 509(a)(1), (2) and (4). This
express statutory provision may foreclose the Treasury Department from
expanding that exclusion by regulation to allow a supporting
organization to make a loan to another supporting organization or to a
private foundation that is a disqualified person, even though the
transaction is between two section 501(c)(3) organizations. If this
result is what Congress intended, it represents a material departure
from the pre-PPA policy of excluding all transactions between section
501(c)(3) organizations from the application of the self-dealing and
intermediate sanctions excise taxes.
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\11\ Reg. Sec. Sec. 53.4946-1(a)(8) and 53.4958-3(d)(1).
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The limited statutory exclusion in section 4958(c)(3)(A)(i)(II)
also clouds the Treasury Department's regulatory authority with respect
to the other automatic excess benefit transaction rules in section
4958(c)(2) and (c)(3)(A)(i)(I). Although neither of these latter
provisions contains the same limited statutory exclusion, the language
in closely related section 4958(c)(3)(A)(i)(II) may cast doubt on the
Treasury Department's regulatory authority to extend the pre-PPA
exclusion for all section 501(c)(3) organizations to the new automatic
excess benefit transaction rules. The Treasury Department could view
the limited statutory authority for loans to disqualified persons as an
indication of Congressional intent toward automatic excess benefit
transactions more generally.
The policy reflected in the private foundation self-dealing rules
of excluding all section 501(c)(3) organizations from self-dealing
penalties has withstood the test of time. A more restrictive approach
under the automatic excess benefit transaction rules creates further
complexity and more traps for the unwary. Accordingly, we respectfully
suggest that the Oversight Subcommittee reconsider this aspect of the
PPA.
2. The Treatment of Perpetual Charitable Trusts as Supporting
Organizations

Background. Prior to the PPA, a trust described in section
501(c)(3) could qualify as a Type III supporting organization under
section 509(a)(3) if it met the ``responsiveness test'' and the
``integral part'' test in Treasury Regulation section 1.509(a)-4(i)(2)
and (3). Under Treasury Regulation section 1.509(a)-4(i)(2)(ii) a trust
could meet the responsiveness test if it was a charitable trust under
state law, named each supported organization in its governing
instrument, and was subject to a state law that gave the beneficiary
organization(s) the power to enforce the trust and compel an
accounting. PPA section 1241(c) overruled this regulation. The Joint
Committee Report states as follows:
In general, under [this] provision, a Type III supporting
organization that is organized as a trust must, in addition to present
law requirements, establish to the satisfaction of the Secretary, that
it has a close and continuous relationship with the supported
organization such that the trust is responsive to the needs or demands
of the supported organization.\12\
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\12\ Joint Committee Report at 362. The Advance Notice of Proposed
Rulemaking (REG 155929-06) issued on August 1, 2007 addresses this
charitable trust issue only preliminarily and requests further comment.
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We understand that the PPA included this provision in response to
reported abuses of donors' ``parking'' assets in a charitable trust and
retaining effective control of them due to a failure of oversight by
the supported organization. Such abusive ``parking'' of assets is
designed to avoid dedicating the assets to charitable purposes and use.
However, this PPA provision is very broad in scope and affects a
significant number of charitable trusts where there is no hint of
abuse. For example, it is not uncommon for a donor to create a separate
trust with a bank or other independent trustee to serve as an external
endowment for a named charity. Donors do so for a number of reasons,
including concerns that future officers of the charity will not honor
the donor's intent, that the endowment should be protected from the
charity's creditors, that the charity might otherwise make imprudent
invasions of principal, or that the charity lacks investment expertise.
Having a trust serve as an external endowment avoids these concerns and
serves legitimate charitable purposes. The establishment of such trusts
stands in sharp contrast to the abuses at which the provision is aimed;
yet, the PPA provision applies to them as well.

Comment. We assume that Congress did not intend the PPA to have the
effect of revoking the supporting organization status of the
significant number of nonabusive charitable trusts described above.
However, there is no assurance that the Treasury Department's
regulations will adequately constrain the scope of PPA section 1241(c)
to avoid the unnecessary conversion of many nonabusive charitable
trusts into private foundations.\13\ Accordingly, we respectfully
suggest that the Oversight Subcommittee reconsider the scope of PPA
section 1241(c) to ensure that it clearly reflects its intent and is
not applied more broadly than intended.
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\13\ The breadth of PPA section 1241(c) is discussed at pages 62-66
of the Tax Section's June 4, 2007, comments to the Service. Those
comments recommend steps that the Service and the Treasury can take to
ameliorate the overbreadth of PPA section 1241(c).
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3. Non-Functionally Integrated Type III Supporting Organizations

Background. The PPA imposes new restrictions directed at Type III
supporting organizations that do not qualify as ``functionally
integrated'' under section 4939(f)(5)(B), including rules that (1) deny
qualified distribution treatment for grants to them by private
foundations, (2) impose excess business holdings rules, (3) require
private foundations that make grants to them to exercise expenditure
responsibility, (4) disqualify them from administering donor advised
funds eligible to receive deductible charitable contributions, and (5)
impose new payout requirements to be set by the Treasury
Department.\14\
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\14\ I.R.C. Sec. Sec. 4942(g)(4)(A)(i), 4943(f)(3)(A),
4945(d)(4)(A)(ii) & 170(f)(18)(A)(ii); PPA Sec. 1241(d). The Tax
section's June 4, 2007, comments to the Service, at 51-56, discuss
these provisions and make recommendations regarding the definitional
issues the Service and the Treasury face with respect to functionally
integrated Type III supporting organizations.
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Under these new provisions, non-functionally integrated Type III
supporting organizations are treated more harshly than private
foundations. A grant from one private foundation to another private
foundation can be a qualifying distribution that counts against the
grantor's minimum distribution requirement if the grantee serves as a
conduit for the grant under the ``out of corpus'' rules of section
4942(g)(3). However, no such flexibility is allowed for grants by
private foundations to non-functionally integrated Type III supporting
organizations.

Comment. The PPA's rules creating the new categories of
functionally integrated and non-functionally integrated Type III
supporting organizations are a source of significant complexity and
have resulted in significant confusion. The statutory definitions are
ambiguous, and the Service has suspended issuing determination letters
on whether a Type III supporting organization is functionally
integrated.\15\ It has been reported that many private foundations are
simply refusing to make grants to any Type III supporting organization
as a result of these new rules. The punitive denial of the ``out of
corpus'' rules for grants to non-functionally integrated Type III
supporting organizations has added to private foundations' concerns.
The reaction of private foundations is creating problems for all Type
III supporting organizations. Given the many unanswered questions, we
encourage the Oversight Subcommittee to reconsider these rules. If
Congress decides to retain these rules, the Oversight Subcommittee
should monitor how the Treasury Department carries out its broad
regulatory authority to ensure that these provisions do in fact address
the reported abuses that led to their enactment. Finally, the effective
date of these rules should be postponed until the Treasury Department
issues final guidance clarifying the scope of these rules.\16\
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\15\ Memorandum from Acting Director, EO Rulings and Agreements,
Feb. 22, 2007.
\16\ The Advance Notice of Proposed Rulemaking (REG 155929-06)
issued on August 1, 2007 (``ANPRM'') makes several constructive
proposals regarding functionally and non-functionally integrated
supporting organizations, but does not address all of the concerns with
PPA's new restrictions and leaves many questions unanswered. The ANPRM
requests comments by October 31, 2007, and only after that date will
proposed regulations be issued. The ANPRM states that new rules will
not be effective until temporary or final regulations are issued; in
the interim, exempt organizations will be forced to continue to grapple
with the PPA's statutory restrictions and penalties without definitive
guidance.
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4. Gifts of Partial Interests in Tangible Personal Property

Background. The PPA made several changes to the rules governing
deductions for charitable contributions of tangible personal property.
The changes that have caused the most concern involve new valuation and
recapture rules for gifts of undivided interests in tangible personal
property under sections 170(o), 2055(g) and 2522(e). Where a donor
contributes an undivided interest in tangible personal property to
charity, these new PPA rules: (1) limit the donor's deduction for any
subsequent gift of an undivided interest in the same property for
income, gift and estate tax purposes by basing the subsequent deduction
on the lesser of the property's fair market value at the time of the
initial gift or its fair market value at the time of the subsequent
gift; (2) require the recapture of both income tax and gift tax
deductions, plus interest, if either (i) the donor does not contribute
all of the remaining interest in the property before\17\ the earlier of
the donor's death or 10 years after the initial contribution or (ii)
the donee charity does not have substantial physical possession of the
property and does not use the property for a tax-exempt purpose during
the period it has partial ownership; and (3) impose a 10 percent
addition to both income and gift tax attributable to such recapture.
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\17\ Presumably the use of the word ``before'' in the statute does
not require a donor to foresee the date of his death, so that a bequest
of the remaining interest would avoid recapture if the donor dies
within 10 years.

Comment. Gifts of undivided interests are a valuable and legitimate
way that many museums acquire works of art. We question whether the
reported abuses of such gifts justify the PPA's attempts to discourage
them. Moreover, the PPA's valuation and recapture rules do not simply
discourage such gifts, but in fact punish them harshly. For example,
assume that a donor contributes a 50 percent undivided interest in a
painting worth $1 million to a museum on July 1, 2007, and gives the
remaining 50 percent to the same museum 10 years later on June 30,
2017, at a time when the value of the painting has appreciated to $2
million. Under the PPA, the donor's income tax deduction for the second
gift is limited to $500,000 instead of $1 million. Limiting the donor's
gift tax deduction to $500,000 forces the donor to pay out of pocket
$200,000 of gift tax just to make the subsequent charitable
contribution within the timeframe prescribed by the PPA (assuming a 40
percent effective gift tax rate in 2017). The subsequent gift may well
cost the donor more in gift tax than the donor will save in income tax.
The recapture rules pile on yet more penalties. The first recapture
rule, based on a donor's failure to contribute the remaining undivided
interest within the time permitted, would be triggered by a donor who
forgets to amend his will and then dies before making a subsequent
gift. That donor would be penalized by recapture for mere inadvertence.
Recapture of the income tax, along with interest and an addition to
tax, is itself a penalty. Requiring gift tax recapture as well, plus
interest and addition to tax, compounds the penalty. The second
recapture rule, based on a donee charity's not having substantial
physical possession of the property and not putting the property to a
related tax-exempt use, again is excessively punitive by requiring
recapture of the gift tax as well as the income tax.\18\ Because donors
do not view the gift tax charitable deduction as an affirmative
benefit, any gift tax recapture is particularly punitive and would
discourage the making of such charitable gifts.
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\18\ The second recapture rule presents separate issues, including
its inconsistency with the PPA's other related-use recapture rule for
tangible personal property in section 170(e)(7).
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5. S Corporation Charitable Deductions

Background. Charitable deductions of an S corporation pass through
to its shareholders under section 1366(a)(1)(A). Prior to the PPA, when
an S corporation contributed appreciated long-term capital gain
property to charity, the shareholders were required to reduce the basis
of their stock in the S corporation by their proportionate share of the
property's fair market value under section 1367(a)(2)(B). This pre-PPA
rule contrasted with the partnership rule where partners are required
to reduce their basis in their partnership interests only by their
proportionate share of a contributed asset's basis.\19\
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\19\ See Rev. Rul. 1996-11, 1996-1 C.B. 140.
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The partnership approach is consistent with the general policy of
section 170 of encouraging charitable contributions of appreciated
property by allowing taxpayers to claim a deduction for the property's
full fair market value. The prior S corporation rule had the effect of
depriving shareholders of the advantage of a fair market value
charitable deduction afforded other kinds of assets because the larger
basis reduction increased the shareholders' gain or reduced the
shareholders' loss upon a later disposition of the S corporation stock.
It also discouraged gifts of highly appreciated property, such as
conservation easements, because shareholders often had insufficient
basis to absorb the deduction. PPA section 1203(a), which expires at
the end of 2007, added flush language at the end of section 1367(a)(2)
that effectively establishes parity between S corporations and
partnerships for this aspect of entity-level charitable contributions
of appreciated property.\20\ This temporary PPA change allows S
corporation shareholders the same advantage for entity-level charitable
contributions that individual donors have.
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\20\ Differences in the computation of basis for S corporation
stock and partnership interests also affect the amount of the
charitable contribution that an owner can deduct, but such differences
are beyond the scope of these Comments to the PPA.

Comment. Because this PPA change (a) is consistent with the
longstanding tax policy of allowing charitable deductions for the full
fair market value of appreciated property and (b) establishes parity in
the treatment of entity-level charitable contributions by S
corporations and partnerships, it should be made permanent.
6. Public Disclosure of Form 990-T

Background. Prior to the PPA, no taxpayer had been required to
publicly disclose Federal income tax returns. Consistent with this
policy, tax-exempt organizations were not required to publicly disclose
their tax returns (Form 990-T), although they were subject to public
disclosure requirements with respect to their information returns (Form
990). The PPA added section 6104(d)(1)(A)(ii) to require section
501(c)(3) organizations, but not other tax-exempt organizations, to
disclose their Forms 990-T in addition to their Forms 990.

Comment. The PPA's provision requiring the public disclosure of
Form 990-T raises several concerns. It treats tax-exempt organizations
less favorably than for-profit businesses, which are not required to
disclose their tax returns. It treats section 501(c)(3) organizations
less favorably than other tax-exempt organizations. It forces churches,
which do not file Form 990 but do file Form 990-T, to disclose
information about their operations for the first time, a mandated
disclosure that implicates First Amendment concerns. It has the
potential for turning away private joint venture partners and co-
investors who prefer not to subject their activities to public
disclosure. Its effectiveness is open to question because it often can
be readily avoided by transferring an unrelated business to a taxable
subsidiary corporation. Finally, because the Form 990-T is also used
for purposes other than reporting unrelated business activity, such as
claiming refunds of withholding and excise taxes, information with no
bearing on unrelated business activity may be disclosed.\21\ An
alternative approach would largely avoid these concerns, while
achieving the disclosure Congress seeks. Instead of subjecting the Form
990-T to disclosure, additional disclosure of unrelated business
activity could be required on the Form 990. The Form 990 already
requires some disclosure of unrelated business activity, and that
disclosure could be expanded.
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\21\ Interim guidance was provided in Notice 2007-45, 2007-22
I.R.B. 1320, which states that a Form 990-T filed solely to claim a
refund of telephone excise tax does not have to be made available for
public inspection, but otherwise a Form 990-T must be disclosed ``in
its entirety.''
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7. Extending Abatement Rules to sections 4966 and 4967

Background. Excise taxes imposed on private foundations and public
charities under Chapter 42 of the Code are generally subject to the
Service's authority to abate them under sections 4961-4963, except for
the first-tier excise tax on self-dealing of section 4941(a) and the
excise tax on tax-shelter transactions of section 4965. The PPA did not
extend the Service's abatement authority to the new excise taxes
imposed on donor advised funds under sections 4966 and 4967. This
failure may have been an oversight because the excise taxes under 4966
and 4967 are included in the definition of ``first tier taxes'' in
section 4963(a) but are omitted from the list of ``qualified first tier
taxes'' eligible for abatement in section 4962(b). Moreover, the Joint
Committee Report states that the excise taxes under sections 4966 and
4967 ``are subject to abatement under generally applicable present law
rules.''\22\ The excise taxes under sections 4966 and 4967 are
complementary to the excise tax under section 4958, which is subject to
abatement.
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\22\ Joint Committee Report at 349-50.

Comment. There appears to be no reason to exclude the excise taxes
under sections 4966 and 4967 from the possibility of abatement. A
technical amendment should be enacted to ensure eligibility for
abatement.
8. Payments to Controlling Exempt Organizations

Background. PPA section 1205(a) amended section 512(b)(13) to
provide that, for certain payments received or accrued in 2006 and
2007, tax-exempt organizations would not be subject to unrelated
business income tax on interest, rents, royalties and annuities
received from certain related organizations to the extent that such
payments reflected an arm's-length, fair market value standard. This
change conforms the treatment of tax-exempt organizations with the
treatment of taxable enterprises, making both subject to an arm's-
length standard under section 482. The earlier rule, which caused tax-
exempt organizations to be subject to unrelated business income tax
automatically on such payments, encouraged tax-exempt organizations to
favor transactions with unrelated parties instead of related entities.

Comment. Consistent with prior comments of the Tax section, the
substantive changes to section 512(b)(13) made by the PPA should be
made permanent. Inflated pricing in related-party transactions would
remain taxable (with a penalty), while arm's-length dealings could
continue. This approach would place tax-exempt organizations on the
same footing as taxable entities and would no longer penalize
transactions between tax-exempt organizations and their related
organizations.

Statement of American Institute of Philanthropy
Thank you for holding hearings on the IRS's proposal to improve the
Form 990 and other ways to reform the nonprofit sector. Many of the
changes, if put into effect, will greatly enhance the public's access
to important information that was previously not required to be broken-
out or disclosed. We appreciate that the new schedules are designed to
increase the accounting and reporting burdens of only those charities
with more complex financial transactions, and do not force smaller
charities with simpler operations to complete additional forms.
With that said, we at the American Institute of Philanthropy (AIP)
were shocked by one glaring change to the Form 990 that will
significantly reduce charities' accountability to the public, and deny
donors of the information they need to understand how their
contributions to charity are being used. The current version of the
Form 990 requires charities that divide the expenses related to joint
educational/fundraising campaigns (Joint Costs) among program,
management & general, and fundraising expense, to provide a breakout of
what dollar amounts are being allocated to each function. The new Form
990, if adopted, would allow charities to conveniently disguise as
program expense what many donors would consider fundraising activities.
This would leave the public at a great disadvantage, taking away

the one reporting requirement that shows donors what portion of their
contributions are being used to fund more solicitations, rather than
the bona-fide programs they are intending to support.
The public is being bombarded with an ever-increasing amount of
phone and mail solicitations from charities. As a nationally prominent
charity watchdog organization, we are flooded with questions from both
the public and the media, who want to understand how charities are
using donors' hard-earned dollars. Many people are outraged to learn
that charities are allowed to claim large portions of solicitation
costs as program service expenses. Charities may claim that such
activities are educating the public. You would not know this based on
the complaints we frequently receive from donors who are fed up with
the constant barrage of phone calls and mail they receive from
charities requesting contributions. Based on AIP's more than fifteen
years of experience reviewing such mail and phone appeals, we think it
would be obvious to almost anyone that the primary purpose of
solicitations is to raise funds, with the educational component being
largely incidental in most cases.
Under current rules, a charity that includes an ``action step'' in
their phone or mail solicitations such as ``don't drink and drive,'' or
``buckle your seatbelt,'' can claim that they are ``educating'' the
public, and can therefore report much of the expense of these appeals
as a program. Such ``action steps,'' often relayed to potential donors
through professional fundraisers hired by charities to broadly solicit
the public for money, are typically messages of information that is
common knowledge. Professional telemarketers, on average, keep two-
thirds of the money they raise before the charity receives anything.
What this means is that someone donating $50 to charity through a
professional fund raiser may have just paid $30 to be solicited and
``learn'' that they should buckle their seatbelt. This is not what most
donors would consider to be a charitable program, and the public should
not be excluded from knowing how much of a charity's reported program
expense is part of its solicitation activities.
The reporting requirements for joint costs should be expanded not
eliminated, so donors know what they are really paying for. Even when
following the joint cost reporting requirements of AICPA SOP 98-2,
charities are given wide latitude in how they account for and allocate
these expenses. In considering changes to Form 990, the IRS should
consider adding an additional requirement in which charities would
disclose their five most expensive solicitation campaigns, including a
breakout of each campaign's program, management & general and
fundraising expenses, including the method used for allocation. The
nonprofit should also provide a good description of the program being
conducted in conjunction with each solicitation that cites specifically
what is being accomplished and why the recipient of the solicitation
has a use or need for the information.
At the very least, the current disclosure requirements for joint
cost reporting on the Form 990 should remain intact. While a break-out
of Joint Costs may continue to be required in a charity's audit under
AICPA standards, this is not enough. There are numerous examples of
charities incorrectly reporting or omitting important information from
their tax forms, audits, and other reports. The Joint Cost reporting on
Form 990 serves to provide information that may be cross-checked with a
charity's audit, state filings, and other data, for consistency and
correctness. Such reporting can prevent a charity from claiming that
failing to attach a required schedule or omitting important information
from their reports was simply an oversight.
In summary, AIP encourages all donors to charity to ask what
percentage of their donation is being spent on programs that are not a
part of a group's solicitation efforts. If the new IRS form eliminates
the disclosure of Joint Cost solicitation allocations, the public will
no longer be able to have this very basic question answered by
referring to the Form 990. It will also open the floodgates for
unscrupulous fund raisers to aggressively solicit, knowing that most of
the donating public will not be able to determine that they are only
funding fundraising.
I thank you for taking the time to review our concerns, and
encourage you to contact me if I can be helpful in providing additional
insight into how Form 990 information may improve the oversight of
nonprofit organizations and better assist donors and recipients of
charity services. These proposed Form 990 changes, if adopted, will
have sweeping and long-lasting effects within the nonprofit sector, and
it is important that they result in more accountability to the public,
not less.
Sincerely,
Daniel Borochoff
President

Statement of American Society of Appraisers
The undersigned professional appraisal organizations, representing
more than 30,000 professional appraisers in the U.S., greatly
appreciate the Committee's invitation to comment on provisions in the
Pension Protection Act (PPA or Act) relating to tax-exempt
organizations. Our comments are limited to those sections of the Act
which make far-reaching changes to the manner in which tax-related
valuations are performed, including those involving appraisals of non-
cash charitable contributions.\1\
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\1\ Title XII, Subtitle B, Part 1, sections 1213, 1214, 1216, 1218
and 1219 of H.R. 4 (P.L. 109-280).
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Hundreds of provisions of the Tax Code require Individual and
Business taxpayers to report the fair market value of tangible and
intangible property for a variety of Income, Estate and Gift tax
purposes. One of those purposes involves the valuation of noncash
donations to tax-exempt organizations. Each year, eligible charities
receive about $36 billion in non-cash property whose fair market value
must be determined and reported to IRS to substantiate taxpayers'
claims to charitable deductions.\2\ The reliability and integrity of
tax-related appraisals in general, and valuations of non-cash
contributions in particular, have long been a source of concern to IRS,
to the tax writing Committees and to the public.
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\2\ According to a recent IRS study covering tax year 2003 returns,
six million individual taxpayers reported 14.3 million noncash
donations valued at $36.9 billion on Form 8283. These noncash
contributions included public and closely held stock; real estate; land
and fade easements; intellectual property; art and collectibles; cars;
household items; other investments; and so forth.
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Our organizations have been active participants for a number of
years in the Congressional debate over how to address these concerns,
culminating in the valuation reforms of the Pension Protection Act.
With one important exception, we strongly support these reform
provisions as appropriate, necessary and cost-effective remedies for
discredited IRS valuation policies which permitted anyone to appraise
the value of tangible and intangible property for tax purposes--whether
or not they had any valuation education, skills or training; and which
allowed the use of any approaches to determining fair market value
whether or not they were generally accepted by valuation professionals.
The exception to our strong support involves the fact that the new
law's most important appraisal reform provisions--requiring meaningful
definitions of the terms ``Qualified Appraiser'' and ``Qualified
Appraisal''--are limited to valuations of non-cash charitable
contributions and do not apply to the many other Tax Code sections
which require taxpayers to report the fair market value of property.
These narrowly applied provisions involve (1) redefining the term
``Qualified Appraiser'' by requiring individuals performing tax-related
valuations to have demonstrable and meaningful valuation-specific
education, training and experience; and (2) redefining the term
``Qualified Appraisal'' by requiring adherence to generally accepted
valuation standards in reaching determinations of fair market value.
Although the other key features of the reforms (i.e., tightening the
tolerances giving rise to findings of substantial and gross valuation
misstatements and the addition of new sanctions that can be applied
against appraisers) are significant and appropriately apply to all tax-
related appraisals, we believe the provisions requiring appraiser
competency and adherence to generally accepted valuation standards are
the lynchpin of the Act's remedies and should apply, as well, to all
Tax Code valuations.
Unless this imbalance is remedied, the otherwise excellent tax-
related appraisal reforms established by Congress in the Pension Act
will have the unintended effect of creating two separate and unequal
systems for taxpayer valuations--a fully reformed system which applies
only to section 170 appraisals relating to charitable contributions;
and, a continuation of two of the most ineffective aspects of the old
system, for all other tax purposes.
We are writing, therefore, to respectfully urge the Oversight
Subcommittee to correct this major imbalance by applying the Act's
appraiser competency and generally accepted appraisal standards
requirements to all valuations required by the Tax Code, not just those
involving noncash contributions.
We would be very pleased to work with the Subcommittee to address
this issue. If you have any questions or would like to contact our
organizations, please call or contact the government relations
representative of the American Society of Appraisers, Peter Barash, or
the Appraisal Institute's government affairs representative, Bill
Garber.

Statement of American Society of Association Executives
I am President and chief executive officer of the American Society
of Association Executives (``ASAE''), a tax-exempt organization that is
recognized as exempt from Federal income tax under section 501(c)(6) of
the Internal Revenue Code 1986 (the ``Code'') and that represents
roughly 22,000 members, the majority of whom are the chief executive
officers or senior staff professionals of trade, professional or
philanthropic organizations.
I am writing to you about a couple of relatively minor provisions
in the recently enacted Pension Protection Act of 2006 (P.L. 109-280,
the ``Act''), that, if left unchanged, could have a major unintended
impact on many associations' ability to support and be supported by
their related foundations. A close review of new Code section
4958(c)(3) indicates that a technical correction may be necessary to
clarify an area of ambiguity. Likewise, a change made to Code section
509(f)(2)(A) might have the same effect.
First: new Code section 4958(c)(3) provides in two separate
subsections (sections 4958(c)(3)(A)(i)(II) and 4958(c)(3)(C)(ii)) an
exception to the general rule imposing automatic excess benefit
treatment of loans paid by supporting organizations to disqualified
persons and of grants, loans, compensation, or other similar payment
paid by supporting organizations to substantial contributors. The
exception in each of those subsections is for ``an organization
described in paragraph (1), (2), or (4) of section 509(a).''
The exception language could be interpreted as not including
section 501(c)(4), (5), and (6) organizations that are considered to be
section 509(a)(2) organizations by virtue of the flush language of
section 509(a). This clearly was not the intent of Congress and such an
interpretation would present a nonsensical result in practical
application. Specifically, a publicly supported section 501(c)(6)
organization, for example, could qualify as a supported organization
under section 509(a), and yet could be effectively prohibited from
receiving a loan, grant, compensation or other similar payment from a
section 501(c)(3) supporting organization even though that supporting
organization is obligated by its very charter to act in support of the
supported organization's charitable, educational and other qualifying
purposes.
Second: IRC section 509(f)(2)(A), added by the PPA, prohibits an
organization from qualifying for section 509(a)(3) ``Type I'' or ``Type
III'' status if it accepts a gift from a person who directly or
indirectly controls the organization being supported.
Section 509(f)(2)(B)(i), like section 4958(c)(3), provides an
exception to the ``controlling person'' restriction for ``an
organization described in paragraph (1), (2), or (4) of section
509(a).'' And, as with section 4958(c)(3), a credible and logical
interpretation of the language would be that all organizations that are
treated as section 509(a)(2) organizations by virtue of the flush
language of section 509(a) are included as part of the exception
provided.
But, given the lack of total clarity with regard to these changes,
we believe it would be advisable to approve a technical correction to
revise the language of the affected subsections slightly. A draft of
such slight revisions (in ``blackline'' format) is set forth on the
attached pages, with the proposed new language italicized and bolded.
This proposed revision takes language directly from section 509(a) and
gives effect to the clear intent of Congress with regard to the
affected subsections.
For a more detailed review of this issue, please see the attached
analysis documents.
Proposed Technical Correction #1
(b) Certain Transactions Treated as Excess Benefit Transactions.--
Section 4958(c), as amended by this Act, is amended by redesignating
paragraph (3) as paragraph (4) and by inserting after paragraph (2) the
following new paragraph:

``(3) Special rules for supporting organizations.--

``(A) In General.--In the case of any organization described in
section 509(a)(3)--

``(i) the term `excess benefit transaction' includes--

``(I) any grant, loan, compensation, or other similar
payment provided by such organization to a person described in
subparagraph (B), and

``(II) any loan provided by such organization to a
disqualified person (other than an organization described in paragraph
(1), (2), or (4) of section 509(a), including an organization described
in section 501(c)(4), (5), or (6) which

would be described in paragraph (2) if it were an organization
described in section 501(c)(3)), and

``(ii) the term `excess benefit' includes, with respect to
any transaction described in clause (i), the amount of any such grant
loan, compensation, or other similar payment.

``(B) Person described.--A person is described in this
subparagraph if such person is--

``(i) a substantial contributor to such organization,

``(ii) a member of the family (determined under section
4958(f)(4)) of an individual described in clause (i), or

``(iii) a 35-percent controlled entity (as defined in section
4958(f)(3) by substituting `persons described in clause (i) or (ii) of
section 4958(c)(3)(B)' for `persons described in subparagraph (A) or
(B) of paragraph (1)' in subparagraph (A)(i) thereof).

``(C) Substantial contributor.--For purposes of this
paragraph--

``(i) In general.--The term `substantial contributor' means
any person who contributed or bequeathed an aggregate amount of more
than $5,000 to the organization, if such amount is more than 2 percent
of the total contributions and bequests received by the organization
before the close of the taxable year of the organization in which the
contribution or bequest is received by the organization from such
person. In the case of a trust, such term also means the creator of the
trust. Rules similar to the rules of subparagraphs (B) and (c) of
section 507(d)(2) shall apply for purposes of this subparagraph.

``(ii) Exception.--Such term shall not include any
organization described in paragraph (1), (2), or (4) of section 509(a),
and such term shall not include any organization described in section
501(c)(4), (5), or (6) which would be described in paragraph (2) if it
were an organization described in section 501(c)(3)),.''
Proposed Technical Correction #2
Internal Revenue Code
SUBTITLE A--INCOME TAXES (Sections 1 to 1564)

CHAPTER 1--Normal taxes and surtaxes (Sections 1 to 1400 . . .

SUBCHAPTER F--Exempt Organizations (Sections 501 t . . .

PART II--Private Foundations (Sections 507 t . . .

Sec. 509. Private Foundation Defined

509(f) Requirements For Suppo . . .

509(f)(2) Organizations Cont . . .

Sec. 509(f)509(f)(2) Organizations Controlled By Donors

509(f)(2)(A) In General

For purposes of subsection (a)(3)(B), an organization shall not be
considered to be--

509(f)(2)(A)(i) operated, supervised, or controlled by any organization
described in paragraph (1) or (2) of subsection (a), or

509(f)(2)(A)(ii) operated in connection with any organization described
in paragraph (1) or (2) of subsection (a), if such organization accepts
any gift or contribution from any person described in subparagraph (B).

509(f)(2)(B) Person Described

A person is described in this subparagraph if, with respect to a
supported organization of an organization described in subparagraph
(A), such person is--

509(f)(2)(B)(i) a person (other than an organization described in
paragraph (1), (2), or (4) of section 509(a), including an organization
described in section 501(c)(4), (5), or (6) which would be desribed in
paragraph 2 if it were an organization described in section 501(c)(3),)
who directly or indirectly controls, either alone or together with
persons described in clauses (ii) and (iii), the governing body of such
supported organization,

509(f)(2)(B)(ii) a member of the family (determined under section
4958(f)(4)) of an individual described in clause (i), or

509(f)(2)(B)(iii) a 35-percent controlled entity (as defined in section
4958(f)(3) by substituting ``persons described in clause (i) or (ii) of
section 509(f)(2)(B)'' for ``persons described in subparagraph (A) or
(B) of paragraph (1)'' in subparagraph (A)(i) thereof).

Statement of Association for Healthcare Philanthropy
The Association for Healthcare Philanthropy (AHP) is pleased to
present its comments for the written record for the hearing on tax-
exempt charitable organizations.
AHP is an association of professional development executives who
are responsible for the management of foundations and development
departments of nonprofit health care providers throughout the United
States. A critical part of their mission is supporting local health
care programs through philanthropic fundraising that directly benefits
the institution in which they work. These nonprofit medical facilities
approach and have come to rely on the generosity of grateful patients
who they have served to help underwrite wellness programs, mobile
health vans, mammography screenings, hearing and eye exams, hospital
facility improvements, essential equipment upgrades and health care
services for the uninsured.
Established in 1967, AHP is a not-for-profit organization whose
4,500+ members manage philanthropic programs of foundations and
development departments in 2,200 of the nation's not-for-profit,
charitable health care providers. In 2006, this philanthropic support
reached $7.9 billion according to AHP's most recent giving survey
report. As a practical matter, most, if not all, of health care
providers routinely factor into their budgets an expected level of
philanthropic support.
AHP represents highly skilled fund raisers in health care
philanthropy. Many hold the Certified Fund Raising Executive (CFRE) or
the Fellow Association for Healthcare Philanthropy (FAHP) designation,
which recognize professionalism in the field by documenting experience
and testing knowledge in health care resource development. More than
60% of AHP members have been in the field of fundraising for 11 or more
years, with 39% having been in the field for 16+ years. Our members
believe in transparency and accountability in their work and follow the
AHP Statement of Professional Standards and Conduct and its companion
Donor Bill of Rights, copies of which are included with the letter. In
addition, in 2006 AHP launched the AHP Performance Benchmarking
Service. One of the goals of this program is to provide consistent
reporting of fundraising dollars that AHP member organizations
generate.
AHP members are an integral part of their health care institutions
and are a critical component in attracting needed dollars to support
community benefit programs. With that in mind, AHP is a supporting
organization of the Catholic Health Association's Guide for Planning
and Reporting Community Benefit.
As the Oversight Subcommittee reviews 501(c)(3) tax-exempt health
care organizations, AHP would like to share with you a number of
critically important challenges facing the not-for-profit health care
community and some steps AHP is taking to meet these challenges. It is
important to understand the environment that health care fund raisers
are currently working within to fully grasp the importance of their
tax-exempt status and the need for transparency and accountability.
These challenges are fairly complex, but they fall into three main
categories: 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 entitlement that
has developed over the years with regard to health care delivery. This
development in our society creates many stumbling blocks for health
care philanthropy--particularly for hospitals, medicals centers, long-
term care facilities and hospices.
Patients believe that they have a right to the highest quality of
care; that the US has the best health care in the world; that it is far
too expensive; and that third parties such as insurance companies are
making decisions about health care unrelated to the delivery of good
care--decisions that should be made by physicians and nurses. For
philanthropy, it raises the question-- why donate to such a system?
In addition, few Americans are aware of the differences between
for-profit and not-for-profit health care providers or the fact that
only 12 to 14 percent of providers are in a for-profit delivery system.
Fewer still know that only about one-third of hospitals in the United
States have a positive bottom line, while another third are barely
keeping their heads above water and the rest are deep in red ink and
financially in trouble.
Second, the financial challenges to nonprofit health care providers
are many. Some are linked to the fact that many hospitals have
postponed capital spending and underinvested in their infrastructure.
They need to address deteriorating facilities, but fully 85 percent of
hospital chief financial officers say it is going to be more difficult
for their organizations to fund capital expenditures in future years.
At the same time, technology's promise, particularly in health care
delivery, has created enormous stresses on finances relative to
providing quality health care and using cutting-edge technology in
providing that care. Expensive technological initiatives need to be
undertaken to maintain effectiveness, while operating margins that
already are thin threaten to become thinner, placing more
responsibility on philanthropy to fill in the gap.
Similarly, the burden of meeting the health care needs of the
uninsured, including non-citizens, weighs heaviest on the nonprofit
sector, even as revenues from Medicare and Medicaid decline.
Third, on the regulatory scene, the Health Insurance Portability
and Accountability Act, or HIPAA, is severely impacting efforts of
fundraisers. It is making philanthropic activities more costly and less
efficient while increasing the cost of compliance because hospitals,
nursing homes, clinics and hospices must upgrade computer systems,
train staff and pay for legal advice. AHP fully supports HIPAA.
Unfortunately, a lack of understanding on the role of institutionally
related development offices in a health care organization has led the
Federal government to enact that portion of the rule that restricts
philanthropic efforts.
In fact, 4 years after HIPAA went into effect, the Federal
government in a recent letter to AHP, conceded there were practically
no examples of any violations ``in the context of fundraising
efforts.'' Complaints of violations of the HIPAA rule have been
received by the agency's Office of Civil Rights with practically none
involving fundraising.
Yet in a 2007 AHP survey, 56% of respondents who contact past
patients report that HIPAA has had a negative effect in their ability
to run a successful grateful patient program.
AHP has a lot of educating to do. Health care providers need more
information about HIPAA compliance. government officials and
legislators need a better understanding of philanthropy.
With that in mind, AHP wants to take the opportunity to educate
legislators, the media and the public with regard to nonprofit health
care providers and their tax-exempt status. AHP fully supports
legislation that stems tax-avoidance scams and that shines more light
on compensation packages of nonprofit executives. However, there is a
real danger that an all too common problem will arise: unintended
consequences. With the challenges facing health care delivery and the
definite need for philanthropic support, it is crucial that the role of
the development office and its operation is understood fully so as not
to thwart fundraising efforts and erode the pubic trust of nonprofit
health care providers.
As I mentioned earlier, AHP supports clearly defined terms for data
reporting across the board for fundraising entities. Evidence of this
is our successful launch of the AHP Performance Benchmarking Service.
At its launch, 41 of our AHP members in 18 states and two Canadian
provinces have become part of this new fundraising system designed to
better meet corporate compliance and transparency requirements, and to
ensure that dollars donated by grateful patients or their families are
accounted for and spent effectively.
The AHP Performance Benchmarking Service, is a unique, integrated
database of business practices and performance metrics for raising
philanthropic health care fundraising to new levels of performance.
Participating organizations are in Alabama, Arizona, California,
Florida, Georgia, Illinois, Maryland, Michigan, Minnesota, Nebraska,
New Jersey, New York, Oklahoma, Pennsylvania, Tennessee, Virginia,
Washington, Wisconsin, Ontario and Saskatchewan. Philanthropic
fundraising, now more than ever, is vital to sustain and grow the
nonprofit health care sector's ability to deliver first class services
to patients and communities. AHP's Performance Benchmarking Service
advances this effort by transforming basic financial and program data
into useful information that enables hospital chief executive officers
and boards of directors to integrate philanthropy into their overall
strategic planning for their health care organizations.
AHP members have as their missions to serve their communities.
According to AHP's Report on Giving 2006, health care institutions in
the U.S. raised $7.9 billion through philanthropy, a 11.5% increase
over 2005. Those dollars are being used for health care construction
and renovation, equipment purchases, community benefit programs,
charitable care, research and training, general operation, among
others. In 2005, the largest expense item for institutions was
construction and renovation, accounting for 23.9%. In 2006, that
expense rose to 31.8%. Each year AHP members provide data that
demonstrate where their philanthropic dollars are being used by their
health care organization in order to support their missions--to serve
their communities.
In summary Mr. Chairman and Members of the Subcommittee, AHP
members feel that every dollar donated is critical, and we are taking
all necessary steps to ensure we achieve the most efficient return on
the philanthropic investments of grateful donors and their families.
Enc.: AHP Statement of Professional Standards and Conduct
Donor Bill of Rights
Association for Healthcare Philanthropy
Statement of Professional Standards and Conduct
All members shall comply with the Association's Statement of
Professional Standards and Conduct:
Association for Healthcare Philanthropy members represent to the
public, by personal
example and conduct, both their employer and their profession. They
have, therefore, a
duty to faithfully adhere to the highest standards and conduct in:
I. Their promotion of the merits of their institutions and of
excellence in health care generally, providing community leadership in
cooperation with health, educational,
cultural, and other organizations;
II. Their words and actions, embodying respect for truth, honesty,
fairness, free inquiry, and the opinions of others, treating all
withequality and dignity;
III. Their respect for all individuals without regard to race,
color, sex, creed, ethnic or national identity, handicap, or age;
IV. Their commitment to strive to increase professional and
personal skills for improved service to their donors and institutions,
to encourage and actively participate in career development for
themselves and others whose roles include support for resource
development functions, and to share freely their knowledge and
experience with others as appropriate;
V. Their continuing effort and energy to pursue new ideas and
modifications to improve conditions for, and benefits to, donors and
their institution;
VI. Their avoidance of activities that might damage the reputation
of any donor, their institution, any other resource development
professional or the profession as a whole, or themselves, and to give
full credit for the ideas, words, or images originated by others;
VII. Their respect for the rights of privacy of others and the
confidentiality of informationgained in the pursuit of their
professionalduties;
VIII. Their acceptance of a compensation method freely agreed upon
and based on their institution's usual and customary compensation
guidelines which have been established and approved for general
institutional use while always remembering that:
a. any compensation agreement should fully reflect the standards
ofprofessional conduct; and,
b. antitrust laws in the United Statesprohibit limitation on
compensation methods.
IX. Their respect for the law and professional ethics as a standard
of personal conduct, with full adherence to the policies and procedures
of their institution;
X. Their pledge to adhere to this Statement of Professional
Standards and Conduct, and to encourage others to join them in
observance of its guidelines.
A Donor Bill of Rights
Philanthropy is based on voluntary action for the common good. It
is a tradition of giving and sharing that is primary to the quality of
life. To assure that philanthropy merits the respect and trust of the
general public, and that donors and prospective donors can have full
confidence in the not-for-profit organizations and causes they are
asked to support, we declare that all donors have these rights:

I. To be informed of the VI. To be assured that information
organization's mission, of the about their donations is handled
way the organization intends to with respect and with
use donated resources, and of its confidentiality to the extent
capacity to use donations provided by law.
effectively for their intended
purposes. II. To be informed of the identity of VII. To expect that all relationships
those serving on the with individuals representing
organization's governing board, organizations of interest to the
and to expect the board to donor will be professional in
exercise prudent judgment in its nature.
stewardship responsibilities.III. To have access to the VIII. To be informed whether those
organization's most recent seeking donations are
financial statements. volunteers, employees of the
organization or hired
solicitors.IV. To be assured their gifts will be IX. To have the opportunity for
used for the purposes for which their names to be deleted from
they were given. mailing lists that an
organization may intend to
share. V. To receive appropriate X. To feel free to ask questions
acknowledgment and recognition. when making a donation and to
receive prompt, truthful and
forthright answers.

DEVELOPED BY
American Association of Fund Raising Counsel (AAFRC)
Association for Healthcare Philanthropy (AHP)
Council for Advancement and Support of Education (CASE)
National Society of Fund Raising Executives (NSFRE)
ENDORSED BY
(in formation)
Independent Sector
National Catholic Development Conference (NCDC)
National Committee on Planned Giving (NCPG)
National Council for Resource Development (NCRD)
United Way of America

Association of Art Museum Directors
New York, New York 10022
July 27, 2007
House Ways and Means Oversight Subcommittee
Congressman John Lewis, Chairman
1136 Longworth House Office Building
Washington, DC 20515

Dear Chairman Lewis:

We would like to thank you for the opportunity to comment on the
charitable provisions that were contained in the Pension Protection Act
of 2006 (``PPA''). The Association of Art Museum Directors, founded in
1916, represents over 170 art museums in the US. We address our
comments to you on behalf of our members, most of whom receive
fractional gifts and view the ability to do so as an important tool to
make the best art available to the American public.
As you may be aware, many of the provisions included in the PPA
have had a significant impact on charitable donations to the nation's
art museums. In particular, the new restrictions imposed on fractional
gifts have resulted in a pronounced reduction in donations of artwork
to museums across the country. The loss of important works represented
by most fractional gifts will have a lasting negative impact on the
public's ability to view and appreciate invaluable works of art, most
of which museums could not afford to purchase.
Section 1218 of the PPA tightened the requirements necessary for a
taxpayer to receive an income tax deduction for the donation of
qualified fractional gifts of tangible personal property to a museum.
In most cases, these new rules also limited or reduced the available
deduction for the donation of a fractional gift. These changes were
made to address perceived abuses surrounding the deductions,
particularly in cases where the donated artwork was not in the
possession of the acquiring museums. While the changes were drafted to
allow fractional gifts to continue to be made, they have effectively
ended donations of fractional gifts to museums for several reasons.
First, the reduction in the available income tax deductions
received during the life of a fractional gift has made the donation of
appreciating artwork financially imprudent.
Second, the necessity to complete the gift in a 10-year period is a
serious impediment to donors making substantial gifts. Third, the
imposition of these changes on fractional gifts entered in to before
passage of the PPA has impacted existing contracts for gifts raising
questions of both fairness and the imposition of retroactive taxes.
Fourth, the potentially unusual results created by modifying estate and
gift tax rules applicable to fractional gifts has made planning for
these donations practically impossible. While some of the above
problems could be corrected through technical corrections, such as the
estate and gift tax area, other changes will need substantive changes
in law.
Already, museums are experiencing a cessation in fractional gift
donations. The following are just a few examples that illustrate the
problem:

A West Coast contemporary art museum that was negotiating
with a donor for his collection of 40 contemporary works has been
informed by the donor that he would not be making the fractional gifts
as a result of the law changes.
An East Coast museum had a donor withdraw his offer for
13 contemporary drawings by well-known artists because of the new
restrictions.
A Santa Fe museum had a potential donor of a Tribal Folk
Art collection worth approximately $2 million withdraw an offer to give
the collection to the museum
A Washington, DC museum had an offer to donate a 30%
fraction on a collection of 20 prints and drawings withdrawn after the
legislation was passed. A Kentucky museum had received five important
works as fractional gifts from a collection of 60 pieces of 20th
century American Art. Since the passage of the new law the remaining
works have not been offered to the museum as had been promised before
passage of the PPA.

We look forward to working with you and your Subcommittee to ensure
that the overwhelming benefits that the American public derives from
their museums' diverse and growing collections are enhanced by
administrable and rational tax policy. While there may have been a need
to correct potential abuses, we believe that the changes made in PPA
went far beyond addressing these concerns and have had an unnecessary
detrimental impact on our Nation's art museums.

Sincerely,
Gail Andrews
President

Statement of Association of Blind Citizens, Holbrook, Massachusetts
As you review how the Internal Revenue Code affects charitable
giving, I am writing to provide the Committee with some information
regarding the impact of changes made in 2004 as part of the American
Jobs Creation Act to the Federal Tax Code regarding deductible vehicle
donations. These changes have significantly reduced the number and
value of vehicles being donated to the Association of Blind Citizens
(ABC). For years before the law changed, ABC found vehicle donations to
be an important and stable revenue stream. The moneys we received were
used to provide critical services to the blind and visually impaired
community. As unrestricted funds, these donations were utilized to
support direct services and general operating expenses.
The 2004 changes have seriously impacted our work and, I am sure,
the services provided by many other charities across the United States.
In 2004, ABC received 3,823 vehicle donations. In 2006, ABC received
1,302 vehicle donations--a 65% decrease in volume following the change
in the Tax Code. ABC's agent, Helping Hands of America, does not accept
cars that are not running, which has enabled ABC to receive higher
quality donations. The practice of not accepting vehicles that do not
run, a practice we continue today, helps to curtail abuse of the Tax
Code because a car that cannot be on the road could not represent an
accurate fair market value tax deduction.
As you know, before tax year 2005, a taxpayer could deduct the fair
market value (FMV) of vehicles donated to charity. Under what was then
section 170 of Title 26 of the US Code, a donor could claim the FMV as
determined by well-established used car pricing guides up to $5,000. I
believe that donors who donated cars in working order were more likely
to follow the law and claim the appropriate FMV. The donor was able to
use a standard published guide such as the Kelly Blue Book to help them
to compare options regarding their vehicle disposition.
Under the new section 170, deductions over $500 are limited to the
actual proceeds from the sale of the vehicle, regardless of its
appraised value. This means that a taxpayer with a newer-model car in
good condition has no real idea what deduction will be allowed until
the vehicle is sold. So donors must risk getting far less credit for
the donation than it is actually worth. And they must wait days, weeks
or months--sometimes into the next tax year--to learn the result. In
our experience, donors with late model cars are not willing to take
this risk.
Clearly, these changes that took effect in 2005 has caused a
significant drop in the volume of donations. We did not make any
changes in our marketing program from 2004 to 2006. In 2004, the
average age of ABC's vehicle donation was 10-12 years; in 2006, the
average age of vehicle donations was 12-14 years old.
I believe that potential donors are deterred from making a vehicle
donation because they do not have a standard guide to obtain
approximate tax deduction information. If the donor is not able to
determine approximate FMV, he/she is not able to compare the tax
deduction value to the options of privately selling the vehicle or
trade value which is being offered by an automobile dealer. I have
spoken to many donors who told me that the dealer was giving them a bad
trade deal and they were happy that they could make the donation
knowing proceeds were going to a good cause in addition to receiving a
tax deduction.
The change in the tax law has resulted in fewer donations,
especially of higher-value cars which are also the transactions least
subject to abuse. This lost revenue has been difficult to replace, so
we have had to reduce staff and the direct services we provide to the
blind and visually impaired. It's hard to believe that's really what
Congress really intended.
Please consider the issues that I have briefly discussed above as
the Subcommittee reviews policy toward tax-exempt organizations. I
fully respect and understand the need to curb abuse of the Tax Code.
However, I believe that changes aimed at reducing abuses must be
carefully balanced against the benefits to charities that Congress
meant to encourage when it originally approved tax deductions for
vehicle donations.
Thank you for your time and consideration of this vital matter. I
look forward to working with you and am available to provide any
additional information that you may need.

Statement of Association of Fundraising Professionals
On behalf of the Association of Fundraising Professionals (AFP), I
am writing to provide comments regarding the provisions relating to
tax-exempt organizations in the Pension Protection Act of 2006. As an
organization that represents individuals responsible for generating
philanthropic resources, AFP has first-hand knowledge and understanding
of charitable giving. We hope that our thoughts and perspective will
prove helpful to you as you review this legislation.
Background
AFP represents nearly 28,000 members in more than 190 chapters
throughout the world, working to advance philanthropy through advocacy,
research, education and certification programs. AFP members work for a
wide variety of charities, from large multi-national institutions to
small, grassroots organizations, engaged in countless missions and
causes including education, healthcare, research, the environment and
social services, to name a few. In 1960, four forward-thinking and
prominent fund raisers met with the goal of creating an association,
now AFP, that would promote good stewardship, donor trust, and ethical
and effective fundraising.
AFP members are required annually to sign our Code of Ethical
Principles and Standards of Professional Practice, which were first
developed in 1964. A copy of the Code is attached. AFP instituted a
credentialing process in 1981--the CFRE, or Certified Fund Raising
Executive designation--to aid in identifying for the giving public fund
raisers who possess the demonstrated knowledge and skills necessary to
perform their duties in an effective, conscientious, ethical, and
professional manner. This was followed in 1990 by the ACFRE for
advanced fund raisers. We also have a strong ethics enforcement policy
that can result in the revocation of credentials and expulsion of
members who engage in prohibited behavior.
This background is cited to emphasize the importance that AFP and
its members place on ethical fundraising. Much of our work is spent
educating and training our members and the public in ethical
fundraising practices while working with Federal and state regulators
to improve regulation and to identify wrongdoers who don't belong in
the charitable sector.
In addition, since its founding, AFP has championed donor rights.
AFP was the driving force behind the creation of the Donor Bill of
Rights and provides information to potential donors about how to
select, evaluate, and give wisely to charities. AFP encourages all
donors and nonprofit volunteers to investigate and become engaged with
charities of their choice before making financial commitments. A copy
of the Donor Bill of Rights is attached.
The IRA Rollover
The charitable giving provisions in the Pension Protection Act are
helping our Nation's charities to thrive. In particular, the IRA
Rollover provision is a powerful incentive, allowing donors to transfer
funds directly and tax-free from an IRA to a charitable organization.
This provision encourages potential donors to draw upon a new source of
assets in support of charitable organizations that serve the public
good.
Under the current provision, a donor who has reached the age of
70\1/2\ is allowed to exclude from his or her income any IRA funds up
to $100,000 that are withdrawn and transferred to a charity when filing
a tax return for the year of the transfer.
Tax incentives such as the IRA Rollover provision play a vital role
in encouraging donors to make gifts, especially as the contribution
amounts become larger. In fact, in just the past 10 months, the IRA
Rollover provision has brought in over $69 million in new gifts for the
charitable sector according to a recent National Committee on Planned
Giving survey. It is worth noting that the survey, while instructive,
is not comprehensive and does not cover the entire charitable sector.
It merely represents a fraction of the positive impacts of the IRA
Rollover provision.
In fact, it is estimated that there is more than $2.7 trillion in
retirement funds like IRAs. The individuals and communities served by
the nation's charitable sector can benefit from the IRA Rollover
provision because it encourages a significant amount of new
contributions from individuals who would no longer have to pay tax on a
charitable gift of IRA funds. These contributions support programs for
those less financially well off through important services, such as
those provided by health, education, social service, and cultural
organizations.
Unfortunately, the IRA Rollover provision is scheduled to sunset at
the end of 2007. It is imperative that Congress make this provision
permanent for the nation's charities.
Equally important, to make the provision even more effective,
Congress should not only make the IRA Rollover permanent, but it should
also enhance the provision by removing the $100,000 cap on gifts from
IRA accounts, and by lowering the age threshold for all such gifts from
70\1/2\ to 59\1/2\.
Many in the charitable sector believe that this single provision
alone will have the greatest demonstrable positive impact for all
charities of any changes to Federal gift tax proposals.
Charitable Reforms
A few other charitable reforms were contained in the Pension
Protection Act of 2006. Although they were mostly commonsense reforms
that likely will not burden our Nation's charities, we are concerned
about a potential slippery slope that might result in the enactment of
unduly burdensome charitable reforms that would deter charities from
fulfilling their altruistic missions.
Over the past few years, we have witnessed the introduction of
proposed charitable reforms that sought to raise revenue from the
charitable sector. For instance, it has been proposed that new ``user
fees'' be imposed on the sector together with the drastic modification
or complete elimination of deductions for charitable contributions of
property--so called noncash contributions. Another proposal would have
established a floor on deductions for both taxpayers who claim the
standard deduction and those taxpayers who itemize their deductions,
which essentially would impose a tax on deductions. Such proposals turn
the concept of tax exemption on its head.
It also is worth noting that empirical data indicates that there is
NOT widespread abuse among the charitable sector and that the new
proposals are unnecessary. Reports collected by the FBI, the Federal
Trade Commission, State Attorneys General and even watchdog groups like
the Better Business Bureau show that reports of charity fraud are less
than 1 percent of all complaints of fraud.
Moreover, the IRS already has the statutory authority, rules,
regulations and enforcement mechanisms to effectively police the
charitable sector. Existing laws are fully sufficient to address the
abuses which may be occurring in the sector. A recent study found that
of the 94 abuses cited by the Senate Finance Committee during its June
2004 hearing on charity oversight, 92 of those abuses could have been
addressed by current laws, regulations and reporting requirements.
However, the IRS has never been given the Congressional budget
appropriations necessary to engage in the reasonable level of
enforcement activity necessary to fulfill its statutory mandates.
AFP does not oppose demonstrably necessary nonprofit sector
regulations. Legitimate fund raisers understand the need for
regulation, and AFP has strongly supported appropriate and defensible
initiatives on both the Federal and state levels that have increased
regulation of charities and fundraising.
But in every case, the regulations that AFP has supported have been
balanced with the charitable sector's need to raise funds for the
critical programs it provides. AFP is concerned that some proposed
reforms, like unprecedented user fees and floors for itemized
deductions, will prove extremely burdensome to many charities,
resulting in the loss of funds, while doing little to accomplish their
stated goal of curbing abuses.
Conclusion
AFP appreciates the opportunity to provide comments to the House
Ways and Means Subcommittee on Oversight.
I appreciate the opportunity to share AFP's views with you. I look
forward to working with you and the Subcommittee on issues related to
the tax-exempt sector.
Thank you for your time and consideration.

Statement of Atlanta Union Mission, Atlanta, Georgia
The Association of Gospel Rescue Missions (AGRM) represents 294
rescue missions in the United States that provide critical services to
homeless and poor individuals who face the greatest challenges. Founded
in 1913, AGRM's member missions offer emergency food and shelter, youth
and family services, prison and jail outreach, medical care,
rehabilitation, and specialized programs for the mentally ill, the
elderly, the urban poor, and street youth.
Combined member ministries of the AGRM comprise one of the largest
non-profit organizations in the United States. Last year, AGRM missions
served more than 41 million meals, provided 15 million nights of
lodging, distributed more than 27 million pieces of clothing and 1.1
million furniture items, and provided 142,000 individuals with the
educational programs necessary to achieve productive living.
Recently, the Congress passed and the President signed the Pension
Protection Act of 2006 (PPA). Included in this law are a series of
charitable tax reforms designed to encourage greater charitable giving.
We hope that these charitable tax reforms accomplish their intended
purpose of increasing the resources charities have to serve and promote
the common good.
Unfortunately, one provision (Section 1216), of the PPA, if wrongly
implemented, has the potential to severely hinder the charitable
sector. Specifically it could cripple the ability of the member
missions of AGRM from carrying out our important mission. The provision
benignly states:
``Limitation of deduction for charitable contributions of clothing
and household goods''
``In General--In the case of an individual, partnership, or
corporation, no deduction shall be allowed under subsection (a) for any
contribution of clothing or a household item unless such clothing or
household item is in good used condition or better.''
Our concern is addressed later in this testimony and is rooted in
the original proposal set forth by the Senate.
Thrift Shops Providing Clothing & Household Goods to the Poor
One of the primary charges of rescue missions in America is to
clothe the homeless and the poor. To this end, 132 rescue missions
operate approximately 200 thrift stores around the United States. Each
year, Americans contribute an estimated $277 million in clothing and
household goods to our missions. The contributions are critical to the
ability of our member missions to provide necessary clothing and other
items for clients who participate in both our emergency and long-term
rehabilitation programs. While these contributions provide our missions
some revenue, of equal importance, the operation of thrift stores
provide the poor, specifically the working poor, with the opportunity
to clothe themselves and furnish their homes at an affordable cost.
Moreover, the operations of thrift stores provide AGRM member missions
an opportunity to integrate residential recovery programs with real
experience, thereby providing vocational training for clients and
customers. We do so by maintaining the dignity and pride of our
customers.
We are proud of the merchandise we provide to the poor and homeless
and we want the poor and homeless to be proud of the merchandise they
obtain from our missions and thrift stores.

Atlanta Union Mission

For example, Mr. Chairman, the Atlanta Union Mission, located in
Atlanta, Georgia, runs six thrift stores throughout the Metro Atlanta
region. Proceeds from the thrift store operations are used to help fund
the Mission's programs of emergency services and recovery. The ministry
also makes vocational training available to men in recovery at the
Mission's Northeast Georgia Campus (The Potter's House), and it employs
qualified recovery program graduates. The Mission also donates a
significant amount of merchandise to needy families in the community.
Opened in 1938, the Mission serves as many as 1,070 individuals each
day with residential recovery programs, emergency shelter, and
transitional housing.
Through its thrift stores, the Mission reaches more than 200,000
customers each year. Last year, the Mission distributed free of charge,
44,600 pieces of clothing and household goods to clients or persons in
need from the community. These were all items that had been donated to
the Mission. Another 1.15 million items that were donated to the
Mission were used to stock and replenish the thrift stores.
With the help of clients, volunteers and about 15 paid staffers,
the Mission is able to process and distribute these donations. In
addition, the Mission currently operates seven trucks, 5 days a week.
This translates to approximately 1,820 truckloads of gifts-in-kind
picked up by the Mission each year.
If section 1216 were to be interpreted or implemented in a
draconian fashion as originally described and envisioned in Senate
legislation, the Mission would have to quadruple the number of paid
staff, clients, and volunteers working in its thrift stores in order to
handle the volume of paperwork associated with itemizing and
documenting each item donated. The truckdrivers would no longer be able
to complete the 7-10 daily pick-ups they currently make. As the
truckdrivers do not work in the thrift stores, they are not best suited
to assessing the condition or value of donated items. As great or
greater would be the impact upon the ability of staff at the Mission's
thrift stores. For example, it is very common for large donations to be
delivered to the Mission on Saturdays. In the larger stores, a dozen
people or more would be required to process the volume of donations.
This is not something that the Mission can afford to do. Alternatively,
the Mission would be forced to close down its six thrift stores in the
Atlanta region:

Athens Thrift Center
Comerce Thrift Center
Cumming Thrift Center
Gainesville Thrift Center
Snellville Thrift Center
Winder Thrift Center

Union Gospel Mission Twin Cities and the Marie Sandvik Center, Inc.

In Minnesota, the Union Gospel Mission Twin Cities and the Marie
Sandvik Center, Inc, provide a wide variety of services to the
homeless. Both missions are dedicated to providing clothing and other
items necessary to meet the basic human needs of the men, women and
children that reach out to the missions. While neither the Marie
Sandvik Center nor the Union Gospel Mission have a thrift store, they
are representative of all of our member missions who rely heavily on
donated clothing and household goods to meet the needs of individuals
who participate in programs at the Mission as well as for the homeless
and needy who come to the Mission for help. Thousands of donations of
gifts in kind are received each year by these missions. Neither the
Marie Sandvik Center nor Union Gospel Mission sell these items--they
give them away because they believe good, decent clothing is an
important component of building self-confidence for these people who
have been through great struggles.
If section 1216 were to be interpreted or implemented in a radical
manner, the Union Gospel Mission, the Marie Sandvik Center, and all of
our member missions who accept donations of clothing and household
goods would find their ability to function effectively severely
compromised. For example, the Union Gospel Mission receives donations
of approximately 80,000 pounds of clothing and goods each year. The
Union Gospel Mission would have to add multiple staff persons or take
current full-time staff away from their direct work with clients in
order to properly process the volume of clothing and goods donated to
the Mission.

AGRM Supports section 1216 But Remains Concerned About Overregulation

AGRM supports the language of section 1216 because we believe that
it clarifies the current practice of requiring the taxpayer to
accurately and honestly report charitable donations. AGRM is concerned,
however, that if the IRS interprets and implements the provision in the
most draconian sense it could shift the responsibility from the donor
to the donee charitable organization to evaluate and appraise the
donation of clothing and household goods.
This provision, as originally proposed in S. 2020, the Tax Relief
Act of 2005, would have required the Secretary of the Treasury to
annually publish an itemized list of clothing and household goods and
assign an amount representing the fair market value of each item in
good used condition. Every conceivable item would have had to be
assigned a value, from shoes, socks and pantyhose to jeans, sweaters,
and suits to hats, scarves, and bandanas. And, the burden of assessing
or valuing each article of clothing or household good donation would
have fallen on our rescue mission clients, staff, and volunteers.
Imagine the amount of time it would take a truck driver who is picking
up a contribution of clothing and goods from a donor's home. In order
to comply with the provision, the truckdriver would have to sort
through each item, making the judgment of whether or not the item was
in good used condition so that he could properly credit the donor for
the contribution. If a used coffeepot were included in the donation,
for example, should the truckdriver ask the contributor if he may make
a pot of coffee to determine if the coffeepot works? Similarly,
consider the burden that would be placed on a staff person or volunteer
who receives donations at a mission. Imagine the backlog that would
develop as the mission staff examine and evaluate each and every item
while the donor waits for the process to be completed. The mission or
any nonprofit in a similar situation would quickly be overwhelmed,
potentially discouraging donors from donating items to the missions.

This proposed change presented serious concerns for AGRM, including:

1. The potential personnel hours and paperwork involved in
complying with this proposal would have been extensive, and would have
required itemizing, defining, and determining the condition of each
donation at point and time of intake. Most of our members would not
have the resources to meet this requirement and would be forced to
close their thrift store operation.
2. Alternatively, a donor who disagreed with the Treasury's
valuation list or our member's assessed value could have asked for a
receipt for the value of the sale at a later date. It would not have
been feasible for our thrift stores to provide documentation of sales
amounts to the donor of donated items. Such a burden would be crippling
to our organization.\1\
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\1\ Because it is not possible to determine if a donated item will
be sold or given away in the future by the charity, there would be no
assurances that a sales record would be available to the donor at point
of intake. Our member missions do not barcode the millions ofm donated
items for tracking through our system.
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3. The Secretary would be required to establish values of donated
items which may or may not be accurate. A vase from a dollar store has
a very different value than a crystal or silver vase from Dillard's or
Macy's.
4. If enacted, this provision would have placed nonprofit
organizations in the unreasonable and uncomfortable position of being
the evaluator between the taxpayer and the taxing entity.

To shift the overwhelming evaluation and appraisal process as well
as the extraordinarily complicated accounting process would have tragic
consequences. Not only would staff costs increase dramatically, but our
missions would be forced to take staff away from hands-on work of
meeting the critical needs of our clients. As a result, our ability to
transform the lives of the hurting would be greatly diminished.
Additionally, it would cripple our revenue streams, it would cripple
our practical training programs, and it would cripple the poor and
working poor who rely on thrift stores for everyday clothing and
household goods.
Rightfully, rationally, and thankfully, the provision enacted into
law in the Pension Protection Act leaves the responsibility to fairly
and accurately report the value of a charitable donation of clothing
and household goods, in good used condition or better, on the donor.
AGRM is fully supportive of this provision and urges the Committee to
ensure that the provision is implemented and interpreted as written.
AGRM supports Congress's efforts to encourage charitable giving.
Overwhelmingly, our member missions rely on the generosity of their
communities to provide them with clothing and household goods and with
monetary donations to carry out vital services such as education,
counseling, job training, and addiction treatment. We appreciate the
need for accurate accounting practices, but we urge the Committee to
ensure that the laws they pass are not arbitrary and ensure that they
will not add hours of paperwork, increase accounting costs, or worse,
discourage charitable giving.

Baton Rouge Area Foundation
Baton Rouge, Louisiana 70802
July 27, 2007
Committee on Ways & Means
Subcommittee on Oversight
U.S. House of Representatives
1102 Longworth House Office Building
Washington D.C. 20515

Dear Committee Members,

I am writing this letter to supplement the letter my colleagues and
I drafted in response to your request for comments regarding the impact
of certain provisions of the recently enacted Pension Protection Act of
2006 (PPA). In addition to recognizing that the PPA has many beneficial
provisions which promote charitable giving, we outlined our concerns
and advised you to discontinue the provisions which hinder legitimate
philanthropic initiatives. Because we would like you to amend the PPA
provisions which unfairly penalize donor advised funds, I would like to
provide additional examples demonstrating the good that donor advised
funds have done over the past 2 years. Donor advised funds offer a
unique way for individuals to donate to charitable causes, and thus
increasing philanthropy overall.
After Hurricanes Katrina and Rita, the Baton Rouge Area
Foundation's activities shifted, and our main focus became aiding those
who had been affected by two of the three largest natural disasters in
our country's history. We were overwhelmed yet very grateful for the
support we received from people across the United States. In total, we
received over $45 million in donations designated for hurricane relief
efforts. Various community foundations and national charities made
significant donations to help us aid hurricane victims. Without the
support of donor advised funds, the Foundation would not have been able
to fund as many programs devoted to hurricane relief efforts. In this
instance, donor advised funds helped over 99 charitable organizations
which in turn provided aid to individuals affected by Hurricanes
Katrina and Rita. Our local knowledge and strong relationships with
Louisiana nonprofits helped ensure donors that their money would be
devoted to the cause they wished to support.
It makes no difference whether donors choose to establish a donor
advised fund at a national charity or at a community foundation. Both
institutions provide effective means to support philanthropic
endeavors. Donors benefit greatly when they can choose from various
mechanisms to donate to charities because no two donors are exactly
alike. Each form of organized giving has a different objective and
fulfills different needs.
Donor advised funds have created an efficient way for donors to
plan their giving. Donor advised funds established at national as well
as those established at community foundations advance philanthropy by
connecting donors with charities whose needs match the donors'
philanthropic interests. Such efficiency in giving was clear when
donors wanted to help South Louisiana residents who were impacted by
Hurricanes Katrina and Rita. Institutions that manage donor advised
funds were able to move funds efficiently and got money to those
organizations serving impacted individuals quickly.
Without the use of donor advised funds, we would not have been able
to provide such great support to South Louisiana's recovery efforts. In
addition to the countless recipients of aid, the Foundation's
administration and Board of Directors are indebted to those
institutions that maintain donor advised funds. These donors directed
massive amounts of funds, affection, and good will to hurricane
affected areas. We remain grateful for the donors' belief in us and
know that we could not have helped so many South Louisiana residents
without the support from donor advised funds.

Sincerely,
John G. Davies
President

Statement of Capital Region Community Foundation
The Subcommittee has requested comments regarding the impact of the
Pension Protection Act of 2006 (the Act) upon charitable foundations.
The Capital Region Community Foundation, located in Lansing, Michigan,
has been adversely affected by one particular portion of the Act,
dealing with scholarship funds, in a manner that seems to be an
unintended consequence of the Act's provisions. Other community
foundations around the nation have been similarly affected, and the
wording of the current statute will in the long run discourage the
establishment of scholarship funds that would otherwise assist
thousands of deserving students obtain a college education.
The problem lies in the way in which the Act affects scholarship
funds that are established by sponsoring organizations or associations.
These include service clubs (Rotary, Kiwanis, Lions, and so forth.),
high school alumni groups, professional associations, and other civic
organizations that are not 501(c)(3) entities. They also include
501(c)(3) organizations such as educational foundations associated with
local schools, as well as school districts themselves. Tens of
thousands of such organizations around the country have established
scholarship funds designed to assist students from local high schools
attend college. The awards are often modest, but the members and
supporters of these organizations are quite proud of the financial
assistance they are able to render to local students, especially since
these scholarship awards are often based in large part upon financial
need.
Many of these organizations have utilized their local community
foundations, which are public charities, as the vehicles for holding
and managing these scholarship funds. This arrangement allows
individual donors to receive tax deductions for their gifts, and the
funds can be professionally invested, benefiting from the safeguards
associated with community foundation management. Prior to the enactment
of the Act, sponsoring organizations that utilized a community
foundation to hold and invest the funds could still handle the
administration of their own scholarship programs, including the review
of applications and the selection of award recipients. The ability of a
sponsoring organization to make the award selections is understandably
a source of pride for its members and supporters, and has served to
encourage ongoing donations to such scholarship funds by many
individuals.
Unfortunately, under the provisions of the Act such scholarship
funds now fall under the definition of ``donor advised funds,'' and
donor advised funds are precluded under the Act from making grants to
individuals, whether such grants are made directly to an individual, or
to a college or university on the individual's behalf.\1\ Although the
Act provides an exception to this rule, the primary way that such
scholarship funds can fall within that exception is for the sponsoring
organization to give up its ability to select the scholarship
recipients. Instead, the community foundation must appoint an
independent advisory Committee to make those selection decisions.\2\
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\1\ Note that a 501(c)(3) organization (or other qualified
organization) that can make scholarship grants to individual students
from a fund it holds on its own is prohibited by the Act from making
similar award decisions regarding a fund that it establishes with a
community foundation. Treating the two situations differently makes no
logical sense.
\2\ The Act provides another exception for funds that make
distributions to only one organization. However, this exception is
unavailable in many situations, such as: (1) where the fund provides
support for charitable causes other than scholarships, and
distributions are therefore made to various charitable organizations;
and (2) where the sponsoring group is informally organized, such as an
alumni group for a local high school, and therefore has no bank
account, financial officer, and so forth. In addition, channeling
scholarship moneys through the sponsoring organization is often less
secure than having the community foundation--with its substantial
internal controls--handle the moneys and issue scholarship checks
directly from the fund.
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This results in two adverse consequences. First, the community
foundation must assume full responsibility for administering the
scholarship program, including the recruitment and appointment of
advisory committee members unrelated to the sponsoring organization,
coordination of the committee's meetings, and the handling of all
paperwork associated with the committee's work. As a result of
incurring this additional burden, the foundation usually has to charge
a higher administrative fee, which naturally reduces the amount
available for scholarships.
Second, and more importantly, this arrangement reduces the
sponsoring organization's involvement in the scholarship selection
process, and diminishes its members' interest in contributing to a
scholarship over which the organization has lost control. Although the
Act permits the sponsoring organization to have some representation on
the advisory Committee, such limited participation understandably
reduces the organization's membership's sense of satisfaction and level
of support for ``their'' scholarship fund. When one considers the large
number of such scholarship funds across the nation, the cumulative
negative impact of such loss of support is quite significant.
I would propose that the Act be amended to allow sponsoring
organizations to make scholarship award decisions relating to funds
they have established with community foundations, provided that the
grants are awarded in an objective and nondiscriminatory basis, as the
Act requires.\3\ This would restore to these organizations the
incentive to continue funding the tens of thousands of scholarships
that they support each year, reduce the administrative burden on
community foundations, and increase the number of scholarship dollars
available to deserving students nationwide.
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\3\ Where the sponsoring organization is a 501(c)(3) organization
(or other qualified organization), the community foundation should be
permitted to assume that the decisionmaking process is carried out
appropriately. In other cases, the community foundation can exercise
due diligence to ensure that the selection process complies with the
necessary requirements.

Statement of Chapman Trusts
The Chapman Trusts are a group of 12 trusts supporting 18
charitable, medical and educational organizations in Oklahoma, Arkansas
and Texas.\1\ The trusts are managed by independent fiduciaries and
have provided consistent and responsive support to their charitable
beneficiaries since 1949. Because each of the twelve trusts is a type
III supporting organization, the following comments are confined to
those provisions of the Pension Protection Act\2\ (the ``PPA'')
affecting type III supporting organizations.\3\
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\I\ See attached schedule of Chapman Trust beneficiaries.
\2\ Pub. L. No. 109-280, 120 Stat. 780 (2006).
Each Chapman Trust is a state law charitable trust, exempt from
taxation under IRC Sec. 501(c)(3) and qualifying as public charity
under I.R.C. Sec. 509(a)(3)(iii).
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Introduction
Unlike type I and type II supporting organizations, whose governing
boards are controlled by or overlapping with those of the supported
organizations, type III supporting organizations have governing boards
that are independent of those of their supported public charities.\1\
In order to demonstrate that a type III nevertheless has a sufficiently
close relationship with its supported organizations to justify its
public charity status, existing Treasury Regulations have required such
organizations to meet two tests: a ``responsiveness test'' and an
``integral part test.'' The responsiveness test requires that the
supporting organization be responsive to the needs and desires of its
supported organizations, while the integral part test requires that the
support actually provided by the supporting organization is substantial
and needed by the supported organizations to conduct their charitable
programs. Together, these two tests ensure that, despite having
independent management, the supporting organization is operating
closely with the supported public charities in much the same way as a
controlled subsidiary would.
We agree with the distinguished panelists at the Subcommittee's
hearing on July 24, including Steven T. Miller, Commissioner of the Tax
Exempt and government Entities Division of the Internal Revenue
Service, and Steve Gundersen, President and chief executive officer of
the Council on Foundations, that in general the charitable sector is
very compliant with the tax laws. We also acknowledge that there are
those in every sector, including our own, that will use whatever means
are available to enrich themselves, and that in recent years some have
used type III supporting organizations for improper personal gain.
However, as was pointed out numerous times during the Subcommittee's
hearing, the charitable sector is a vital part of American society, and
charitable organizations--including type III supporting organizations--
play an important role in healing the sick, educating our young, caring
for the aged and at-risk youth, and countless other important tasks
that the government alone cannot accomplish.
Several provisions of the PPA were aimed at supporting
organizations generally and type III supporting organizations
specifically. It is no secret that some on the Hill would solve the
problem of abuse within the type III community by eliminating all type
III supporting organizations,\4\ and many of the PPA provisions appear
to reflect this radical approach. For example, without attempting to
delineate between abusive and essential supporting organizations, the
PPA jeopardized the private foundation funding for all type III
supporting organizations (and in some cases all supporting
organizations) by placing harsh penalties on private foundations that
fund certain type III supporting organizations. Similarly, without any
evidence of the extent or nature of the abuse of supporting
organizations save a few anecdotal media reports, the PPA included
sweeping prohibitions on compensation of substantial contributors to
all supporting organizations, as well as reimbursement of expenses they
incur, that extend far beyond the restrictions placed even on private
foundations. Other provisions appear to have been hastily inserted,
without much idea as to how they would apply in practice, leading
potentially to many unintended consequences. And yet other provisions
delegate to Treasury vast discretion to subject all type III supporting
organizations to restrictive operating and payout requirements that
would inhibit the ability of good organizations to provide support
tailored to the needs and desires of their supported public charities.
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\4\ See Charity Oversight and Reform: Keeping Bad Things from
Happening to Good Charities: Hearing Before the Senate Committee on
Finance, 108th Cong., Staff Discussion Draft at 2, at http://
finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf
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We submit that this is no way to strengthen and improve the
charitable sector. Instead, Congress should undo the misguided PPA
supporting organization provisions and direct the IRS to embark on a
comprehensive program of enforcement of the current regulatory
standards. This would eliminate abusive supporting organizations that
are indirectly controlled by or providing private benefits to their
donors as well as organizations that do not have a close relationship
of responsiveness and dependence with their supported organizations. In
addition to weeding out abusive entities without uprooting effective
organizations, such a targeted effort would provide Congress with
information about the nature and extent of actual supporting
organization abuses so that, with input from compliant and constructive
type Ills and their supported public charities, Congress could enact an
effective package of legislative reforms that would not eliminate good
organizations along with the bad.
Although piecemeal amendment of the PPA's supporting organization
provisions cannot make up for the lack of information or absence of
collaboration in the lead up to their passage, it would nonetheless
alleviate some of the difficulties these provisions have caused or may
cause for numerous supporting organizations that daily contribute to
the education, health and welfare of our communities. Following are
specific comments on some supporting organization provisions of the PPA
offered in response to your request for information regarding how the
PPA's new rules affect charitable organizations and the difficulties
arising in implementing PPA provisions.
Responsiveness
Two of the new provisions in the PPA are aimed at strengthening the
responsiveness test in existing Treasury Regulations in order to ensure
that an appropriately close relationship exists between the supporting
and supported organizations. In current Treasury regulations, there are
two alternative methods to satisfy the responsiveness test. The first
alternative generally requires either that at least one officer or
board member of the supporting organization be appointed by or be one
of the supported public charity's officers or governing board or that
the officers or board members of the supporting organization maintain a
``close and continuous'' relationship with the officers or board
members of the supported organizations. In addition, by reason of the
relationship between the supporting and supported organizations'
leaders, the supported organization must have a ``significant voice''
in the investment policies of the supporting organization, the timing
and manner of making grants, the selection of grant recipients of the
supporting organization, and otherwise directing the use of the income
or assets of the supporting organization.\5\ The second alternative,
sometimes known as the ``trust option,'' allows type III supporting
organizations that are state law charitable trusts to meet the
responsiveness test if (i) the trust is a charitable trust under state
law; (ii) each beneficiary is named specifically in its governing
instrument; and (iii) each beneficiary has the power to enforce the
trust and compel an accounting under state law.\6\ Many type III
supporting organizations have been created as state law charitable
trusts in conformity with this regulation.
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\5\ Treas. Reg. Sec. 1.509(a)-4(i)(2)(ii).
\6\ Treas. Reg. Sec. 1.509(a)-4(i)(2)(iii). State trust law varies
by state. However, in Oklahoma, trustees have a duty of loyalty to
invest and manage the trust assets solely in the interest of the
beneficiaries, and a duty of impartiality to invest and manage the
trust assets of multiple beneficiaries impartially. Okla. Stat. tit.
60, Sec. Sec. 175.65,175.66. In addition, private inurement to
employees, officers, directors and members of the governing board is
prohibited. Okla. Stat. tit. 60, Sec. 301.8.
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The first of modification of the responsiveness test was the
addition of new Code section 509(0(1)(A), which requires supporting
organizations to provide certain information specified by the Treasury
Secretary to each supported organization, such as the supporting
organization's governing documents, its annual Forms 990 and 990-T, and
an annual report detailing the support provided to its supported
organizations as well as a projection of support to be provided in the
next year.\7\ The provision of additional information about the
supporting organization's finances and activities will enable the
supported organizations to better monitor and supervise the supporting
organization and increase the ability of supported organizations to
make meaningful recommendations and requests of the supporting
organization, and we fully support this new requirement. In fact, since
inception the Chapman Trusts have provided the named beneficiaries
annually with copies of the Trusts' Forms 990 and statements of trust
activity, including all trust income and disbursements (trustee fees,
consulting fees, and so forth.) and current trust asset values. Failure
to provide such information would be a factor in determining whether
the supporting organization meets the responsiveness test, allowing the
IRS to deny type III supporting organization status to abusive
organizations that do not maintain the intended close and responsive
relationship with their supported organizations.
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\7\ PPA, Sec. 1241(b), 120 Stat. at 1102; Staff of the Joint
Committee on Taxation, 109th Cong., Technical Explanation of H.R. 4,
the ``Pension Protection Act of 2006,'' As passed by the House on July
28, 2006 and as Considered by the Senate on August 3, 2006, at 362
(JCX-38-06, 2006) (hereinafter, ``JCT Technical Explanation'').
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The second attempted modification of the responsiveness test fails
for lack of clarity and attention to the application of the rules to
type Ills organized as trusts. section 1241(c) of the PPA provides that
for purposes of satisfying the requirements for type III supporting
organization status a trust shall not be considered to be operated in
connection with a supported organization ``solely because (1) it is a
charitable trust under state law, (2) the supported organization . . .
is a named beneficiary of such trust, and (3) the supported
organization . . . has the power to enforce the trust and compel an
accounting.'' \8\ The meaning of this provision is far from clear.
Standing alone it appears to be merely an accurate statement of the
existing regulations: solely meeting the trust option of the
responsiveness test has never been sufficient to establish an
``operated in connection with'' relationship with a supported
organization, because the integral part test must also be met. In its
technical explanation, the Joint Committee on Taxation indicates that
this provision of the PPA means that type III supporting organizations
organized as trusts ``must, in addition to present law requirements,
establish to the satisfaction of the Secretary that it has a close and
continuous relationship with the supported organization such that the
trust is responsive to the needs or demands of the supported
organization.'' \9\ We certainly affirm the value of a close
relationship between the trustees of a supporting organization and the
leadership of its supported organizations. We have long maintained very
close working relationships with the board and officers of each of our
supported public charities, and we believe this to be necessary in
order for us to fulfill our fiduciary duties under state trust law to
these beneficiary organizations.
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\8\ PPA, Sec. 1241(c), 120 Stat. at 1103.
\9\ JCT Technical Explanation, supra note 7, at 362.
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We have heard that in some instances a type III trust has claimed
it met the responsiveness test under the trust option while failing to
ever inform its supported organizations of its existence. This is
clearly improper, and it is difficult to see how such an organization
could meet the integral part test, which must also be satisfied before
an organization can qualify as a type III supporting organization under
current regulations. As noted above, we fully support the addition of
new Code section 509(f)(1)(A), which gives the IRS an additional tool
to use to shut down these abusive supporting organizations.
However, simply applying the other current alternative, the ``close
and continuous relationship'' option, to all type III charitable
trusts, as the IRS seems poised to do,\10\ will not be appropriate in
many type III trust situations. For example where an independent
institutional trustee holds the assets of the supporting organization,
it may be quite responsive to the needs and desires of the supported
organization with respect to the timing and manner of distributions
even without a relationship at the board level. Similarly, large
institutional trustees typically neither seek nor accept advice from
supported organizations regarding their investment policies and
practices, but in other respects are very responsive to the needs and
desires of the type III trust's supported organizations. Even the Panel
on the Nonprofit Sector, a group which lacked sufficient representation
of type III supporting organizations, recognized (and twice
specifically noted) the need to adapt any application of the existing
close and continuous relationship option to type III trusts.\11\
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\10\ See Advanced Notice of Proposed Rulemaking, Payout
Requirements for Type III Supporting Organizations That Are Not
Functionally Integrated, 72 Fed. Reg. 42,335, at 42,339 (Aug. 2, 2007).
\11\ Panel on the Nonprofit Sector, Strengthening Transparency
Governance Accountability of Charitable Organizations: A Final Report
to Congress and the Nonprofit Sector 45-46 (2005).
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Section 1241(c) of the PPA, as drafted, is ambiguous and does not
give type III supporting organizations or the Treasury sufficient
direction. We suggest that Congress repeal section 1241(c) of the PPA
and instead direct Treasury to require that the trust option of the
responsiveness test in current Treasury Regulations be amended to
require the supporting organization's trustees or, in the case of
independent institutional trustees, appropriate trustee employees or
representatives to maintain a close and continuous relationship with
the officers, directors or trustees of each supported organization and
that, subject to state law fiduciary duties, the trustees of the
supporting organization give each supported organization the
opportunity to have a significant voice in determining the recipients
of, timing of, and manner of making the organization's grants.
Minimum Payout
Section 1241(d) of the PPA directs Treasury to promulgate new
regulations requiring non-functionally integrated type III supporting
organizations to pay out annually a percentage of assets or income for
the use of the supported organization to ensure a significant amount is
paid to such organization.\12\ Although it may be easiest for Treasury
to simply apply the highest payout rate justifiable under current law--
the 5% of asset value nonoperating private foundation payout
requirement--such an approach ignores the significant difference
between effective supporting organizations and private foundations.
Perhaps the most significant feature of a supporting organization
differentiating it from a private foundation is its close affiliation
with its supported charities rather than with its donors. Private
foundations and donor-advised funds are donor-focused vehicles,
providing flexible mechanisms for donors to meet various philanthropic
goals by funding any number of charitable organizations in any given
year. They are not required to designate specific beneficiary
organizations, and therefore have the ability to pick and choose from a
potentially unlimited pool of beneficiary organizations each year. The
amount of support they provide to particular organizations can vary
widely from year to year according to the shifting priorities of the
foundation's management; often private foundation funding is given only
for a single project or for a few years.
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\12\ PPA, Sec. 1241(d), 120 Stat. at 1103; JCT Technical
Explanation, supra note 7, at 360. A non-functionally integrated type
III supporting organizations is defined as a ``type III supporting
organization which is not required under regulations established by the
Secretary to make payments to supported organizations due to the
activities of the organization related to performing the functions of,
or carrying out the purposes of, such supported organization.'' I.R.C.
Sec. 4943(f)(5)(B).
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Supporting organizations, by contrast, are intended to be charity-
focused entities, whether they are created by the supported charities
themselves or by interested benefactors. A large measure of donor
discretion is forfeited when the supporting organization relationship
is created, binding the supporting organization to its designated
supported public charities, often in perpetuity and excluding the donor
from even an indirect control relationship.\13\ In the case of type III
supporting organizations, the supported public charities must be
specifically named in their organizing documents--thus ensuring an
ongoing relationship between a supporting organization and specific
supported organizations.\14\ Although, the type III relationship has
been identified as the ``loosest'' of the three supporting organization
relationships, it is still much closer than the typical relationship
between a private foundation (or even a donor advised fund) and its
grantees. Unlike the typical private foundation, a supporting
organization acts as an integral part of its designated supported
organizations, consistently providing functional or financial support
over the long term.
---------------------------------------------------------------------------
\13\ Treas. Reg. Sec. 1.509(a)-4(d).
\14\ Treas. Reg. Sec. 1.509(a)-4(d)(4).
---------------------------------------------------------------------------
This consistent, long-term support provided by a supporting
organization is a significant advantage to its supported public
charities. When beneficiaries have a reliable, sustainable source of
support they are able to focus more time and energy on fulfilling their
charitable mission instead of constant fundraising. In addition, a
long-term relationship of support with a supporting organization, like
having a permanent endowment, allows beneficiaries to conduct long-term
research and initiate programs on which their service populations can
rely without fear of interruption. Many public charities prefer
predictable, sustainable and increasing distributions from a dedicated
supporting organization rather than short-lived--even if large--
distributions from private foundations and the uncertainty of hand-to-
mouth fundraising.
Because type III supporting organizations are relied upon by their
supported organizations as a source of long-term support for their
charitable programs--much as an endowment would be--any fixed payout
requirement should be set so as to preserve the supporting
organization's ability to continue to provide comparable levels of
support in the future. The benefits of a permanent endowment are not a
novel discovery; they are age-old and well-documented. Like a permanent
endowment, a supporting organization can provide beneficiaries with a
reliable source of support that ensures financial stability and
security even in fluctuating market conditions. Historically, inflation
has averaged approximately 3 percent per annum. For a permanent
endowment to maintain its inflation-adjusted value, the principal must
be permitted to grow by that much each year. At least one empirical
study has demonstrated that a 5 percent annual distribution rate
exposes the portfolio to a high probability of failing to meet that
objective.\15\
---------------------------------------------------------------------------
\15\ Cambridge Associates, Inc., Sustainable Payout for
Foundations: A Study Commissioned by the Council of Michigan
Foundations, available at
(last updated April, 2004).
---------------------------------------------------------------------------
The key to preserving a supporting organization's ability to
provide consistent support for its supported organizations and their
charitable activities is to select a minimum percentage payout rate
that is sustainable--thus assuring undiminished purchasing power of the
long-term support to the supported organizations. Some have suggested
that a rate of between 4 to 4.25 percent would strike an appropriate
balance between Congress's stated goal of ``ensuring that a significant
amount is paid'' out annually and the desire of many non-functionally
integrated supporting organizations and their supported organizations
to maintain undiminished support in perpetuity. Indeed, where there are
payout requirements in the Code supporting the operation of charitable
programs, they are set at rates lower than the 5 percent minimum payout
rate for private foundations. For example, some medical research
organizations are required to pay out 3.5 percent annually, and even
this requirement applies only if less than half of their assets are
used directly and continuously in their medical research
activities.\16\ Similarly, private operating foundations are required
to pay out a maximum of 4.25 percent annually, and even less in any
year in which their adjusted net income falls below 5 percent.\17\
These payout rates allow the organizations to support their current
operations at a level commensurate with their assets without precluding
increases in principal sufficient to support future operations in the
face of inflation. Payout rates for supporting organizations should
similarly enable them to provide funding for the charitable programs of
the supported organizations both now and in the future.
---------------------------------------------------------------------------
\16\ Treas. Reg. Sec. 1.170A-9(c)(2)(v)(b).
\17\ The regulations require a private operating foundation to
spend ``substantially all'' (defined as 85%) of the lesser of its
adjusted net income or the general private foundation 5% payout
requirements; 85% of 5% is 4.25%. Treas. Reg. Sec. 53.4942(b)-
1(a)(1)(ii),--1(c). A private operating foundation must also meet an
endowment test, a support test, or an asset test. If it opts to qualify
under the ``endowment test,'' it must normally spend at least two-
thirds of the normal private foundation 5% payout (i.e., 3\1/3\%) on
the direct conduct of its charitable activities, regardless of its
adjusted net income. Treas. Reg. Sec. 53.4942(b)-2(b)(1). However, if
it instead meets the support test or the asset test, it need never
spend more than 85% of its adjusted net income for the year.
---------------------------------------------------------------------------
In addition, because most public charity beneficiaries of
supporting organizations prefer predictable, sustainable, and
increasing distributions rather than distributions that may vary widely
from year to year, the regulations creating a new annual minimum
distribution amount should allow for the value of the supporting
organization's assets to be calculated as an average over the prior 3
or 5 years, rather than over the prior year, as is the case for private
foundations. Using the average fair market value for the immediately
preceding twelve or twenty quarters would smooth the effects of market
volatility--thereby moderating the year-to-year variance in supporting
organization required distributions.
This could be accomplished by providing two different methods for
calculating the annual minimum distribution amount. The first method
could simply multiply the applicable percentage by the fair market
value of assets at the immediately preceding fiscal year-end. The
second method could multiply the applicable percentage by the average
fair market value of assets over the immediately preceding twelve or
twenty quarters. The first method provides a simple straightforward
calculation formula that would lessen the burden of compliance and
enforcement. Although a bit more difficult to calculate, the second
method creates an important hedge for the supported beneficiaries
against sudden downward shifts in the market. A smoothing mechanism
similar to the one proposed would protect similarly situated
beneficiaries, their employees, and the persons and communities they
serve from large drops in annual funding due to a plunge in financial
markets. For example, if there were a large drop in the value of the
supporting organization's assets in 1 year, and the asset values
recovered during the following year or two, the required distributions
to supported organizations would remain relatively stable, decreasing
only moderately, if at all, after the downturn and increasing
moderately during the upswing. Using an average asset value over 3 to 5
years to calculate the minimum distribution amount thus makes it easier
for the beneficiaries to project future distributions and plan
accordingly--thereby increasing financial stability for the beneficiary
organizations.\18\
---------------------------------------------------------------------------
\18\ The Tax Code and Treasury Regulations employ similar smoothing
mechanisms in a variety of exempt organization contexts. Perhaps most
relevantly, Treasury Regulation Sec. 53.4942(b)-3(a) allows private
operating foundations to meet their payout requirements based on total
expenditures and income over a 4-year period ending in the year in
question.
---------------------------------------------------------------------------
Although some have questioned the wisdom of perpetual existence of
supporting organizations, perpetual support from a supporting
organization can provide a transformative base from which the supported
beneficiaries can advance their charitable purposes. With the assurance
of annual distributions to sustain vital programs and operations, a
supported beneficiary can gradually evolve from a paycheck-to-paycheck
operation with a good idea to become a regional or national leader in
its philanthropic endeavors because it has the economic wherewithal to
implement its vision. Often private foundations will provide seed money
for an innovative philanthropic project but do not want to provide
ongoing grants to carry on operations. Instead, private foundation
funders will move on after a few years, funding the next organization
with the next good idea. A supporting organization, however, is
designed to operate hand-in-hand with the supported charities,
providing sustaining support while protecting the corpus so that the
charitable operations of the supported organizations can continue
indefinitely.
Thank you for providing exempt organizations with an opportunity to
comment on the hardships and uncertainties created by the PPA. It is
unfortunate that the provisions were never discussed in a bipartisan
manner nor made the subject of Committee hearings where they could be
debated and commented on by those within the sector. If you should have
any questions regarding the above, please feel free to contact me at
(918) 582-5201.
CHAPMAN CHARITABLE TRUSTS
2005 & 2006 DISTRIBUTIONS

ARKANSAS 2006 2005
----------------------------------------------------------------------------------------------------------------
John Brown University $3,370,292.45 $2,871,868.28
------------------------------------
Arkansas Total $3,370,292.45 2,871,868.28OKLAHOMA--Tulsa
----------------------------------------------------------------------------
The University of Tulsa $25,461,323.39 23,317,041.17
St. John Medical Center 9,522,975.14 6,274,307.40
Tulsa Area United Way 1,439,000.00 630,000.00
Holland Hall 2,538,289.00 2,054,362.50
Tulsa Psychiatric Center 750,470.00 684,439.04
Well Baby Clinic (PPOAEO) 235,000.00 234,521.00
Family & Children's Services 205,000.00 205,000.00
Tulsa Community Foundation 200,000.00 300,000.00
(for McFarlin Pediatric Healthcare Fund)
Tula Foundation for Healthcare Services (Bedlam Clinic) 310,000.00 300,000.00
St. Simeon's Episcopal Home 67,703.00 61 341.92
------------------------------------
Oklahoma--Tulsa Total $40,729,760.53 34,361,013.03OKLAHOMA_Oklahoma City
----------------------------------------------------------------------------
Oklahoma Medical Research Foundation $11,123,031.90 10,197,223.96
The Episcopal Diocese of Oklahoma 748,415.00 683 032.04
------------------------------------
Oklahoma--Oklahoma City Total $11,871,446.90 110,880,256.00TEXAS
----------------------------------------------------------------------------
Trinity University $14,865,632.31 13,681,844.45
Presbyterian Children's Homes and Services 752,501.00 684,250.84
St. Mary's Hall 374,648.33 359,393.36
Southwest Foundation for Biomedical Research 187,324.16 129,696.68
Southern Methodist University (fbo McFarlin Auditorium) 208 525.00 191,243.33
------------------------------------
Texas Total $16,388,630.00 15,046,428.33GRAND TOTAL $72,360,129.88 62,859,565.64

Statement of Community Foundation of Western Massachusetts
These comments are submitted on behalf of the Community Foundation
of Western Massachusetts, an administrator of scholarship funds for
students from the western Massachusetts region it serves. They are
directed at the provisions of The Pension Protection Act of 2006 (P.L.
109-280) which prohibited scholarship grants from donor advised funds
unless certain procedures are followed which completely remove control
of the award process from the donors.
For community foundations such as ours, with dozens of such funds,
these provisions make their administration so awkward and burdensome as
to reduce our incentive to accept them, and they reduce substantially
the always tenuous incentive of donors and their families to create
them. The big picture is that donors are not required to be generous,
their generosity is good for our society, the use of an income tax
deduction is a substantially leveraged investment by the government in
encouraging that generosity, and the administration of that deduction
should not be constructed in such a way as to be counterproductive.
Crafted supposedly to prevent a few abuses, the provisions of the Act
hardly qualify by this standard.
The Community Foundation of Western Massachusetts helps 1,000
students from the Pioneer Valley go to college each year with $2
million from 100 scholarship funds. Forty-one of these were classified
as donor advised funds under the Act and required extensive
consultations with their donors in order to make the changes required
to comply with it. The donors to seventeen of them opted out, and many,
unfortunately, will never be heard from again. The award process for
the remaining twenty-four went from being personalized, often family
centered opportunities for pioneering community engagement to
impersonal, assembly line selection forced marches dictated by the
tyranny of a majority selected by us. One can conceive of many
relatively non-conventional students who should be given educational
opportunities but would be chosen only by a persistent few who wish to
champion their cause. Diversified decisionmaking is essential.
Prior to these provisions, we had in place what we thought were
adequate safeguards against private inurement and self-dealing, and we
know of no abuses that would have been prevented by these changes.
As these provisions are reconsidered, we make several drafting
suggestions respecting the scholarship fund exception to the
prohibition of grants to individuals from donor advised funds:
Oversight Subcommittee, House Ways and Means Committee, July 30, 2007,
Page Two
1. The definition of ``donors'' who must not control the
scholarship selection process should be clarified:

to eliminate pre-occupation with de minimus problems.
A $1,000 per year minimum donation, indexed yearly, could
easily allow most donors to participate without sacrificing
material safeguards against abuse;
to exclude donors who advise only as to the amount to
be distributed each year, and not as to the recipients (the law
appears to include both);
to exclude deceased donors so that descendants are
not excluded from participating as advisors;
to exclude the members of donor organizations,
particularly non-profits (e.g. the Latino Scholarship
Association).

2. In addition, the burden of preventing abuse should be shifted
from administering organizations to offending donors by the use of a
safe haven. If, for example, donors who participate in the scholarship
selection process provide written certifications that neither they nor
members of their families or others appointed by them receive any
benefits, direct or indirect, from the awards made, the administering
organization should be relieved of responsibility for false
certifications, and such donors should be allowed to participate in the
same way they did prior to the passage of the Act. Increasing the
penalties for such false certifications, then, with appropriate
enforcement activity, could provide the same level of safeguard against
abuse without discouraging the overwhelming number of generously well-
intentioned donors from achieving their charitable goals that benefit
all of us.

In short, strengthening the processes available before the passage
of the Act could greatly reduce the incidence of abuse while still
preserving the same incentives to be generous in ways that are highly
beneficial. As the Oversight Subcommittee reviews the trail left by the
Pension Protection Act of 2006, we hope these simple correctives can be
considered.

Statement of DLA Piper
On behalf of various exempt organizations, I appreciate this
opportunity to submit comments on issues pertaining to the impact of
the exempt organization provisions in the Pension Protection Act of
2006 (``PPA''). These comments relate specifically to section
4958(c)(3) of the Internal Revenue Code as added by section 1242 of the
PPA (the ``excess benefit transaction'' provision).
Prior to the enactment of section 1242 of the PPA, the Code
provided that supporting organizations may not pay compensation to so-
called ``disqualified persons'' that is excessive or unreasonable.
Under this approach, Congress recognized that supporting organizations
should be permitted to hire the best qualified service providers to
support their activities, and that as long as the compensation for
those services is within acceptable guidelines, it should not matter
who the service provider is. This is especially true in the case of
Type I supporting organizations which are controlled by the public
charities which they support and are therefore protected from potential
overreaching by those who create and fund them.
Under section 1242, however, arrangements between supporting
organizations and disqualified persons that are within previously
acceptable guidelines, including arrangements that had been subject to
prior approval by the IRS, are no longer permitted.
The PPA provision simply goes too far. As the Tax section of the
American Bar Association stated in a letter to the Chairs and Ranking
members of the tax writing Committees dated February 3, 2006 commenting
on some of the pending charitable provisions that were later
incorporated in the PPA, specifically with respect to this section ``.
. . we believe that the bill should not address operations of Type I
and II supporting organizations. We support the recommendations of the
Panel on the Nonprofit Sector to prohibit payment of grants, loans, and
compensation by Type III supporting organizations to or for the benefit
of a donor or related party. We do not support the bill's much broader
prohibition applicable to Type I and Type II organizations, which are
controlled by the public charities that they support. The existing
intermediate sanctions law already imposes excise taxes on improper
transactions involving Type I and Type II supporting organizations. We
submit that S. 2020 [the then pending Senate vehicle for charitable
reforms] should not go beyond existing law with respect to such
organizations.''
In fact, the PPA provision actually imposes a more stringent
restriction on supporting organizations than exists for private
foundations, which would continue to have an exception from the
disqualification rules for reasonable and necessary expenses. There is
no sound basis for allowing private foundations the flexibility to hire
the most qualified service providers, while denying that right to
supporting organizations that are controlled by public charities.
For these reasons, I respectfully submit that Congress modify the
PPA provisions by limiting its application to Type III supporting
organizations as follows:

Proposed amendment to section 1242 (``Excess Benefit
Transactions'') of H.R. 4, the Pension Protection Act of 2006.

On page 891 of H.R. 4, the Pension Protection Act of 2006, in
section 1242 (excess benefit transactions involving supporting
organizations) in part (b) (which adds a new section (3) to Code
section 4958(c) of the Code captioned ``Special Rules for Supporting
Organizations'', rewrite subsection (A) of new section (3) to read as
follows:

``(A) IN GENERAL.-- In the case of any type III supporting
organization (as defined in section 4943(f)(5)(A)) which is not a
functionally integrated type III supporting organization (as defined in
section 4943(f)(5)(B))--''

John Templeton Foundation
West Conshohocken, Pa 19428
August 6, 2007
Congressman John Lewis, Chairman
Subcommittee on Oversight, Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Lewis:

On behalf of the John Templeton Foundation, please accept my
sincere appreciation for the opportunity to offer written comments in
regard to the provisions relating to tax-exempt organizations found in
the Pension Protection Act of 2006 ( P.L. 109-280).
I am the Chairman of the Board of trustees of the John Templeton
Foundation; a private, family foundation located outside Philadelphia,
Pennsylvania. We have actively been following the charitable reform
dialog of the Senate and House over the last few years and embrace the
spirit of accountability and transparency behind the overall effort.
However, we are concerned that many of the recently enacted provisions
may have the effect of treating a perceived symptom rather than a real
part of the problem, working to improve enforcement of the laws that
are currently in place.
Although we believe that there are a number of areas in the Pension
Protection Act of 2006 ( 2006 PPA) that deserve additional
consideration, we would respectfully offer comment in three areas:
Private Foundation Excise Taxes, Tax on Net Investment Income and
Grants from Private Foundations to Supporting Organizations.
Private Foundation Excise Taxes
Currently, Code sections 4941 to 4945 impose taxes on private
foundations who engage in acts of self dealing with ``disqualified
persons'', who fail to distribute a minimum amount of their assets each
year as Qualifying Distributions, who have ``excess business
holdings'', who maintain investments that are considered to jeopardize
the foundation's charitable purpose and who have expenses that are
construed as ``taxable expenditures''. With these sections as a part of
the existing Internal Revenue Code, we are concerned that the new
provisions serve a purely revenue raising function rather than
enhancing the enforcement of current policy.
In addition, the Internal Revenue Service does not have the ability
of abating the initial tax imposed on disqualified persons as a part of
a self-dealing transaction due to reasonable cause. This is not
consistent with the imposition of other excise taxes. We believe that
if additional excise taxes are imposed on disqualified persons with
respect to self-dealing transactions that the Internal Revenue Service
should have the discretion to waive these penalties for cause as with
other excise taxes. We feel that if a Foundation Manager has followed
the rebuttable presumption procedures found in section 4958 of the
Internal Revenue Code when entering into a transaction that involves
payment of compensation to a disqualified person that the manager
should not be subject to penalty.
Taxation of Charitable Use Assets
Code section 4940 imposes an excise tax on the net investment
income of a private foundation. At present, this definition does not
include capital gain or loss from the disposition of property used to
further an exempt purpose. The 2006 PPA would allow for the inclusion
of the gains and losses from charitable use property in the calculation
of excise tax with the only exception being the deferral of tax in a
like kind exchange. This appears to be inherently contrary to the
intention and purpose of charitable legislation dating back to the
initial granting of tax exempt status in the late 1800's.
We have seen over the history of the charitable community the way
in which it has been able to respond to the needs of the citizens of
the United States in a timely and impactful manner. We have certainly
seen this in the wake of Hurricanes Katrina, Rita and Wilma. The
charitable community works hand in hand with the government in so many
areas to provide the resources, training and education needed to impact
humanity. Further taxation of charitable use assets only limits the
ability of the charitable community to focus on the work identified in
its mission with no corresponding result other than the generation of
revenue.
We believe that the charitable community has an important role in
America and do not want to see a trend like that of countries like
France who do not encourage philanthropy or work it into the fiber of
their legislation. In addition, in an environment where we work to
reduce administrative expense and costs through cost effective fiscal
management tools and policies directed by governing by-laws and charter
as well as the Internal Revenue Code, it appears that many of these
provisions will only add to the operational burdens and non-charitable
expenditures of private foundations not make them more efficient.
The budget of the Internal Revenue Service's Exempt Organization
division, which is responsible for the oversight and enforcement of the
charitable community, is approximately $ 50 million dollars annually.
Initially, it was the intention of Congress that the excise taxes on
the books prior to the 2006 PPA fund this division of the IRS. Prior to
the modification of the excise taxes in the 2006 PPA, the excise tax on
private foundations brought in eight times the annual budget of the
Exempt Organization division. Therefore, we do not understand the
revenue component behind the taxation of charitable use assets as its
funds will not be directed to the charitable community. Although we
recognize that the tax moneys raised are not specifically matched with
those from whom they are collected, it does appear contradictory to the
intent and purpose of the Charitable sector.
Grants from Private Foundations to Supporting Organizations
Both the Senate Bill, section 345, and House Bill, section 1244,
attempt to narrow a private foundation's ability to make qualifying
distributions in accordance with section 4945 of the Internal Revenue
Code to supporting organizations. We recognize that the House's bill
further defines the restriction to Type III supporting organizations
that are not functionally integrated and Type I, Type II and Type III
functionally integrated organizations where a disqualified person of
the private foundation directly or indirectly controls the supporting
organization.
We have searched our resources and do not understand the motivation
behind these changes and cannot identify any specific abuses that
support a legislative change of this magnitude. Over the past 2 years,
we have worked with a Type I supporting organization and have found it
to be administered with an extremely high level of responsibility and
fiscal management. It enables academics, scientists and researchers
whose work falls within the mission of the Foundation and whom we are
interested in supporting to conduct their studies and work as a
collaborative network outside the direct influence of the Foundation.
As an organization, we are working to bring together the scientific and
religious communities to have measurable impacts on Humanity in areas
like Spirituality and Health, Cosmology, Character Development,
Enterprise Based Solutions to Poverty, Genius Research and Free
Enterprise. It is imperative that we have the ability to encourage and
support collaboration, which we believe is the backbone to modern
philanthropy, by allowing these scientists and religious leaders to
come together in an environment that is free from ``perceived'' bias.
Provisions such as the restriction of grants by private foundations to
supporting organizations constrain the ability of organizations to
promote research that could bring about positive change and new
learning. We respectfully believe that this is not the intention of
Congress and strongly support reconsideration of these provisions.
Again, we thank you for the opportunity to share our thoughts with
the Committee and for our voice to be heard. We are proud to be members
of the charitable community and believe that it is a community whose
members embody integrity and responsible stewardship as each entity
recognizes the duties and honor that come with the oversight and use of
charitable assets. We believe that the sensational accounts that are
represented in the media with regards to the charitable community
represent a very small minority of the sector and not the norm. If you
require any additional information with regard to our comments, we
would be pleased to be responsive and to work with you, your staff and
Committee.

Sincerely,
Dr. John M. Templeton, Jr.
Chairman, Board of Trustees

Ewing Marion Kauffman Foudation
Kansas City, Missouri
August 6, 2007
Hon. John Lewis, Chairman
Subcommittee on Oversight, Committee on Ways and Means
United States House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20525

Dear Chairman Lewis:

I submit this letter as the General Counsel and Secretary of the
Ewing Marion Kauffman Foundation, a private foundation in Kansas City,
Missouri with a philanthropic mission focused on entrepreneurship, math
and science education, and the Kansas City region.
This letter is in response to the Subcommittee's request for
comments regarding the Pension Protection Act of 2006, P.L. 109-280
(``PPA''). More specifically, these comments address two aspects of the
PPA--those that altered how private foundations may interact with
supporting organizations and that imposed a new tax on capital gains
from sale of property used in charitable activity.
Private Foundations and Supporting Organizations
Until the PPA, the Internal Revenue Code (``IRC'') \1\ allowed
private foundations to treat supporting organizations under
Sec. 509(a)(3) in the same manner as other public charities. This
allowed private foundations to rely on determinations by the Internal
Revenue Service for purposes of making qualifying distributions under
IRC Sec. 4942 and for presumptions that grants to supporting
organizations were not taxable expenditures under IRC Sec. 4945. The
PPA changed those rules and, in doing so, imposed unnecessary risks and
burdens on those private foundations still willing to make grants to
supporting organizations.
---------------------------------------------------------------------------
\1\ Except as otherwise noted, section references to the IRC are to
the Internal Revenue Code 1986, as amended.
---------------------------------------------------------------------------
We have three fundamental concerns about this provision of the PPA.
First, it imposes administrative burdens on the financial and time
resources of supporting organizations and foundations still willing to
interact with supporting organizations, but the diversion of resources
does not seem to carry a corresponding benefit. Second, it presumes
that exercising expenditure responsibility is not adequate when private
foundations deal with certain types of supporting organizations, which
presumption is contrary to longstanding policy and practical
experience.\2\ Third, it potentially forces private foundations to
choose between (a) making payments to fulfill existing commitments to
supporting organizations and risk excise taxes or (b) not making those
payments and risk breaching obligations to the supporting organizations
and the loss of the corresponding programmatic opportunities.
---------------------------------------------------------------------------
\2\ The PPA prevents private foundations from treating as
qualifying distributions payments they make to Type III supporting
organizations (unless functionally integrated) or to any supporting
organization in which a disqualified person with respect to private
foundation grantors controls the supporting organization or its
supported organization. In addition, the PPA further penalizes such
payments if the grantor fails to exercise expenditure responsibility.
---------------------------------------------------------------------------
In order to make payments to supporting organizations, even on
commitments that predate the PPA, private foundations that still want
to interact with supporting organizations must undertake additional due
diligence not previously contemplated.\3\ If the supporting
organization is a type III, that due diligence can be extensive,
intrusive for all involved (the foundation, supporting organization,
and the supported organization), costly, and time consuming. There does
not seem to be a corresponding benefit, and there is a certain irony in
the reality created by the PPA that it is easier for a private
foundation using expenditure responsibility to make legitimate,
charitable grants to General Electric, Time Warner or the Trump
Organization than it is to a supporting organization declared by the
IRS to be charitable. Under the PPA, even exercising expenditure
responsibility under IRC Sec. 4945 for grants to some supporting
organizations is not enough for the grant to be a qualifying
distribution.
---------------------------------------------------------------------------
\3\ Determination letters from the IRS prior to the PPA generally
acknowledge whether an organization is a public charity under IRC
Sec. 509(a)(3), but such letters offer no guidance as to whether the
supporting organization is considered a type I, II, III functionally
integrated, or III non-functionally integrated. These distinctions are
crucial under the PPA, and the burden is ultimately on private
foundations to spend the time and incur the expense of making these
distinctions or deciding to rely on the grantee's assessment (which
itself involves time and money).
---------------------------------------------------------------------------
The operating presumption under this provision of the PPA appears
to be that

supporting organizations are rife with and inherent tools for abuse.\4\
While I do not suggest that abuse has not existed, the PPA seems to
have gone to extremes in assuming that all such organizations are
abused and that private foundations are the primary abusers,
particularly if there is overlap of disqualified persons among the
foundation and the supporting organization.
---------------------------------------------------------------------------
\4\ The paucity of hearings prior to passage of the PPA forces an
unusual degree of speculation, including about the extent to which
current laws and regulations are not adequate to address the problems
that might exist with the use and operation of supporting
organizations.
---------------------------------------------------------------------------
Our experience with supporting organizations is quite different. We
have seen first hand how universities can effectively use supporting
organizations as a legitimate vehicle to expand and supplement their
educational missions. However, we also have now experienced how the PPA
forces these organizations to redirect money and time from their
charitable and educational activities to convincing private foundation
grantors that they are in compliance with the PPA. This can even
involve expense associated with engaging extra legal and accounting
services. This is not an effective or productive use of charitable
resources, which the foundation also spends directly to undertake its
own analyses to ensure compliance with the PPA or indirectly through
the supporting organization's efforts to do so. Any benefit derived
from these aspects of the PPA seems to be far outweighed by the burdens
imposed.
This provision of the PPA also appears to apply to any payments by
private foundations, including subsequent payments on grant commitments
made prior to any discussions of the PPA much less its enactment. This
has the potential of imposing an ex post facto burden on foundations of
choosing between complying with the law, thereby risking breach of
contract, or accepting consequences for knowingly deciding not to
comply. I am not aware that any supporting organization grantee has
been forced to sue a private foundation to enforce a pre-PPA
commitment, but the scenario is plausible. At a minimum, the law should
not apply to payments made pursuant to written agreements in effect on
the effective date of the law.
If the need for reform in the relationship between private
foundations and supporting organizations was so dire, requiring
expenditure responsibility may have been an adequate step. If the
prevailing belief is that more is necessary, expenditure responsibility
coupled with pass-through requirements would have been a more measured
response than that presented in the PPA. Even those steps, however,
would not necessarily have reduced abuses of supporting organizations
by individuals not connected with private foundations.
Taxation of Charitable Use Assets
The PPA also expanded the definition of ``net investment income''
under IRC Sec. 4940 to impose a new tax on private foundations when
they sell property that they used in charitable activity, unless there
is a certain like-kind exchange. Taxing gains from the sale of
charitable use property has arguably breached a sacrosanct policy that
respected charitable activity by treating such gains differently from
investment gains. Whether this is a one-time breach or a slippery slope
is unclear. The fact that the breach has occurred at all is
significant, particularly because the breach seems on the surface to
have been motivated solely by the desire to raise revenues without a
clear policy rationale. In fact, many have questioned the policy
rationale for having imposed the tax before the PPA, particularly when
the revenue raised has not been used for the intended purpose of
funding sector-based activity; increasing the tax base is a change in
the wrong direction.
Even without considering the policy implications, the new tax
denies the use of these dollars for charitable purposes and imposes an
additional layer of strategic complexity on those evaluating whether to
sell or purchase charitable use property. The policy threat raised by
taxing income from the sale of charitable assets used in charitable
activities is far more dangerous.
These two components of the PPA are complex and they appear
intended to address complicated issues. Unfortunately, they are also
unduly burdensome in imposing monetary and time demands that seem
disconnected from the problems Congress may have been seeking to
address and, in the process, they imposed their own problems for the
charitable and philanthropic sectors.
Mr. Chairman, we applaud the Subcommittee's willingness to hold
hearings and solicit comments on the efficacy of the PPA, and we are
pleased to submit these comments for the Subcommittee's consideration.
Respectfully,
John E. Tyler III
General Counsel and Secretary

Statement of Food Donation Connection
These comments call attention to a technical correction needed to
the charitable giving incentives created by recent tax legislation
found in H.R. 4, the Pension Protection Act of 2006, section 1202--
``Extension of Modification of Charitable Deduction for Contributions
of Food Inventory''. This correction would bring the provision in line
with the original intent of Congress to encourage food donations by all
business entities.
Food Donation Connection (FDC) coordinates the donation of
wholesome prepared food from restaurants and other food service
organizations to local non-profit agencies that help people in need.
Federal Tax Code (IRC Section 170(e)(3)) has provided an incentive for
C corporations to donate their food inventory since 1986. Since its
founding in 1992, FDC has been involved in the effort to pass
charitable giving incentives for food donations for all business
entities and is currently working with several restaurant companies
that have agreed to donate food if this issue is resolved. FDC has
coordinated the donation of over 110 million pounds of prepared food
for companies like Yum! Brands (Pizza Hut, KFC, Taco Bell, Long John
Silver's, A&W) and Darden Restaurants (Red Lobster, Olive Garden,
Smokey Bones). We currently coordinate donations from 7,000 restaurants
to 3,500 non-profit agencies nationwide.
In our discussion with Yum! Brands franchisees about the charitable
giving incentives contained in H.R. 4 (Pension Protection Act of 2006,
which extended the provision of H.R. 3768 (KETRA) to December 31, 2007)
we discovered an issue in the Tax Code that negate the tax savings for
S corporations that donate food. Individual S corporation shareholders
may not be able to take the deduction for the donation of food
inventory, depending on their basis in the corporation. In working with
S corporations we have learned the following:

S corporation income is distributed to each shareholder
based on each shareholder's ownership percentage and therefore the
deductibility of the deduction depends on each shareholder having
sufficient basis (i.e. `at risk' IRS rule) in the company to permit
deduction at the individual level.

S corporations make ongoing distributions to shareholders
rather than retain excess funds in the company and therefore S
corporation shareholders have no basis (i.e. distributions reduce
basis).

As a result, S corporation shareholders do not believe
they are entitled to a tax deduction and do not benefit from recent tax
law changes and are therefore not motivated to donate.

Under this current situation, the shareholder basis rule trumps the
intention of Congress to extend the special rule for certain
contributions of food inventory to S corporations (H.R. 4 extension of
H.R. 3768 Sec.305, which modified IRC section 170(e)(3)).
To remedy this situation, a technical correction could be made to
the language of H.R. 4, the Pension Protection Act of 2006. The
following wording would be added to H.R. 4 section 1202:

(c) In General--section 170(e)(3)(C) of the Internal Revenue Code
1986 (relating to special rule for certain contributions of inventory
and other property) is amended by redesignating (iv) as (v) and
inserting after (iii) the following new paragraph:

(iv) S corporation BASIS LIMITATION--In the case of food
contributions from S corporations, limitations on individual
shareholder's deductions due to shareholder basis (section 1366(d)(1))
on stock and debt do not apply. However, shareholder's basis continues
to be adjusted consistent with section 1367(a).'

The immediate impact of this change would mean that over 721
restaurants in 26 states would be eligible for this deduction for
donating food, and therefore willing to donate. See the list below for
additional details.
It is the intent of Congress to address the needs of Americans by
providing valuable resources to charitable organizations. This
technical correction would fulfill the original intent of the
legislation by allowing S corporations to take advantage of this
charitable deduction for contributions of food inventory.
Thank you for considering these comments.

Subchapter S Corporation Shareholder Basis Example

The following example of how an S corporation treats income
distributions and deductions is provided by Rage, Inc, a 100 restaurant
Pizza Hut franchise.

Average annual profit per restaurant $65,000

Shareholder Basis at the beginning of the year $0

Shareholder Basis at the end of the year $65,000 (same as profit)

Dividend distribution at end of year $65,000

Taxable Income to Shareholders $65,000

Shareholder basis after Dividend Distribution returns to $0

If a restaurant donates wholesome food that results in a deduction
of $1,000 they are faced with two alternatives:

1. If the dividend (profit) distribution remains $65,000 this
creates an actual dividend distribution of $64,000 and would trigger a
$1,000 capital gain to the shareholder.
2. The dividend distribution to the shareholder is reduced to
$64,000.

Both alternatives lack the incentive to donate food that is
intended by Congress for all business entities.

For S corporation shareholders to receive the intended incentive
for donating food the deduction must be basis neutral and exempt from
the `at risk' IRS rules.
Yum! Brand Franchisees Willing to Donate with S Corp Basis Cost
Resolution
The passage of H.R. 4 has roused the interest of many Yum! Brands
franchisees to donate food. A number of franchised operators of Pizza
Hut, KFC and Long John Silver's restaurants that have told Food
Donation Connection they would start a Harvest food donation program if
the issue with S corporation basis costs can be corrected.
The following chart lists the number of new restaurants and the
pounds of food donations that can be projected from these restaurants.
The poundage projections are based on averages from Yum! Brands
operated restaurants. These donations include cooked prepared pizza,
breadsticks, chicken, fish, mashed potatoes, vegetables, biscuits and
other items that have been properly saved, packaged and chilled or
frozen. The saved food would be picked up on a regular basis by local
food banks and hunger relief agencies and used in the local community.
Yum! Brands has been donating surplus food from its restaurants
since 1992. In 2006, over 1,800 local hunger relief agencies received
about 11.5 million pounds of prepared food from 4,100 Yum! Brands
restaurants. This food has been a tremendous help for these agencies,
as donated food frees up their limited resources for other needs.
The list of 721 restaurants represents a broad spectrum of
communities across 26 states and 140 congressional districts. These
restaurants are operated by 15 different franchised groups. Since the
Yum! Brands system is over 75% franchised, resolution of the S
corporation tax deduction issue will result in many more opportunities
to encourage donation of wholesome prepared food.
------------------------------------------------------------------------
# Lbs per
State District Represenative Resturants Year
------------------------------------------------------------------------
AL 05 Robert E. (Bud) 2 10,350
Cramer Jr.
AZ 01 Rick Renzi 6 17,197
AZ 03 John B. Shadegg 2 5,732
AZ 07 Raul M. Grijalva 11 31,529
AZ 08 Gabrielle Giffords 14 40,127
CA 24 Elton Gallegly 1 5,175
CA 26 David Dreier 2 10,350
CA 27 Brad Sherman 5 25,875
CA 28 Howard L. Berman 4 20,700
CA 29 Adam B. Schiff 2 10,350
CA 30 Henry A. Waxman 4 20,700
CA 31 Xavier Becerra 2 10,350
CA 32 Hilda L. Solis 2 16,511
CA 33 Diane E. Watson 4 20,700
CA 35 Maxine Waters 1 5,175
CA 36 Jane Harman 1 5,175
CA 38 Grace F. 4 16,861
Napolitano
CA 46 Dana Rohrabacher 1 1,336
CO 03 John T. Salazar 4 20,700
CO 05 Doug Lamborn 1 5,175
DC Delegate Eleanor Holmes 1 5,175
Norton
FL 03 Corrine Brown 1 5,175
FL 05 Ginny Brown-Waite 5 14,331
FL 07 John L. Mica 3 15,525
FL 08 Ric Keller 2 10,350
FL 12 Adam H. Putnam 1 5,175
FL 13 Vern Buchanan 2 10,350
FL 15 Dave Weldon 6 31,050
FL 16 Tim Mahoney 13 15,525
FL 17 Kendrick B. Meek 5 25,875
FL 18 Ileana Ros- 4 20,700
Lehtinen
FL 20 Debbie Wasserman 2 10,350
Schultz
FL 21 Lincoln Diaz- 2 10,350
Balart
FL 22 Ron Klein 5 25,875
FL 23 Alcee L. Hastings 2 10,350
FL 24 Tom Feeney 5 25,875
FL 25 Mario Diaz-Balart 1 5,175
GA 09 Nathan Deal 4 11,465
GA 10 Paul Broun 2 5,732
IA 05 Steve King 8 22,930
IL 12 Jerry F. Costello 1 2,866
IL 15 Timothy V. Johnson 3 8,599
IL 19 John Shimkus 4 11,465
IN 01 Peter J. Visclosky 2 5,732
IN 02 Joe Donnelly 4 11,465
IN 03 Mark E. Souder 1 2,866
IN 04 Steve Buyer 1 2,866
IN 05 Dan Burton 5 16,640
IN 08 Brad Ellsworth 2 5,732
IN 09 Baron Hill 1 2,866
KY 01 Ed Whitfield 2 5,732
KY 02 Ron Lewis 2 5,732
KY 04 Geoff Davis 3 8,599
KY 05 Harold Rogers 7 20,064
LA 01 Bobby Jindal 6 31,050
LA 02 William J. 8 41,401
Jefferson
LA 03 Charlie Melancon 1 5,175
LA 06 Richard H. Baker 9 46,576
MD 01 Wayne T. Gilchrest 5 23,567
MD 02 C. A. Dutch 4 20,700
Ruppersberger
MD 03 John Sabanes 3 15,525
MD 04 Albert Russell 1 5,175
Wynn
MD 05 Steny H. Hoyer 7 36,226
MD 07 Elijah E. Cummings 1 5,175
MI 01 Bart Stupak 9 25,796
MI 02 Peter Hoekstra 2 5,732
MI 03 Vernon J. Ehlers 16 45,860
MI 04 Dave Camp 3 8,599
MI 05 Dale E. Kildee 1 2,866
MI 06 Fred Upton 7 20,064
MI 07 Tim Walberg 8 22,930
MI 10 Candice S. Miller 2 5,732
MS 01 Roger F. Wicker 11 56,926
MS 02 Bennie G. Thompson 10 51,751
MS 03 Charles ``Chip'' 10 51,751
Pickering
MS 04 Gene Taylor 19 98,326
NC 01 G. K. Butterfield 2 5,732
NC 02 Bob Etheridge 7 31,608
NC 04 David E. Price 25 106,846
NC 05 Virginia Foxx 14 53,980
NC 06 Howard Coble 9 46,576
NC 10 Patrick T. McHenry 5 14,331
NC 11 Heath Shuler 23 65,924
NC 12 Melvin L. Watt 5 25,875
NC 13 Brad Miller 29 122,371
NE 01 Jeff Fortenberry 11 31,529
NE 02 Lee Terry 14 40,127
NE 03 Adrian M.Smith 12 34,395
NJ 05 Scott Garrett 5 25,875
NJ 06 Frank Pallone Jr. 1 5,175
NJ 07 Mike Ferguson 3 15,525
NJ 09 Steven R. Rothman 6 31,050
NJ 10 Donald M. Payne 5 25,875
NJ 11 Rodney P. 4 20,700
Frelinghuysen
NJ 12 Rush D. Holt 1 5,175
NJ 13 Albio Sires 8 41,401
NY 07 Joseph Crowley 1 5,175
NY 13 Vito Fossella 3 15,525
NY 16 Jose E. Serrano 8 41,401
NY 17 Eliot L. Engel 3 15,525
NY 18 Nita M. Lowey 2 10,350
NY 20 Kirsten Gillibrand 1 2,866
NY 23 John M. McHugh 16 52,786
NY 24 Michael Arcuri 7 36,226
NY 25 James T. Walsh 8 41,401
OH 02 Jean Schmidt 2 5,732
OH 08 John A. Boehner 1 2,866
OH 10 Dennis J. Kucinich 11 56,926
OH 11 Stephanie Tubbs 16 82,801
Jones
OH 13 Sherrod Brown 10 51,751
OH 14 Steven C. 7 36,226
LaTourette
OH 16 Ralph Regula 2 10,350
OH 17 Tim Ryan 2 10,350
PA 01 Robert A. Brady 1 5,175
PA 05 John E. Peterson 2 5,732
PA 06 Jim Gerlach 11 5,175
PA 09 Bill Shuster 1 5,175
PA 10 Christopher Carney 2 5,732
PA 13 Allyson Y. 1 5,175
Schwartz
PA 16 Joseph R. Pitts 4 20,700
PA 17 Tim Holden 4 20,700
PA 19 Todd Russell 8 41,401
Platts
SC 01 Henry E. Brown Jr. 12 34,395
SC 02 Joe Wilson 14 40,127
SC 03 J. Gresham Barrett 3 8,599
SC 04 Bob Inglis 6 17,197
SC 05 John M. Spratt Jr. 6 17,197
SC 06 James E. Clyburn 5 14,331
TN 04 Lincoln Davis 1 2,866
TN 07 Marsha Blackburn 4 20,700
TN 08 John S. Tanner 1 5,175
VA 01 Jo Ann Davis 3 8,599
VA 02 Thelma D. Drake 2 5,732
VA 05 Virgil H. Goode 3 10,908
Jr.
VA 06 Bob Goodlatte 2 5,732
VA 07 Eric Cantor 1 2,866
VA 09 Rick Boucher 13 37,261
WI 03 Ron Kind 7 20,064
WI 07 David R. Obey 1 2,866
WV 03 Nick J. Rahall II 6 17,197
Totals 721 2,930,650
------------------------------------------------------------------------

Supplemental Sheet to H.R. 4 Technical Tax Comments
Food Donation Connection (FDC) administers the Harvest Program to
coordinate the distribution of excess food from restaurants and other
food service organizations to qualified local non-profit organizations
that help people in need. FDC has coordinated prepared food donation
programs since 1992 involving the donation of over 110 million pounds
of quality surplus food. We currently coordinate donations from 7,000
restaurants to 3,500 non-profit agencies nationwide.

Statement of Foundation For The Carolinas, Charlotte, North Carolina
Foundation For The Carolinas (``FFTC'') is a community foundation
located in Charlotte, North Carolina. It ranks in the top thirty of
grants, gifts and assets for community foundations in the United States
and has approximately 1,700 total funds, including hundreds of donor
advised funds (``DAF's'') and seven supporting organizations. We are
writing in response to your request for comments on the charitable
provisions of the Pension Protection Act (``PPA'') as part of the
hearings held on June 24, 2007.
1. Definition of Donor Advised Funds: With regard to the new
statutory definition of a DAF we suggest providing specific and
detailed examples in regulations of when a particular fund is or is not
a DAF. Because of the sheer number of DAF's examples will help in the
classification of a particular fund. For example, if a particular fund
specifies four permissible donees (e.g. four universities) and the
donor may specify the percentages allocated between the respective
schools does this meet the donor advisory part of the test since the
legislation identified a specific exclusion for one permissible donee?
We also urge Congress to make certain other changes applicable to DAF's
including clarifying the ability of sponsoring organizations to
purchase goods and services on the open market using DAF assets and
excluding funds created by public charities and governmental entities
from the definition of DAF's.
2. Excess Business Holdings and DAFs: We urge Congress to repeal
the application of the excess business holdings rules to DAF's. We
believe that the other changes made by the PPA and applicable to DAF's
will prevent the abuses that have occurred in the past. We do not
believe that there is any reason to believe that business holdings that
are given to a DAF are subject to any more abuses than if they were
given to a public charity. If repeal is not a viable alternative
perhaps Congress could adopt provisions that allow for the sale or
payout of illiquid assets over some reasonable period of time or a
phase-in of the rules to allow for an orderly transition.
3. Payment of Grants from DAFs to Type III SOs: With regard to the
treatment of distributions from DAFs to Type III supporting
organizations and certain supporting organizations as taxable
distributions the new requirements put an unreasonable burden on DAF's
and supporting organizations. We agree that the provision stating that
a grantor, acting in good faith, may rely on a written representation
signed by an officer, director or trustee of the grantee that the
grantee is a Type I or Type II supporting organization provided that
the representation describes how the grantee officers, directors, or
trustees are selected and references any provisions and governing
documents that establish a Type I or a Type II relationship between the
grantee and its supporting organization. However, the grantor should
not have the burden of ``collecting and reviewing copies of governing
documents of the grantee (and, if relevant, of the supporting
organization (s)).
4. Supporting Organizations. Like many large community foundations
FFTC currently has four Type III supporting organizations for which it
is the supported organization. These Type III's are typically broadly
supported community based organizations which have been formed to
benefit, for example, the arts or a particular faith-based community.
If a Board member of the Type III wants to make a gift from a non-
operating private foundation he controls to the Type III, section 4942
(g) would deny qualifying distribution treatment to the private
foundation. This is not the type of abuse the statute is designed to
prevent and this type of distribution should not be denied treatment as
a qualifying distribution. In FFTC's situation, Board members are
giving in response to a fundraising campaign for a particular focus
area of the Type III supporting organization; they are not
``controlling'' members of the Board, families or sole donors. How can
nonprofits conduct normal fundraising strategies under these
regulations? For the same reasons if the gift was made from a DAF
instead of a private foundation to the Type III the gift should not be
treated as a ``taxable distribution'' under section 4966. Perhaps there
should be some broad exception for Type III's that support community
foundations because of the lack of the potential for abuse; or an
exception for Type IIIs that are created to support community based
causes and not controlled by one or more specific donors or families.
5. Disaster Relief Funds. IRS Notice 2006-109 dealt with, among
other things, disaster relief funds established by employers at
community foundations or other public charities to provide disaster
relief grants to employees and their family members who are victims of
a natural disaster (e.g., Katrina). We believe that similar regulations
should be issued to apply to hardship funds established by employers
for their employees. Such funds are designed to provide similar relief
to employees suffering real hardship. We believe all the regulations
mentioned in the Notice are reasonable and are already being followed
by FFTC. However, hardship funds should be specifically mentioned as
well to avoid any confusion about whether or not they meet the
definition of a DAF.
6. IRA Charitable Rollover. We strongly support H.R. 1419 and S.819
which would allow donors to qualify for the favorable IRA charitable
rollover rules when making gifts to DAF's, supporting organizations and
private foundations. We also support extending these provisions beyond
2007 and to gifts over $100,000.
7. Other Concerns. We also urge Congress to make certain
adjustments to the PPA in order to address some situations in which the
PPA is hampering community philanthropy. These include:

Clarifying that the designation in a gift instrument of
scholarship Committee members by title or position does not constitute
an appointment by the donor of persons holding those positions.
Providing for abatement of first-tier taxes for the new
penalty provisions of PPA on the same basis as for existing penalty
taxes.
Temporarily suspending the penalties for making grants to
certain supporting organizations until the IRS can reliably identify
those organizations.

Thank you for your consideration of our comments.

Grantmakers Without Borders
August 31, 2007
Hon. John Lewis, Chairman
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives
343 Cannon House Office Building
Washington, DC 20515

Dear Congressman Lewis:

This statement is submitted on behalf of Grantmakers Without
Borders (``Gw/oB'') in response to the House Subcommittee on
Oversight's request for written comments on provisions relating to tax-
exempt organizations in the Pension Protection Act of 2006. In
addition, Gw/oB would like to specifically respond to Congressman
Pascrell's comments regarding charities and terrorism during the July
24, 2007 hearing.
Bckground
Gw/oB is a philanthropic network dedicated to international social
change philanthropy in the developing world. Gw/oB's membership,
currently numbering 150 grantmaking entities, includes private
foundations, grantmaking public charities, individual donors with a
significant commitment to international philanthropy, and philanthropic
support organizations. Gw/oB's members make lifesaving grants to
international grassroots organizations that target the root of
economic, environmental, and social inequalities within their local
communities. Grants range from support to children affected by HIV/
AIDS, to reforestation projects in Brazil, to relief for victims of
natural disasters.
II. Pension Protection Act
The diversity of Gw/oB's membership makes it impractical for these
comments to reflect every impact felt by its membership due to the
Pension Protection Act. However, two recurring matters deserve
mentioning.
A. IRA Charitable Rollover
The Individual Retirement Account (``IRA'') Charitable Rollover
provision within the Pension Protection Act eliminates the tax that
formerly discouraged transfers from IRAs to charities. Consequently,
many individuals have chosen to donate their annual minimum
distributions to public charities, resulting in millions in charitable
donations. Unfortunately, this valuable provision expires at the end of
2007.
Gw/oB has joined Independent Sector, the National Committee on
Planned Giving, and many other charities in advocating for the Public
Good IRA Rollover Act of 2007. This Bill would make the IRA Charitable
Rollover permanent, remove the dollar limit on donations per year, and
provide IRA owners a planned giving option beginning at age 59\1/2\.
Furthermore, the Public Good IRA Rollover Act includes private
foundations as eligible to receive donations, thereby allowing a
greater number of worthy nonprofits to enjoy the benefits of the IRA
Charitable Rollover.
B. Donor Advised Funds
The Pension Protection Act makes significant changes to the
operation and management of donor advised funds (``DAF''s). Recognizing
the growing popularity of DAFs, Congress responded with needed
regulations to offset the potential for abuse. As a result, DAFs now
have a statutory definition--a fund that is owned and controlled by a
sponsoring organization, separately identified with reference to the
donor, and subject to the recommendations of the donor in relation to
the fund's investments and distributions--limits are placed on who can
receive distributions, and new requirements are in place on the
management of those distributions by the sponsoring organization.
Within the legislative history of the Pension Protection Act, some
lawmakers sought to limit the use of DAFs for international
grantmaking. Gw/oB finds this proposal deeply disturbing. It
unnecessarily and unfairly targets international philanthropy at a time
when global U.S. philanthropic engagement is as crucial as ever. We
hope the following comments make the case for the enormous value of
DAFs to international grantmaking and giving.
Furthermore, many of Gw/oB's members are finding some regulations
within the Pension Protection Act difficult to apply. Here we attempt
to describe some of those challenges.
1. Present Important Advantages to International Grantmaking and Giving
Often, the advantages of DAFs make them an attractive choice for
international grantmaking and giving. Although Gw/oB understands and
respects the underlying reasons behind recent legislative changes to
the operation and organization of DAFs, we urge that these advantages
be preserved.
a. The Advantages of Donor Advised Funds to Grantmaking Organizations
International grantmaking, for a variety of reasons, is more
complex than domestic grantmaking. Consequently, many organizations
that wish to make lawful and effective international grants do not have
the capacity or expertise to do so. DAFs provide a valuable mechanism
whereby organizations that lack this necessary capacity and expertise
may rely on a qualified sponsoring organization to provide the
solutions to important international grantmaking challenges.
Federal tax law requires organizations that give international
grants to practice 501(c)(3) equivalency determination\1\, expenditure
responsibility\2\, or a degree of due diligence that guarantees the
funds are used for a charitable purpose. Organizations that make few
international grants, have a small a staff, or are new to international
grantmaking often turn to a DAF to manage the legal obligations inherit
to international grants. In addition, the world of international
grantmaking is incredibly diverse. Literally, a world of funding
opportunities is possible. DAFs provide a means whereby organizations
new to international grantmaking can learn more about this diverse
world, thus acquiring the expertise necessary to make effective
international grants.
---------------------------------------------------------------------------
\1\ A good-faith determination by a grantor organization that a
grantee organization is the equivalent of a 501(c)(3) public charity.
The grantor should collect the same information the IRS would require
if it were to make its own determination of the grantee organization.
\2\ Additional oversight procedures exercised by a grantor to
guarantee that its funds are used for a charitable purpose. Expenditure
Responsibility typically requires five steps: a pre-grant inquiry
whereby the grantor determines the grantee organization to be capable
of achieving the charitable purpose of the grant, a written grant
agreement signed by the grantee that details the purpose of the grant
and commits the grantee to only spend the funds on that purpose, one or
more reports from the grantee detailing the use of the funds, a
separate account maintained by the grantee that exclusively houses
charitable funds, and the grantor organization, when a private
foundations, must notify the IRS on Form 990-PF that an expenditure
responsibility grant was made during the tax year.
---------------------------------------------------------------------------
DAFs often act as a valuable learning tool for grantmaking
organizations. By contributing a DAF to a qualified sponsoring
organization, the grantmaking organization is able to see what capacity
and expertise is needed so that it can eventually make its own
international grants.
b. The Advantages of Donor Advised Funds to Individual Donors
Critics of DAFs argue that contributions should be ineligible as
charitable deductions. They reason that the retention of advisory
privileges declassifies contributions as completed gifts. If accepted,
this argument will undermine a core advantage to DAFs in the context of
international giving.
Most charitable contributions are given for altruistic reasons, but
the promise of a charitable deduction is often an underlying incentive
for many individual donors. Since Federal tax law disqualifies most
overseas contributions by individuals as charitable deductions, DAFs
are a valuable alternative that provides the benefits and incentives of
a charitable deduction while preserving the possibility that a donor's
funds will support a foreign organization. Of course sponsoring
organizations must protect against donors that abuse their advisory
privileges. However, preventing donor abuse by making contributions
ineligible as charitable deductions throws the baby out with the bath
water and will, in the long run, stem the flow of U.S. charitable
dollars to Haiti, Afghanistan, and elsewhere in the Third World where
charitable resources are so desperately needed.
2. The Pension Protection Act Significantly Changes The Due Diligence
Required For Those Public Foundations That Give International
Grants From Their DAFs.
When a public foundation gives an international grant with its
general funds, Federal tax law requires the public foundation to ensure
the grant is used exclusively for its charitable purpose through
sufficient ``discretion and control.'' Public foundations are afforded
a fair amount of autonomy in determining what that ``discretion and
control'' will look like. Under the Pension Protection Act, when a
public foundation makes an international grant with a DAF, the public
foundation must apply due diligence methods traditionally reserved for
private foundations: equivalency determination\3\ or expenditure
responsibility.\4\ Consequently, international grants made with a DAF
are not easily incorporated into a public foundation's grant portfolio.
In addition, it is unclear how expenditure responsibility should be
applied by a public foundation. Gw/oB is waiting for further
clarification on this issue.
---------------------------------------------------------------------------
\3\ See fn 1
\4\ See fn 2
---------------------------------------------------------------------------
3. The Pension Protection Act Includes Fundraisers As Disqualified
Persons With DAFs
The Pension Protection Act expands the list of disqualified
persons, automatically instituting an excess benefit transaction tax on
any ineligible distribution. However, one category of disqualified
persons includes those that wish to be reimbursed for fundraising costs
for the DAF. The fact is that not all DAFs are set up by wealthy
individuals; there are those that are set up by individuals with modest
financial means who raise funding from the public at large and then
channel those funds overseas through a DAF. In cases such as these, it
is quite reasonable to expect reimbursement for out-of-pocket expenses
incurred by necessity in raising funding for the DAF. While excessive
fundraising costs, as elsewhere in the non-profit sector, are to be
strongly discouraged, completely forbidding reimbursement for
reasonable fundraising costs associated with DAFs will jeopardize the
existence of an important subset of DAFs.
III. Charities and Terrorism
During the July 24, 2007 hearing on tax-exempt organizations,
Congressman Pascrell questioned the repeated accusations by the
Department of the Treasury that ``charities are a significant source of
terrorist funding.'' He specifically referenced a recent Treasury
Inspector General Report released on May 21, 2007\5\ and noted that the
Department of the Treasury seems to be ``painting the sector with a
wide brush.'' Gw/oB applauds Congressman Pascrell for his comments and
hopes each Committee Member will read the June 8, 2007 letter that was
sent to the Department of the Treasury by a coalition of nonprofit
organizations, including
Gw/oB, opposing the conclusions of the referenced Treasury Inspector
General Report.\6\
---------------------------------------------------------------------------
\5\ http://www.treas.gov/tigta/auditreports/2007reports/
200710082fr.pdf
\6\ http://www.internationaldonors.org/advocacy/
TIGTALetter_Paulson.pdf
---------------------------------------------------------------------------
Every day, Gw/oB works to counter these overbroad and
unsubstantiated statements by the Department of the Treasury.
Unfortunately, the Department of the Treasury's statements have
inflicted real, ongoing harm on nonprofit organizations, particularly
international grantmakers, and caused a loss of public confidence in
the charitable sector as a whole.
Furthermore, the ``tools'' being released by the Department of the
Treasury, such a the ``Anti-Terrorist Financing Guidelines''\7\ and the
``Risk Matrix for the Charitable Sector,''\8\ are doing little to fight
terrorism and, in fact, chill important philanthropic aid that often
acts as a counter balance to terrorism influences within vulnerable
communities. To further frustrate things, these tools exist within a
legal framework of draconian penalties that easily intimidate the
highly risk adverse charitable sector.
---------------------------------------------------------------------------
\7\ http://www.treas.gov/press/releases/docs/tocc.pdf--Letter
released by Gw/oB opposing the ``Anti-Terrorist Financing Guidelines''
http://www.internationaldonors.org/news/gwob_letter_ 122206.pdf
\8\ http://www.treas.gov/offices/enforcement/ofac/policy/
charity_risk_matrix.pdf--Letter released by Gw/oB opposing the ``Risk
Matrix for the Charitable Sector'' http://www. internationaldonors.org/
advocacy/GwoB_Treasury_Letter-Risk_Matrix.pdf
---------------------------------------------------------------------------
The U.S. charitable community takes the issue of terrorism very
seriously and the 1.8 million 501(c)(3) organizations, including 71,000
foundations, that exist in the U.S. work tirelessly to ensure that
their charitable services or funding are used for the intended
charitable purpose. As noted by Steve Gunderson, the President and CEO
of Council on Foundations, within his testimony:
[i]in fact, we have seen no evidence to indicate that U.S.
charities are a major source of terrorist support. Out of hundreds of
thousands of U.S. charities and billions of dollars given out in grants
and material aid each year, only six U.S. charities are alleged to have
intentionally supported terrorists. Thus far, Treasury has not
identified a single case of inadvertent diversion of funds from a
legitimate U.S. charity to a terrorist organization. . . . An even
larger issue is that, by exaggerating the extent to which U.S.
charities serve as a source of terrorist funding, Treasury is fueling
an environment in which wary donors may refrain from making charitable
contributions.
Gw/oB's hope is that a system can be put in place that supports the
charitable work of those organizations acting lawfully and provides the
necessary due process to those organizations suspected of having links
to terrorism.
IV. Conclusion
Gw/oB thanks you for this opportunity to submit comments regarding
the Pension Protection Act and the Department of the Treasury's counter
terrorism measures. In summary, Gw/oB would like:
Sec. the IRA Charitable Rollover to be permanent and expanded to
include private foundations,
Sec. Congress and the IRS to resist any legal changes to the
operation and management of DAFs that unnecessarily impedes their use
for charitable giving to the Third World, and
Sec. the House Ways and Means Committee to further explore
Congressman Pascrell's questioning regarding charities and terrorism
(the Department of the Treasury needs to be held accountable for its
counter terrorism measures that affect that charitable sector).
If you have any further questions, please feel free to contact our
Advocacy Coordinator at the Washington, D.C. office, Vanessa Dick.

Sincerely,
John Harvey
Executive Director

Statement of Greenlining Institute
The Greenlining Institute is a multi-ethnic advocacy and public
policy center that focuses on issues of philanthropy to underserved
communities and the economic empowerment of our nation's minorities.
Our members include the three largest African-American churches in
California, the Hispanic Chamber of Commerce, the Black Business
Association, the Latino Issues Forum and the Mabuhay Alliance of San
Diego.
We applaud you for announcing the Overview Hearing on Tax-Exempt
Charitable Organizations.We are submitting our views as they relate to
charitable giving foundations.
Greenlining recognizes that foundations have made considerable
contributions to our Nation's great democracy.In the past, especially
during the sixties, foundations led efforts to address civil rights
through strategic grantmaking that introduced minority leaders to the
public policy process in an attempt to directly benefit communities of
color.Unfortunately, rather than evolving and growing, many of these
efforts have subsided and foundations as a whole appear to be
withdrawing from their commitment to justice and equality.
Foundations Accused of Redlining Minority Communities
``There is not a study out there that says that we are
appropriately serving minority communities on a percentage basis.''
Steve Gunderson, President, National Council on Foundations\1\
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\1\ Video: Leadership in Philanthropy, Part 1.The Greenlining
Institute, March 2007.Available at:http://youtube.com/
watch?v=j49Wn7wgFO0
---------------------------------------------------------------------------
According to the Honorable Steve Gunderson, President of the
National Council on Foundations, no study exists that demonstrates
foundations are adequately serving minority communities.On the
contrary, there is considerable evidence to suggest that foundations
are severely short-changing communities of color.Greenlining has
compared this short-changing to the redlining practices of banks,
insurance companies, and other corporations.
Over one third of the nation is minority and an estimated two
thirds of the poor, particularly the underserved poor are
minorities.Low-levels of philanthropic giving to the poor weakens the
ability of the hundreds of thousands of low income organizations
serving the poor to effectively serve the poor.
Below are some statistics to consider.

Grantmaking to Ethnic/Racial Minorities: According to the
Foundation Center, grantmaking for minorities has declined as a
proportion of grants awarded by the largest foundations.Even though
grant giving as a whole has increased, grants to minority communities
have decreased.The numbers provided by the Foundation Center are
controversial and might be understated since they only capture very
large foundations, leaving out a sample of about 79,000 foundations.\2\
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\2\ Cohen, Rick. ``Moral Court for Charity.'' Non-Profit Quarterly
11 May 2007
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Grantmaking to the Poor:According to Rick Cohen, former
President of the National Committee for Responsible Philanthropy, grant
dollars to the poor from large foundations dropped between 2004 and
2005.According to Rick Cohen, ``The proportion of foundation grant
dollars (from generally larger foundations) targeted to economically
disadvantaged population groups was 16.7% in 2002, 20.3% in 2004, but
only 15.7% in 2005.''\3\
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\3\ Ibid.
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Empowering Minority Organizations to Better Serve Their
Constituents. Greenlining launched its efforts to hold philanthropic
foundations more accountable to diverse non-profit organizations with
the release of our Fairness in Philanthropy report.This report found
that the top 50 foundations in the country invested only 3% of the
dollars in minority-led organizations.Greenlining followed in 2006 with
a second report entitled Investing in a Diverse Democracy which found
that only 3.6% of dollars are invested in minority-led
organizations.\4\
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\4\ Many foundations dismissed Greenlining's reports due to flaws
in the methodology.Greenlining made numerous requests to foundations
requesting input and feedback on developing the methodology.
---------------------------------------------------------------------------
Why is Corporate America More Diverse than the Foundation
Sector? According to available data, corporate boards are slightly more
diverse than foundation boards.For example,only 6.7% of foundation
board members are African-American compared to 9.1% of Fortune 500
board members and 10% of Fortune 100 boards.\5\
---------------------------------------------------------------------------
\5\ Cohen, Rick. ``Moral Court for Charity.'' Non-Profit Quarterly
11 May 2007
---------------------------------------------------------------------------
Hiring Practices of Large Foundations:Available
statistics by the Council on Foundations show disproportionately few
positions held by minorities at major foundations, especially among top
executives.These statistics themselves are controversial since they are
taken from a self selected sample of foundations.
Foundation Endowments Might Be Causing More Harm than
Good. Recent investigative articles by the Los Angeles Times point to
disturbing facts that foundation endowments might cause considerable
harm on minority communities.Foundations that exclude minorities in
their grantmaking and hiring practices are perhaps causing more harm
than good to underserved communities by their tax-exempt existence.

Overall, the available research indicates that communities of color
receive a very small portion of philanthropic dollars in our country.As
you know, this debate is not new.Unfortunately foundations are still
making only limited efforts to seriously address this issue.
Government Efforts to Hold Foundation's Accountable
The Chairs of the Legislative Latino, Asian and Black Caucuses in
California have been national leaders on efforts to hold foundations
accountable to communities of color.

State Hearings Hosted By California Minority Caucuses.
Joe Coto, Chair of the Latino Caucus, Alberto Torrico, Chair of the
Asian/Pacific Islander Caucus, and Mervyn Dymally, Chair of the Black
Caucus, held a hearing on April 24, 2006 to discuss foundation
diversity practices.Unfortunately, only a very small number of
foundation leaders chose to participate in this important
discussion.The hearing revealed that some corporate foundations are
outperforming private foundations in reaching the poor and underserved.
A.B. 624, Proposed Transparency Legislation. The heads of
the Latino Caucus and Black caucus introduced A.B. 624, legislation
that would require foundations with greater than $250 million in assets
to report key racial and ethnic data to the state's attorney
general.The legislation is currently on a 2-year cycle to allow
foundations to come up with a better alternative.\6\
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\6\ A summary of A.B. 624 is attached.
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Recommended Questions at Hearing
Given the half trillion dollars sitting in the endowments of 80,000
grantmaking institutions, we hope you will ask questions to see how
that money is reaching the constituencies you represent.Specifically,
we recommend the following questions:

1. What is the Council of Foundations doing to ensure that minority
communities are receiving their fair share of philanthropic
dollars?More importantly, how will Congress know that these efforts are
leading to tangible success?
2. In exchange for their tax exemption, what diversity data should
Congress require from large foundations?
3. What regulations or legislation is necessary to ensure that all
communities are appropriately served by philanthropy?
4. What incentives can we give foundations to ensure that they are
more responsive to community concerns?
5. What are the key indicators to measure diversity in philanthropy
and how can we use these indicators to hold foundations more
accountable to all communities.
Other Pertinent Issues to Explore
Two issues that have not yet been explored but are being raised
informally and often quietly to avoid potential foundation retaliation
are:

1. Whether foundations should count their administrative expenses
as part of their grants when these expenses often equal 20 percent of
grant dollars particularly when foundation staff and boards are not
sufficiently diverse; and
2. Whether foundations are informally conspiring to restrict their
grant giving to 5 percent of assets when their annual returns are
generally in double digits.A 2-percent increase in grant giving from 5
to 7 percent of assets would increase foundation giving by
approximately 15 billion a year, a sum greater than the total cash
philanthropy of all corporations in America.\7\
---------------------------------------------------------------------------
\7\ We raised this particularly in the context of some foundations
contending that to give more to underserved minorities might displace
the amount they give to American icons such as the opera, symphony, and
ballet.
---------------------------------------------------------------------------
We hope you will consider our viewpoints that are shared by
hundreds of minority community leaders throughout the country.Please
consider us as a resource on this topic as it moves forward.Thank you
once again for your leadership and commitment to justice, equality, and
civil rights on behalf of the country's 110 million minorities.

Statement of High Museum of Art
Thank you for the opportunity to comment on the effect of the
charitable provisions in the Pension Protection Act of 2006 (``PPA'').
My observations pertain to the new restrictions imposed on fractional
gifts of works of art to museums. Since the passage of the PPA, no
fractional gifts have been donated to the High Museum of Art. Based on
informal discussions with colleagues in art museums across the country,
this situation is now commonplace. Donations of fractional gifts to
museums have all but disappeared.
Museums have felt the loss of fractional gifts even more keenly
because many of these potential gifts are the most highly prized works
in private collections and are works that museums generally cannot
afford to purchase themselves. The impact of this loss is significant
for museums since the American public may never have the pleasure of
seeing these works.zzzzzzzzzz
Prior to the enactment of the Pension Protection Act, the High
Museum of Art has been the recipient of over $1 million partial
ownership interest in 37 works of art valued at over $2.2 million. Some
of the gifts are entire collections, for example we have received a
photography collection made up of 15 works and a ceramics collection
made up of 18 pieces. One of our most beloved works, a painting by the
well-known American Impressionist painter Mary Cassatt, came to the
museum as a fractional gift. On the other hand, two collectors who have
been contemplating the donation of entire collections--one a
significant 19th and 20th century American paintings and sculpture and
the other a collection of posters and prints by Toulouse-Lautrec--have
declined to give as a result of the changes to the law.
The inability to take the current fair-market value deduction for
each fraction given has made the donation of artworks that will
appreciate in value financially imprudent. Add to that the significant
negative impact on existing contracts for fractional gifts and you
begin to see the devastating affect the new law has had on the ability
to continue to grow museum collections.
Finally, the provision in the new law which requires donors to
complete their gift within 10 years is a serious impediment to future
gifts. Donors of valuable works of art may need more than 10 years to
take full advantage of the tax deduction and may also wish to enjoy
their art in their own homes for a longer period of time. This is
particularly true of older donors who have owned works for years and
for whom the works are an important part of their home, their identity
and their environment. This change in the law means that people will
not donate fractional gifts until much later in their life. In the
museum community we have a saying: ``a gift delayed is often a gift
denied.'' Anything can happen to the work while the donor waits for the
appropriate time to make the first fractional donation. We have seen
this all too often.
It is also important to remember, that once a donor gives the first
fraction of a work, the museum will eventually own the work and it will
be available to the public; should that take an additional decade or
two before a highly valuable work comes forever into the public domain
does not seem to be unreasonable from a public policy standpoint, given
what the American public will ultimately gain from the gift.
Thank your for your interest in this matter, and please do not
hesitate to contact if you have questions.

Statement of Independent Sector
These comments are submitted by Independent Sector in response to
the Oversight Subcommittee's Advisory OV-4, requesting written comments
on provisions relating to tax-exempt organizations in the Pension
Protection Act of 2006 (P.L. 109-280).
Independent Sector is a nonpartisan membership organization,
organized as a 501(c)(3) public charity, that brings the nonprofit
community together to make a greater difference in improving people's
lives. Our coalition of approximately 600 charities, foundations, and
corporate philanthropy programs advocates for public policies that
advance the common good; strengthens the effectiveness of
organizations; and connects nonprofit leaders so they can develop ideas
and take action.
As you know, Diana Aviv, President and chief executive officer of
Independent Sector, testified before your Oversight Subcommittee
hearing on Tuesday, July 24, 2007, on tax-exempt charitable
organizations. In addition to providing the Subcommittee with an
overview of our Nation's charitable community, she discussed the events
leading up to passage of the charitable provisions in the Pension
Protection Act of 2006 (PPA). Rather than repeating those comments
here, I refer you to that testimony.
Enacted in August 2006, the Pension Protection Act contains an
important package of reforms intended to strengthen the work of the
charitable sector by deterring potential abuse of tax-exempt
organizations and creating additional safeguards to ensure that donated
funds are used for charitable purposes. The law also includes critical
charitable tax giving incentives to help generate needed new resources
for the sector. With the recommendations of the Panel on the Nonprofit
Sector in hand, Independent Sector and many other charitable
organizations worked extensively with Congress in drafting this package
of charitable reforms and incentives. Accordingly, we strongly support
the charitable incentives and many of those reforms. However,
Independent Sector also believes that some changes are needed to a few
of the reforms in the Pension Protection Act. Our comments in this
submission will focus on the charitable giving incentives and the
limited areas where we believe the reforms have presented problems and
can be refined.

Charitable Giving Incentives

The Pension Protection Act included several important charitable
giving incentives, including an enhanced tax deduction for gifts of
property for conservation purposes, an enhanced deduction to
corporations for contributions of food and book inventory, and a giving
incentive commonly known as the IRA Charitable Rollover. All of these
provisions are scheduled to expire at the end of 2007. We urge the
Committee to include them in any tax packages being considered.
One of these incentives, we feel, should also be enhanced.
Independent Sector has long supported the IRA Charitable Rollover
incentive because we believe that it generates significant, new and
badly needed resources to support the work of charities across the
sector. An important first step, the limited version of the IRA
Charitable Rollover included in the Pension Protection Act, permits
Individual Retirement Account owners starting at age 70\1/2\ to make
tax-free charitable gifts totaling up to $100,000 per year from their
IRAs directly to charities (except private foundations, donor advised
funds, and supporting organizations).
Even the limited version of the IRA Charitable Rollover has enabled
Americans to make millions of dollars of new or increased contributions
to the nonprofits--including hospitals, museums, educational
institutions, and religious organizations--that benefit people every
day. Thousands of older Americans have accumulated adequate funds in
their IRAs to meet their retirement needs, and they are using this
incentive to give something back to their communities. The incentive is
particularly helpful for older Americans who do not itemize their tax
deductions and would not otherwise receive any tax benefit for their
charitable contributions. In addition, the pattern of giving has
demonstrated that the incentive has very wide appeal. According to
voluntary surveys conducted by the National Committee on Planned Giving
and the higher education community, the most common IRA Rollover gift
has been $5,000, with the majority of gifts between $1,000 and $10,000.
We strongly support efforts to extend and expand this valuable
charitable giving incentive before it expires at the end of 2007. In
the House, the ``Public Good IRA Rollover Act of 2007'' was introduced
earlier this year on a bipartisan basis by Representatives Earl Pomeroy
(D-ND) and Wally Herger (R-CA). This legislation will extend the
current IRA Charitable Rollover by making it permanent and expand its
reach by making all charities eligible to receive IRA Rollover
donations. The measure also provides IRA owners with the opportunity,
starting at age 59\1/2\, to use several planned giving annuity options
currently in the Internal Revenue Code, and removes the present
$100,000 limit on donations per year. This legislation has been
endorsed by nearly 900 nonprofits from every state in the country.

Charitable Reforms

As discussed in Diana Aviv's testimony before the Subcommittee on
July 24, Independent Sector continues to support the vast majority of
reforms enacted in the Pension Protection Act. The issues we raise here
for your consideration relate primarily to clarifications of the
legislative language.

A. The definition of donor advised fund should be clarified to
exclude funds created by a public charity or governmental entity.

Independent Sector strongly supported the inclusion of a definition
of donor advised funds in the Pension Protection Act. Indeed, the Panel
on the Nonprofit Sector specifically recommended that the term ``donor
advised fund'' be statutorily defined in Federal law. The goal of this
definition is to address potential abuses of these funds, now widely
employed as philanthropic vehicles by a broad range of donors, without
discouraging the use of such funds. The definition of ``donor advised
fund'' incorporated in the Pension Protection Act has included a few
ambiguities that have created confusion about whether certain types of
funds established within public charities are subject to the new rules.
The Act's definition specifically excludes a charitable fund or
account that makes distributions only to a single identified
organization or governmental entity (Section 4966(d)(2)(B)(i)).
However, this definition does not explicitly exempt a fund established
by a public charity or governmental entity that may make distributions
to other organizations. Here are two examples of how such a fund could
work. A public charity establishes a disaster relief fund at a
community foundation to raise and grant funds for disaster relief. All
of the advisors for the fund are appointed by the public charity. The
advisory Committee for the fund recommends grants to several local
disaster relief organizations. In another, a state governmental entity
may establish a fund at a community foundation to raise and grant funds
for economic revitalization projects for economically depressed
neighborhoods in the area. All of the advisors for the fund are
appointed by the governmental entity. The advisory Committee for the
fund recommends grants to several local organizations. The current
definition of a donor advised fund could impede these kinds of efforts.
Accordingly, we propose that the Act's definition of donor advised fund
be clarified to exempt funds established by public charities or
governmental entities to make distributions to other organizations
where the public charity or governmental entity appoints all of the
advisors.

B. Clarifying that sponsoring organizations of donor advised funds
should be able to purchase, at or below market value, goods and
services necessary to fulfill their charitable purposes with advised
fund assets.

The Pension Protection Act creates penalties for sponsoring
organizations and managers of donor advised funds if a sponsoring
organization makes a ``distribution'' from fund assets to individuals
and to certain organizations for a non-charitable purpose. However, the
legislation does not define the term ``distribution,'' and two
questions arise. There is uncertainty about whether a donor advised
fund is permitted to make payments for the purchase of goods or
services, at or below fair market value, for legitimate charitable
activity. Likewise, it is unclear whether the prohibition of
distributions to individuals applies to otherwise legitimate purchases
from individuals or businesses that operate as sole proprietorships. We
propose that the statute be modified to address both of these questions
by clarifying that sponsoring organizations and/or managers of donor
advised funds are permitted to make such payments from fund assets to
business entities and to individuals for goods or services from a
business organized as a sole proprietorship.

C. Clarifying that a donor in creating a scholarship fund can
designate public officials and/or leaders of the public charity where
the scholarship will be used as members of the scholarship selection
Committee.

As noted above, the Pension Protection Act prohibits grants to
individuals, including scholarships, from donor advised funds. The Act
provides an exception for grants to individuals for travel, study or
other similar purposes, provided that (1) the donor's or donor
advisor's advisory privileges are performed exclusively in such
person's capacity as a member of a committee appointed by the
sponsoring organization, (2) no combination of a donor or donor advisor
or persons related to such persons control such committee, and (3) all
grants from such fund are awarded on an objective and nondiscriminatory
basis pursuant to a procedure designed in advance and approved by the
sponsoring organization's board.
Unfortunately, the statutory definition and scholarship exception
are proving problematic for donor created scholarship funds where the
donor designates that the scholarship selection Committee include
certain public officials and/or leaders of the public charity where the
scholarships are to be used. Under section 4966 of the Pension
Protection Act, such scholarship funds could fall within the definition
of ``donor advised fund'' but would not qualify for the statutory
exception permitting scholarship grants to individuals due to the
donor's role in designating members of the scholarship selection
Committee. Accordingly, we ask Congress to clarify the scholarship
exception to section 4966 to permit a donor, in creating a scholarship
fund, to designate that the members of the selection Committee include
the holders of identified public offices and/or leaders of the public
charity where the scholarships are to be used.

D. Providing for abatement of first-tier taxes for the new penalty
provisions of the Pension Protection Act on the same basis as for
existing penalty taxes.

The Act established excise taxes on taxable distributions with
respect to donor advised funds but failed to extend the abatement
provisions of section 4962. That section gives the Secretary authority
to refrain from assessing excise taxes if it is established that a
taxable event was due to reasonable cause and not willful neglect and
the event was corrected within a specified period. The types of events
to which this abatement provision applies include failure to distribute
income of a private foundation, the making of political expenditures,
and certain excess benefit transactions.
Independent Sector views the offenses prohibited in the Pension
Protection Act as equivalent to those that are subject to abatement
under section 4962, and recommends that the statute be amended to
provide that relief. Indeed, the goal of the prohibitions is to correct
behavior in this highly technical area of the law. Since the excess
benefit transactions provisions in the Act, in particular, are
essentially strict liability penalties, there is the likelihood that
inadvertent behavior or actions could run afoul of the new, higher
standards. The abatement language in section 4962 was intended to
provide relief for these types of cases where inappropriate action can
be corrected. We therefore recommend that the Code be amended to extend
the abatement provisions of section 4962 to the new penalties enacted
with the Pension Protection Act.

E. Temporarily suspending the penalties for making grants to
certain supporting organizations until the Internal Revenue Service can
reliably identify those organizations.

The Pension Protection Act requires private non-operating
foundations and sponsoring organizations of donor advised funds to
exercise expenditure responsibility with respect to grants to Type III
supporting organizations that are not ``functionally integrated'' with
their supported organizations. Unfortunately, there is currently no way
for funders to know with certainty whether many proposed grantees are
Type III supporting organizations, much less whether they are
``functionally integrated.'' There is still serious doubt that the IRS
EO Master File can be relied upon to provide accurate information about
the status of a supporting organization. The predictable effect is that
funders affected by these rules are delaying or suspending grants.
Moreover, the Internal Revenue Service is only now developing
regulations to provide guidance to determine whether a supporting
organization is ``functionally integrated.'' We ask Congress to modify
the effective date for these provisions so that they take effect upon
the issuance of IRS regulations on the definition of ``functionally
integrated'' and to clarify what documentation will be required from a
supporting organization to satisfy this classification.

Treasury Department Study on Donor Advised Funds

A final matter related to the Pension Protection Act on which we
would like to comment is the study on donor advised funds by the
Department of the Treasury that is due to be released in August.
Section 1226 of that Act requires the Secretary to report on a series
of questions related to charitable deductions, the advisability of
requiring such funds to make distributions, and the retention of donor
rights and privileges. Independent Sector is very interested in working
with Congress to interpret the forthcoming study and to address
concerns and proposals that the Secretary may raise. We therefore urge
the Committee to treat the Treasury study as a continuation of the
dialog on further reforms to donor advised funds and similar entities,
and to convene all interested parties for a full hearing of the issues
presented.
We would be pleased to discuss any of the above or related issues
with the staff of the Committee at any time. Thank you for your
consideration of these important matters.

Statement of Karen D. Krei, Piedmont Community Foundation, Middleburg,
Virginia

Dear Committee Members,

Thank you for the opportunity to give input on how the PPA Act of 2006
has impacted the small community foundation world. The questions and
comments listed below refer mostly to the IMPACT on Donor Advised Funds
(DAF) and the importance of donor advised funds to the community
foundation. The questions were posed by the IRS when gathering input
for Congressional study.Respectfully,
Karen Krei
Executive Directo

__________

1. What are the effects or the expected effects of the PPA
provisions (including the Sec. 4958 excess benefit transaction tax
amendments applicable to donor advised funds and supporting
organizations) on the practices and behavior of donors, donor advised
funds, sponsoring organizations, supporting organizations and supported
organizations?
Many donors provide fundraising events to benefit their funds to
support community causes in which they have particular interest. This
gives a broad segment of society with modest means a method to make a
significant charitable impact. Prior to PPA related fundraising
expenses could be made from those funds; following PPA they cannot.
This is an area that should be amended to allow related fundraising
expenses, with oversight on self-dealing, from a DAF. PPA is causing
hardship for the small donor. The current law has the chilling effect
of discouraging fundraising using a DAF and will drive more donors to
form their own 501(c)(3)'s. Would you rather have one responsible
community foundation with a community board of directors with
oversight, paid staff, and one 990 filed that encompasses many
accounts; or flooded with new mini--nonprofits to oversee at the
Federal and state level To what purpose is the real question!
Example: One donor lost a wife to breast cancer. He had a DAF
rather than a 501(c)(3) because he doesn't want to run a board of
directors or the administration of the fund, he simply wants to raise
funds to prevent breast cancer using his own identifiable name on the
fund. He wants to create a legacy. He is a good ``salesman''; he
connects to others in the community; he brings in donations for the
cause. He has modest means yet now pays for all expenses out of his
pocket because we cannot reimburse him or pay the legitimate costs. He
does this because he believes in his cause, but how long he can do this
without reimbursement is questionable. Why is the current situation OK?
It is not OK. PPA should be amended so his money spent is reimbursable.
He gives his time and talent. Why is his treasure not treasured as a
legitimate expense?
2. What are the advantages and disadvantages of donor advised funds
and supporting organizations to the charitable sector, donors,
sponsoring organizations, and supported organizations, compared to
private foundations and other charitable giving arrangements?

For donors: Donor advised funds (DAF) provide an invaluable conduit
for the ``everyday donor'' to create a charitable fund, either pass
through or permanent endowment legacy, without needing the vast sums of
money necessary to create a private foundation., or the expense,
expertise and work to create and maintain their own 501(c)(3). Because
of the lower threshold to participate (as low as $5,000) the DAF is
unique in the ability to rally philanthropic capital as no other tool
can do. People crave the ability to have a fund ``with an advisory
voice'' that stands in memory or honor of a loved one or their family
name. It is a comfort, it gives back to the community and it encourages
future family members to value participating as a steward of their
community. This powerful tool lets everybody have a seat at the table
of philanthropy. No other charitable tool duplicates these benefits.
For community: The DAF is the lifeblood of local level
philanthropy, and therefore the community foundation. At the local
level donors with a DAF have access to local knowledge of charitable
need, and local collaborations can be built with other like-minded
donors. Endowed DAF's provide an ongoing local funding source; always
in high demand in communities across America. Charities depend on
grants from these funds and as the DAF's grow so do the distributions
to accomplish more charitable work in the community. Compared to a
private foundation a DAF can attract like-minded donors to that fund
which is not the case for a private foundation which usually works as a
solitary donor. One could argue that while private foundations may have
more assets on a 1 to 1 fund basis, it is the local community
foundation DAF that can ignite broad support for giving back to the
community in a variety of interest areas. many donors provide special
community events to fund their DAF. In this respect the commercial DAF
is also at a disadvantage to a local community foundation. Without the
DAF at the local level, community philanthropy would be severely
curtailed and many community foundations may be in jeopardy of
existence. This would not serve the community.

For charitable sector: Beyond having the funding source mentioned
above, the DAF's require due diligence on each nonprofit grantee. The
charitable sector is well served by due diligence which vets recipients
as viable tax exempt organizations with bona-fide missions, board
governance and effectiveness. Due diligence is good for holding and
encouraging high standards in the charitable sector. Without local
DAF's at community foundations, face to face diligence would not be
available to the ``everyday donor'' and the charitable sector standards
would be viewed from afar which is heralded to lead to fraud and
distrust of the sector. We do not see fraud and distrust at the
community foundation. The DAF also serves the sector by suppressing the
creation of more small 501(c)(3) organizations that in turn need
oversight, community boards, operation incomes, and so forth. Without
the DAF available the charitable sector would find more nonprofits out
competing for less dollars. Not a good outcome.
3. How should the amount and availability of a charitable
contribution deduction for a transfer of assets to a donor advised fund
or a supporting organization, and the tax-exempt status or foundation
classification of the donee, be determined if:
a. the transferred assets are paid to, or used for the benefit of,
the donor or persons related to the donor (including, for example,
salaries and other compensation arrangements, loans, or any other
personal benefits or rights)?
No donors are allowed to personally benefit from their gift. These
are the rules and we would not accept any gifts to the contrary. Not
sure why you are asking this question.
b. the donor has investment control over the transferred assets?
Not sure why you are asking this question either. The value of the
gift is the value of the gift at the time of ownership transfer
regardless of how it came to be an asset of the Foundation. The FMV at
the time of the ownership transfer is the tax deductible amount. The
key words are ownership transfer. The third party investment management
retained at the time of transfer has nothing to do with ownership,
distribution or investment control. There is no donor investment
control. That investment house the donor's gift is now our client and
must meet our benchmarks, and so forth. If they do not meet our
investment policy guidelines they will be fired. We own, manage and
invest our assets, period.
c. there is an expectation that the donor's ``advice'' will be
followed, or will be the sole or primary consideration, in determining
distributions from, or investment of the assets in, the supporting
organization or the donor advised fund?
This question seems to indicate that DAF ``expectation'' is a bad
thing or somehow relates to a following action. These semantics seem to
blur clear intention. I would say both the Foundation and the DAF
should have expectation to operate as the rules apply, not via advise.
Each DAF must follow the rules of the signed funding agreement which
assures each party how the rules and legal control apply. Our
distributions are made following the funding agreements which clearly
state the Foundation has sole control of distributions. We do not
``blindly'' follow advice. When receiving advised requests from a DAF
we do the due diligence on the potential donee, confirm that the grant
falls within our foundation published funding priority guidelines and
confirm it does not benefit the donor or donor-related people. If it
meets our standards there is no surface reason not to fund the advised
grant even though the directors are free to refuse on any grounds.
Practically, why would you refuse to fund something that meets the
priority funding areas for your Foundation? Again, this is the benefit
of a community foundation DAF which has priority funding areas for the
community; something a commercial DAF does not have.
d. the donor or the donee has option rights (e.g., puts, calls, or
rights of first refusal) with respect to the transferred assets?
We hold no assets with option rights nor would we.
e. the transferred assets are appreciated real, personal, or
intangible property that is not readily convertible to cash?.
It is always our action to convert transferred assets to cash as
quickly as possible so that a charitable distribution will be
available. Our gift policy allows us to refuse gifts that have
liquidity or legal issues. If an appreciated stock takes a tumble or
rises before we sell it in the 24 hour window after receipt, this is
the result of our action, not the donors, and the donor is given the
FMV at the time of transfer as their gift value. We take the loss/gain
on our capital gains/loss statement. Our investment actions remain
accountable to the public as results are published.
4. What would be appropriate payout requirements, and why, for:
donor advised funds?
Why are required payouts needed for a community foundation? Our
goal is to get as much money as possible to the community, not incubate
it while waiting for a cause. The community expects, and should
receive, maximum annual distributions that leave growth of corpus
intact for endowed funds. Our distribution policy lists 5% at the
discretion of the directors in order to maintain endowment commitments
and distribute as much a possible to the community annually. We
generally give at least 5% of assets annually, last year was 11%, and
much more if looking at the impact of annual pass through funds
(sometimes 100% of those funds). If a DAF does not make advised grants
regularly they are in jeopardy of being absorbed into the annual
unrestricted community grant making program. If they had a restriction
or area of interest, then they may be restricted as a community grant.
I see no benefit to add restriction on distribution amounts for
individual or collective DAF's in a community foundation as they must
already meet the distribution guides of the foundation which, in our
case, would never fall below 5%. More regulation is not needed and
would be another cost of administration if imposed to ``prove'' the
singled out DAF class meets some kind of arbitrary payout.

funds that are excepted from donor advised fund treatment
by statute or by the authority of the Secretary, but for which the
donor retains meaningful rights with respect to the investment or use
of the transferred amounts?

Do not know about any such funds.

supporting organizations?
any other types of charities?
5. What are the advantages and disadvantages of perpetual existence
of donor advised funds or supporting organizations?
DAF's at a community foundation assist in providing a reliable
funding base to meet emerging need in the community. The DAF is a
substantial strand in the 3 objectives of a community foundation:

growth of an unrestricted permanent endowment as the most
effective means to meet the needs of the community now and in the
future
administering a strategic grant-making program to
maximize impact and effectiveness in achieving positive long-term
changes in our community
leadership of charitable activities; identify and address
the important issues of the local charitable sector and harness
collaborative resources to improve the quality of life in the community

Many community foundations are made up of over 90% DAF's! The
community is well served by their existence and donor passion to
perpetuate charitable support.
There are not perpetual DAF's at our community foundation, but the
fund itself can become perpetual. There is a two generation cap on
family advising. If the account is at least $25,000 in assets we
maintain it as a separate fund name and grant source. If it had
restricted area of interest we maintain that restriction. It becomes
part of our competitive grant cycle for community grant-making program.
Money will always be available and money will always be distributed to
meet emerging need. Again, flexibility to serve without preset
restrictions allows for effective local distribution of funds.
A word on supporting organizations: I can see no reason why there
should be a problem with their perpetual existence as long as they meet
the needs, rules and requirements. Many supporting organizations are
integral to community foundations as they should be. They serve a
defined charitable purpose that complements the supported organization.
The community benefits from consolidated effort that meets the high
standards of the organization. It is an efficient and effective
relationship.

Statement of Kenneth H. Ryesky
I. INTRODUCTION
Per Hearing Advisory OV-4 (12 June 2007), and OV-5 (9 July 2007),
House Ways and Means Oversight Subcommittee Chairman John Lewis
solicited written on the provisions relating to tax-exempt
organizations contained in the Pension Protection Act of 2006 (P.L.
109-280) (``PPA''). This Commentary is accordingly submitted.
II. COMMENTATOR'S BACKGROUND & CONTACT INFORMATION
Background: The Commentator, Kenneth H. Ryesky, Esq., is a member
of the Bars of New York, New Jersey and Pennsylvania, and is an Adjunct
Assistant Professor, Department of Accounting and Information Systems,
Queens College of the City University of New York. He has also taught
courses in Business Law, and in Taxation, at Sy Syms School of
Business, Yeshiva University. Prior to entering into the private
practice of law, Mr. Ryesky served as an Attorney with the Internal
Revenue Service (``IRS''), Manhattan District. In addition to his law
degree, Mr. Ryesky holds BBA and MBA degrees in Management. He has
authored several scholarly articles on taxation.
Contact information: Kenneth H. Ryesky, Esq., Department of
Accounting & Information Systems, 215 Powdermaker Hall, Queens College
CUNY, 65-30 Kissena Boulevard, Flushing, NY 11367. Telephone 718/997-
5070 (vox), 718/997-5079 (fax). E-mail: [email protected].
Disclaimer: This Commentary reflects the Commentator's personal
views, is not written or submitted on behalf of any other person or
entity, and does not necessarily represent the official position of any
person, entity, organization or institution with which the Commentator
is or has been associated, employed or retained.
III. COMMENTARY ON THE ISSUES
A. Scope of Commentary
Title XII of the PPA consists of several provisions relating to
tax-exempt organizations (and having little, if any, direct connection
with pensions). Confident that others who have more direct and
comprehensive insight and experience with other provisions of Title XII
will apprise the Subcommittee of their views on such other provisions
(as indeed, has already occurred at the 24 July 2007 Subcommittee
Hearing), this Commentator will limit the instant Commentary to PPA
Sec. 1217, the enhanced documentation requirements for charitable
deductions, codified at I.R.C. Sec. 170(f)(17). This PPA provision,
though not the most significant in dollars, does affect every
individual taxpayer who itemizes deductions.
For the sake of clarity and brevity, unless specifically
distinguished otherwise, the terms ``charitable'' and ``tax exempt''
will be used interchangeably in the current discussion, and the fine
legal distinctions between charitable, religious, educational and
governmental purposes, as reflected in the verbose provisions of I.R.C.
Sec. 501, will be largely ignored.
B. Historical Overview
It has long been the policy of the state and Federal governments to
foster and encourage eleemosynary organizations, see, e.g. Matter of
Kimberly, 27 A.D. 470, 473 (N.Y. App.Div., 4th Dept. 1898). As Chief
Justice Horace Stern of the Pennsylvania Supreme Court remarked,
``there is no class of institutions more favored and encouraged by our
people as a whole than those devoted to religious or charitable
causes,'' Bond v. Pittsburgh, 368 Pa. 404, 408, 84 A.2d 328, 330 (Pa.
1951). Indeed, those disinclined to contribute funds for charitable,
religious or similar purposes were often suspected of impropriety. See,
e.g. United States v. Pape, 253 F. 270 (S.D. Ill. 1918).
Consistent with the law's favored view of charitable and religious
causes, policy dictates that tax deductions for such purposes be
facilitated and encouraged, see, e.g. Gardiner v. Hassett, 63 F. Supp.
853, 856 (D. Mass. 1945); 11 U.S.C. Sec. 548(a)(2).
Abuses of the tax-exempt status of charitable organizations were,
for a long time, largely tolerated and condoned by the authorities and
the public, given the overall benefits to society provided by the tax
exempts. More recently, however, as abuses of the system have garnered
public notoriety, the regulations affecting charitable organizations
have multiplied. Over the years, the laws have responded to various
public concerns ranging from unfair competition with legitimate
taxpaying businesses, H. Rep. No. 2319, 81st Cong., 2d Sess. (1950), at
36-37, reprinted at 1950-2 C.B. 380, 409; S. Rep. No. 2375, 81st Cong.,
2d Sess. (1950), reprinted at 1950 U.S.C.C.A.N. 3053, 3081, 1950-2 C.B.
483, 504-05; C.F. Mueller Co. v. Commissioner, 190 F.2d 120 (3d Cir.
1951), aff'g 14 T.C. 922 (1950), to the use of tax-exempt organizations
to support subversive political activity, see, e.g., A New Red Inquiry
Approved by House: Will Study if Tax-Free Groups Use Their Wealth to
Promote Subversion, N.Y.Times, April 5, 1952, p. 5. The use of tax-
exempt organizations in insurance and Medicaid fraud schemes has been a
problem, see, e.g. United States v. Hendricks, 2003 U.S. App. LEXIS
12938 (4th Cir. 2003); Easton v. Public Citizens, Inc., 1991 U.S. Dist.
LEXIS 18690 (E.D.N.Y. 1991); Congregation B'nai Jonah v. Kuriansky, 172
A.D.2d 35, 576 N.Y.S.2d 934 (3d Dept. 1991), app. dismissed 79 N.Y.2d
895, 590 N.E.2d 244, 581 N.Y.S.2d 659 (1992); Matter of Fuhrer, 100
Misc. 2d 315, 419 N.Y.S.2d 426 (Sup. Ct. Richmond Co. 1979), enforced,
72 A.D.2d 813, 421 N.Y.S.2d 906 (2d Dept. 1979); St. Francis Home,
Inc., v. Ohio Dept. of Job and Family Services, 2006 Ohio 6147 (Ohio
App. 2006), appeal denied 864 N.E.2d 653 (Ohio 2007). The poster child
for personal salary and perquisite abuse of charitable organizations
was William Aramony, the CEO of the United Way of America, see United
States v. Aramony, 88 F.3d 1369, cert. denied 520 U.S. 1239 (1997); see
also Vacco v. Aramony, N.Y.L.J., 7 August 1998, p. 21 (Sup. Ct. N.Y.
Co. 1998).
Suspicion of complicity by tax-exempt organizations and their
principals and employees in the inflation of charitable donation dollar
values is not unknown, see, e.g. St. German of Alaska Eastern Orthodox
Catholic Church v. United States, 840 F.2d 1087 (2d Cir. 1988).
Taxpayers' abuses involving unreported quid pro quo goods or services
in return for charitable contributions led to the requirement of a
written receipt from the charity for contributions of $250 or more, and
not just a canceled check, Omnibus Budget Reconciliation Act 1993, P.L.
103-66, Sec. 13172(a), 107 Stat. 312, 455-456, codified at I.R.C.
Sec. 170(f)(8).
And so, while encouraging and facilitating charitable works, the
law must strike a balance so that abuses of and by charitable
organizations can be deterred, detected and punished.
C. The Requirements of PPA Sec. 1217
Prior to PPA, the taxpayer could substantiate cash donations
amounting to less than $250 with ``reliable written records showing the
name of the donee, the date of the contribution, and the amount of the
contribution.'' Treas. Reg. Sec. 1.170A-13(a)(1)(iii) (2006). The
standard for the reliability of the written record was case-specific,
Treas. Reg. Sec. 1.170A-13(a)(2)(i) (2006). The Treasury had dispensed
with some or all of the substantiation requirements by exempting the
writing requirement in the case of a small cash contribution evidenced
by ``an emblem, button, or other token traditionally associated with a
charitable organization and regularly given by the organization to
persons making cash donations.'' Treas. Reg. Sec. 1.170A-13(a)(2)(i)(C)
(2006). Under the ambiguous and subjective standard, the taxpayer's
bare unsubstantiated word, when credible, was accepted by the taxation
authorities and the courts. Cf., e.g. Bagby v. Commissioner, 102 T.C.
596, 611 (1994); Robinette v. Commissioner, T.C. Summary Op. 2006-69;
Fontanilla v. Commissioner, T.C. Memo 1999-156; Jackson v.
Commissioner, T.C. Memo 1999-203; Matter of Eble, N.Y.S. Div. of Tax
Appeals, Determination DTA No. 817710 (13 June 2002); Matter of
Martucci, N.Y.S. Div. of Tax Appeals, Determination DTA No. 817748 (27
December 2001) (allowing unsubstantiated claims of cash donations to
collections at houses of worship where taxpayer's word was found to be
credible), with Anthony Muhammad v. Commissioner, T.C. Summary Op.
2006-144; Curtis Muhammad v. Commissioner, T.C. Summary Op. 2006-174;
Matter of Mott, N.Y.S. Div. of Tax Appeals, Determination DTA No.
818315 (January 24, 2002) (disallowing unsubstantiated claims of cash
donations to collections at houses of worship, where taxpayer had
credibility issues).
Indeed, internal IRS directives permitted allowance of modest
amounts credibly claimed by the taxpayer to have been given as
undocumented contributions, see, e.g. Calderazzo v. Commissioner, T.C.
Memo 1967-25, n. 3 and accompanying text.
PPA Sec. 1217 mandates that beginning with tax year 2007, all cash
donations must be substantiated with either a written acknowledgment or
a bank record showing the name of donee, date and amount of
contribution. Documents that are bogus, altered or otherwise of
questionable provenance will presumably continue to be rejected as
fulfillment of the substantiation requirement, see, e.g. Curtis
Muhammad v. Commissioner, T.C. Summary Op. 2006-174, n. 5; Prowse v.
Commissioner, T.C. Memo. 2007-31; Matter of Paul Tam, N.Y.S. Div. of
Tax Appeals, Determination DTA Nos. 819366 & 819367 (27 May 2004), as
will bank records such as canceled checks which do not clearly indicate
the required particulars of the charitable donation. See, e.g. Murray
v. Commissioner of Revenue, 1989 Minn. Tax LEXIS 72 at *28-*29 (Minn.
Tax Ct. 1972).
D. The Specific Problems and Complications of PPA Sec. 1217
(1) Less money placed in the donation receptacles
While it is too early to really do a comprehensive study, the
anecdotal evidence to date, consistent with the Commentator's limited
personal observations, seems to indicate that less cash is being placed
in public donation receptacles. Certain charitable organizations,
including but not limited to the Salvation Army and the Jewish National
Fund, have, over the years, developed public repute and recognition
through their public donation receptacles. Through calendar year 2006,
those who regularly or spontaneously used donation receptacles to
effect small contributions to various charitable organizations could
claim the tax deduction based upon a reasonable and good faith
estimate. The congregant who, at the local synagogue's morning minyan,
regularly places a dollar bill in the pushke, can do the arithmetic to
reach a fairly accurate estimate of his donations for the year.
Starting in calendar year 2007, such estimates have not been a valid
basis for a charitable deduction. Accordingly, for those taxpayers who
itemize their deductions, it now makes little fiscal sense to make
undocumented contributions as previously described.
(2) Reduction in spontaneous donations
A charitable deduction requires that the donor have charitable
intent at the time of the donation, United States v. American Bar
Endowment, 477 U.S. 105 (1986); Commissioner v. Duberstein, 363 U.S.
278, 285 (1960). For reasons previously described, small spontaneous
charitable donations via public collection receptacles make no fiscal
sense for those who itemize their deductions. Charitable contributions
must now be planned, or at least deliberated, so that the donor can
write a check and/or find a donee who is postured to give a receipt for
cash, or find a donee who is prepared to accept donations via credit
card. Therefore, on account of PPA Sec. 1217, the spontaneous
inspiration of the moment, which is inherent in scenarios such as the
passing of a collection plate at religious services, or depositing a
coin in a donation receptacle at the gravesite of a revered decedent,
may well be overridden by the donor's sense of fiscal responsibility
and the imperative to optimize one's financial position at tax time.
Moreover, PPA Sec. 1217 has also enhanced the very real possibility
of pressure by the donor upon the donee to tender a noncontemporaneous
receipt based upon the donor's word instead of the donee's records or
recollections. Such actions obviously have a corrupting effect upon the
integrity of the taxation system.
(3) End of anonymous donations
It may be appropriate or desirable to tender an anonymous
charitable contribution. Such a situation may arise where, for example,
the donor wishes to make a small one-time donation to an organization
for a particular purpose (e.g., a fundraiser dinner journal ad where
the guest of honor is a friend, relative or business associate of the
donor), but has no intention of making subsequent donations, and does
not wish to place undue burdens on the organization. If the donor's
identity is known, the organization may well spend more in the ensuing
years on mailings and postage, for further solicitations, than the
donor contributes on this one occasion. PPA Sec. 1217 has severely
limited the tax incentive for such a would-be anonymous donor.
(4) Obsolete and invalid Treasury Regulation
Prior to PPA Sec. 1217, contributions of ``a small amount'' could
be substantiated by ``an emblem, button, or other token traditionally
associated with a charitable organization and regularly given by the
organization to persons making cash donations.'' Treas. Reg.
Sec. 1.170A-13(a)(2)(i)(C) (2007). Thus, tokens such as the red poppy
from the American Legion, the daisy from Childrens Hospital of
Philadelphia, or the wrapper of a candy bar from the Lions Club's
``Candy Day'' fundraiser event were acceptable by the IRS as supporting
evidence of small contributions to those charities. One gets the sense
that the taxpayer in Jennings v. Commissioner, T.C. Memo 2000-366,
aff'd 19 Fed. Appx. 351, 2001 U.S. App. LEXIS 20731, 2001-2 U.S. Tax
Cas. (CCH) para. 50,651 (6th Cir. 2001), may have at least partially
demonstrated his entitlement to a deduction to the Tax Court, if only
he would have been able to produce such an ``emblem, button, or other
token'' associated with one of his charitable donees.
PPA Sec. 1217's blanket reference to ``subsection (a)'' serves to
limit the utility of the poppies and daisies and candy bar wrappers so
severely as to make such tokens all but irrelevant in substantiating a
deduction. Absent some Congressional relaxation of the stringent
provision, it would behoove the IRS to review Treas. Reg. Sec. 1.170A-
13 in general and Treas. Reg. Sec. 1.170A-13(a)(2)(i)(C) in particular.
E. The Trade-Off of PPA Sec. 1217's Specific Problems and Complications
Most charitable donors are motivated by higher forces and powers
than the dollars and cents they contribute out of their pockets. It is
obvious that in most instances, a donor can retain far more in his or
her bank account by not giving anything at all to charity, taxation
issues notwithstanding. Yet, people choose to give to charity.
The IRS and other taxation authorities necessarily deal with
charitable contributions in strict terms of dollars and cents. But
there is also an unquantifiable aspect of charitable giving, the
personal involvement of the donor in the process. From this, the donor
receives great moral and spiritual benefit from his or her
participation. The knowledge that he or she made some sort of
difference on this Earth, and the personal connection with the process,
benefit the donor in ways which can never be evaluated using fiscal or
accounting principles.
Congress must provide a statutory framework to foster fiscal and
legal accountability of the charitable giving process, and the IRS and
other law enforcement agencies must police the process and its
participants. But, as Ricardo warned, taxation ``frequently operates
very differently from the intention of the legislature by its indirect
effects,'' David Ricardo, The Principles of Political Economy and
Taxation chapt. 16 at 157 (Everyman's Library, no. 590, J.M. Dent &
Sons, London, 1969) (1817); also printed in 1 The Works and
Correspondence of David Ricardo (Piero Sraffa, ed., Cambridge Univ.
Press, 1951) at 239.
There is, of course, a need to hold the charitable and other tax-
exempt organizations to a relatively high degree of scrutiny, not only
to ensure that the not be used in schemes to illegally evade taxes or
to confer private inurement to their principals, but also to effect
general law enforcement, including the funding of terrorism and
subversive activities. In seeking to impose accountability upon the
tax-exempt organizations and their contributors with PPA Sec. 1217,
Congress has placed an obstacle to many acts of charitable donation
which, while low in dollar value, are nonetheless significant and
important in other respects.
Moreover, the numerous small-sized tax-exempt organizations that
fill small specific niches and effectively handle specialized needs not
well addressed by the broad brush approaches of the larger charitable
organizations, are now being weighed down by the additional
requirements of PPA and other recent legislation, much as the small
family businesses and farms are being squeezed out by the giant
retailers, manufacturers and agricultural concerns.
The inflexible documentation requirement of PPA Sec. 1217 certainly
goes far toward ensuring accountability, but this strict accountability
standard has come at a price.
IV. CONCLUSION
The opening statement by Chairman Lewis at the 24 July 2007
Subcommittee Hearing emphasized the need for a strong and healthy
nonprofit sector. This can only come about if donors have a positive
relationship and emotional connection with the respective charitable
organizations who would receive their donations.
On account of the provisions of I.R.C. Sec. 170(f)(8), the
operation of PPA Sec. 1217 effectively operates disproportionately, if
not exclusively, upon donations of less than $250.00. These donations
may be small and insignificant, even in the aggregate, but there is
more at stake than the small pocket change that is or is not deposited.
The passionate relationship of many a large donor to his or her
favorite charity has been initiated by a coin dropped, unacknowledged
and undocumented, into a collection receptacle. Charitable
organizations must continue to develop and nurture their donorships.
PPA Sec. 1217 has interposed some impediments to some traditional
methods of donor development.
It is well to note that the aforementioned I.R.C. Sec. 170(f)(8),
which addresses the documentation of the presence or absence of a quid
pro quo in charitable donations of $250.00 or more, specifically
authorizes the Treasury/IRS to relax some of those requirements, I.R.C.
Sec. 170(f)(8)(E). How ironic that PPA Sec. 1217, as codified in I.R.C.
Sec. 170(f)(17), is far more rigid for documenting smaller charitable
donations!
The Treasury/IRS should similarly be authorized to relax the
documentation requirements for the smaller donations under appropriate
circumstances, balancing the needs of tax enforcement and law
enforcement in general against the salutary effects that small,
spontaneous undocumented donations may have upon the charitable sector.
According to Mr. Miller's testimony at the Hearing on 24 July 2007,
America's charitable sector is generally in compliance with the tax
laws; the deviations which receive attention in the news media are the
exceptions, and not the general tendency. Problems relating to
undocumented small pocket change donations are not among the charitable
sector's significant tax problems and issues highlighted by Mr. Miller
in his testimony.
Though reposing too much discretion in the tax collector does run
the risk of the tax uncertainty Adam Smith admonishes us to avoid, the
rigid standard of PPA Sec. 1217 does dampen and discourage a monetarily
insignificant, though highly symbolic, method of public participation
in the charitable giving process. Accordingly, Congress should consider
giving the Treasury and the IRS a modicum of bounded discretion to
enable the good faith tax return filer to benefit from a modest
charitable deduction, so as to reflect spontaneous and undocumented
cash contributions not currently deductible on account of PPA
Sec. 1217.

Statement of Lester M. Salamon, Baltimore, Maryland
Executive Summary: (2 pages)
Nonprofit Governance and Accountability
Lester M. Salamon and Stephanie L. Geller
This report shows that, contrary to some accounts in the press, the
nonprofit is adhering to reasonable standards of governance and
accountability. The full text of the report is available at:

http://www.jhu.edu/listeningpost/news/pdf/comm04.pdf
Executive Summary: (1 page)
Investment Capital: The New Challenge for American Nonprofits
Highlights one of the significant challenges facing nonprofit
organizations--their limited access to investment capital. The full
text of the report is available at:

http://www.jhu.edu/listeningpost/news/pdf/comm05.pdf
Excerpts: (5 pages)
Employment in America's Charities: A Profile
This report documents the enormous scale and growing role of
nonprofits in the United States. The full text of the report is
available at:

http://www.jhu.edu/ccss/research/pdf/
Employment%20in%20Americas%20Charities.pdf

Section 1: A significant employer
Section 4: A dynamic sector
Section 5: Regional variations in nonprofit employment growth
Section 6: A diverse sector
Section 7: Nonprofit prominence in particular fields
Excerpt from:

Nonprofit Governance and Accountability

Lester M. Salamon and Stephanie L. Geller, ``Nonprofit Governance
and Accountability'' Communique No. 4. (Baltimore: The Johns Hopkins
Center for Civil Society Studies, October 2005).
EXECUTIVE SUMMARY
Responding to concerns about nonprofit governance and
accountability surfaced in a discussion draft \1\ issued by the Senate
Finance Committee, the Johns Hopkins Nonprofit Listening Post Project
conducted a survey, or Sounding, of its nationwide sample of nonprofit
organizations in five key fields (children and family services, elderly
housing and services, community and economic development, theaters, and
museums) to examine the governance and accountability practices of the
nation's nonprofit organizations.
Key findings from this survey included the following:
(1) Board roles. The boards of overwhelming majorities (85-90
percent) of the nonprofit organizations surveyed are highly or
significantly involved in the key strategic oversight functions that
nonprofit boards are expected to perform. These include:

Setting organizational missions (93 percent);
Setting the chief executive's compensation (88 percent);
Establishing and reviewing organizational budgets and
finances (87 percent);
Setting organizational objectives (87 percent);
Reviewing auditing and accounting policies and practices
(83 percent); and
Approving significant financial transactions (81
percent).

(2) Financial disclosure. The overwhelming majority (97 percent) of
sampled organizations have undergone an independent audit within the
past 2 years and comparable proportions (95 percent) regularly
distribute their financial reports to their boards.

(3) Ethics protections. The overwhelming majority of responding
organizations also already have other policies and procedures in place
to promote accountability and ethical behavior. This includes:

Internal controls on finances and financial accounting
(98 percent);
Records retention policies (84 percent);
Conflict of interest policies (83 percent);
Travel expense policies (81 percent);
Compliance programs for regulation (81 percent); and
Codes of ethics for board and staff (73 percent).

Even among smaller organizations, a majority have such policies in
place.

(4) Best-practice standards

Nearly two-thirds of the organizations surveyed already
take part in best-practice accreditation programs, and nearly 60
percent of these participate in more than one such program.
Of those organizations that do not participate in formal
best-practice accreditation programs, most report following an
internally developed set of standards.
Internal factors such as a desire to promote
organizational excellence and improve transparency are more important
in explaining adherence to best-practice accreditation standards than
external pressures from funders, clients, or the press.

(5) Organizational changes

Nearly one in three organizations (29 percent) reported
making some material change in their structure, programs, funding, or
mission over the previous two years.
However, most of these (54 percent) reported notifying
the Internal Revenue Service of this change. And those that did not
report typically experienced less significant changes (e.g., changes in
funding sources).

(6) Nonprofit awareness

Most nonprofit boards (80 percent) are at least
``somewhat knowledgeable'' about nonprofit laws at both federal and
state levels, and two-thirds reported having discussed the federal
Sarbanes-Oxley law.
Only 36 percent of the organizations reported having held
at least brief board discussions of the Senate Finance Committee staff
proposals for increased regulation of nonprofit governance.

The full Communique on Nonprofit Governance and Accountability is
available for downloading at: www.jhu.edu/listeningpost.
U.S. Senate Finance Committee, Staff Discussion Draft (June 22,
2004) (http://finance.senate.gov/hearings/testimony/2004test/
062204stfdis.pdf).
Excerpt from:
Investment Capital: The New Challenge for American Nonprofits
Lester M. Salamon and Stephanie L. Geller, ``Investment Capital:
The New Challenge for American Nonprofits'' Communique No. 5
(Baltimore: The Johns Hopkins Center for Civil Society Studies, April,
2006).
EXECUTIVE SUMMARY
Once considered fundamentally labor-intensive institutions,
nonprofit organizations are increasingly confronting expanded needs for
``investment capital'' to finance the facilities, technology, and
innovations required to remain viable in an increasingly competitive
environment. Because of their relatively small scale and their non-
profit character, which makes it impossible for them to issue stock,
however, nonprofits confront special difficulties in accessing
investment capital. Regrettably, though, precious little is known about
the special challenges nonprofit organizations face in generating such
capital or the degree of success they have had in overcoming them.
To help fill this gap, the Johns Hopkins Nonprofit Listening Post
Project took a preliminary ``Sounding'' of its nationwide sample of
nonprofit organizations in five broad fields of nonprofit action
(children and family services, community and economic development,
elderly housing and services, museums, and theaters) to learn about the
capital needs of these organizations and the ease or difficulty they
face in meeting these needs.
Based on the results of this Sounding, the following major
conclusions emerge:

1. Nonprofits in these core human service, community development,
and arts fields have significant investment capital needs.
2. These needs extend well beyond the traditional areas of physical
capital to embrace program development, staff upgrading, and strategic
planning. This likely reflects the growing competition in many of these
fields and the substantial infusion of entrepreneurial spirit into the
nonprofit sector in recent years.
3. Despite these needs, nonprofits have encountered significant
difficulty accessing the major pools of investment capital in our
country, such as insurance companies and pension funds. Many nonprofits
have limited knowledge of these capital resources, and those that do
have knowledge report substantial difficulty in accessing them.
4. Although other sources, such as commercial banks, government,
foundations, and individual donors, are more familiar to nonprofits,
some (e.g., government) are quite difficult to access for investment
capital purposes and others (e.g., commercial banks, foundations, and
individual donors) are limited in their areas of interest.
5. Although some variations exist in the applicability of these
findings among the different types of nonprofit organizations surveyed
and between organizations affiliated with national intermediary
organizations and those not so unaffiliated, what is most striking is
how uniform they seem to be, at least among the types of organizations
examined here.
6. While it is impossible to say for certain whether these results
apply equally to other types of nonprofit organizations, they certainly
suggest the need for increased attention to the investment capital
needs of nonprofit organizations and possible policy actions to level
the playing field for nonprofit access to capital.
Excerpts from:
Employment in America's Charities: A Profile
Lester M. Salamon and S. Wojciech Sokolowski, ``Employment in
America's Charities: A Profile'' (Baltimore, MD: Johns Hopkins Center
for Civil Society Studies, 2006).
Section I: A Significant Employer
In the first place, these data sources make clear that charitable
nonprofit organizations employ far more people than is widely
recognized. As of the second quarter of 2004, the latest year for which
data on nonprofit organizations are available, American charities
employed 9.4 million paid workers and engaged another 4.7 million full-
time equivalent (FTE) volunteer workers for a total work force of more
than 14 million workers (see Table 1).\4\

Table 1 Employment in American Charities, 2004
----------------------------------------------------------------------------------------------------------------
Number As % of US Economy
----------------------------------------------------------------------------------------------------------------
Paid workers 9.4 million 7.2%
----------------------------------------------------------------------------------------------------------------
Volunteer workers (FTEs) 4.7 million 3.9% *
----------------------------------------------------------------------------------------------------------------
Total workforce 14.1 million 10.5% *
----------------------------------------------------------------------------------------------------------------
Wages ($billions) $321.6 billion 6.6%
----------------------------------------------------------------------------------------------------------------
Sources: Data on paid employment and wages from Quarterly Census of Employment and Wages (QCEW) accessed through
the U.S. Bureau of Labor Statistics. Data on volunteer workers from U.S. Census Bureau, Current Population
Survey, (http://www.census.gov/cps/). Volunteer time converted into full-time equivalent (FTE) workers by
dividing the total number of hours volunteered by the number of hours in a typical work year. For further
detail on data sources, see Appendix A.
* Volunteers added to total employment to compute percentage of total work force.

The workforce of the charitable nonprofit sector thus represents
10.5 percent of the country's total workforce. Put somewhat
differently, the paid workers of charitable nonprofit organizations
outnumber those of the utility, wholesale trade, and construction
industries; and the paid and volunteer workers together outdistance the
combined employment of all three of these major industries taken
together (see Figure 1).

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This sizable workforce naturally attracts significant wage
payments. Nonprofit paid workers thus received $321.6 billion in wages
in 2004, more than the wages paid by the utilities ($50.1 billion),
construction ($276 billion), and wholesale trade ($283.7 billion)
industries, and almost as much as the finance and insurance industry
($355.8 billion).
Section IV: A Dynamic Sector
Not only is the nonprofit sector a sizable employer, but also it
has been a growing employer, adding both paid jobs and volunteer
workers at a much higher rate than the rest of the economy. This has
certainly been true of the past two years, for which comparable
national data are now available, though it is consistent with earlier
findings covering a more extended period for a limited set of
states.\7\ Thus, between 2002 and 2004, the nonprofit workforce,
including paid and volunteer workers, grew by 5.3 percent. Both the
paid and volunteer portions of the nonprofit workforce grew by over 5
percent during this period. By contrast, overall employment in the
economy declined by 0.2 percent during this same period (see Figure 3).
---------------------------------------------------------------------------
\7\ See: Lester M. Salamon and S. Wojciech Sokolowski, ``Nonprofit
Organizations: New Insights from QCEW Data,'' Monthly Labor Review
(September 2005), p. 24.

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Section V: Regional Variations in Nonprofit Employment Growth
This pattern of nonprofit workforce growth at rates in excess of
the growth of total employment is evident in almost every part of the
country, though the actual scale of change differs markedly from place
to place as does the contribution that volunteers and paid workers make
to the totals. Thus, as Table 6 shows, the nonprofit workforce grew by
anywhere from nearly 10 percent in the Pacific region to under 1
percent in the West South Central region between 2002 and 2004. In
every region, however, nonprofit workforce growth exceeded the growth
of overall employment, though in one of these (the Mountain region)
this was due largely to the substantial growth in volunteer employment.
What is more, nonprofit employment grew even in regions where overall
employment, affected by the economic recession then under way, actually
declined. This suggests that nonprofit employment functions as a
counter-cyclical mechanism, continuing to expand to meet needs even as
overall employment slumps.

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This same pattern is also clearly apparent at the state level,
though the variations here are greater. Thus, nonprofit employment grew
at a faster rate, or declined at a slower rate, than overall employment
in all but four states (Montana, Alabama, Missouri, and New Mexico), as
shown in Table 7.

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Section VI: A Diverse Sector
Charitable nonprofit employment is scattered across a wide variety
of fields, from information and scientific services to religion and
civic affairs. The bulk of this employment, however, is in human
services, and within that broad category, in health services. In
particular, as shown in Figure 4, hospitals alone account for one-third
of all nonprofit employment, and other health providers, such as
clinics and nursing homes, account for another 21 percent. Two other
human service fields that account for substantial shares of total
nonprofit employment are education (14 percent of the total) and social
assistance (13 percent).\8\
---------------------------------------------------------------------------
\8\ For a more detailed breakdown of the distribution of nonprofit
employment by NAICS code categories, see Appendix C.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Section VII: Nonprofit Prominence in Particular Fields
While nonprofit paid workers comprise 7 percent of national
employment overall, in many fields their role is far more prominent
than this overall average might imply. Thus, nonprofit organizations
account for more than half of all employment in hospitals, social care,
and museums; and a third of all employment in nursing and residential
care and colleges and universities (see Figure 5 and Appendix C).
Without the nonprofit sector, therefore, crucial health, education, and
social care functions would be lacking.

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Lettie Pate Evans Foundation
Atlanta, Georgia 30303
July 25, 2007

The Honorable John Lewis, Chairman
Subcommittee on Oversight
House Ways & Means Committee

Dear Chairman Lewis:

This letter is in response to the House Ways and Means Oversight
Subcommittee Advisory, OV-4, requesting written comments on provisions
in the Pension Protection Act of 2006 related to tax-exempt
organizations. On behalf of the Lettie Pate Evans Foundation and Lettie
Pate Whitehead Foundation, this letter expresses our concerns with
those provisions of the Pension Protection Act that contemplate a new
minimum payout requirement for certain supporting organizations.
Section 1241(d)(1) of the Pension Protection Act directs the
Secretary of the Treasury to promulgate new regulations that require
type III supporting organizations ``to make distributions of a
percentage of either income or assets to supported organizations.''
Existing regulations require type III supporting organizations to
distribute substantially all of income annually. However, a new asset-
based minimum payout requirement--if enacted by the Treasury
Secretary--would adversely impact supporting organizations like the
Lettie Pate Evans Foundation and the Lettie Pate Whitehead Foundation,
which have a long history of significant and growing distributions to
beneficiaries and whose donors specified in their wills that grants
shall be paid from income only.
Trustees of the Lettie Pate Evans Foundation administer two
separate funds--the Lettie Pate Evans Restricted Fund and the Lettie
Pate Evans General Fund. Each fund is a separate type III supporting
organization. The Lettie Pate Whitehead Foundation is also a type III
supporting organization administered by its own distinct governing
body.
Lettie Pate Evans Restricted Fund
Lettie Pate Whitehead Evans left the bulk of her estate to
establish the Lettie Pate Evans Restricted Fund as trustee for the
benefit of 14 specified charitable beneficiaries. In her will, Mrs.
Evans dictated exactly how the income--and she specified only income--
from her residuary estate should be divided among the beneficiaries.
Since its inception in 1953, the Evans Restricted Fund has distributed
all of its income annually (from $225,000 in 1954 to over $41 million
in 2006) to the 14 beneficiaries. More than $489 million has been
distributed to the beneficiaries, which is 61 times the value of the
total assets contributed to the Fund. Cumulatively, the Evans
Restricted Fund has become the largest donor to Georgia Tech, Berry
College, the College of William and Mary, Washington and Lee
University, Episcopal High School and the Protestant Episcopal
Theological Seminary in Virginia.
The will establishing the Evans Restricted Fund specified that the
fund's corpus ``shall not be invaded'' and that all payments must be
made from net income. If the current minimum payout requirement is
amended to require type III supporting organizations to invade corpus
and distribute more than net income, trustees of the fund would be
prevented from complying with the donor's instructions. The Evans
Restricted Fund and its beneficiaries presumably would be forced to
pursue equitable reformation proceedings in court, imposing significant
hardship and considerable expenses on the fund and its beneficiaries.
Lettie Pate Whitehead Foundation
Mrs. Evans' son, Conkey Pate Whitehead, established through his
will the Lettie Pate Whitehead Foundation to honor his mother. The
Whitehead Foundation was established for the primary purpose of
providing educational opportunity to needy women in nine specified
Southern states. Funded upon Mrs. Evans' death in 1953, the Foundation
immediately began making annual grants to educational institutions for
need-based scholarships for women. Net annual distributions from the
Lettie Pate Whitehead Foundation have grown from $100,000 in 1954 to
$21,639,800 in 2006. Annual support is now provided to 201 schools and
colleges and 14 facilities serving elderly women.
All 215 supported organizations receive a grant every year. More
than $300 million has been distributed to beneficiaries since 1954,
which is 16 times the value of the assets contributed to the
Foundation. Since the Whitehead Foundation became a supporting
organization, distributions to supported organizations have risen each
year. Beneficiaries rely on this steadily growing income stream to fund
scholarships for over 8,000 needy female college and nursing students
and to fund the care of aged women.
As in the case of the Evans Restricted Fund, the Lettie Pate
Whitehead Foundation was created under the terms of a will that directs
trustees to make grants only from net income. If the current payout
requirement is amended to an asset-based requirement, trustees of the
Whitehead Foundation would be unable to comply with the will's
prohibition on distributions of principal. In addition, distributions
to beneficiaries would fluctuate with the market. Declining
distributions in some years would jeopardize schools' ability to
administer a consistent scholarship program. Schools may feel obliged
to drop students from the scholarship program in years when a market
decline dictates a smaller grant.
Donors to the Evans Restricted Fund and Whitehead Foundation
understood that preserving principal ensures a stable and permanent
income stream for supported organizations. These organizations'
investment policies seek reliable and consistent income growth while
preserving the real value of the corpus. Trustees of these supporting
organizations are concerned that new regulations requiring
organizations to pay out more than income will steadily erode value
from these funds, ensuring that less total philanthropic dollars could
be distributed to supported organizations over time.
Narrowly Tailor Regulations
The Evans Restricted Fund and Whitehead Foundation are not the kind
of abusive organizations Congress targeted in the Pension Protection
Act of 2006. We understand and share Congress's concern that some
living taxpayers use supporting organizations as tax shelters while
providing little or no benefit to charity. Such schemes prevent the
public from realizing benefit from the donor's tax deduction. Reported
abuses seem most commonly to involve donors parking non-income
producing assets in supporting organizations, making no distributions
to charity (because there is no income) and borrowing assets from the
supporting organization for reinvestment.
We support efforts to stop these abusive practices. In particular,
we applaud those provisions of the Pension Protection Act that prevent
loans from supporting organizations and that strengthen restrictions
and penalties for abuse by disqualified persons. These and other
provisions in the Pension Protection Act should go a long way toward
eliminating the reported abuse.
But no new regulations should cut so broadly as to limit legitimate
philanthropy. Additional safeguards--such as a new minimum payout
requirement--should be enacted only as necessary and should be crafted
to target abusive taxpayers only and to avoid sweeping change that may
adversely impact legitimate supporting organizations and their
beneficiaries. New minimum payout requirements may be narrowly tailored
to ensure that credible organizations like the Evans Restricted Fund
and Whitehead Foundation can continue to distribute a steady, growing
income stream to beneficiaries according to the donors' direction.
We recently suggested to the Treasury Department that new
regulations limit an asset-based payout requirement only to those
supporting organizations that have not yet distributed to charity the
public benefit incumbent in the donor's tax deduction. The existing
payout requirement set out in Treasury Regulations section 1.509(a)-4--
``substantially all'' of income--is appropriate and sufficient for
those type III supporting organizations that have distributed to
charity an amount greater than or equal to the value of the donor's
cumulative gifts to the supporting organization. However, until a
supporting organization distributes an amount equal to the donor's
gifts, it may be necessary to require the supporting organization to
distribute a minimum percentage of assets annually. With this simple
overlay to the existing payout requirement, no taxpayer may create or
use a type III supporting organization to shelter non-income producing
assets.
We suggested that Treasury promulgate this new regulation by adding
the following at the end of the first sentence of Treasury Regulations
section 1.509(a)-4(i)(3)(iii)(a): provided, however, that until the
first taxable year following the taxable year in which the supporting
organization's cumulative distributions to one or more publicly
supported organizations equal the value of the donor's contributions,
the supporting organization must distribute at least X% of its assets
to its publicly supported organizations for any taxable year in which
such amount is greater than substantially all of its income. For
purposes of applying the proviso in the prior sentence, (i) the value
of a supporting organization's assets shall equal the aggregate fair
market value of all non-exempt assets as described in section 4942(e),
and (ii) the value of any property that is contributed shall equal the
fair market value of such property at the time the contributions were
made.
The following examples illustrate this provision's operation and
could be incorporated into the regulations if Treasury adopts this
approach.
Example 1. With a $100 million gift, a taxpayer establishes W, an
organization described in section 501(c)(3), to support Y, a publicly
supported organization. W meets the responsiveness test described in
subparagraph (2) of this paragraph. W must pay at least X% of its asset
value annually to Y until W cumulatively distributes at least $100
million to Y. In taxable years following the taxable year when W
distributes a total of $100 million to Y, W must pay substantially all
of its income to Y.
Example 2. The taxpayer from the above example makes a subsequent
$50 million gift to W. W must pay at least X% of its assets to Y until
W distributes at least $150 million to Y.
Adopting this approach will ensure that new regulations are
narrowly drawn to curb abuse while also securing charitable
distributions to supported organizations in perpetuity. Perhaps most
importantly, this narrow approach to regulation will ensure that
supporting organizations remain a vital, legitimate and attractive
vehicle for taxpayers to support worthy charitable causes. Prospective
donors will be less likely to create this kind of perpetual legacy if
they are forced by regulation to liquidate charitable principal. Sound
tax policy should encourage and facilitate the generous impulse of
wealthy Americans like the donors who created the Lettie Pate Evans
Restricted Fund and Lettie Pate Whitehead Foundation.

Sincerely,
P. Russell Hardin
President

Statement of Marin Community Foundation
As members of the tax-exempt community, we are responding to the
Committee's Advisory of June 12, 2007 requesting written comments on
provisions relating to tax-exempt organizations in the Pension
Protection Act of 2006 (PPA). According to the Advisory, you are
seeking public comments regarding the tax-exempt community's views on
the impact of the recently enacted provisions on charities and
foundations. The Subcommittee is particularly interested in how these
new rules affect, or will affect, charitable efforts and the
difficulties that have arisen in implementing these provisions.
Further, the Subcommittee requests comments on the provisions scheduled
to expire on December 31, 2007.
Overall, we believe the charitable incentives proposed are positive
and most of the reforms are reasonable. However, there are a few areas
of concern that we ask you to address regarding the impact on
charitable foundations and their ability to meet their charitable
missions.
Charitable foundations help individuals, families, corporations,
nonprofits and community groups achieve their charitable goals in
communities throughout the nation. There are various tools available,
such as utilization of a community foundation that can help stimulate
significant private investment to further the quality of life in a
given community. Some reforms within the PPA, if interpreted in a
particular way, could limit the ability of charitable foundations,
including community foundations, to function effectively. Furthermore,
some provisions may be disincentives to charitable giving.
We have outlined our concerns and suggestions in detail below. More
specifically, the following sections describe challenges that the PPA
poses to donor advised funds and supporting organizations, thus
limiting a community's ability to increase charitable giving.
Some of the PPA Provisions Have Unnecessarily Saddled Donor Advised
Funds and Supporting Organizations With New Regulations That
Are Not Necessary to Correct the Abuses Identified by Congress
At a minimum, donor advised funds and supporting organizations
should not be penalized in comparison to private foundations. Donor
advised funds and supporting organizations are popular and effective
tools for philanthropy. For the most part, these tools have enjoyed a
long history of success in the United States. They allow donors to
relinquish control over assets easily and commit them for charitable
purposes. Yet, they also allow donors to remain involved appropriately
in a manner that engages the donors and their families with
philanthropy. Our foundations collectively made charitable grants of
over $333 million in 2006; with more than $147 million from donor
advised funds.
We are concerned that the PPA provisions may unnecessarily cast a
cloud of suspicion over donor advised funds and supporting
organizations. The new provisions are already causing confusion in the
minds of donors who do not understand the perceived criticism. To the
extent donors begin to believe that donor advised funds and supporting
organizations are not legitimate charitable vehicles, or donors are
hampered by unreasonably bureaucratic restrictions or procedures,
current and future charitable giving will be affected negatively. The
impact will be compounded by the perception that giving through donor
advised funds is no longer simple. Simplicity in giving has been an
attractive hallmark of these funds.
The PPA implements some additional restrictions and limitations
that are not necessary. We believe that the desired reforms can be
achieved in a more reasonable manner. Increased oversight can provide
many of the necessary checks and balances and help detect and punish
bad actors in the charitable sector. While we recognize there are some
bad actors in the world of donor advised funds and supporting
organizations that justify rigorous oversight including the review of
an organization's exempt status, we are concerned that the result will
be the casting of a wide net that will unfairly entangle reputable
organizations and their honest donors.
In sum, we suggest that donor advised funds and supporting
organizations should not be treated unfairly and discriminatorily in
comparison to private foundations.
While Overall the Five Year Excess Business Holdings Provision is
Beneficial, There Are Circumstances Under Which It Can Be
Excessive and Harmful to Donor Advised Funds and Supporting
Organizations
The excess business holdings provision, along with the provision
allowing for an extended period under certain circumstances, may
establish an appropriate policy for treating illiquid assets which are
donated for charitable purposes. Five years to divest holdings of
closely held stock (or other assets exceeding twenty percent of a
business enterprise) is certainly a reasonable timeframe for most
transactions.
However, there should be additional allowances for special
circumstances that may arise while liquidating assets. There are many
circumstances under which a community would benefit if the five year
timeframe was extended. In fact, the five year limitation can have an
unintended negative impact and unnecessarily limit utilization of donor
advised funds and supporting organizations and in turn limit the
philanthropic advantages to a community.
This is best understood by example. A particular fund was created
with closely held stock by the founder of a private company. After the
death of the founder, the company's value diminished greatly. It took
slightly more than five years for the health of the company to rebound.
If the stock was sold early, then the established foundation would have
amounted to a few million dollars. However, allowing the company to
regain its footing allowed for a stock sale price that netted over
thirty times the original value of a few million dollars to support
community needs. While no foundation should hold onto stock
indefinitely, there is clear need to move beyond five years in specific
circumstances to prohibit fire sales that shortchange a community. In
another example, a donor advised fund received an ownership interest in
a ranch just beyond a major urban area. The maximum value for selling
that interest and creating liquidity for grantmaking was not realized
until more than ten years later, when commercial development reached
that area.
Moreover, the new PPA provisions will make it very difficult for
donors who want to contribute significant ownership of closely held
business interests to a community foundation fund without the sale of
those interests in the future. While there are complex options
available to accommodate donors who want a community foundation to
retain long-term ownership rather than receive and sell, the new PPA
provisions are unnecessarily limiting and confusing. These provisions
will likely cause potential donors to avoid utilizing these vehicles
which will in turn harm philanthropy.
As a further example, since the PPA provisions were passed, one of
our foundations has been contacted by individuals wanting to know if
they can still make donations whereby the Foundation would have long-
term possession. In particular, siblings contacted the Foundation
wanting to leave a portion of the bank stock in their estates to a
charitable entity without the necessity of selling the stock at some
point in the future. While the Foundation has been working hard to
implement and explain these new provisions, it is clear that the
burdensome nature of some of the provisions will cause donors to pull
back. It is highly counterproductive to the purposes of philanthropy
and the intent behind the PPA, to impose over-restrictive limitations
on the use of donor advised funds and supporting organizations.
Ultimately, a foundation has the responsibility and control with regard
to investments and as such should have adequate discretion to make
prudent decisions based on particular circumstances at a point in time
including market conditions. Any establishment of timelines and limits
in this regard is unnecessarily prohibitive.
In sum, we suggest that additional allowances be made whereby the
five year limitation can be extended.
While the Excess Benefit Transaction Provisions Are Warranted, Some
Technical Corrections and Definitions Are Needed
We understand and appreciate inclusion of the excess benefit
transaction provision in the PPA. However, we are concerned there is
the potential to interpret and apply it too broadly resulting in
unforeseen restrictions. The term ``excess benefit transaction'' in
Section 1232 (which includes any grant, loan, compensation or other
payment from a fund to a donor, donor advisor, family member of the
donor or donor advisor, or an entity 35 percent controlled by a donor,
donor advisor or family member) should not include uniform fees and
charges paid by a sponsoring organization to a service provider so long
as those fees and charges are reasonable.
The routine fees for services to a sponsoring organization that are
assessed by the sponsoring organization against all of the donor
advised funds should not be considered a payment from a donor advised
fund. For example, assume a bank provides services to a sponsoring
organization and also is a donor to a donor advised fund maintained by
that sponsoring organization. Assume further that the sponsoring
organization assesses the bank's fees uniformly against the donor
advised funds that it maintains. The pro rata portion of the fees paid
to the bank from the bank's donor advised fund should not constitute an
excess benefit transaction under this rule.
Additionally, compensation for professional services to
disqualified individuals should be permitted in the same way these
types of payments are permitted for private foundations. Compensation
rules should be applied equally to all entities. Professional services
include investment management of assets by disqualified individuals.
However, if this were allowed, it would be important to ensure that
compensation is at market rate or below, and that investment returns
are commensurate with similar investment products.
Finally, the term ``excess benefit transaction'' should not
automatically include the payment or reimbursement of reasonable
expenses on behalf of a substantial contributor if the reasonable
expenses are paid or reimbursed in the substantial contributor's
capacity as an organization manager. Consider the following examples:

A donor is a director of a supporting organization which
is holding a meeting. The supporting organization buys lunch for all of
the directors who attend the meeting and the donor eats the lunch. This
should not automatically be considered an excess benefit transaction.
It was not an act of self-dealing under Internal Revenue Code Section
4941 if given to or reimbursed to a foundation manager.
A supporting organization buys D & O insurance that
covers all directors, including a donor. The pro-rata portion of the
premium allocable to the donor's coverage should not automatically be
considered an excess benefit transaction. The pro-rata portion of the
premium would not be considered an excess benefit transaction for a
foundation manager.

We believe there should be no direct or indirect benefit to the
donor or persons related to the donor for a donor advised fund or
supporting organization. The donor receives the maximum tax deduction
allowed by law and has the ability to impact the community by being
allowed to recommend an investment strategy and to give advice
regarding the grant making. Moreover, there should be no charitable
deduction for the transfer of assets to a donor-advised fund or
supporting organization when those assets are paid back to or used for
the benefit of the donor or persons related to the donor. However,
there should be an appropriate standard for a nominal ``benefit'' which
does not violate this principle.
In sum, we ask that some clarifications and technical corrections
be made in the excess benefit transaction provisions.
The Bookkeeping Requirements of the PPA are Illogical, Overly
Burdensome and in Some Instances Impossible to Fulfill
The unreasonable nature of the PPA bookkeeping provisions is best
understood with an explanation of the related laws. Under current law,
any person who contributed more than $5,000 to an organization, if the
amount contributed is more than 2% of the total contributions received
by the organization from its inception through the close of the taxable
year of the gift, is a substantial contributor. Further, a substantial
contributor remains a substantial contributor until:

He and related parties have not made contributions to the
organization for 10 years,
Neither he nor any related party was an officer,
director, or trustee of the organization during those 10 years, AND
His (and related parties') aggregate contributions are
determined to be insignificant when compared to the aggregate
contributions of another person.

Under the PPA, supporting organizations may not make any grant,
loan, compensation, or other similar payment to substantial
contributors, their family members, and 35% controlled entities of any
of them. Given that substantial contributors remain as such for at
least 10 years, in order to avoid unwittingly entering into disallowed
transactions, supporting organizations will need to keep a running list
of all of their contributors from inception, their family members, and
their respective businesses, calculating the overall gifts made and
each contributor's percentage thereof as of the end of each taxable
year.
This recordkeeping requirement is not only burdensome, but in
reality nearly impossible to fulfill. As time passes and families and
business interests expand and contract, there will be much confusion
with regard to the recordkeeping required herein. A substantial
contributor should cease to be classified as such as soon as his or her
aggregate contributions constitute less than 2% of the organization's
aggregate contributions.
Further, investment advisors who are substantial contributors to
the organization should be permitted to act as investment advisors to
the organization, and receive compensation as such. Currently, as a
substantial contributor, an investment advisor cannot receive payments
of any kind from the organization. In order to curb potential abuse,
investment advisors, whether substantial contributors or not, should be
treated as disqualified persons for the purposes of the excess benefit
tax. Thus, while transactions between an investment advisor and an
organization must be fair (and perhaps could be required to comply with
the Treasury Regulation Sec. 53.4958.6 regarding safe harbor for excess
benefit transactions), they will not be completely disallowed. Such an
allowance would be consistent with private foundation rules and would
help prevent the application of unnecessary and arguably unintentional
penalties on donor advised funds and supporting organizations.
Moreover, foundations should be given flexibility with regard to
reasonable expenses. At a minimum, reimbursements for services from
vendors, including sole proprietors, should be permitted, particularly
in situations where a donor advised fund or supporting organization has
clear documentation from the vendor and support for the expenditure is
directly related to a charitable program or purpose. For example, some
donors want to host fundraising activities such as sporting or social
events that encourage others to contribute to a donor advised fund. The
fund could have one of many varied purposes including making grants
that support research for a disease or making grants for memorial or
educational objectives. Expenses for such events can be appropriately
charged to a donor advised fund. However, for a variety of reasons
including avoiding dealing with multiple vendors who helped with the
event and writing many small checks, some community foundations elect
to reimburse the donor for his or her expenditures. Foundations should
be able to do this without concern. Foundations should be able to make
payments directly to such vendors without concern that such payments
will constitute taxable distributions. It is not always feasible for a
foundation to exercise expenditure responsibility but there are ways to
ensure that the expenses are appropriately related and legitimate.
Without appropriate flexibility, donors with donor advised funds
may be forced to cease participation in many charitable fundraising
events which are a vital source of funding to benefit local
communities. Donors often recommend donations to charities for
fundraising events that produce most of the charities' revenue. For
example, a charity may sell tickets to a concert, sporting event, or
dinner to raise money for its charitable mission. These events yield
many donations for charities, yet some provisions of the PPA may
decrease the amount of support charities receive through their
fundraising events. The PPA provisions prohibit community foundations
from making grants from donor advised funds which confer more than an
``incidental benefit'' to a donor or related party. Previously, many
community foundations made grants to charitable organizations which
offer donors admission to fundraising events if the foundation only
paid the charitable portion from the donor advised fund and the donor
paid the cost of any personal benefits, such as the value of a meal or
party favors. The accuracy of this process is ensured because charities
are required to state the fair market value of any goods and/or
services a donor may receive through a fundraising event. The
foundation can deduct the value of the goods and/or services to
determine the tax-deductible portion of the donation. Because of
uncertainty after the PPA was enacted, some community foundations have
required that either a gift from a donor's donor advised fund not be
made, or if the gift is made, the donor must promise he will not attend
the fundraising event. It is very onerous for a foundation to try to
monitor whether or not a donor has attended a fundraising event to
which his donor advised fund has made a gift. It should be permissible
for a community foundation to verify the value of any benefits
associated with a fundraising event and only pay the cost of the
charitable portion from the donor's donor advised fund.
In sum, we ask that the PPA bookkeeping provisions be interpreted
and applied in a logical manner to which donors and charities can
easily abide.
Donors Should Be ``Invested!''
While a donor should not have investment control over the
charitable assets in a donor-advised fund, some donors have valuable
investment expertise and could provide positive contributions to the
investment growth of charitable assets. We believe donors should be
welcome to make recommendations about the investment of charitable
assets held in donor-advised funds, subject to the actual investment
control and approval of the community foundation staff members and
trustees.
A distinction must be made between investment control and
investment advice. If a donor best understands his charitable goals
regarding grant making, a donor should be able to make suggestions
regarding the investment strategy for a donor advised fund. A donor
should expect to have a reasonable choice of investment options by
which to grow the assets and maximize grants to the community.
In closely held stocks or alternative assets, the donor and the
independent board of the foundation must work together to make sure
that the maximum possible outcome is achieved so that the community
benefits. To date, discussions regarding illiquid assets have not been
productive. Any future legislation and regulation on these issues
should avoid unnecessary negative outcomes such as ``fire sales.''
It is important for the donor to feel as if he is an active partner
with the community foundation. It has been our practical experience
that the more a donor is engaged in the fiduciary management of the
fund, the more thoughtful and engaged he is in the granting of the
funds. In other words, donors want to see their fund get positive
returns on investments in both monetary and community benefits.
By definition, a donor's advice plays a central role in making
grants from a donor-advised fund. This allows donor engagement in a way
that motivates charitable giving. It also expands the community
foundation's knowledge of the community and its non-profit
organizations. As long as the sponsoring public charity, such as a
community foundation, retains control over the investment and
distribution of the assets, there is no violation of the underlying
basis for allowing a charitable contribution deduction. Following donor
advice does not indicate an inappropriate level of donor control. It
may simply mean that the donors are recommending grants to verifiable,
legitimate and effective nonprofit organizations. Community foundation
staff members and trustees should augment a donor's judgment with their
own professional and objective knowledge about the nonprofit grant
recipient, its current nonprofit status and its legitimacy and
effectiveness. The same level of a charitable contribution deduction
would be available to the donor if the assets were given directly from
the donor to the nonprofit. But by utilizing a donor-advised fund at a
very low fee (most community foundations charge an annual one percent
administrative fee), several benefits can be claimed for promoting
additional charitable giving. Furthermore, the collaboration with and
oversight of the community foundation are gained as added value for the
promotion of good grant making.
In sum, we ask that a key distinction is made between investment
control and investment advice in the application of the PPA provisions
regarding donor investments.
We Support a 5% Distribution Requirement
Overall, we support the implementation of a payout requirement for
donor advised funds or supporting organizations. A payout commensurate
with the private foundation requirement (five percent annually) is
justified. However, the payout requirement should be applied to the
aggregate of those funds. The circumstances in each donor advised fund
are too unique to make a uniform five percent payout requirement for
each fund feasible. Any regulation that would require tracking and
apply a payout requirement per fund would unnecessarily add yet another
layer of administrative burden on an already over-taxed foundation
staff and ultimately reduce the positive impact to the community.
Donor advised funds should be permitted to maintain their
flexibility which will in turn maximize their benefit to the community.
Some funds may need to accumulate over time in order to make a large
grant that will have a more significant impact. Others have assets
which require multiple years to liquidate appropriately. A payout in
the aggregate would be a more efficient and effective way to ensure
that there is a minimum aggregated annual distribution by all donor
advised funds across the nation.
Donor Advised Funds and Supporting Organizations Should Be Allowed to
Participate in IRA Charitable Rollover
Section 1201 provides for ``charitable IRA rollovers'' to virtually
any charitable organization (including private foundations), but would
prohibit rollovers to donor advised funds or supporting organizations.
Donor advised funds and supporting organizations should be permitted
recipients of charitable IRA rollovers for several reasons.

The Securities Industry Association has requested IRS
confirmation that IRA trustees/custodians are not obligated to verify
charitable requirements under Sec. 1201. Thus, donor advised funds and
supporting organizations can serve as a valuable resource to verify the
actual charitable intent of the transaction.
Donor advised funds and supporting organizations can
serve as a valuable tool to help achieve charitable aims in a
community. Donor advised funds allow for strategic deployment of
charitable resources so that a donor's (whether it be a family,
individual or corporation) funds can be used for the maximum benefit of
the community, not simply one organization.
Donor advised funds could help assure that IRA dollars
are actually used for charitable purposes. Donor advised fund
administrators possess expertise on charitable grant-making whereas IRA
administrators do not. The PPA turns the IRA of every citizen into a
donor directed fund that is arguably being administered by people who
may not fully understand the complexities of charitable grant-making.
Moreover, IRA administrators do not have the time and resources to
investigate whether or not a beneficiary is a bona fide charity. Donor
advised fund administrators have practices in place to ensure that
charitable dollars will be distributed to qualified charities.
With donor advised funds (or supporting organizations),
the IRA rollover could easily support multiple charities. It is
unlikely that the IRA administrator would allow the donor to disburse
their donation to multiple charities. A community foundation for
example can efficiently distribute this money into the community.
Donor advised funds play an important role in charitable
giving, and serve as a valuable tool to help donors achieve their
charitable goals. As reported in the Wall Street Journal (August 1,
2006) donor advised funds are increasingly popular, distributing $3.3
billion to other charitable organizations in 2005, an increase of 20.8%
over the amount granted in 2004. Donor advised funds provide efficiency
and flexibility in charitable giving, and are an ideal charitable
entity to use in a charitable IRA rollover.
Given that donor advised funds are now subject to as or
more stringent rules than private foundations, they should be eligible
recipients for IRA rollovers. From an enforcement and/or compliance
perspective, Congress and the IRS should be encouraging donors to use
well-run sponsoring organizations of donor advised funds. Donor advised
funds are well-qualified to identify and transmit funds to qualifying
charities because they perform such transactions day-in and day-out
during the regular course of their charitable activities.

In sum, we ask that donor advised funds and supporting
organizations be permitted to participate in IRA charitable rollovers.
In Unique Circumstances, the PPA Can Unfairly Limit Scholarship Funds
and Disaster/Emergency Relief Funds
In some instances, advisory committees to scholarship funds and
employer-created emergency relief or disaster relief funds are not
appointed or controlled by the community foundation. Rather, the donor
and/or persons appointed by the donor serve on the advisory committee
and they review applications and select scholarship recipients.
Typically, the funds follow an objective and nondiscriminatory
selection process similar to a private foundation and review the final
selections made by the committees to ensure they followed such a
process. However, under the PPA, these funds would be classified as
donor advised funds and prohibited from making distributions to
individuals. Thus, we ask you to consider the following technical
corrections:

If a fund can demonstrate it has proper checks and
balances in place equivalent to showing that it is following a private
foundation's objective and nondiscriminatory selection process approved
by its board, such funds should not be considered donor advised funds
under the PPA.
In the event a scholarship fund is classified as a donor
advised fund, the scholarship fund can make scholarship checks payable
to a school and in so doing comply with the rule regarding prohibited
grants to individuals.
Closing Comments
The PPA has provided some necessary and well-placed guidance for
the charitable community as a whole. As a result, we expect to
experience many benefits. However, we are concerned that particular
provisions may be misinterpreted and lead to unforeseen circumstances
that will make charitable giving and the continued work of charities
difficult and sometimes impossible.
We appreciate the opportunity to participate in this very important
process.

League of Women Voters of Arlington, Virginia
July 31, 2007

Chairman Lewis
Ways and Means Committee
House of Representatives
U.S. Congress

Dear Chairman Lewis:

I am writing to share with you the difficulties that the Pension
Protection Act of 2006 has created for the League of Women Voters of
Arlington, VA in operating our small scholarship program.
We created this scholarship program 15 years ago, in honor of a
member who was killed in a car accident. Every year we award a
scholarship in the amount of $1,000 to $1,500 to one or two graduating
seniors who plan to enter college in programs related to public
service. High school counselors notify students about applying and
obtain the applications from them. A committee of local League members
reviews the applications, interviews the applicants, and selects the
winner(s). The majority of recipients are low income minority students
with substantial needs for financial assistance in order to attend
college. Over the years, some League members have donated between
$50.00 and $100.00 per year to the scholarship fund. No relative of a
League member has ever received a scholarship. The scholarship fund is
administered for us by the Arlington County Community Foundation
(ACCF).
According to ACCF, the Pension Protection Act requires that we
change our process in the following ways:

Change the composition of the selecting committee so that
a majority of members are non-League members. This dilutes the
commitment of local League members, and creates the burden of trying to
find other interested individuals to serve.
Eliminate from service on the committee any League member
(or other person) who has contributed to the scholarship fund,
regardless of the dollar amount given. This again reduces the number of
potential volunteers, and discourages involvement of those individuals
most committed to the scholarship program.
Submit detailed documentation to ACCF about how our
applicants are recruited and screened, as well as the names of members
and non-members serving on the scholarship committee. We are in the
process of providing this information. However, given that we are an
organization of volunteers, additional paperwork requirements impose a
hardship on us.

We have spent a considerable amount of volunteer time in the last
year trying to understand the requirements of the Pension Protection
Act in relation to our scholarship program, and we are now in the
process of trying to comply. From our point of view, these requirements
do not improve the management or administration of our scholarship
program. Rather, the Act has made the process more labor-intensive,
with no visible advantages.
Thank you for considering our concerns.

Sincerely,
Nancy E. Tate
President

Statement of National Cattlemen's Beef Association
The National Cattlemen's Beef Association (NCBA) appreciates the
opportunity to comment on the charitable provisions of the 2006 Pension
Protection Act (PPA). Producer-directed and consumer-focused, NCBA is
the largest and oldest organization representing America's cattle
industry, and it is dedicated to preserving the beef industry's
heritage and future profitability through leadership in education,
marketing and public policy.
Section 1206 of the PPA changed the tax incentive for voluntary
conservation donations--donations by private landowners that retire
development rights to protect significant wildlife, scenic, and
historic resources--and NCBA strongly supports H.R. 1576 which would
make these provisions permanent. By providing a more significant tax
benefit for conservation donations, this provision opens the door to
voluntary, landowner-led conservation on millions of acres of land
across the country, and it is particularly helpful to family farmers,
ranchers, and other moderate-income landowners. It is also worth noting
that many of these donations are made to local, community-based
charities dedicated to keeping land in agriculture, conserving
important wildlife habitats, and protecting important open space and
historic resources.
In the short time since the bill's passage, this provision has
greatly increased the interest in and use of voluntary conservation
easement donations across the country, particularly among the farmers
and ranchers who own the vast majority of America's private land
resources. It provides a real and effective incentive for private
landowners to contribute to saving our Nation's wildlife, watersheds,
working farmlands, and our scenic and historic heritage.
The donation of a perpetual conservation easement to a conservation
organization is a serious and complex decision for any landowner,
involving the disposition of what is usually their family's most
valuable asset. It is a decision that cannot and should not be rushed
by a deadline. We thank you for your cosponsorship of H.R. 1576, and
urge you to do all you can to see that it is enacted into law. We look
forward to working with you and your Subcommittee on this and other
issues involving the protection and conservation of our Nation's
natural resources.

Statement of National Christian Foundation
I serve as General Counsel to National Christian Charitable
Foundation, Inc. (``NCF''), a Christian community foundation with its
headquarters in Atlanta, Georgia. NCF is exempt from federal income tax
under Code Section 501(c)(3), and qualifies as a public charity (rather
than a private foundation) under Code Sections 509(a)(1) and
170(b)(1)(A)(vi). It maintains donor advised funds, and it is supported
in its charitable service by several supporting organizations.
Additionally, we are located just north of Atlanta, Georgia and are
pleased that someone from Georgia is leading the effort to strengthen
American charity. We are also honored to fund effective charities in
your district in Atlanta. NCF appears in the 2006 Chronicle of
Philanthropy report as the 4th largest charitable organization in
Georgia (29th largest in the United States).
I write in response to your subcommittee's request of June 12,
2007, for comments regarding Title XII, Provisions Relating to Exempt
Organizations, of the Pension Protection Act of 2006, P.L. 109-280 (the
``Act''). We are very grateful for the opportunity to comment on the
Act because it has introduced significant unwarranted barriers to our
charitable work, as well as uncertainty regarding what it prohibits and
what it allows.
Part 1 of Subtitle B of Title XII imposes heightened reporting and
recordkeeping requirements and increased penalties for noncompliance
with existing rules, and it eliminates deductions for contributions of
property of doubtful charitable value. We applaud these enforcement
provisions. Parts 2 and 3 are different. While captioned ``Improved
Accountability,'' they actually impose new rules and restrictions
apparently intended to prevent private benefit that in fact the Code
already prohibits. Moreover, they single out donor advised funds
(``DAFs'') and supporting organizations (``SOs'').
We believe Parts 2 and 3 significantly impede worthwhile charitable
activities, and have no foundation in any rational public policy. We
identify below modifications and clarifying corrections to those parts
that we believe are necessary to remove unnecessary obstacles to
charity.
Misconceptions Underlying Parts 2 and 3
Parts 2 and 3 impose private-foundation rules on DAFs and SOs,
treating them essentially as private foundations, and sometimes--
astoundingly--treating them more harshly than private foundations. In
so doing, the sponsors of these parts betray a lack of appreciation for
the value of DAFs and SOs, an unwarranted and unprecedented hostility
to private donor influence, and lack of thought about the obvious
differences between these charitable structures and private
foundations.
Donor advised funds and supporting organizations increase
charitable giving, and correspondingly, charitable work, and enable
donors to provide valuable, diverse input.
DAFs and SOs increase the amount of contributions to charity,
thereby increasing the level of good work charities can do, improving
social conditions in the United States and abroad, and decreasing the
burdens of government. Donors give more when they know they will be
able to participate in decisions regarding ultimate charitable
distribution. Donors give more when they can make large contributions
efficiently all at once, without the necessity of identifying
immediately the ultimate charitable beneficiaries. Donors give more,
and more frequently, when their hearts are engaged by participation in
the ultimate distribution decisions.
At the same time, DAF sponsoring and supported organizations are
better able than smaller charities to develop the specialized,
relatively expensive expertise required to receive, hold, and liquidate
complex gifts of assets other than cash and publicly-traded securities.
Frequently the largest gifts, those that produce the most resources for
charitable use, are such complex gifts. DAF sponsoring organizations
and supported organizations efficiently spread the costs of developing
such expertise and handling such assets over numerous contributions and
charities.
On the other side of the ledger, donors to DAFs and SOs provide
valuable assistance to sponsoring and supported organizations in
identifying for distributions and expenditures worthwhile charitable
endeavors and the charities that best pursue those endeavors.
This donor input makes giving through DAFs and SOs democratic
giving; it spreads charitable choices over a broad spectrum of people
rather than confining those choices to the leaders of a few grant-
making public charities and foundations. It is efficient, free-market
giving that requires charitable causes and the charities that pursue
them to compete for contributions from numerous potential donors.
Moreover, it is dispersed giving that allows for experimentation by
innovative charities without large-scale risk of waste or harm from
failed experiments. These benefits are not realized in forced
contributions (taxation) or in contributions to large grant-making
charities with centralized decisionmaking and relatively limited donor
input.
Donor influence for charitable purposes is not and has never been
considered inherently bad.
The sponsors of Parts 2 and 3 appear to have acted on a general
sense that donor influence is a bad thing. This is unprecedented and
unjustified.
The legislative history of the Tax Reform Act of 1969 identifies
concern about abuse of private foundations for private benefit--not a
simplistic aversion to private donor influence--as the reason for the
restrictions and disincentives imposed on private foundations in that
Act. See Treasury Report on Private Foundations 5-10, Staff of House
Comm. on Ways and Means, 89th Cong.
In fact, the intent of the charitable-contribution deduction as
identified by the Supreme Court is exactly to encourage private
charitable action. See Bob Jones University v. United States, 461 U.S.
574, 590 (1983) (purpose of deduction is ``to encourage the development
of private institutions that serve a useful public purpose'' (emphasis
supplied)). Clearly neither Congress nor the Supreme Court has treated
private control over choices within the bounds of 501(c)(3) as an evil
in itself. To the contrary, our laws historically demonstrate a belief
that numerous private actors, some large and some small, make better
decisions, as a whole, than does a centralized bureaucracy. DAF and SO
structures stand squarely in this tradition.
There is no reason to believe that somehow centralized
decisionmakers in a few large public charities, unaided by donor input,
make better charitable choices than do boards and staff of DAF
sponsoring organizations aided by input from numerous donors, or
leaders of SOs subject to supervision by the supported organizations.
Likewise, there is no reason to believe that public charities
without donor input make better decisions about the timing of ultimate
distribution or expenditure. Once given to a DAF or SO (or even a
private foundation), funds may not be used for the donor's private
benefit; thus, a donor gains no personal benefit by withholding funds
for a need of which he or she has been convinced. In fact, donors who
advise DAF sponsoring organizations to make distributions serve as a
check on the motivation directors, officers, and staff of other kinds
of public charities may feel to withhold distributions and expenditures
inappropriately in order to assure the continuation of their
livelihoods.
Treating donor advised funds and supporting organizations like
private foundations (and sometimes worse) is unjustified: unlike a
private foundation, a donor advised fund structure, as well as a
supporting organization structure, checks a donor's use for his private
benefit.
Of course the risk of private benefit outside the bounds of
501(c)(3) is a bad thing, but that risk in a DAF or SO structure
logically is less than any such risk perceived to attend private
foundations, and is no greater than any such risk that may attend any
other kind of public charity. Accordingly, it is inappropriate to
subject a DAF or SO to private foundation restrictions and
disincentives.
DAF and SO structures provide for an independent check on a donor's
power to use his contributed funds for private interests that is in
addition to the checks present in a private foundation structure. This
check is the interest of the independent directors and officers in
assuring that the sponsoring organization or SO complies with the
requirements for its exempt status and truly advances worthwhile
charitable interests. Whatever the risk that a foundation controlled by
an individual, family, or business will expend funds for inappropriate
purposes, expend too little for charitable purposes, unduly delay
charitable expenditures, or expend funds for a private interest (we
expect such incidents are relatively infrequent), the risk that a fund
or organization merely advised or influenced by such an interest is
significantly smaller. This is the reason that, according to the Senate
Report on the 1969 Act, SOs do not ``give rise to the problems which
led to the restrictions and limitations'' on private foundations. S.
REP. No. 91-552, at 56 (1969). The same is true for DAFs.
In summary, DAFs and SOs are useful structures resistant to abuse,
and should be encouraged rather than discouraged.
Specific Problematic Provisions and Proposed Changes
The Act has produced the negative effects discussed below. We
suggest that Congress make the following modifications to the Act's
provisions in response.

Prohibition Against Distributions From a DAF To any Natural Person--
Code Section 4966(c)(1)(A). Rescind, or at least clarify that
``distribution'' means only gratuitous payments.

The prohibition against a DAF making a distribution ``to any
natural person'' blocks many gifts to needy people that will simply go
unmade through any other means. It should be rescinded.
No other public charity--and not even a private foundation--is
prohibited from making benevolence distributions to the poor. There is
no public policy justification for such a prohibition against any
charitable organization, and especially not against a DAF or SO: a
donor is just as likely as a public-charity or private-foundation
employee to identify worthy needy recipients. Moreover, a distribution
from a DAF must be approved by independent staff members of the
sponsoring organization who are concerned to maintain its tax-exempt
status. Accordingly, a DAF benevolence distribution is no more likely
to provide an improper private benefit than is a benevolence
distribution made by a public-charity employee without any donor input,
and is less likely to do so than is a private-foundation benevolence
distribution.
The fear that ``distribution'' might be construed to include
compensation payments prevents any direct charitable action with DAF
funds. For example, a sponsoring organization may not use DAF funds to
hire a missionary, teacher, or researcher. At the least, then, the DAF
community needs a clear definition of ``distribution'' that confines
its meaning to gratuitous payments and excludes payments of
compensation.
Congress should not shut down direct good work by a DAF unless for
a compelling reason, and there is no such reason when the Code already
prohibits private benefit and private inurement, and when DAF payments
are subject to approval by disinterested board members with input from
disinterested staff members of the sponsoring organization.
``Distribution'' customarily refers to a payment not made in exchange
for goods, services, or a promise to repay. Thus, Congress probably
intended the same meaning in the Act, and this should be made clear.

Prohibition Against Distributions From a DAF To a Type III Non-
Functionally-Integrated Supporting Organization--Code Sections
4966(c)(2)(A), (d)(4)(A)(i), and 4943(f)(5)(B). Suspend effectiveness
until the Treasury Department issues Regulations defining
``functionally integrated Type III supporting organization.''

The Act recognizes the two categories of Type III SOs established
in the Regulations, those that qualify as SOs on account of their
integration into the operations of their supported organizations
(functionally-integrated SOs), and those that do not qualify as
functionally-integrated SOs and therefore must make distributions to
their supported organizations (non-functionally-integrated SOs). The
Act prohibits a DAF from making distributions to a non-functionally-
integrated SO unless the DAF sponsoring organization exercises
cumbersome expenditure responsibility over the distribution.
The problem is that the definition of a functionally-integrated SO
in the Regulations is undeveloped and vague. Therefore, it is
impossible to determine what qualifies as a functionally-integrated SO
and what qualifies as a non-functionally-integrated SO.
In this state of uncertainty, a supported organization no longer
can make distributions to a SO that it believes to be functionally
integrated but cannot be sure is functionally integrated. Being able to
make these distributions is beneficial because it enables the supported
organization in essence to receive and liquidate complex gifts and then
hold the proceeds for its Type III SOs, distributing funds to them just
as needed to make grants or conduct operations. Like other supported
organizations, NCF has developed technical expertise required to
receive, process, hold, and liquidate non-cash contributions, and
employs the experienced, trained staff necessary to manage receipting,
investment, and administrative functions. Moreover, the supported
organization through this practice maintains direct control over the
funds the SO needs, and therefore greater control over the SO to assure
that it operates exclusively to carry out the purposes of the supported
organization. At the same time, the supported organization and all the
funds it holds, including the funds in the particular DAF, are shielded
from the SO's liabilities.
Accordingly, this provision should be suspended until the Treasury
Department clarifies the meaning of ``functionally integrated.''

Prohibition on DAF Distributions that Produce More Than Incidental
Benefit To a Donor--Code Section 4967. Clarify that distribution is
permissible if it would be deductible as a contribution paid directly
by the donor.

The Act does not define what a more-than-incidental benefit is.
Accordingly, a DAF cannot now safely make a distribution to a public
charity that then uses the funds to pay travel and other expenses of
useful ministry performed by the donor, even though the donor could pay
those expenses directly and receive a charitable-contribution
deduction. Similarly, a DAF cannot safely make a distribution to a
public charity as part of a fundraising event in which the donor pays
separately for a banquet, golf tournament, or similar premium item,
even though the donor could pay the charity directly and receive a
partial deduction. Moreover, there is great concern among community
funds and their donors that making distributions in fulfillment of a
donor's pledge provides a more than incidental benefit. These possible
interpretations of the Act would serve no purpose other than as traps
for the unwary.
Accordingly, Section 4967 should be amended to clarify that a
distribution will not be deemed to result in a more than incidental
benefit if the full amount of the distribution would be deductible as a
charitable contribution if paid by the donor.
Doing so would in essence make authoritative the explanation of the
Joint Committee on Taxation that a more than incidental benefit is one
that would reduce a donor's contribution deduction if a charity
provides it in exchange for such contribution.

Prohibition On Payment By DAF or SO Of Even Reasonable Compensation To
Donors (or Substantial Contributors), Related Persons, or Donor-
Designated Advisors--Code Sections 4958(c)(2) and (3), (f)(1)(D), (7),
4966(d)(2)(A)(iii). Rescind the ``first-dollar'' definition of excess
benefit transaction, or at least clarify that the prohibition of any
compensation does not apply to an independent investment advisor
recommended by the donor.

The Act amends Code Section 4958 to add donors to DAFs, substantial
contributors to SOs, and persons related to them to the list of
disqualified persons to whom an exempt organization may not provide
excess benefits, on pain of the disqualified person and organization
managers incurring substantial penalties. We believe these are
reasonable additions.
However, the Act goes further and defines an excess benefit
transaction as paying any compensation for services, even the ``first
dollar,'' to one of these new disqualified persons. This rule prevents
a DAF or SO from paying reasonable compensation to qualified donors and
related persons for direct charitable work (social work, evangelism,
teaching, etc.), grant investigation and auditing, general
administration, or investment management. A quirk in the definition of
a donor-related person for DAF purposes also prevents a DAF from
compensating any professional investment advisor recommended by the
donor.
This first-dollar definition of excess benefit transaction should
be rescinded. (If it is not, at least Section 4958(f)(7) should be
amended to clarify that its list of disqualified persons does not
include an investment advisor with no relation to the donor other than
that the donor recommended that the DAF sponsoring organization engage
him for investment advice.)
The first-dollar prohibition of compensation is inexplicable.
Donors and related persons make excellent service-providers. They
naturally are mission-minded, and motivated to assure that their (or
their family member's) contributed dollars are used efficiently. For
the same reason, they carefully select whom they recommend as service-
providers. It is not rational to bar a skilled service provider--
especially one who is personally motivated to achieve and protect
maximum funds for his or her charitable concerns--from serving a DAF or
SO merely because he or she is the donor or has been recommended by the
donor.
Moreover, this first-dollar prohibition applies only to DAF and SO
structures and not to any other type of exempt organization, not even a
private foundation, even though DAF and SO structures better protect
against unreasonable compensation. The independent directors and
officers of a DAF sponsoring organization or supported organization
exercise overriding legal control and supervision to prevent a donor
from receiving unreasonable compensation, and they are motivated to do
so in order to protect the organization's exempt status and mission. In
the context of a DAF, the directors and officers feel a special
motivation: they must protect the tax-advantaged status of the entire
sponsoring organization, including the DAFs of all other donors.

Prohibition Against DAF Owning Excess Business Holdings--Code Section
4943. Rescind the prohibition.

Extending the excess business holding prohibition to DAFs
discourages donors from contributing valuable business income streams,
and thereby reduces funds for charity and constricts charitable work.
Most wealth available for gifting exists in the form of interests
in businesses rather than cash. Many of these interests produce
significant revenue streams even though they are not readily marketable
or are transfer-restricted. Often the donor and charity correctly
believe the charity will benefit more from holding these interests and
continuing to receive the revenue streams for a long period of time
than from liquidating them immediately. Business interests are where
the wealth lies, and gifts of those interests hold tremendous promise
for turning American business into an engine for charitable good here
and around the world. Charities are able to tap into this source
through use of the DAF structure.
For the following reasons, the DAF structure facilitates gifts of
business interests, and without it most of those gifts will not be
made. First, a DAF enables a donor of a business interest to give once,
at the particular time the donor is able to give, while spreading the
funds among several needy charities as their needs arise and as they
prove their effectiveness over time. This gift-spreading reduces the
risk that a donor's gift will be used ineffectively or even wasted, or
that it will over-fund a charity and cause it to become complacent,
unaccountable, and moribund. Moreover, sometimes a gift is simply too
large for one charity's needs. Confining such large gifts to large
charities stifles smaller, newer--perhaps more innovative--charities.
Second, a DAF enables a donor to give to only one charity rather
than being forced to attempt to split up the business interest among
numerous charities. Splitting a gift is unnecessarily expensive and
time consuming, for both donor and charity. Moreover, a DAF sponsoring
organization is able to develop the expertise required to receive and
hold business interests. Most operating public charities do not have
this expertise, and it does not make economic sense to require them to
duplicate the effort and expenditure of resources necessary to develop
it. Similarly, a DAF sponsoring organization develops through
experience the sophistication necessary to be a reasonable shareholder
while also protecting the charitable benefit of the gift. At the least,
a donor knows the risk of bad shareholder behavior is less when only
one charity--one the donor has investigated thoroughly--owns an
interest, than when numerous charities do. In contrast, splitting a
business interest among numerous charities increases the risk of at
least one unsophisticated charity either unnecessarily asserting
minority shareholder rights, or passively enabling the donor to exclude
the charity from the full benefits to which its ownership entitles it.
Finally, a potential, eventual buyer of the donor's and the
charities' interests is less likely to be interested in purchasing if
it will have to deal with numerous charities rather than just one. This
is also true of a donor's partners in the enterprise who must often
waive restrictions to allow the donor to transfer any of their interest
to charity. If the charity is unsophisticated in these type gifts or if
there are multiple charities, it is understandably less likely that the
charitable gift will occur.
Accordingly, the prohibition against a DAF maintaining business
holdings should be rescinded.
Extending the private foundation restriction against excess
business holdings to DAFs again demonstrates a failure to think about
the differences between private foundations and DAFs. Congress
identified the following concerns when it imposed the restriction on
private foundations in 1969, none of which apply to DAFs:

Increased use of foundations to maintain control of
businesses, and a corresponding decrease in concern about producing
income for charitable purposes. A donor concerned to maintain his
control over his business will not contribute it to a DAF, which is
controlled by independent directors and officers and over which he has
only the power to advise. Likewise, the independent directors and
officers of a DAF sponsoring organization can have no motivation to
perpetuate a donor's control to the detriment of the organization's
charitable mission.
Uncertainty in the law about what point business
involvement or noncharitable purposes become substantial non-exempt
purposes for which the only penalty is the harsh one of revoking exempt
status. There of course would be uncertainty about when the purpose in
the head of a donor who controls both business and foundation switches
from charitable advancement to personal business advancement. There is
no such uncertainty about the purposes of the independent directors and
officers of a DAF sponsoring organization.
Diversion of most of the interest and attention of the
foundation managers away from their charitable duties to the
maintenance and improvement of the business. The donor who controls a
foundation can force foundation personnel to attend to his business;
the donor who merely advises a DAF has no such power over the personnel
of the DAF sponsoring organization.
Where the charitable ownership predominates, the running
of a business in a way that unfairly competes with businesses whose
owners must pay tax on the income derived from their businesses. This
concern is effectively addressed by Unrelated Business Taxable Income
rules, applicable to all charitable entities including DAF's and SO's.
Moreover, the only reason the independent directors and officers of a
DAF sponsoring organization would agree to accept, and then hold, a
business interest is that the interest produces greater revenue for
charitable purposes than does another holding. In other words, the DAF
sponsoring organization is motivated to maximize its revenue rather
than maintain a business that can compete only with lower returns. In
any event, this concern is no greater when a DAF sponsoring
organization holds the interest than when any other kind of public
charity holds it.

See S. REP. No. 91-552 (1969), cited in Priv. Ltr. Ruling
199939046. Accordingly, there is no rational public policy interest
that justifies the significant harm done to charity by extending the
excess business holdings rule to DAFs.

Exclusion of DAFs, SOs, and Private Foundations As Recipients of IRA
Rollovers--Code Section 408(d)(8). Extend the IRA rollover at least to
DAFs and SOs, and preferably to private foundations as well.

The exclusion of DAFs, SOs, and private foundations as recipients
of IRA rollovers limits overall funding for charitable work, and places
these beneficial structures at a disadvantage relative to other types
of public charities. The IRA rollover should be extended to each.
The exclusion is nothing more than a means of discouraging or
limiting giving to DAFs, SOs, and private foundations, similar to the
way the 1969 legislation limited the deductibility of contributions to
private foundations. As argued previously, hostility to donor influence
generally is unjustified and unprecedented. At the least, DAFs and SOs
should be added as permissible recipients of IRA rollovers since they
are not subject to the perceived greater risk of private benefit that
drives the various private foundation disincentives.
Thank you for your consideration of these significant barriers to
charitable activities thrown up by the Act, and of our requests for
relief. We would be pleased to provide additional information or other
assistance to the Subcommittee as you may request. Our president or I
would be very pleased to testify to the Subcommittee or assist you in
any way regarding the great work we are able to do with input from our
donors through the DAF and SO structures.

Sincerely,
Timothy W. Townsend
General Counsel

Statement of National Committee for Responsive Philanthropy
NCRP recommends that the Committee:

Extend the charitable provisions found in the Pension
Protection Act, including the IRA Rollover, and keep them in their
current form.
Subject supporting organizations and donor-advised funds
to the excise tax, similar to how private foundations already pay the
tax, and dedicate the revenue to oversight of the sector.
Simplify the supporting organization structure by
eliminating the Type III classification, through which most abuses
occur.
Develop a clear set of guidelines and requirements for
international organizations to be considered charitable organizations.

As the nation's premier philanthropic watchdog group, NCRP values
this opportunity to substantively contribute to the discussion, which
we anticipate will have an impact on efforts to promote the public's
interest among foundations, corporate grantmakers, individual donors
and public charities.

__________
Comments from the National Committee for Responsive Philanthropy
July 30th, 2007
The National Committee for Responsive Philanthropy (NCRP) is
pleased to have the opportunity to provide comments to the House Ways
and Means Committee on the subject of provisions relating to tax-exempt
organizations contained in the Pension Protection Act of 2006 (P.L.
109-280).
As the nation's premier philanthropic watchdog with a 30-year track
record of research and action on non-profit and philanthropic
accountability, NCRP is well acquainted with the questions being
addressed by the Committee. Throughout our 30-year history, NCRP has
been at the forefront of bringing about substantive change in the
philanthropic sector, and with the passage of the Pension Protection
Act last year, NCRP believes significant steps were taken to make
philanthropy more responsive and address the needs of communities that
need help the most.
The efforts of the 109th Congress in passing the Pension Protection
Act of 2006 constituted, we believe, a noble starting point in the
fight to significantly reform the practices of tax-exempt organizations
in the United States. Notable among these revisions were the
regulations put in place on donor-advised funds, supporting
organizations and private foundations. Many of the regulations put in
place were long overdue and received the full support of both NCRP and
other organizations in the philanthropic sector. However, despite the
many substantial reform measures put in place by the Pension Protection
Act, NCRP believes more can be done to strengthen the charitable
community by revising several of the measures introduced with the
legislation last year.
In addition, the five new tax incentives that were introduced to
help encourage charitable giving are set to expire at the end of 2007,
and NCRP strongly believes they should be extended in their current
state. Chief among these provisions is the IRA Rollover incentive,
which permits taxpayers 70\1/2\ and older to make tax-free donations
from Individual Retirement Accounts (IRAs) to charitable organizations.
Overall, NCRP strongly supported the passage of the Pension
Protection Act and today fully endorses the vast majority of the
provisions contained within it. Only a small portion of the legislation
directly affects the non-profit community, with the main section being
Title XII, also known as the portion of the bill pertaining to tax-
exempt organizations. The giving incentives and reform measures
included are a huge step forward toward increased transparency in the
philanthropic sector, and the changes made have already had a
substantial impact on the sector as a whole.
NCRP welcomes the efforts of the 110th Congress to address the
concerns of the philanthropic sector, and we believe the arrival of new
leadership in Congress this session can truly bring about substantive
change in the philanthropic community. The comments we have submitted
below outline NCRP's main concerns with the Pension Protection Act and
highlights the sections of the bill we feel deserve reexamination by
the Ways and Means Committee; in addition, we have also outlined
several areas we believe deserve the attention of the Committee going
forward when considering new legislation pertaining to the non-profit
and philanthropic sectors.
TAX INCENTIVES FOR CHARITABLE GIVING
The passage of the Pension Protection Act last August brought with
it five new tax incentives that were put in place to encourage greater
contributions to charitable organizations. All five of these incentives
have had a positive effect on communities all over the United States,
and NCRP strongly supports extending these programs before they are due
to expire at the end of the 2007 calendar year. Tax deductions allowed
for food and book donations especially are programs that we believe
will significantly benefit the American people; new legislation from
the 110th Congress that permanently extends these programs is highly
recommended and encouraged by NCRP.
The Pension Protection Act includes a tax incentive relating to IRA
accounts, and the provision allows taxpayers 70\1/2\ and older to make
tax-free donations to public charitable organizations. The donations
have had a remarkable effect on communities all over the country, and
NCRP supports legislation that would keep the IRA rollover program in
its current state and permanently extend the provisions that are
contained. Any changes to the requirement of which charitable
organizations are eligible to receive these tax-free contributions
would detract from the primary purpose of the IRA Rollover in the first
place, which was to provide IRA account holders the opportunity to make
charitable donations that would best serve the interests of the
charitable community.
Current restrictions in the Pension Protection Act prevent IRA
account holders from making tax-free contributions to donor-advised
funds, supporting organizations or private foundations. Legislation
introduced in Congress this year by the House and Senate (H.R. 1419 and
S. 819, respectively) would repeal these restrictions and allow
contributions to be made to these funds. NCRP is concerned that if
these restrictions are lifted, more money will be taken away from
public charities and will sit in donor-advised funds or private
foundations unused. By sitting in the bank accounts of large private
foundations, money that could have been donated to public charities
directly will simply add to the assets of foundations. By extending the
current IRA rollover tax credit in its current state, NCRP believes
that money contributed from these IRA accounts will truly be put to the
best use possible.
DONOR-ADVISED FUNDS
The passage of the Pension Protection Act brought forth the first
substantive effort to regulate donor-advised funds. The vast majority
of the provisions contained in the Pension Protection Act are changes
that NCRP supports, and many are changes that were advocated by NCRP in
the years leading up to the passage of the Act last August. However,
there a few issues we feel should be corrected relating to donor-
advised funds, and these include a payout requirement, the tax issue
arising from donations to a donor-advised fund in place of a donation
to a private foundation and the issue of excessive donor control.
In passing the Pension Protection Act, lawmakers removed an
expected provision that would call for a minimum annual required level
of distributions for donor-advised funds, a provision which NCRP fully
supported. Instead of including the provision in the bill, the Pension
Protection Act calls for a study commissioned by the Treasury
Department and the secretary of the Treasury to answer several
questions relating to donor-advised funds and supporting organizations.
These questions include: whether tax deductions for contributions to
supporting organizations and donor-advised funds are appropriate given
how donated assets are used, and whether the donor receives any
benefits from the transaction, either directly or indirectly; second,
whether there should be a payout requirement on donor-advised funds;
and finally, whether the retention by donors of rights associated with
their contribution is consistent with the tax treatment of donations as
completed gifts. The Treasury Department's study is set to be completed
and turned into the Senate Finance Committee some time before the end
of 2007. NCRP submitted comments in April of this year to the IRS
relating to the Treasury study, and the study, when released, will
hopefully be responsive to the issues we raised in our comments, which
can be viewed on our website.
NCRP feels that there are a few minor inadequacies in the Pension
Protection Act that should be corrected by future pieces of
legislation. The first of these measures concerns donations being made
to a donor-advised fund in place of a gift to a private foundation.
Deduction limits already in place that prevent large, unethical gifts
to private foundations are a needed check against tax abuse in the
United States. Because of these laws, donors have the potential to make
significant tax-exempt contributions to donor-advised funds to try and
circumvent tax responsibilities. The Pension Protection Act does not
address this problem. We realize that correcting all the problems
relating to tax evasion with tax-exempt organizations is far from
certain, but with legislation aimed at correcting these evasion
techniques, the sector can become more responsive to the needs of the
constituents they claim to be representing.
The second concern we have found in the Pension Protection Act
relating to donor-advised funds concerns the issue of excessive donor
control. One of the key requirements for a fund to be considered a
``donor-advised fund'' is the notion that the donor has the right to
provide advice on how the fund makes investments or donations. A donor
can recommend which charities receive the funds, but the foundation
administering the fund is under no legal obligation to allocate the
funds per the request of the donor. When a grant is made from a donor-
advised fund to the donor's private foundation, we believe the
transaction of funds constitutes excessive donor control. While
technically allowed under the Pension Protection Act, which allows a
donor-advised fund to make a donation to any organization, NCRP
believes action should be taken to address the unethical nature of
grants and donations being made from a donor-advised fund to a private
foundation that features the same individual.
SUPPORTING ORGANIZATIONS
The structure currently set in place by the Pension Protection Act
regarding supporting organizations is confusing at best. The
distinctions between Type I, Type II and Type III organizations,
despite the clarification brought forth in the bill, still remain
unclear. The definitional tests put in place remain complex, and with
no clear, transparent definitional test in place, the potential for
abuse and fraud remains high. This is most true with Type III
supporting organizations, where the control by the sponsored
legislation is the weakest and the potential for abuse is the
strongest. With Type I and Type II supporting organizations, there is
at least some level of control set in place, and because of this, the
abuse of funds is less likely to occur. We urge Congress to look into
revising the section of the Pension Protection Act dealing with
supporting organizations and scrapping the category of Type III
supporting organizations all together; by eliminating this category and
refining the definitions and classification of supporting
organizations, the hope is that greater transparency and responsiveness
will result. NCRP addressed the issue of Type III organizations in our
comments to the IRS back in April 2007.
Similar to our argument for a minimum annual required level of
distributions for donor-advised funds, NCRP believes the same rule
should be applied to supporting organizations. To achieve a maximum
level of accountability concerning supporting organizations, and donor-
advised funds, all efforts should be made to ensure stronger disclosure
of the distributions made by the funds. NCRP would like to see
legislation introduced in Congress this session concerning an effort to
require ``real time'' disclosure of grants made by supporting
organizations that would result in detailed, unrestricted disclosure.
Greater insight into who is receiving these funds in a quick and
responsive way has the potential to encourage increased accountability
among the supporting organizations and donors themselves, in the end
resulting in more dollars going to the charities that need the money
the most.
EXCISE TAXES
One of the provisions missing from the Pension Protection Act that
we would like to see amended by future legislation concerns supporting
organizations and donor-advised funds paying excise taxes. Given the
history of abuse and fraud that is prevalent in both supporting
organizations and donor-advised funds, we believe a mechanism that must
be put into place is to require the funds to pay excise taxes, similar
to how private foundations already do. With billions of dollars in
assets, donor-advised funds and supporting organizations can easily
afford to make the payments, and when coupled with a strict payout
requirement, the taxes paid should not take away from the charitable
contributions the funds are making. NCRP believes excise taxes on
private foundations, donor-advised funds and supporting organizations
should be used exclusively for oversight of the nonprofit sector.
Adding a new excise tax to donor-advised funds and supporting
organizations without dedicating the revenue to oversight of the sector
would serve little purpose.
INTERNATIONAL ORGANIZATIONS
One aspect of the Pension Protection Act that deserves
clarification is the provision dealing with international
organizations. When a donor-advised fund issues a grant to an
international charitable organization, the fund is required to ``make a
good faith determination that the organization is equivalent to a
domestic charity,'' with no standards or rules governing how this
determination is supposed to be made. With the potential for fraud and
abuse by international organizations and the good-natured intent of
donor advised funds being tarnished because of unclear specifications,
NCRP feels that new standards should be put in place by either the
Treasury Department or Congress that clarify the expectations used when
making grants to international organizations. With clearer guidelines
as to what constitutes a charitable international organization, donor-
advised funds can have a better understanding as to whom they are
contributing to; in addition, having the regulations in place can
ultimately make sure charitable dollars are allocated to the people and
resources that need them the most.
REPORTING REQUIREMENTS
Section 1223 of the Pension Protection Act, located under the
Reforming Exempt Organizations subtitle, issues new reporting
requirements on tax-exempt organizations that are not currently
required to file information returns. Under the current law, these
organizations have gross receipts of less than $25,000 on an annual
basis. This threshold has not been raised in nearly three decades, and
NCRP believes an increase in the threshold will benefit smaller
organizations that cannot afford to take on the workload of the
increased reporting requirements. We believe raising the annual
threshold to $50,000 will have a positive impact on the sector and
decrease the number of organizations that have to file the normal
amount of paperwork that larger organizations are required to file.
NCRP will be submitting comments to the IRS next month concerning the
revisions of the 990 form, and will include comments on the threshold,
and how we strongly encourage a raise in the reporting requirement.
CONCLUSION
NCRP has been on the offensive for years relating to the problems
associated with donor-advised funds, supporting organizations and
private foundations. The changes made in the Pension Protection Act
were a noble step forward in the fight to bring about more
responsiveness and transparency to the philanthropic sector. However,
there is still substantial work that needs to be done, and NCRP hopes
that through our comments and the comments of our colleagues there can
be a dialogue to bring about change. Despite the passage of the Pension
Protection Act nearly a year ago, tougher regulation standards on
donor-advised funds and supporting organizations are still sorely
needed, and NCRP believes this can be achieved, partly, through
mandatory payout requirements and excise taxes. It is our hope that
through new legislation these measures and the others laid out in our
comments can be achieved.
Finally, we would like to stress our fundamental belief that the
charitable provisions in the current Pension Protection Act deserve
renewal. By permanently extending these provisions, Congress will be
sending a clear message to the philanthropic community that they are
encouraging charitable activity, especially in regard to the IRA
Rollover program. NCRP strongly believes that the best way to ensure
strong charitable giving through the IRA Rollover program is to leave
the provision in its current state. Changing the provision in any sort
of meaningful or substantial way would harm the essential spirit of
philanthropy that resides in its current form. NCRP is hoping to see
legislation this session that refrains from revising the IRA Rollover
plan and leaves the charitable revisions contained in the Pension
Protection Act intact. The other charitable revisions contained in the
bill, including rewarding donations to food and book programs, deserve
an extension as well.
We would like to thank the House Ways and Means Committee for
allowing us to submit comments pertaining to the provisions in the
Pension Protection Act that relate to tax-exempt organizations. NCRP is
willing to assist the Committee in any way we can relating to issues
concerning the non-profit and philanthropic sectors, and we look
forward to working with the Committee to bring about substantive change
to the charitable community.

Statement of National Committee on Planned Giving
National Committee on Planned Giving (NCPG) is the professional
association for individuals whose work includes developing, marketing
and administering charitable planned gifts. NCPG consists of more than
130 local councils representing upward of 11,000 nonprofit fundraisers
as well as consultants and donor advisors working in for-profit
settings. Collectively these individuals transact billions of dollars
in charitable gifts each year.
The mission of NCPG is to increase the quality and quantity of
charitable planned gifts by serving as the voice and professional
resource for the gift planning community. As such, NCPG strongly
supports federal legislation that permits older Americans to transfer
money from their Individual Retirement Accounts (IRAs) directly to
charities without suffering tax penalties. This legislation is commonly
referred to as the IRA Charitable Rollover.
In August 2006, a limited version of the IRA Charitable Rollover
was enacted into law as part of the Pension Protection Act (Public Law
109-280). This provision, scheduled to expire at the end of 2007,
permits IRA owners beginning at age 70\1/2\ to make outright charitable
gifts totaling up to $100,000 per year from their IRAs directly to
eligible charities. The donor does not have to report the distribution
as taxable income and is not entitled to claim a charitable income tax
deduction for the gift.
NCPG is pleased to report that this provision has generated an
enormous amount of new charitable giving. For example, NCPG has
received reports of nearly 4,500 charitable gifts made pursuant to this
provision, totaling over $80 million. This data is the result of a
voluntary, unscientific survey conducted by NCPG, so the total number
of charitable gifts from IRAs is likely much higher.
In short, the IRA Charitable Rollover has allowed older Americans,
particularly those individuals who do not itemize their tax deductions
and would not otherwise receive any tax benefit for their charitable
contributions, to donate money to thousands of nonprofits that work
every day to enrich lives and strengthen communities across the country
and around the world. Unfortunately, the IRA Charitable Rollover is
scheduled to expire at the end of the year. If the provision lapses,
the nation's charities risk losing out on millions of dollars that
could be generated by this important tax provision.
Accordingly, NCPG strongly supports enactment of the Public Good
IRA Rollover Act (H.R. 1419), introduced on March 8, 2007 by
Representatives Earl Pomeroy and Wally Herger, which would make
permanent and expand the current IRA Charitable Rollover. Over 900
organizations from every state in the country have joined with NCPG to
support this legislation.
Specifically, H.R. 1419 accomplishes four important things. First,
the legislation makes the IRA Charitable Rollover permanent. Second, it
removes the $100,000 cap per year on IRA gifts. Third, it permits all
charities to receive IRA gifts. Fourth, the legislation permits IRA
owners, beginning at age 59\1/2\, to create a life-income gift through
existing planned giving options such as charitable gift annuities,
charitable remainder unitrusts, charitable remainder annuity trusts and
pooled income funds.
NCPG believes H.R. 1419 will build upon the great success of the
current IRA Charitable Rollover. The legislation will spur millions of
dollars in new charitable donations that will go to support critical
programs and services. NCPG urges the Congress to act on this
legislation soon.

Statement of National Council of Nonprofit Associations
Introduction
The National Council of Nonprofit Associations (NCNA) respectfully
submits this testimony to the Subcommittee on Oversight of the House
Committee on Ways and Means in response to the Overview Hearing on the
Nonprofit Sector on July 24, 2007 and the request for comments
regarding the passage of the Public Good IRA Rollover Act of 2007 (H.R.
1419, S. 819).
NCNA is the network of state and regional nonprofit associations
serving over 22,000 members in 41 states and the District of Columbia.
NCNA links local organizations to a national audience through state
associations and helps small and mid-sized nonprofits:

Manage and lead more effectively;
Collaborate and exchange solutions;
Save money through group buying opportunities;
Engage in critical policy issues affecting the sector;
and
Achieve greater impact in their communities.

NCNA also serves as a unified voice for the small and midsize
nonprofits who continue to positively impact their communities. Over
90% of nonprofits in America have operating budgets of less than 5
million dollars. Representing all fields within the nonprofit sector--
healthcare, education, the arts, environmental groups--these small and
midsize nonprofits are vital contributors to improve our nation's
quality of life. It is in the interests and perspective of these
organizations that we submit our comments.
The following comments express NCNA's support of two issues: (1)
the Nonprofit Capacity Building Initiative, which would increase the
capacity, effectiveness, and accountability of small to midsize
nonprofits and, ultimately, improve the quality of life in local
communities and (2) the Public Good IRA Rollover Act of 2007 (H.R.
1419, S. 819), which has already resulted in over 75 million dollars in
gifts to nonprofit organizations.
The Nonprofit Capacity Building Initiative
The recently released GAO report (Nonprofit Sector--Increasing
Numbers and Key Role in Delivering Federal Services, July 24, 2007)
identified several policy issues related to how the federal government
interacts with the nonprofit sector. The report noted that key to a
healthy nonprofit sector include: strengthening governance, enhancing
capacity, ensuring financial viability, and improving data quality
without overly burdening the sector with unnecessary or duplicative
reporting and administrative requirements. NCNA and its state
association members have proposed a program that will address the key
issues identified in the GAO report through the Nonprofit Capacity
Building Initiative (NCBI). This initiative would create a federal
revenue stream for training and capacity building, especially for small
nonprofits through existing technical assistance and management support
entities at the state and local level. Combining federal assistance
with state and local level programming is necessary for best management
practices to be widely understood and adopted within the nonprofit
sector.
Over 90 percent of nonprofits operate with annual budgets under $5
million. These organizations play a vital role in local communities and
in the quality of life of all Americans through their work in
education, healthcare, the arts, social services, and other fields.
While small and midsize nonprofits are best positioned to reach and
serve all Americans they are least likely to have the adequate
resources to meet the needs of their constituents and access to
programs and information designed to help them manage and govern their
operations. As aptly stated in the GAO report, ``Given the way the
sector is woven into the basic fabric of our society, it is essential
we maintain and cultivate its inherent strength and vitality and have
accurate and reliable data on the overall size and funding flows to the
sector.''
Specifically, topics and activities addressed by NCBI would include
the following: (1) Leadership Development (Board Composition and
Function, Staff Professional Development, Volunteer Training, and
Development and Succession Planning); (2) Organizational Development
(Board Governance, Systems: Management, Human Resources, Financial,
Planning, Policies and Procedures, Fiscal Controls); (3) Legal
Compliance and Reporting (Policies and Procedures, New and Existing
Federal and State laws, On-Line Reporting Systems); and (4) Technology
(Training, Equipment, and Software).
The NCNA network has the national infrastructure and expertise to
launch a Nonprofit Capacity Building Initiative for the nonprofit
sector through state associations of nonprofits. By investing in this
already existing network, the federal government can leverage the
collective experience, resources, and strength of these established
organizations. This investment can improve the quality and reach of
services to build the capacity of nonprofits, while reducing
redundancy, and avoiding the creation of new bureaucracies at the
national, state, and local level.
The Public Good IRA Rollover Act of 2007
In addition, the NCNA supports the Public Good IRA Rollover Act of
2007. The response to the 2007 Act--more than 75 million dollars in
giving--is a clear indicator that the IRA Rollover Act serves donors,
charities, and the public at large and should be extended permanently.
While NCNA has not yet gathered systematic data on the impact of the
IRA Rollover on our members, initial reports are favorable. Small
organizations are reporting IRA Rollover contributions that exceed past
giving. For example, the Executive Director of an interfaith Pharmacy
in Louisiana writes reports that one donor contributed $1,203, ten
times more than the donor's previous gift. Community Foundations,
including those in Montana and Louisiana, are reporting IRA Rollover
contributions. This is a positive sign for the NCNA network because
local and community foundations often fund our extensive network of
small and midsized nonprofits.
In Closing
NCNA supports the efforts of the House Ways and Means Committee in
strengthening the partnership between government and the nonprofit
sector, increasing the accountability of nonprofits, and supporting the
capacity and effectiveness of the charitable community across the
country. We believe that the Nonprofit Capacity Building Initiative and
the IRA Rollover Act are examples of policies that work to achieve our
shared goals.
Thank you for the opportunity to submit these comments, please
contact me if you have questions or need additional information on
these or related issues.

Statement of National Multiple Sclerosis Society
The National Multiple Sclerosis Society thanks the Subcommittee for
this opportunity to provide comment on the significant role and impact
that the IRA charitable rollover provision enacted as part of the
Pension Protection Act of 2006 is having on tax-exempt charitable
organizations. In addition, these comments focus on our support for the
``Public Good IRA Charitable Rollover Act of 2007'' (H.R. 1419).
Multiple sclerosis (MS) stops people from moving, and the National
Multiple Sclerosis Society (the Society) exists to make sure it
doesn't. Through our home office and 50-state network of chapters, the
Society funds MS research, provides a variety of programs and services
to people with MS, offers professional education, and furthers our
efforts through advocacy at the local, state and Federal levels. The
Society is dedicated to ending the devastating effects of MS and moving
closer to a world free of this disease.
The Society is classified as a 501(c)(3) non-profit organization
under the Internal Revenue Code. To that end, we applaud the adoption
of the provision in the Pension Protection Act of 2006 that allows for
taxed exempt charitable rollover IRA distributions to non-profits from
individual IRA plan holders. Specifically, the provision provides an
exclusion from gross income for otherwise taxable IRA distribution of
up to $100,000 per year from traditional and Roth IRAs for making
qualified charitable distributions during the tax year 2006 and 2007 by
individuals who have attended at least age 70\1/2\ at the time of
disbursement to the charity of choice.
While limited in its scope, the IRA charitable rollover provision
has already made a significant impact on charities across the U.S.
According to the Independent Sector and the National Committee on
Planned Giving, initial reports show that during the first four months
this provision was in effect, more than $70 million in IRA charitable
rollover contributions were made to eligible non-profits. Between
September 2006 and December 2006, the Society recorded $131,000 in
contributions from charitable rollover IRAs applicable to our fiscal
year 2007 operating budget.
The IRA charitable rollover provision encourages a new type of
planned giving that enables charities to keep improving the lives of
Americans and give more back into their communities. Thus far, this
type of planned giving helped organizations build new cancer centers,
develop additional counseling programs for at risk youth, support
housing for homeless families, and provide art therapy for elderly
Americans and individuals with developmental disabilities. In addition
to the community benefits, the charitable rollover IRA provision helps
older Americans support their favorite causes without tax penalties
when receiving required disbursements from their IRAs.
The current charitable rollover IRA provision will expire on
December 31, 2007. Given the significant impact that this type of
planned giving has had on the Society and the non-profit community in a
very short timeframe, we urge the Subcommittee to support the Public
Good IRA Charitable Rollover Act of 2007 (H.R. 1419). H.R. 1419 would
extend and broaden the current charitable rollover IRA provision by
making it permanent. In addition, the bill seeks to remove the current
$100,000 per taxpayer per year limitation, make all charities eligible
to receive these types of donations, and would allow donors to make
contributions beginning at age 59\1/2\.
The Society strongly supports H.R. 1491, and we encourage this
Subcommittee and Congress to take a more in-depth look at the
significant benefits the charitable rollover IRA provision has had on
non-profits and communities across our country. Non-profits exist to
provide programs and services that help better the lives of Americans,
and the charitable rollover IRA provision provides additional resources
through which non-profits can improve and increase delivery of these
programs and services. These additional resources go directly back into
the communities non-profits serve. The Society urges the Subcommittee
to mark-up and report out the Public Good IRA Charitable Rollover Act
of 2007 (H.R. 1419). Thank you.

Statement of New York Community Trust
Introduction
For almost a century, community foundations have been building
permanent charitable resources to meet the current needs of their
communities and the unforeseen needs of the future. And for more than
80 years, The New York Community Trust (The Trust), through the
generosity of donors past and present, has supported nonprofit
organizations in the New York metropolitan area that work daily to
ensure that our community is a vital and healthy place in which to live
and work--for all residents. When we started in 1924, our sole mission
was to distribute to nonprofit organizations the income from charitable
trusts set up by will and held by New York City banks. The Trust's
founders were men of vision who understood the power of an institution
that could employ the combined charitable passions of individuals to
meet a broad variety of community needs. They also understood that
contemporary donors could not anticipate the compelling issues that
would confront their successors--and they were committed to ensuring
that adequate resources would be available for the future. In those
early days, our donors set up unrestricted or broad field-of-interest
funds through bequests, trusting tomorrow's leaders to spend it wisely.
Today, The Trust has assets of $2 billion; $700 million of that total
is held in more than 1,000 donor-advised funds, which range in size
from $5,000 up to $99 million. Those funds routinely pay out more than
10 percent of their assets to charity annually. The remaining $1.3
billion rests in permanent unrestricted or field-of-interest funds.
We opened our first ``donor-advised'' fund in 1934, before there
was even a name for it--and long before there were any specific laws or
regulations. During her lifetime, this first ``donor advisor'' made
suggestions to the staff of The Trust as to charitable distributions
from the fund. When she died, the assets remaining in the advised fund
became part of The Trust's discretionary grantmaking program--a program
that relies on a professional staff that assesses community needs,
investigates nonprofits, vets their projects and finances, and
recommends grants to our distinguished volunteer board. Grants we make
from the fund she created, which now has $64 million in assets, support
projects to help low-income elders keep their homes and apartments,
train poor, young women to become licensed day-care providers, reduce
environmental health hazards in substandard housing, and much more.
A profoundly important social contract was established with that
first donor-advisor that continues to this day: in consideration for
the privilege of making grant recommendations, money would be left in
the fund for future generations. That is still our expectation and is
characteristic of our relationship with most donors to The Trust.
The philanthropic world has changed since 1934 and 21\st\ century
donors have significantly more choice than they did years ago. When the
IRS gave public charity status to donor-advised funds sponsored by
financial institutions, donor expectations changed. The notion of
community philanthropy pioneered by community foundations morphed into
individual charitable checking accounts, with little expectation of,
commitment to, or mechanism for permanence.
Nonetheless, The Trust and its donors support a dazzling array of
charitable activity. So it was with dismay that we greeted the tax
advantages offered for Hurricane Katrina giving and the IRA charitable
rollover because those incentives were not available for contributions
to donor-advised funds. In addition, other provisions of the Pension
Reform Act of 2006 imposed burdens that seem designed to discourage
charitable giving and based on assumptions that donor-advised funds are
inherently flawed and that contributions to these funds are not, in
fact, completed gifts. We recognize that there have been some egregious
misuses, but we believe that enforcement of existing regulations can
surely find and punish those individuals who violate the law without
penalizing generous people who use their funds to do good. Indeed, the
1976 Treasury regulations implementing the Tax Reform Act of 1969, and
the so-called ``Section 507 regs,'' set out in careful detail the facts
and circumstances needed for a completed gift. Guided by the Section
507 regulations, The Trust, and our community foundation colleagues,
instituted policies to make sure that our charitable institutions and
our donor-advisors are in compliance.
In short, donor-advised funds are not a new-fangled tool to avoid
taxes; they are a long-standing approach developed by community
foundations and addressed in Treasury Regulations to enhance and
encourage donors to invest charitably in the immediate and future needs
of communities. They are one of many ways that permanent charitable
institutions are able to both consolidate many grants from different
funds--restricted, unrestricted, and donor-advised--to support
community programs and to build their assets for the future health and
well-being of their communities.
This is the prism through which we respond to the Committee's
request for comments on how the Pension Protection has affected
community foundations.
Definition of Donor-Advised Funds
The Trust considers the definition of donor-advised fund under Code
Section 4966(d)(2) to be overly broad in that it includes donor-advised
funds established by governments, public charities, and private
foundations. As a result, donor-advised funds established by
governmental and tax-exempt entities are prevented from indirectly
supporting the types of programs that they are still permitted to
operate or for which they may provide direct support. This result seems
at best unintended and at worst counterproductive. Treasury Regulation
Section 1.507-2(a)(8) sets out in detail the requirements for a private
foundation that terminates its existence and transfers ``all of its
right, title, and interest in and to all of its net assets'' to one or
more Code Section 170(b)(l)(A) organizations. The Section 507
regulations provide clear rules, and have been looked to since their
promulgation in the mid 1970s as the legal anchor not only for the
proper termination of private foundations into donor-advised funds of
public charities, but also for the establishment of donor-advised funds
within public charities. In fact, the regulations under Section 170
governing component funds of community trusts specifically cross
reference Treasury Regulation Section 1.507-2(a)(8) in defining how a
transferor private foundation may transfer its assets to a fund at a
community trust that would qualify as a component fund. Until the mid-
1950s, The New York Community Trust existed solely in trust form, and
the various funds that constituted The Trust met the requirement of
being a ``component fund'' as prescribed in the special community
foundation regulations under Code Section 170 and adopted by Treasury
in 1976. Twenty years before the '69 Tax Act, The New York Community
Trust created a sister not-for-profit corporation, Community Funds,
Inc., to which donors could make contributions for all the same
purposes and in analogous forms as contributions to The Trust. The two
entities are treated as one organization for tax purposes. Most
community foundations formed in recent years have taken the form of
not-for-profit corporations rather than trusts, and virtually all
community foundations, regardless of the structure, have looked to the
Code Section 507 regulations for guidance in establishing and operating
donor-advised fund programs.
The PPA also sweeps up in its definition a fund where the advisors
are ``appointed'' by the donor--even when they are named in the
instrument. As a result, a fund set up by will is deemed to be a donor-
advised fund if the decedent named unrelated individuals to an advisory
committee. In addition, the broad definition of what constitutes
advisory privileges pulls in relationships so minor that the donor
cannot be viewed as controlling the fund, for example, where the
donor's advice is limited to the amount of money to be expended each
year.
Applying Private Foundation Rules to Donor-Advised Funds
Donor-advised funds encourage charitable giving by individuals who
want to engage regularly in thoughtful, responsible philanthropy and
want to be part of a permanent charitable institution that will respond
to the community's needs now and in the future. They offer a community,
with all of its complexity and diversity, the opportunity to receive
support from an array of donors whose passions and commitments reflect
that very diversity and complexity: popular vs. unpopular causes,
general support vs. project support; liberal vs. conservative; direct
services vs. policy work; immediate needs vs. future needs.
As a ``sponsoring organization'' under the new nomenclature of the
Pension Protection Act of 2006, The Trust (and other community
foundations) provides its donor-advisors with professional grantmaking
staff and knowledge of the community and its needs. Its board can
hardly be viewed as controlled by its donors. At The Trust, staff also
brings a high level of diligence to its review of potential grantees
prior to approving grant recommendations. In this respect, The Trust
performs an independent investigation of any charity recommended for
support, including support from a donor-advised fund at The Trust. The
charitable sector as a whole benefits from this kind of review because
it imposes a discipline on prospective grantees, who know that both
their fiscal and program operations are being scrutinized.
In addition to providing guidance on the selection of grantees, the
sponsoring organization provides an extra layer of oversight and
necessary administration that is otherwise difficult for individual
donors or unstaffed family foundations to manage. A sponsoring
organization is responsible for determining that grantees have current
financial statements and or audits, operate with independent boards of
directors, have timely filed their Forms 990 with the IRS, and have an
organizational structure adequate to the projects being undertaken.
Because The Trust, as a sponsoring organization, has legal title and
control over all of its assets, including donor-advised funds, it
assumes the responsibility for charitable assets and assures that these
assets are used exclusively for tax-exempt charitable purposes. Being
part of a major charitable institution that is equipped to manage and
oversee grants to hundreds of organizations empowers donors to hold
grantees accountable for the quality of their work.
The law governing charitable contribution deductions (Section 170
of the Code and the accompanying Treasury Regulations, court cases and
so forth) quite clearly provides that a gift to a charity that provides
impermissible private benefit to the donor or another private
individual is not tax-deductible. To create special rules and
regulations for contributions to donor-advised funds that are part of a
functioning public charity does not add anything material to existing
law. The need is for best practices and oversight by sponsoring
organizations and donors and for enforcement by the IRS: new and
redundant special rules will only create a maze of foot faults.
Rules restricting certain grants, described more fully below, also
treat donor-advised funds like private foundations, including
restrictions on grants to foreign organizations, 501(c)(4)
organizations for charitable purposes, and individuals. The likely
effect will be to drive more donors to private foundations, rather than
to the more cost-effective donor advised funds at a professionally
staffed sponsoring organization.
Prohibition on Certain Types of Grants from Donor-Advised Funds
Scholarship Funds: Complex rules about when a donor is deemed to
control the advisory committee to a scholarship fund are overly broad.
The PPA should have excluded from the definition those funds
established for scholarships and awards, regardless of composition of
committee. Congressional concern about inappropriate benefits to the
donor or her family is already addressed by other rules prohibiting
personal benefit. And the prohibition on grants from donor-advised
funds to individuals should not have included funds with a specific
charitable purpose such as scholarships and awards, regardless of the
composition of the advisory committee. Many of our scholarship funds
are small, but important, and function efficiently only because they
are advised by the families or individuals who created them. We have
reconstituted these committees in compliance with PPA, but we are
concerned that they will not function as well as they have, and
discourage future donors who want to involve their families in
philanthropy.
Grants to Foreign Charities and 501(c)(4)s: Many of our donors
support charities abroad. Requiring the sponsoring organization to
exercise full expenditure responsibility imposes an unreasonable
burden, and has compelled us to prohibit donors from suggesting these
grants. Similarly, many 501(c)(4)s have charitable missions, including
volunteer fire departments and rotary clubs. The burden of exercising
expenditure responsibility for what are often modest grants is
excessive, and we no longer permit them.
Supporting Organization: The rules precluding grants from donor-
advised funds to non-functionally integrated type III supporting
organizations also make the sponsoring organization responsible for
determining which organizations meet the type III definition. This
imposes an unreasonable burden on a sponsoring organization with
hundreds of donor-advised funds. Such determinations should be the
responsibility of the IRS.
Penalties on Certain Transactions
Section 4967 imposes a tax on a donor or advisor who recommends to
the sponsoring organization a distribution from a donor-advised fund if
the distribution results in a donor, donor-advisor, or related person
receiving a more than an ``incidental benefit.'' A tax also is imposed
on the donor, donor-advisor or related person who receives the benefit
and fund managers of the sponsoring organization who knowingly agree to
make the distribution, with no concomitant burden on the grantee that
improperly provides the benefit.
This new provision will require a sponsoring organization to devote
more of its resources to the administrative task of identifying those
individuals and entities that might be related to the donor or donor-
advisor.
Section 4958 (Intermediate Sanctions)
The inclusion of investment advisors as disqualified persons is
overly broad, picking up all investment advisors for many sponsoring
organizations, whether they are independent or have a relationship with
a donor to a donor-advised fund. Compensation to any vendor should be
reasonable, but to create an additional category of disqualified
persons solely for sponsoring organizations makes no sense. If Congress
considers investment advisors and their fees suspect, then they should
be suspect for all public charities.
Section 4943 (Excess Business Holdings)
The Pension Protection Act extends the application of the excess
business holdings rules to donor-advised funds. In applying the rules,
each donor-advised fund's holdings are aggregated with the holdings of
disqualified persons with respect to the donor-advised fund, as defined
by Code Section 4943(e)(2). A sponsoring organization will now be
required to devote considerable staff and financial resources to
compliance with these rules--no small undertaking in light of the
breadth of the aggregation rules. A sponsoring organization must
monitor the holdings of each donor-advised fund to determine whether it
falls within the 2 percent de minimus rule and, if not, additionally
identify the disqualified persons and their investment holdings that
are in common with the donor-advised fund. This is a daunting task
because of the endless string of relatedness constituting disqualified
persons. There is no rational way that an institution with numerous
donor-advised funds can gather and track this information in any
meaningfully accurate way; the result is likely to be significant
noncompliance or meaningless attempted compliance.
IRA Charitable Rollover
Because of the estate tax rates on IRA assets left to heirs other
than a spouse, and because many donors can afford to forego these
assets, we applauded the charitable rollover provision of the PPA.
However, donor-advised funds should not have been excluded. Indeed,
donor-advised funds at a community foundation, with the oversight and
grantmaking experience explained above, are the ideal vehicles for the
rollover; investment managers that hold IRA assets do not have this
expertise. The Trust also believes that the rollover should be made
permanent.
Form 990T
The PPA requires that Form 990T be made public. Unlike the Form
990, the information return, which is public information, the 990T is a
tax return. Individuals' and corporations' tax returns are not public
documents, and this provision puts public charities, and any taxable
companies in which they have an interest, at a disadvantage.

__________

As explained in the Introduction, community foundations and similar
charitable institutions have twin goals: to serve living donors and
meet immediate community needs; and to be permanent endowments that
have the resources to respond to the needs we cannot now imagine.
Encouraging donors to think in terms of contributing to a permanent
fund buttresses both goals. At The Trust, all donor-advised funds, if
not fully expended after two successions of advisors, become
unrestricted funds of The Trust. And with our other component funds,
they provide irreplaceable support for the voluntary institutions that
are a vital part of American democracy.

Statement of Ohio Grantmakers Forum
Ohio Grantmakers Forum is pleased to provide the following comments
on the impact of the Pension Protection Act of 2006's charitable
provisions as they relate to our members, who are private and community
foundations, other public charity grantmakers and corporate foundations
and giving programs. We appreciate and applaud the Subcommittee's
interest in exploring the impact--both intended and otherwise--of this
important legislation through written comments and the scheduled public
hearing.
IRA Charitable Rollover Provision
Ohio's community foundations and Jewish federated funds have
received nearly $5 million in donations due to the IRA charitable
rollover provisions included in last year's Pension Protection Act.
During its short duration to date, the incentive has been a significant
source of new dollars and some new donors, with gifts ranging from a
few hundred dollars up to the $100,000 cap on contributions. These
gifts result in additional funds flowing into nonprofit organizations
that provide critical services to people in need, support educational
achievement, make communities safer places and strengthen Ohio's
economy. According to our research, many more dollars could be raised
if more types of organizations--such as donor advised funds--were
eligible for the charitable rollover of IRA assets. Ohio Grantmakers
Forum supports H.R. 1419 and its provisions to expand and extend the
rollover beyond this tax year.
Regulatory Provisions
Our community foundation members, those most affected by the new
regulations included in the Pension Protection Act, have indicated to
us that they are quite cumbersome and expensive to implement. This is
of special concern to us since Ohio's charitable grantmakers already
are regulated by federal and state law, to ensure that they fulfill
their fiduciary duties and operate ethically. Additionally, the
charitable sector has numerous voluntary self-regulation mechanisms in
place to educate and help nonprofit entities to behave at the highest
ethical levels. For instance, members of Ohio Grantmakers Forum
indicate each year that they adhere to our Guiding Principles that call
for greater transparency and accountability. (See below for the list of
Guiding Principles.)
Furthermore, community foundations across the nation and in Ohio
are rapidly adopting ``National Standards.'' These self-regulatory
standards include detailed financial, grantmaking and operational
practices and policies. Adding additional federal regulations,
definitions and reporting requirements is not only unnecessary, but
directs the attention of foundations away from their vital work as
grantmakers. The one-size-fits-all approach to the new regulations can
be particularly problematic in this regard for smaller foundations with
minimal or no paid staff.
We hope that the Oversight Subcommittee will review the issues
outlined by Independent Sector and the Council on Foundations last
fall, in a letter to the IRS, and consider how it might address and
resolve these issues in this session.
Thank you for the opportunity to comment upon the Pension
Protection Act's provisions impacting charitable organizations and
giving.

__________

Ohio Grantmakers Forum Guiding Principles

1. Adhere to the highest standards of ethical behavior in all
philanthropic activities.
2. Operate with an active governing board that sets and regularly
reviews all organizational policies, including those related to
governance, conflict of interest, grantmaking, and finance (including
audit).
3. Have basic information readily available regarding programs,
funding priorities and application requirements.
4. Maintain constructive relationships with applicants, grantees,
donors and the public based on mutual respect, candor and
confidentiality.
5. Strive to include the perspectives, opinions and experiences of
the broadest possible cross-section of people to inform the
organization's grantmaking/contributions, governance/staff structure
and business practices.
6. Support continuous learning by trustees, staff and grantees.
7. Honor donor intent through thoughtful deliberation in the
context of changing social conditions.
8. Fulfill all fiduciary and legal responsibilities.

__________

Revised by the Board of Trustees August 1, 2006

OGF Board of Trustees

David T. Abbott
The George Gund Foundation
Chair

Rene Hoy
Honda of America Foundation
Vice Chair

Scott McReynolds
The Greater Cincinnati Foundation
Treasurer

Patricia R. Conley
KnowledgeWorks Foundation
Secretary

Margot James Copeland
KeyBank

Stuart W. Cordell
Robert S. Morrison Foundation

Kim Cutlip
The Scioto Foundation

Heidi Jark
Fifth Third Bank

Susanna H. Krey
Sisters of Charity Foundation of Cleveland

Dennis M. Lafferty
Jones Day

Michael M. Parks
The Dayton Foundation

Richard W. Pogue
Deaconess Community Foundation

Ronn Richard
The Cleveland Foundation

Gordon Wean
The Raymond John Wean Foundation

Denise San Antonio Zeman
Saint Luke's Foundation of Cleveland, Ohio

Ohio Osteopathic Foundation
Columbus, Ohio 43201-0130
July 5, 2007

The Honorable John Lewis, Chairman
Committee on Ways and Means Oversight Committee
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Lewis:

I am submitting this letter in response to the request of the Ways
and Means Oversight Committee for written comments concerning the
impact of the Pension Protection Act on charitable organizations.
The Ohio Osteopathic Foundation (Foundation) is a 501(c)(3)
organization classified as a supporting organization within the meaning
of section 509(a)(3) of the Internal Revenue Code. Immediately prior to
the enactment of the Pension Protection Act (PPA) of 2006, the
Foundation received the first installment of a five-year grant from a
non-operating private foundation that will allow us to substantially
increase the quality of our programs. As a result of the PPA
restrictions on the ability of supporting organizations to accept or
receive gifts from private foundations, however, the remainder of this
grant is now in jeopardy. The grantor is concerned about violating
these restrictions and triggering the excise tax created by the PPA. As
a result, the grantor is withholding the remaining installments of the
grants unless we change our public charity classification to that
described in 509(a)(1) or 509(a)(2).
The Foundation has functioned as a ``Type I'' supporting
organization for more than 20 years. It is operated, supervised and
controlled by the members of the Ohio Osteopathic Association
(Association) to ensure that its programs and grants benefit the entire
osteopathic profession in Ohio and do not inure to the benefit of any
disqualified individual or group of individuals.
As a small organization, we have been able to avoid duplicative
administrative costs by donating employee time from the Association to
support Foundation programs. We have also maximized investment income
in the Foundation to benefit osteopathic education and research. The
main beneficiary of our grants has been the Ohio University College of
Osteopathic Medicine, a public institution in the state of Ohio.
While conversion of the Foundation to a 509(a)(1) or 509(a)(2)
organization might have been easily accomplished in the past, we are
now hindered in making a conversion because of another large grant we
received immediately prior to enactment of the PPA. That grant
significantly increased our annual investment income, which may exceed
the one-third income limitation needed to qualify for exemptions under
one of these other sections.
The Foundation believes that the restrictions imposed by the PPA on
the ability of private foundations to make distributions to supporting
organizations need to be refined to allow these distributions to be
made when appropriate governance mechanisms are in place. We further
believe that Type I supporting organizations which have appropriate
governance structures and accountability mechanisms should be treated
in the same manner as public charities that receive their exemption
under 509(a)(1) or 509(a)(2) of the Internal Revenue Code.

Sincerely,
Jon F. Wills
President

Statement of the PGA Tour
The PGA TOUR is very grateful for this opportunity to provide
comments to the Committee on the exempt organization provisions in the
Pension Protection Act of 2006, and will focus its attention entirely
on section 1205.
Section 1205 of the Pension Protection Act of 2006 (``PPA'') was a
positive first step toward resolving a problem that was created a
decade ago when Congress unexpectedly altered the rules relating to
transactions between tax-exempt organizations and certain taxable
subsidiaries.
In general, interest, rents, royalties, and annuities (i.e.,
payments of passive income) are received free of tax by exempt
organizations. Under Code section 512(b)(13), however, these payments
are subject to tax if they are received from a ``controlled''
organization (e.g., a subsidiary). Prior to the enactment of the
Taxpayer Relief Act of 1997 (``TRA 97''), an organization was
considered controlled if the exempt organization had a direct ownership
interest of 80 percent or more in that organization. TRA 97 changed the
ownership percentage to 50 percent. According to the TRA 97 Committee
Reports, the reason for automatically taxing income from a controlled
organization was to prevent subsidiaries of tax-exempt organizations
from ``reducing otherwise taxable income by borrowing, leasing, or
licensing assets from a tax-exempt parent organization at inflated
levels.''
Section 1205 of the PPA in structure is the product of close to a
decade of discussions between members of the exempt community and
Congress. As adopted, the section modifies TRA 97 to provide that
interest, rents, royalties and annuities received by an exempt
organization from a controlled organization will only be taxed when the
payment exceeds fair market value. A 20 percent penalty is imposed on
excessive payments. Tax-exempt organizations that receive interest,
rent annuity or royalty payments from a controlled organization must
report payments on informational tax returns. The change to Code
section 1205 only applies to payments made under binding written
contracts (or their renewals under substantially similar terms) in
effect on the date of enactment. The fair market UBIT test is in effect
for 2006 and 2007.
Congress also provided that the Treasury Department will submit no
later than January 1, 2009, a year after the section expires, a study
of the effectiveness of the Internal Revenue Service in administering
the new section.
Section 1205 was needed to correct an anomaly in TRA 97 which
resulted in exempt organizations becoming liable for UBIT on payments
of passive income even when they reflect fair market amounts. For
example, many exempt organizations receive rents at an arm's length
amount from taxable subsidiaries that were established and operate for
non-abusive purposes. Under TRA 97 these exempt organizations were
subject to tax, even though their receipt of rents from unrelated
organizations under the exact same terms would not be subject to tax.
This treatment significantly reduced funds available for tax-exempt
purposes at a time when government funding of many tax-exempt
organizations is being substantially reduced and private sector
organizations are being called upon to assume additional
responsibilities.
Section 1205 recognizes that fair market value can be established
generally by reference to amounts paid in comparable arrangements by
unrelated third parties. Similarly, fair market rents or royalties can
be established or referenced to existing transfer pricing principles.
The Internal Revenue Service has extensive experience in determining
the fair market value of transfers between related parties under Code
section 482. Moreover, the Service is applying section 482 principles
to transactions involving tax-exempt organizations. For example, IRS
letter rulings hold that tax-exempt organizations must comply with
section 482 in transfers of tax-exempt property. Thus, both the Service
and taxpayers have experience with these principles.
The effort to modify the changes enacted to section 512(b)(13) in
the TRA 97 resulted prior to 2006 in the adoption of provisions similar
to section 1205 (but not containing the limitations discussed above) in
tax bills that cleared one House of Congress but not the other, and at
one point in a budget reconciliation bill that was vetoed by President
Clinton on unrelated grounds. The American Bar Association Section of
Taxation endorsed these efforts, which were at the time embodied in a
pending Senate provision, in a letter to the Chairmen and Ranking
Members of the tax writing committees dated February 3, 2006 stating
that ``[t]he amendment addresses concerns that many tax-exempt
organizations have raised for a number of years.''
While section 1205 of the PPA is a step forward, it has two notable
limitations which we urge the Committee to address this year.
First, the provision only applies to binding contracts in existence
on the date of enactment of the PPA, or renewals of such contracts on
substantially similar terms. The Committee should remove this
limitation; after all, the provision contains mechanisms against abuse
both in the form of the application of a market value concept using the
principles of section 482, and, in addition, applies a tough twenty
percent penalty tax on the portion of any payment that exceeds fair
market value. These mechanisms are the product of years of discussion
between Congress and the exempt community and will be effective both
with respect to existing and new arrangements between exempts and their
controlled subsidiaries and there is no technical reason under the
circumstances to limit the provision to existing contracts.
Second, the PPA provision as modified to cover new contracts should
be extended beyond the current expiration at the end of 2007,
preferably on a permanent basis. These rules were intended, absent the
limitations that were added last year when the provision was made a
part of the PPA, to settle the issue on a permanent basis and provide
exempts with certainty regarding the tax treatment of transactions with
controlled subsidiaries; they were not intended as temporary measures
and were not so limited in any of the pieces of legislation in which
they had previously been included.
A great many exempt organizations maintain controlled taxable
subsidiaries as a permanent part of their structure. Only by extending
the provision, preferably on a permanent basis, will the exempt
community have the certainty it needs in this area.
Arguably the authors of the PPA version of this provision limited
it with the expectation that Congress would eventually receive a
Treasury study on which to base a further evaluation of the provision's
effectiveness. But we submit that the approach taken will be more
harmful than helpful to exempts. After all, the study might not be
submitted until a year or more after the PPA provision expires creating
another round of uncertainty for exempts.
Both Congress and Treasury maintain regular oversight of the tax
system and will no doubt study the operation of section 512(b)(13) for
some time to come. Regular oversight of an existing provision is much
less disruptive, and we submit better tax policy, than enacting
temporary tax provisions that can be renewed only after they have
expired and only after a special study has been done of their
effectiveness.
For these reasons, we urge the Committee to treat section 1205 of
the PPA as a good first step, and to adopt the changes proposed in this
submission in order to create certainty both for exempt organizations
in this area as well as for Treasury.

Statement of Putnam Scholarship Fund
I am writing as President of the Putnam Scholarship Fund to ask for
revisions to the portions of the Pension Protection Act of 2006 dealing
with ``donor advised funds.''
The Putnam Scholarship Fund was founded in the late 1940's by Roger
and Caroline Putnam of Springfield, Massachusetts with the support of
many local citizens. The founders believed that securing a college
education was the best way to help people of color become successful
members of American society. Since then the Fund has provided help to
thousands of students. Over the years recipients have gone on to
careers as doctors, lawyers, politicians, clergy and other contributing
members of society. Every annual donation dollar goes to scholarship
aid. The Putnam Family covers all operating expenses and the Board of
Trustees provides their services pro bono. In order to maximize
efficiency, the Fund made arrangements with the Community Foundation of
Western Massachusetts to manage its corpus and to ``triage'' all
applications.
This last point appears to be the major problem with the new
changes in the Act. Because the Scholarship Fund collected the
donations and had also been making the award decisions, we were
considered ``donor advised'' and subject to the new regulations. As I
note below, this has caused us significant additional expense
(affecting what we can award) and forced us to reduce the role of our
volunteer board. We also worry that our donors will wonder if their
wishes are being as clearly followed given the increased overhead and
involvement of ``outsiders.''
We would like to propose the following changes in order to address
these concerns and yet provide the protections the Act was aimed at:
The definition of ``donor advised'' in the Act is too broad. With
what understanding we have of the rationale behind the Act, the need is
focused on the following items:
1. Source of Funding--If the ongoing operating or initial funding
comes from a limited pool (one individual or a small group of
individuals), then there should be cause for concern. In the case of
our scholarship fund, our corpus has been built up over years and came
from a variety of unrelated people. Our annual fundraising also comes
from a variety of people, some of whom are members of the Putnam
family, but, again, the majority of funds raised every year, both in
total dollars and in source of donations, comes from people all around
the country not related to anyone in my family.
2. Relationship of Recipients to Donors--If there is a relationship
between ``material'' donors (those whose annual contributions or income
from capital contributions equals or exceeds the average annual award)
and recipients, then there needs to be a clear and documented
separation between those who solicit funds and those who make awards
(the ``independence'' in the current Act). In our case, this does not
exist and never has, but the current Act requires our Board to be
separate from the ``Selection Committee.'' It forced us to remove
family members who have been participating for years in both
fundraising and award evaluation from one or the other activity. Since
this work is all done ``pro bono,'' this has impacted us severely, but
accomplished nothing since there is no relationship between donors and
recipients. We have also made sure that every individual member of the
Board has signed off every year indicating if they have any
relationship to any recipient or would otherwise benefit from any
award. While that has never happened, if that were to be the case, that
member would abstain from any such award decision.
So where you have a fund that receives its money from a variety of
unrelated individuals and has a Board that is unrelated and independent
of the recipients, the Act should be modified to remove them from the
definition of ``donor advised'' and the subsequent restrictions. Where
the source of funding is provided by a small pool AND there is a
relationship between the recipients and the donors, then the
restrictions make sense.
We propose the definition of ``material'' because there can be
instances where someone who has routinely donated small amounts over
time may be related to a recipient. Our average award is close to
$2,000, but any gift of $1,000 or above is put into our (independently
run) capital fund and we derive only the sustainable income for awards
(about 4.5% annually).
Your feedback is appreciated as well as any information on the
process so that I can understand what to expect.

Thanks,
W. Lowell Putnam
President

Statement of Robert M. Hearin Support Foundation
I commend the Subcommittee on Oversight for its appreciation of the
importance of the work of the charitable community and its role in
American life. I am writing on behalf of the Robert M. Hearin Support
Foundation (the ``Foundation''), a Type III supporting organization
located in Jackson, Mississippi. We are pleased to have the opportunity
to offer comments concerning certain tax-exempt provisions contained in
the Pension Protection Act of 2006 (the ``Act''), pursuant to the
Subcommittee's June 12, 2007 advisory.
As set forth in the instrument that created the Foundation,

The principal goal of the Foundation is to contribute to the
overall economic advancement of the state of Mississippi (the
``State'') by making funds available to any one or more of
[fifteen listed schools] (the ``Schools''), to prepare students
who will directly contribute to the State through capital
investment, creation and expansion of higher paying jobs, and
improvement in the general economy of the State. In making
distributions . . . the Foundation shall concentrate its
efforts on attracting promising students to any one (1) or more
of the Schools, and on improving the quality of instruction in
the Schools, in either case in the fields of business, science,
engineering, economics, law, medicine, accounting, pharmacy,
architecture and other academic disciplines which directly
contribute to the overall economic advancement of the State and
are viewed by trustees as furthering the goals of the
Foundation (the ``Areas of Emphasis''). Concentration of
efforts shall be reflected in a general and long-term
philosophy and goal of developing and supporting fewer larger
projects at the Schools (rather than numerous small gifts to
such institutions) which have the potential to accomplish the
Foundation's principal goal of economic advancement of the
state of Mississippi and to create recognition for excellence
at one (1) or more of the Schools.

Certain provisions of the Act created significant new burdens,
limitations and uncertainty for Type III supporting organizations. We
would like to offer comments on several of these provisions that are of
particular significance to the Foundation.
1. Minimum Payout Requirement
The Act directs the Secretary of the Treasury to promulgate new
Regulations setting out a new payout requirement for Type III
supporting organizations (other than those that are functionally
integrated). The eventual Regulations must, according to the Act,
require each such Type III organization to distribute a percentage of
either its income or assets to supported organizations. Act Section
1241(d)(1). Traditionally, a Type III supporting organization has been
able to fulfill its payout requirement by distributing ``substantially
all'' (i.e., at least 85%) of its income. Treas. Reg. Sec. 1.509(a)-
4(i)(3)(iii)(a).
On August 1, 2007, the Treasury issued an ``advance notice of
proposed rulemaking'' concerning payout requirements for Type III
supporting organizations that are not functionally integrated (the
``Advance Notice''). The proposed new payout requirement is anticipated
to impose an annual payout obligation for Type III supporting
organizations equal to five percent of the fair market value of non-
exempt-purpose assets (i.e., the same distribution requirement imposed
on private non-operating foundations).
A payout requirement tied to the value of a Type III supporting
organization's assets would pose particular difficulties to
organizations that own interests in non-publicly traded business
entities and other assets that are not easily valued. A supporting
organization could make payouts based on a presumed value of an
investment asset notwithstanding that this value is not fully realized
for any number of possible reasons, including lack of marketability and
losses from unpredictable causes like hurricanes. Especially in the
case of Type III supporting organizations owning interests in business
entities with significant contingent liabilities, a payout requirement
tied to value could effectively require the supporting organization to
dispose of its ownership interest--which might necessarily occur in a
manner that involves a considerable loss of value. Additionally, the
Foundation (which has six trustees and no operational staff) would be
required to pay outside experts to appraise its investment assets each
year, thus incurring expenses that would reduce the funds ultimately
available for the beneficiaries.
If, notwithstanding these considerations, Congress believes it
desirable to have a payout requirement tied to the value of a Type III
supporting organization's assets, it would be preferable to have a
payout requirement similar to the standard applicable to private
operating foundations, as proposed by the Comments in Response to IRS
Notice 2007-21 on Treasury Study on Donor Advised Funds and Supporting
Organizations submitted to the Internal Revenue Service by the American
Bar Association Section of Taxation on August 1, 2007. As those
comments explain, the proposed payout requirement for non-functionally
integrated Type III supporting organizations would be the lesser of 85%
of net income or 4\1/4\% of asset value, with a minimum distribution
requirement of 3\1/3\% of asset value.
The Advance Notice also set out the Treasury's intention to propose
regulations that would ``limit the number of publicly supported
organizations a non-functionally integrated Type III supporting
organization may support.'' Prospectively, the limit would be five
publicly supported organizations. The Advance Notice explained that an
organization already in existence when the regulations are proposed
would be permitted to ``support more than five supported organizations
only if the organization distributes at least 85 percent of its total
required payout amount to, or for the use of, publicly supported
organizations to which the supporting organization is responsive
pursuant to Treas. Reg. Sec. 1.509(a)-4(i)(2)(ii).'' For reasons
discussed below (in part 3 of this letter) in connection with the
proposed changes to the responsiveness test, this restriction on
distributions would create considerable problems for the Foundation.
In light of these difficulties, it is desirable for Congress to
provide more specific guidance to the Secretary of the Treasury
concerning the payout requirement for non-functionally integrated Type
III supporting organizations, calling for an approach that avoids the
problems described above.
2. Excess Business Holdings
The excess business holdings rules under IRC Section 4943
previously applied only to private foundations. Under the Act, however,
the excess business holdings rules apply to Type III supporting
organizations (other than those that are functionally integrated). Act
Section 1243.
Under the excess business holdings rules, an excise tax ordinarily
would be imposed if a Type III supporting organization, together with
its baseline and certain disqualified persons, were to hold (directly
or indirectly) more than a 20% voting interest in a business
enterprise. If one or more persons, other than the Type III supporting
organization together with certain disqualified persons, have effective
control of an enterprise, then the limit is raised to 35%, although the
burden is effectively on the Type III supporting organization to
establish that the control resides in other persons. A safe harbor
exists under which the Type III supporting organization need not
consider the holdings of disqualified persons if it (together with
certain related exempt organizations) holds no more than a 2% interest
in the voting stock of a given business enterprise. Transition rules
apply to donated assets. Excess business holdings are subject to a 10%
annual excise tax, plus a 200% excise tax if the holdings are not
timely reduced to permitted levels. See generally IRC Section 4943.
The rules described in the preceding paragraph would be applicable
to Type III supporting organizations on both a prospective and
retroactive basis. However, Type III supporting organizations are
granted the benefit of transition rules over an initial, two-phase
period of 25 years. At the end of that period, the combined holdings of
a Type III supporting organization and its disqualified persons in a
business enterprise must not exceed 35% of the voting stock or 35% of
the equity value of the enterprise (rather than the usual limit of 20%
of the voting stock), subject to the further limitation that if
disqualified persons held more than 2% of the voting stock of the
business enterprise during the prior 25-year period, the holdings of
the Type III supporting organization must not exceed 25% of the voting
stock or 25% of the equity value. Because of the application of a very
complex set of rules that may be triggered by changes in ownership of
the business enterprise during the transition period, it is possible
that the actual ownership limits will be lower than the maximum
percentages stated above. Changes in ownership percentages that trigger
these prohibitions can occur as a result of transactions in which
neither the supporting organization nor any disqualified person
participates (e.g., the redemption of stock held by an unrelated owner
as a result of that owner's retirement or death, or any other type of
change in business circumstances affecting such unrelated owner.)
The imposition of the excess business holdings rules on Type III
supporting organizations could force such an organization to reduce its
business holdings solely in order to effectuate compliance with a tax
rule, without regard to whether the decision is necessarily in the
economic best interests of the organization or, indeed, the best
interests of its beneficiaries, who would bear the burden of any
resulting loss of value. Reducing one's interest in a closely held
business is sometimes very difficult to accomplish given the absence of
a market for ownership interests in the business. The new rules also
interfere with the ability of an organization to comply with a donor's
wishes that a Type III supporting organization retain certain assets
indefinitely. (In this regard, it is useful to bear in mind that some
donors elected to create Type III supporting organizations in the first
place in order to ensure that businesses with which they were involved
could be preserved without regard to the rules that limit the business
holdings of a private foundation. In many cases, the donor's family is
no longer involved with the business in which the supporting
organization has an ownership interest.)
Although the Act contains two narrow exceptions to the excess
business holdings rules as applied to Type III supporting
organizations, one exception is available only in those relatively
limited circumstances where state officials on or before November 18,
2005 used their authority to direct an organization's investment
decisions, and the other exception seems unlikely to be available
unless state officials have taken some action to direct an
organization's investment decisions. In other words, the exceptions are
available only in extremely rare circumstances and, in effect, they
impose a burden on Type III supporting organizations that is
significantly higher than the burden faced by other public charities in
connection with their investment activities.
It is desirable for Congress to amend the Act to create true
``grandfathering'' for the excess business holdings of some or all Type
III supporting organizations, especially those established by donors
who are no longer living. Such a rule would preserve the autonomy of
boards of Type III supporting organizations to make investment
decisions based purely on sound fiduciary and appropriate financial
considerations.
3. Qualification of Trusts as Type III Supporting Organizations
Under current Treasury Regulations, a Type III supporting
organization must meet a ``responsiveness'' test with respect to its
supported organizations. See Treas. Reg. Sec. 1.509(a)-4(i)(2). A Type
III supporting organization structured as a charitable trust has
traditionally fulfilled the responsiveness requirement simply by reason
of being a trust and the fact that its supported organizations have the
power to enforce the trust and compel an accounting. See Treas. Reg.
Sec. 1.509(a)-4(i)(2)(iii). However, the Act provides that this
traditional means of fulfilling the responsiveness requirement will not
be sufficient after the first anniversary of the Act's effective date.
Act Section 1241(c). Although the Act itself does not elaborate, the
Joint Committee Report states that each Type III supporting
organization structured as a trust will be required to establish to the
satisfaction of the U.S. Secretary of the Treasury that the
organization has a ``close and continuous relationship'' with the
supported organizations, such that the supporting organization is
responsive to the needs or demands of the supported organizations.
The Advance Notice anticipates that the proposed Regulations under
this provision of the Act will adopt the responsiveness test under Reg.
Sec. 1.509(a)-4(i)(2)(ii). Under those rules, one of the following
elements must be present and, by reason of such element, one or more
supported organizations must have a ``significant voice'' in the
investment policies of the supporting organization, the timing of
grants, the manner of making them, the selection of grant recipients,
and otherwise directing the use of the income or assets of the
supporting organization.
One or more officers or trustees of the supporting organization
must be elected or appointed by the officers, directors, trustees or
membership of the supported organizations. One or more members of the
governing bodies of the supported organization must also be officers or
trustees, or hold other important offices in, the supporting
organization. The officers or trustees of the supporting organization
must maintain a close and continuous working relationship with the
officers, directors or trustees of the supported organizations. Treas.
Reg. Sec. 1.509(a)-4(i)(2)(ii).
The third of those alternatives (the ``close and continuous working
relationship standard'') is especially appealing for a Type III
supporting organization that supports multiple charities. However, the
payout requirement described above for non-functionally integrated Type
III supporting organizations with more than five beneficiaries has the
potential to create difficulties. As noted, the Advance Notice
anticipates that such organizations will be permitted to ``support more
than five supported organizations only if the organization distributes
at least 85 percent of its total required payout amount to, or for the
use of, publicly supported organizations to which the supporting
organization is responsive pursuant to Treas. Reg. Sec. 1.509(a)-
4(i)(2)(ii).''
In order for a supporting organization to be responsive to a
particular supported organization, the supported organization must have
a ``significant voice'' in, among other things, the timing of grants,
the manner of making them, and the selection of grant recipients by the
supporting organization. If some supported organizations had such a
significant voice and others did not, the appearance of favoritism or
conflicts of interest could result. These problems would be
particularly acute in the Foundation's case because its beneficiaries
are the four-year colleges and universities in Mississippi. To a much
greater extent than the multiple beneficiaries of other grant-making
organizations (such as secondary schools or arts organizations), these
colleges and universities compete head to head with each other for
students, faculty and other resources.
Further, if every supported organization had a ``significant
voice'' in some manner, management of the supporting organization could
become unwieldy and subject to undesirable competition for grants where
there are numerous beneficiaries. It would also become more difficult
for the supporting organization to verify that grants were being used
appropriately if its governing body consisted entirely or primarily of
trustees appointed by the supported organizations. There would also be
the danger of ``log-rolling'' by the trustees, which would frustrate
the Foundation's stated preference for ``developing and supporting
fewer larger projects at the Schools (rather than numerous small gifts
to such institutions).''
Apart from the portion of the payout requirement relating to non-
functionally integrated Type III supporting organizations with more
than five beneficiaries, the anticipated regulations concerning the
responsiveness test for charitable trusts appears workable. But the
combination of the change in the responsiveness test for charitable
trusts and the payout requirement would create serious difficulties.
Consequently, it is desirable for Congress to provide more specific
guidance to the Secretary of the Treasury concerning the payout
requirement for non-functionally integrated Type III supporting
organizations that would avoid the burdensome suggested rule for Type
III supporting organizations with more than five beneficiaries--
especially those that support higher education.
4. Payment of Compensation and Expense Reimbursements to Certain
Persons
Under the Act, the entire amount of a grant, loan, payment of
compensation, or ``other similar payment'' by any type of supporting
organization to a substantial contributor or a related person is an
automatic excess benefit transaction, which triggers the various
penalty provisions of IRC Section 4958 even if the payment is
reasonable. IRC Section 4958(c)(3)(A)(i)(I). According to the Joint
Committee report that accompanied the Act (the ``Joint Committee
Report''), the term ``other similar payment'' includes an expense
reimbursement.
The IRC Section 4958 excise tax (commonly known as ``intermediate
sanctions'' and more precisely referred to as the tax on ``excess
benefit transactions'') is ordinarily imposed only when transactions
are unreasonable and lead to excessive compensation to a disqualified
person. However, for supporting organizations that pay compensation or
reimbursements to a substantial contributor or related person, the tax
is imposed with respect to the full amount of the compensation or
reimbursement, without regard to whether the amount is reasonable or is
otherwise justified.
This excise tax is imposed on the recipient of the excess benefit
and may be imposed on organization managers who approve the
compensation or reimbursement giving rise to the excess benefit. The
tax on the recipient of the excess benefit is 25% of the excess benefit
(again, in this case, the entire benefit), plus an additional 200% tax
if the excess benefit (again, the entire benefit) is not timely
refunded to the supporting organization.
Because of the severity of this excise tax, the new rule
effectively prohibits any supporting organization, regardless of its
type, from paying even reasonable compensation or expense
reimbursements to its founder, his or her spouse and children, and
other family members. This is true whether the compensation is for
services as a director or trustee, as an executive director or program
officer, or as an outside advisor. In this respect, the new rule is
more stringent than the rule for a private foundation, which may,
without adverse tax consequences, reimburse documented expenses and pay
compensation to ``disqualified persons'' (provided the compensation is
not excessive and provided that the services provided are reasonable
and necessary to the foundation's tax-exempt purposes). See IRC Section
4941(d)(E).
Even a Type I supporting organization founded, funded and
controlled by a university or other public charity could run afoul of
the new rule if (for example) the supporting organization pays
reasonable compensation or reimbursements to (for example) the spouse
or child of a director or officer of the supporting organization.
Hence, the Type I supporting organization would be effectively
prohibited from entering into a compensation arrangement that the
founding organization itself could enter into.
It is desirable for Congress to amend the Act in order to eliminate
or modify the automatic excess benefit transaction rules that the Act
imposes on supporting organizations.

Statement of Rodrigues, Horii & Choi LLP
These comments were prepared in response to Chairman John Lewis's
invitation for public comments on the impact of the Pension Protection
Act of 2006, Pub. L. No. 109-280 (the ``PPA'') on tax-exempt
organizations. Specifically, this letter addresses the impact of the
new rules of the PPA on donor-advised funds (``DAFs'') and supporting
organizations (``SOs''). The law firm of Rodriguez, Horii & Choi LLP
respectfully submits the following comments in response to Chairman
Lewis's request. While the firm represents a wide range of community
foundations, SOs, private foundations (``PFs'') and individual donors,
these comments were not made on behalf of any firm clients. The
comments were, however, based on the firm's experience with sponsors of
DAFs, SOs, PFs and individual donors.
A. Advantages of DAFs and SOs
DAFs and SOs serve many important functions with respect to
charitable giving. DAFs and SOs increase overall charitable giving and
funding for charitable organizations. Private foundations (``PFs'')
generally view the five percent required minimum distribution as both a
floor and a cap. The majority of PFs distribute only five percent of
the value of their assets annually as compared to DAFs and SOs which
typically, and definitely in the aggregate, distribute much greater
percentages of their assets. In fact, it is not uncommon for a DAF to
distribute 100 percent of its contributions within a year of
contribution.
Unlike many PFs, DAFs and SOs involve management by public
charities unrelated to the donors. These unrelated managers are well
aware of their responsibilities and potential liabilities in managing
the DAF or SO. In addition, the need to present proposed actions to
unrelated managers causes self-regulation by donors who know that any
proposal will have to be justified to the public charity's board of
directors. Having the donors accountable to the unrelated organization
also reduces potential abuse, thereby reducing the need for Internal
Revenue Service oversight.
DAFs provide many unique advantages to donors. DAFs are routinely
used to facilitate gifts to public charities. Many charities do not
have the expertise to accept gifts of real estate, private stock and
other assets with special considerations. A community foundation or
other sponsor of DAFs may process the gift for one or more charities
and distribute the proceeds to them. PFs are not a practical
alternative because of the limitations on the tax deduction for the
donor and the limitations on assets that PFs can accept.
DAFs can accept gifts on behalf of a charity that is awaiting its
Internal Revenue Service determination letter. PFs in particular are
reluctant to make grants to a charity that has not yet received its
determination letter. Consequently, such a charity would miss out on
needed start-up funding.
Organizations that sponsor DAFs and SOs provide a donor with
investment advice to maximize the amount available for charitable
funding. Sponsoring organizations can also make recommendations for
achieving a particular donor's charitable goals and bring together
other donors to achieve common goals they may not be able to achieve on
their own. DAFs enable a donor new to charitable giving arrangements to
test out his or her philanthropy goals before incurring the expense of
creating a PF to achieve these same goals.
PFs have significant start-up and administrative costs and have a
psychology of permanence. While they are an important long-term source
of funding for the charitable sector, the benefit they provide will
almost always be spread over a long period of time. DAFs, on the other
hand, provide the most immediate benefit to charities and experience
the highest payout percentages as compared to SOs and PFs. DAFs are
routinely suggested as a vehicle to allow a donor to make a single gift
that will be distributed to charities within a year. For a donor facing
timing issues with respect to making a gift (e.g., providing disaster
relief or a possible sale of an asset), the simplicity of creation, low
cost and flexibility of the DAF encourage charitable giving that might
not otherwise occur. A donor who has timing issues with respect to a
gift of $10,000 can easily create a DAF but would never consider a PF
because the donation would likely be eaten up by start-up costs.
Indeed, a PF for a short term would almost never be practical given the
amount of resources and time that it takes to create a PF.
DAFs allow donors at more modest levels to have flexibility in
giving, making philanthropy more attractive to a donor at a five, six
or even low seven figure giving level. While some of these benefits can
be enjoyed with direct gifts, the flexibility of the DAF may be the key
difference between making or not making the gift, or at least the
amount of the gift.
DAFs provide a significant administrative benefit to the Internal
Revenue Service. They eliminate the need for processing separate
information returns and for oversight of the individual accounts.
SOs also serve an important role in charitable giving. SOs
generally involve significant participation by the supported public
charities. While an SO is not subject to a minimum distribution
requirement like PFs, the presence of the public charity's board of
directors brings a sense of immediacy to the SO's board of directors,
encouraging distributions.
SOs are routinely used by public charities that wish to create a
new entity for liability purposes such as hospital fundraising
foundations. An SO is also useful when a charity wants different
governing boards for different aspects of its operations. For example,
one board may manage the exempt purpose activities of the charity while
an SO may be established to hold the endowment with a governing board
focus on investment expertise. Generally, a PF would be unattractive to
a public charity for these functions, and the activities might not
otherwise qualify for public charity status absent the SO rules.
SOs are also used by public charities working together jointly to
carry out a charitable purpose. The operations of the joint charity may
be limited in a PF, and the joint activities or funding may not qualify
for public charity status.
In short, DAFs and SOs serve a vital role to the charitable sector
that cannot be filled by the other public charity classifications or by
PFs. These structures are important to charitable giving arrangements
because they increase overall giving to the charitable sector and are
essential to the structuring of its operations. The direct benefits
that DAFs and SOs provide justify treating them as public charities for
all purposes, including charitable contribution deductions. Indeed,
public charity treatment is essential to allow DAFs and SOs to serve
their vital missions. However, the restrictions imposed on DAFs and SOs
by the PPA makes these charitable vehicles less attractive to donors
and will reduce charitable giving overall.
B. Impact of the PPA on DAFs and SOs
Donor benefits from DAFs and SOs are best regulated under the
excess benefit rules under section 4958 of the Code that existed prior
to the PPA with one exception. Donors to other types of public
charities receive the maximum charitable contribution deduction allowed
under the Code even if they engage in transactions that do not violate
the excess benefit transaction rules. To ensure that excess benefit
standards and scrutiny are applied to transactions that may involve the
donor or a related party, it is appropriate to treat the donor to a DAF
as a disqualified person with respect to transactions related to the
DAF. Such treatment will ensure that the public charity analyzes any
such transaction as a potential excess benefit transaction and takes
the appropriate steps to ensure that no excess benefit is provided to
the donor.
The automatic excess benefit rules added to section 4958 of the
Code by the PPA, on the other hand, are not an appropriate mechanism to
address DAFs and SOs. The automatic excess benefit rules implicitly
assume that the managers of DAFs and SOs will not review transactions
with related parties as carefully as managers of other public charities
that are not DAFs or SOs. Experience does not support this assumption.
As noted above, these managers take their obligations seriously and are
aware of their potential liabilities. As with other types of public
charities, there will be lapses in oversight by managers of some DAFs
and SOs, but these lapses should be dealt with on an individual basis
as is done with other public charities. There is no evidence that DAFs
and SOs experience greater mismanagement than other public charities.
The provisions of the PPA have and will continue to adversely
impact charitable giving. The complexity and ambiguity of the
provisions have already forced DAF sponsors and SOs to incur
significant compliance costs. The distribution limits on DAFs
significantly and unduly restrict the flexibility of DAFs. There is no
evidence to conclude that wide spread abuses of DAF distributions to
individuals existed, and yet many legitimate DAF charitable programs
that assisted individuals in need have been forced to terminate.
While there was no wide spread abuse of compensation from DAFs and
SOs, the automatic excess benefit rules under section 4958 of the Code
have forced the termination of many legitimate employment
relationships. The onerous effective dates caused needless anxiety and
expense for DAFs and SOs with such relationships. The automatic excess
benefit rules are particularly problematic for SOs, which as legal
entities, often require employees and impose legitimate expenses upon
their officers and directors that should be reimbursed or paid by the
SO as part of its administrative costs.
Furthermore, the provisions of the PPA result in traps for the
unwary. For example, a donor who intended to run fundraising events out
of a DAF is now prohibited from being reimbursed for any expenses by
the DAF because the reimbursement would be an automatic excess benefit
even if the expenses are reasonable. Such expenses may also be a
taxable distribution under section 4966 of the Code as distributions to
individuals are strictly prohibited from a DAF. Donors who put funds
for fundraising expenses into a DAF prior to the PPA have no way of
pulling those funds out of the DAF. Donors who create a DAF after the
PPA must be aware of this rule and reserve some of the funding to fund
fundraising events, resulting in a trap for the unsophisticated donor.
The consequences of these rules result in donors being less inclined to
conduct fundraisers, resulting in less funding going to the charitable
sector.
Additionally, there is insufficient guidance on how to apply the
PPA provisions to DAFs and SOs. It is not clear what types of payments
from DAFs and SOs would be considered a payment similar to a grant,
loan or compensation under the automatic excess benefit transaction
rules. Would this include the payment of a donor's personal pledge that
is satisfied through the donor's DAF? It is not a direct payment from
the donor but it alleviates an obligation of the donor and
consequently, has been held as an act of self-dealing in the PF
context.
On the other hand, the satisfaction of a donor's pledge may
properly be addressed under the rules of prohibited benefit
transactions under section 4967 of the Code. A prohibited benefit
includes a distribution on which a donor of a DAF provides advice and
that results in the donor receiving, directly or indirectly, a ``more
than incidental benefit.'' The legislative history states that ``[i]n
general, a distribution results in a more than incidental benefit if,
as a result of a distribution from a DAF, a disqualified person
receives a benefit that would have reduced (or eliminated) a charitable
contribution deduction if the benefit was received as part of the
contribution to the sponsoring organization.'' The satisfaction of a
pledge would have been tax deductible as a charitable contribution to
the donor so it appears to be excluded from the definition of a
prohibited benefit and, therefore, permitted under section 4967 of the
Code.
The problem with this uncertainty for the donor is that correction
and the excise taxes imposed on the transaction are not the same. A
donor who is not sure which rules properly apply must guess. If the
donor does not come to the same conclusion as the Internal Revenue
Service, the donor will be subject to additional failure to report and
failure to pay penalties, resulting in another trap for the unwary.
Another question on the minds of DAF donors is whether a donor can
purchase tickets to a charitable fundraising event which the donor
attends if the donor bifurcates the cost of the ticket by paying for
the non-deductible portion of the ticket himself or herself and having
the DAF pay for the portion of the ticket that would result in a
charitable contribution deduction. A payment by the DAF for only the
charitable portion, with the donor paying the non-deductible portion,
should not result in the donor receiving a prohibited benefit, because
the amount that would have reduced (or eliminated) the charitable
contribution deduction is not being paid out of the DAF. However, the
answer is unclear given the conflicting guidance that the Internal
Revenue Service has issued in the PF context with respect to the self-
dealing rules.
All of the uncertainty caused by the PPA will inevitably reduce
charitable giving because donors and sponsoring organizations will not
want to make distributions that may later be determined to be a
prohibited distribution and subject to excise taxes by the Internal
Revenue Service in the future. This uncertainty, coupled with the PPA
making DAFs and SOs less flexible, will discourage some donations and
encourage other donors to form PFs, thereby reducing and deferring the
amount that will go to the charitable sector. For active
philanthropists with diverse sources of gifts and activities, the PPA
will require the formation of multiple entities in order to accomplish
goals that might have previously been accomplished with a single DAF or
SO. Multiple entities increase the administrative costs of the
philanthropy, reducing its overall benefit. Multiple entities also add
to the return processing and compliance burden of the Internal Revenue
Service.
C. Conclusion
Public charities and donors make routine and wide-spread use of
DAFs and SOs to carryout the important work of the non-profit sector in
the United States. The existing provisions of the PPA and any further
regulation should be based on a study of the operations of all DAFs and
SOs, not widely reported actions of a few DAFs and SOs. There is no
basis to conclude that sponsors of DAFs and SOs are less compliant with
tax and fiduciary requirements than managers of other public charities.
Accordingly, DAFs and SOs should be accorded the same flexibility and
benefits given to other public charities.
As a final note, in contrasting PFs with DAFs and SOs, we do not
intend to diminish the vital role that PFs play in the non-profit
sector. PFs are the endowment of the non-profit sector and often are
the first source of funds for new and innovative programs. PFs,
however, have limitations that would make it impossible for them to
fulfill the roles of DAFs and SOs. As important as PFs are, if DAFs or
SOs are not available or are subject are further limitations, the non-
profit sector will be diminished.
If you wish to contact the firm regarding these comments, please do
not hesitate to contact Reynolds T. Cafferata, William C. Choi or
Shannon M. Paresa.

Samaritan's Purse
Boone, North Carolina 28607
July 26, 2007

Oversight Committee
Committee on Ways & Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Honorable Members of the Subcommittee:

Samaritan's Purse is grateful for dozens of gifts totaling hundreds
of thousands of dollars donors have contributed from their IRAs
pursuant to the Philanthropy Protection Act of 2006 (PPA). We would
encourage the permanent extension of the charitable IRA rollover
provisions of the PPA continued for those who have attained age 70\1/
2\. We also believe that expanding the law to allow transfers into
planned giving arrangements such as Charitable Remainder Trusts and
Gift Annuities for those who have attained 59\1/2\ would be in the best
interests of donors/taxpayers, charities and those they serve, and the
government. Further expanding the provisions to include rollover gifts
from other qualified retirement accounts and tax-deferred annuities
would likewise create a winning combination. We believe that these
provisions likely would accomplish the following:

1. Samaritan's Purse could help more victims of war, poverty,
disease, natural disasters and famine.
2. Many charities would be able to help more people who otherwise
would be dependent on government or would go without help.
3. Large amounts of money currently sitting out of the reach of
taxes in retirement and tax-deferred annuity accounts would be moved
into planned-gift arrangements that will pay out income to the donors.
That income would be fully taxable during the lifetime of its
recipient. The income amount paid to a taxpayer from a gift annuity or
charitable trust in many cases would exceed the Required Minimum
Distribution (RMD) amount for many donors over age 70\1/2\. This would
increase tax revenues.
4. For donors between 59\1/2\ and 70\1/2\, there is great
reluctance to withdraw funds from a tax-deferred account because of the
tax on such withdrawals. If such donors were allowed to roll over such
funds into a charitable trust or gift annuity, many would be highly
motivated by the ability to make a greater difference through their
favorite charities with the initial tax disincentive removed. We have
talked to numerous donors both under and over 70\1/2\ who would be
willing to pay tax on their income from the trust or annuity if they
are able to avoid taxation on moving funds from the tax-deferred
account to the charitable gift plan. The result would be increased tax
revenues.
5. Many donors withdraw only the RMD from their retirement accounts
until they die, after which they give all or a portion of the account
to charity. This means no income tax is ever collected on the remaining
tax-deferred funds. Allowing tax-free rollovers into charitable trusts
and annuities means that some of this tax-deferred money would be taxed
as it is paid out to donors through the trust income or annuity
payments.

Thank you for considering the extension and expansion of the IRA
charitable rollover gift provisions in the Philanthropy Protection Act
of 2006.

Sincerely,
James J. Loscheider
Vice President of Donor Ministries

Steve Nickel, J.D.
Senior Gift Planning Counsel

Schwab Charitable Fund
San Francisco, California 94104
July 30, 2007

The Honorable John Lewis, Chairman
House Ways and Means Oversight Subcommittee
1136 Longworth House Office Building
Washington, D.C. 20515

Dear Mr. Chairman:

Thank you very much for the opportunity to submit written comments
on the provisions relating to tax-exempt organizations contained in the
Pension Protection Act of 2006 (P.L. 109-280). On behalf of the Schwab
Charitable Fund, I am writing to share our views on how the Pension
Protection Act of 2006 (``PPA'') has affected our operations, and to
suggest two areas in need of improvement.
The Schwab Charitable Fund is an independent, non-profit
organization that is recognized as a tax-exempt public charity. The
Charitable Fund was launched in September 1999 and had received more
than $2.2 billion in contributions as of June 30, 2007. Currently, the
Charitable Fund has 8,340 accounts (called ``Charitable Gift
Accounts''). A donor can contribute $10,000 or more to open a
Charitable Gift Account. A significant majority of charitable gift
accounts have assets of less than $50,000. Since inception, the
Charitable Fund has made more than 155,000 individual grants totaling
$673 million to more than 32,000 different charitable organizations.
More than 31 percent of all donations made to the Charitable Fund have
been granted to public charities throughout the country, in every state
in the union. In 2006, the Charitable Fund received more than $700
million in donations, a record and a 28% increase over 2005. More than
$215 million was granted to over 15,000 charities in 2006 alone.
The Pension Protection Act contains a number of provisions
affecting donor-advised funds held by charitable organizations. The
Charitable Fund supports many of the new provisions, particularly the
Section 4967 excise tax on prohibited benefits from donor-advised fund
distributions. The Charitable Fund expects that most of the PPA's
donor-advised fund provisions will have little effect on it because the
provisions are consistent with longstanding Charitable Fund policies.
In addition, the Charitable Fund is aware that the PPA included a
requirement that the Department of the Treasury conduct a comprehensive
study of donor-advised funds and report back to Congress with any
recommendations for further legislation. The Charitable Fund has been
actively involved in this process by submitting a detailed comment
letter about the Fund's operations and policies, and by meeting
directly with IRS and Treasury staff to answer questions. Our comment
letter to the Treasury Department provides a more comprehensive review
of the Charitable Fund and its policies, and also addresses a number of
specific questions posed by Treasury in their request for comment. We
would be happy to provide a copy of that comment letter to the
Committee if that would be helpful.
For the purposes of the Committee's request, we will limit our
comments to two areas of the PPA that have already proven to be
problematic: the prohibition on rolling IRA funds directly to a donor-
advised fund, and the restriction in new section 4966 on making grants
to ``disqualified supporting organizations.''
IRA Charitable Rollover
The Pension Protection Act included a provision allowing
individuals age 70\1/2\ and over to make charitable donations of up to
$100,000 from IRAs and Roth IRAs directly to a charity without having
to count the distributions as taxable income. According to data
collected by the National Committee on Planned Giving, more than $75
million was donated to charity during the first 10 months after
enactment of the legislation, in gifts ranging from $25 to $100,000.\1\
None of those dollars, however, were donated to a donor-advised fund,
because donor-advised funds were specifically excluded from the
definition of ``eligible charity'' in the legislation.
---------------------------------------------------------------------------
\1\ ``NCPG Survey of IRA Distributions to Charity: Results as of
June 4, 2007,'' National Committee on Planned Giving, p. 1. Available
at http://www.ncpg.org/gov_relations/NCPG%20 IRA%20Survey%206-4-07.pdf.
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The Schwab Charitable Fund believes strongly that the IRA
Charitable Rollover provision, which is set to expire at the end of
2007, should be made permanent and that it should be expanded so that
individuals can make IRA and Roth IRA distributions to donor-advised
funds. Representatives Earl Pomeroy (D-ND) and Wally Herger (R-CA) have
introduced legislation, the Public Good IRA Rollover Act of 2007 (H.R.
1419), that will accomplish both goals. Their bill, a companion of
which has been introduced in the Senate, has attracted a bipartisan
group of more than 50 Members of Congress. There is virtually no
disagreement that permitting rollovers from IRAs directly to charities
has been a positive development for charitable giving, as the $75
million donated to date attests. Awareness of this option for
contributing to charity is still relatively low, given the short amount
of time financial institutions and financial planners have had to
promote it to their clients. By making the charitable rollover
permanent, charitable contributions from IRAs should continue to rise
significantly. Congress should quickly make this provision permanent so
as not to slow the growing momentum from their important new mechanism
for philanthropy.
Given that contributions to donor-advised funds also represent
irrevocable gifts to charity, it is important that donor-advised funds
also be allowed to accept these IRA distributions. Donor-advised funds
bring a number of advantages to the philanthropic arena, including:

Providing liquid assets readily available to respond
quickly to natural disasters;
Maintaining a source of funds for charitable giving
during downturns in the economy;
Reducing the red tape, time pressure, and administrative
burdens that often get in the way of giving;
Enabling donors to research charitable organizations and
find a matches for their interests; and
Establishing a legacy of charitable giving that can
involve the whole family and be passed on to future generations.

In summary, they simplify the process of giving for the donor,
particularly if the donor wants to use his or her IRA funds to give to
multiple charities. Donor-advised funds can play an important role in
helping individuals make the most of the IRA charitable rollover.
The PPA and the legislative history underlying it provide no
rationale for why IRA holders were not allowed to send distributions
directly to a donor-advised fund, and there is no policy reason for
their exclusion. Passage of the Public Good IRA Rollover Act of 2007
would ensure that donor-advised fund holders could take advantage of
this important new mechanism for philanthropy. I urge the Committee to
bring this legislation to a vote at the earliest opportunity.
Restrictions on Grants to ``Disqualified Supporting Organizations''
The other provision of the PPA that has already begun to have a
significant impact on the Charitable Fund's operations is the
restriction in new Section 4966 on making grants to ``disqualified
supporting organizations,'' as defined in Section 4966(d)(4). On
December 4, 2006, the Internal Revenue Service issued Notice 2006-109,
which provides interim guidance on several issues, including how donor-
advised funds can determine whether a potential grantee is a
disqualified supporting organization. As a result of Section 4966 and
Notice 2006-109, the Charitable Fund has instituted new due diligence
procedures designed to determine (1) whether a public charity is a
supporting organization; (2) if so, whether it is a Type I, II or III
supporting organization; and (3) if it is a Type III supporting
organization, whether it is functionally integrated. The Charitable
Fund must also determine if the donor or donor-advisor directly or
indirectly controls a supported organization of the supporting
organization (as described in Section 4966(d)(4)(A)(ii)(I)). These
determinations are often difficult for the grantor and time-consuming
for both the grantor and the grantee.
The Charitable Fund anticipates that relatively few of its
recommended grantees will be Type III supporting organizations that are
not functionally integrated and even fewer will be subject to the
control relationship described in Section 4966(d)(4)(A)(ii)(I). Given
that the Charitable Fund makes hundreds of grants to supporting
organizations each year, the Charitable Fund believes that more
practical and efficient procedures are needed for determining a
supporting organization's status. Several proposals have been
suggested, including permitting reliance by grantors on a grantee's
representation of its status as reported on its most recent Form 990 or
on an affidavit. The Charitable Fund supports these proposals and any
others that would simplify the process of making grants to supporting
organizations.
As the Committee continues its review of the tax-exempt provisions
of the PPA, please do not hesitate to contact me if I can answer
questions or provide additional information.

Sincerely,
Kim Wright-Violich
President

Statement of Senator Byron Dorgan
Chairman Lewis, Ranking Member Ramstad and other distinguished
Subcommittee Members, I appreciate this opportunity to visit with you
today about one of the most important charitable giving tax incentives
that Congress has passed in decades.
Last summer, the Congress passed and the President signed into law
a major bill to reform our pension laws. This 392-page bill contained a
little noticed but important new charitable giving tax incentive.
For the first time, the Tax Code permitted taxpayers who have
reached age 70\1/2\ to give money directly from their individual
retirement accounts (IRAs) to qualifying charities on a tax-free basis
without the need to worry about complicated adjusted gross income and
other restrictions that otherwise would apply to tax deductible
charitable contributions. The charitable IRA rollover provision in H.R.
4 applied only for direct IRA gifts, is capped and is available for a
limited time--expiring at the end of this year.
In fact, the charitable IRA rollover provision in H.R. 4 adopted
the same general approach of legislation for direct IRA gifts that I
have been working on called the Public Good IRA Rollover Act with
Senator Snowe of Maine and several of our Senate colleagues.
Before the charitable IRA rollover was enacted into law, I was told
by many charities that potential donors frequently asked about using
their IRAs to make charitable donations but decided against such gifts
after they were told about the potential tax consequences under then-
current tax law. I am pleased to report that the charitable community
is feeling a positive impact of the new charitable IRA rollover
measure. According to a survey conducted by the National Committee on
Planned Giving, over 4,000 IRA donations totaling more than $80 million
have been made to eligible charities since the tax-free IRA rollover
provision took effect last August.
I'm told that the IRA rollovers have resulted in significant gifts
in North Dakota. For example, it reportedly inspired a donor to
Lutheran Social Services of North Dakota to contribute $15,000, an
amount higher than the donor's typical gift. This charitable gift will
help the organization to continue its diverse programs in such areas as
adoption services, counseling for at-risk youth, economic self-
sufficiency for refugees, and services for farmers and ranchers.
Lutheran Social Services believes that the IRA rollover provision
encourages people to give more and to continue giving. The University
of Mary has received five IRA gifts totaling some $280,000. The
Theodore Roosevelt Medora Foundation has received four IRA gifts and
commitments of over $300,000. Jamestown College received fourteen IRA
gifts totaling $130,000. Other North Dakota charities, including
Catholic Health Services for Western North Dakota, have benefited from
tax-free IRA gifts as well. Hillsboro Medical Center Foundation has
received nearly $20,000 in IRA rollover commitments that will help
build a new nursing home, an assisted living facilities and needed
hospital improvements. Most recently, the State Historical Society of
North Dakota Foundation has endorsed the bill.
The positive results are undeniable: the temporary charitable IRA
rollover incentive is working well and making a difference in the lives
of people who are assisted by the nation's network of charities. But we
can even do better. That's why the Public Good IRA Rollover Act that we
have introduced in the 110th Congress would remove its current dollar
cap, expand it to allow taxpayers who have attained age 59\1/2\ to make
life-income gifts and by make it a permanent part of the Tax Code.
Mr. President, with the help and hard work of the Independent
Sector the charitable IRA rollover approach in this legislation has
been endorsed by nearly 900 charitable organizations, including: the
American Cancer Society, the American Red Cross and American Heart
Association, America's Second Harvest, American Association of Museums,
Big Brothers Big Sisters of America, Ducks Unlimited, Easter Seals,
Goodwill, Lutheran Services of America, March of Dimes, the Salvation
Army, United Jewish Communities, United Way of America, Volunteers of
America, YMCA of the USA, Prairie Public Broadcasting, the North Dakota
Community Foundation and many others. I am very pleased that the U.S.
Senate is previously on record in support of the Public Good IRA
Rollover Act in its entirety. In doing so, the Senate recognized that
the charitable IRA rollover is an important tool for charities to use
to raise the funds they need to serve those in need, especially when
government assistance is not available.
The Bush Administration supports charitable IRA rollovers. In his
FY 2008 budget submission, President Bush has proposed making permanent
the limited tax-free charitable IRA distributions provision passed last
summer that is scheduled to expire at the end of this year. While the
President's charitable IRA proposal has merit, the Public Good IRA
Rollover Act is superior in one important respect: by allowing tax-free
life-income gifts from an IRA whose owner has attained the age of 59\1/
2\.
In addition to direct IRA gifts, many charities use life-income
gifts to secure funds today to meet their future needs. Life-income
gifts involve the donation of assets to a charity, where the giver
retains an income stream from those assets for a defined period.
The benefit of allowing life-income gifts at an earlier age is
twofold. First, the life-income gift provision would stimulate
additional charitable giving. The evidence also suggests that people
who make life-income gifts often become more involved with charities.
They serve as volunteers, urge their friends and colleagues to make
charitable gifts and frequently set up additional provisions for
charity in their life-time giving plans and at death. Second, this
approach comes at little or no extra cost to the government when
compared to other major charitable IRA rollover proposals.
Life-income gifts are an important tool for charities to raise
funds, and would receive a substantial boost if they could be made from
IRAs without adverse tax consequences. But life-income gifts are not
part of the administration's proposal. Again, the Public Good IRA
Rollover Act permits individuals to make tax-free life-income gifts at
the age of 59\1/2\.
In closing, Mr. Chairman, I hope your Subcommittee and the Full
House Ways and Means Committee will act this year to permanently enact
into law a tax-free IRA rollover provision that charities say is needed
to encourage billions of dollars in new giving that will provide
assistance to those who need it most.

Statement of Goodwill Industries International
On behalf of Goodwill Industries International, Inc., I am writing
in response to the request by the House Ways and Means Subcommittee on
Oversight for comments on the recently enacted Pension Protection Act
of 2006 (P.L. 109-280).
Goodwill Industries International, Inc. is a network of 186
community-based, independent member organizations in the United States,
Canada, and 14 other countries. Each organization serves people with
disabilities, low-wage workers and other job seekers by providing
education and career services, as well as job placement opportunities
and post-employment support.
Through its services, the network helps people overcome barriers to
employment and become independent, tax-paying members of their
communities. In 2006, nearly one million people benefited from
Goodwill's career services. Donations of clothing and household goods
help to fund our mission.
The new law changes the tax treatment of donated clothing and
household goods by allowing tax deductions only for such donated items
that are in ``good used condition or better.'' Under the new
provisions, however, a deduction is allowed regardless of the condition
if the amount claimed for the item is more than $500 and the taxpayer
has a qualified appraisal. The Internal Revenue Service (IRS), under
the new law, can deny a deduction for the contribution of clothing or
household items that have minimal monetary value, such as used socks
and underwear.
The IRS has issued new guidance on these provisions in Publication
561 that references the price that buyers of used items actually pay in
used clothing stores as an indication of value. We strongly support
educating taxpayers about the new provisions. Many of our retail stores
now include language on their donation receipts to indicate that
``federal law provides that donated clothing and household items must
be in good used condition or better for tax purposes.'' In addition,
many of our agencies offer sample valuation guides, that is, a guide
with the selling price of a range of clothing and household goods to
assist taxpayers in valuing their donations.
We have found, however, that much confusion still exists over this
new law. Many of our donors have been told that they can no longer take
any deductions for clothing and household goods. Others have been told
that the charity must place a value on the item. The new law is clear
that deductions still can be taken by the taxpayer as long as the new
requirements are met and the onus remains with the taxpayer to value
his or her items. The public needs to hear this message from the IRS.
We ask that you request the IRS to issue further guidance pointing
out that, subject to these requirements, donations of clothing and
household goods to charities like ours remain tax-deductible and serve
a worthy public purpose.
If we can be of any assistance, please feel free to contact Lisa P.
Kinard, Director of Public Policy and government Relations for Goodwill
Industries International, Inc.

Statement of Stewart Mott Foundation
On behalf of the Charles Stewart Mott Foundation, these comments
are submitted in response to the Advisory from the Committee on Ways
and Means Subcommittee on Oversight, dated June 12, 2007, requesting
comments from the public on the provisions relating to tax-exempt
organizations contained in the Pension Protection Act of 2006 (PPA)
(P.L. 109-280). We wish to comment on one provision of the PPA that
affects the Charles Stewart Mott Foundation directly: the provision
amending sections 4942(g) and 4945(d)(4)(A) of the Internal Revenue
Code, restricting grants to supporting organizations by private
foundations.
The Charles Stewart Mott Foundation is a private grant making
foundation established in 1926 in Flint, Michigan. The Foundation's
mission is ``to support efforts that promote a just, equitable and
sustainable society.'' The Foundation's grant making activity is
organized into four major programs: Civil Society, Environment, Flint
area and Pathways Out of Poverty. Other grant making opportunities,
which do not match the major programs, are investigated through the
Foundation's Exploratory and Special Projects program. In 2006, the
Foundation's grant actions totaled 545, and total grant payments were
$122 million. The Foundation has assets in excess of $2.5 billion.
The PPA requires private foundations to exercise expenditure
responsibility when making grants to Type III supporting organizations
that are not functionally integrated. It also prohibits private
foundations from counting such grants toward their annual minimum
distribution requirement. Unfortunately, prior to the enactment of the
PPA, the Internal Revenue Service (IRS) had never classified supporting
organizations by type. The IRS also did not make determinations with
respect to whether Type III supporting organizations are or are not
functionally integrated. Private foundations are generally permitted to
rely on IRS Publication 78 in determining when a grant requires the
exercise of expenditure responsibility under section 4945 because the
grantee is not a public charity. However, the IRS did not publish
information about whether an organization's public charity status was
based on section 509(a)(1), section 509(a)(2), or section 509(a)(3) in
Publication 78, so the Publication is not helpful to a foundation
seeking to comply with this provision of the PPA.
The IRS Business Master File (BMF) is also available to download
directly from the IRS Web site. Alternatively, on March 27, 2007, in
the 2007-8 issue of EO Update, the IRS provided that a grantor may use
a third party to obtain the BMF information. In this circumstance, the
third party must provide the grantor the BMF information in a report
that includes: (i) the grantee's name, Employer Identification Number,
and public charity status under section 509(a)(1), (2), or (3); (ii) a
statement that the information is from the most currently available IRS
monthly update to the BMF, along with the IRS BMF revision date; and
(iii) the date and time of the grantor's research. The report must also
be in a form which the grantor can store in hard copy or
electronically. GuideStar's \1\ Charity Check subscription service
includes IRS Publication 78 information and has recently been enhanced
to include information from the IRS BMF.
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\1\ GuideStar is the operating name and registered trademark of
Philanthropic Research, Inc., a 501(c)(3) public charity. GuideStar is
a third party database of information on all IRS-recognized 501(c)(3)
nonprofit organizations eligible to receive tax-deductible
contributions.
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However, this information is still incomplete. The BMF includes the
Code section under which an organization was classified as a public
charity [that is, section 509(a)(1), (2), or (3)], but does not include
the type of supporting organization or whether it is functionally
integrated. As a result, a private foundation cannot rely on even this
more detailed information when making a grant to a supporting
organization.
In recognition of the difficulties faced by foundations when making
grants to supporting organizations after passage of the PPA, the IRS
issued interim guidance in Notice 2006-109, section 3.01. The guidance
in the Notice, while helpful in the absence of legislation correcting
the problems created by this provision of the PPA, requires a
foundation to follow a cumbersome process to determine whether a
grantee is a Type I, Type II, or functionally integrated Type III
supporting organization. This process requires a grantor to collect and
review specified documents and a written representation signed by an
officer, director, or trustee of a supporting organization grantee and
to make its own determination, acting in good faith, as to the status
of the grantee. (As an alternative, a grantor may rely on a reasoned
written opinion of counsel of either the grantor or the grantee
concluding that the grantee is a Type I, Type II, or functionally
integrated Type III supporting organization.)
We have found that the collection and review of the specified
documents, including copies of governing documents of the grantee and,
if relevant, of the supported organization(s), is a time-consuming and
burdensome process for both the grantor and grantee. Even for a larger
foundation like the Charles Stewart Mott Foundation, which has the
resources to try to follow the guidance in the Notice, the process
increases substantially the cost of making a grant to a supporting
organization and the time required to process the grant. It also means
that many smaller grants (including grants under matching gift
programs) are cost-prohibitive and simply will not be made. And it
means that many smaller foundations, without the resources to apply the
guidance in the Notice, may just stop making grants to supporting
organizations.
Other commenters have reached similar conclusions. On June 4, 2007,
the American Bar Association Section of Taxation submitted comments to
the IRS on Notice 2006-109. As the Section notes on p. 59 of its
comments:

``While the procedures of Notice 2006-109 are helpful in that
they set out safe harbors, the procedures are often
impractical, time-consuming and expensive. The result is that
many donors will simply forego making contributions to
[supporting organizations].''

In its comments, the section makes a number of recommendations to
address the problems posed by this section of the PPA. In all, the
section's recommendations and discussion on this provision of the PPA
run to over six single-spaced pages. Key to the recommendations is the
proposal that the IRS expand its existing determination letter program
to further classify supporting organizations as Type I, II, or III (and
whether a Type III is functionally related) and that the IRS embark on
a program to so reclassify all existing supporting organizations. We
wonder whether an already overburdened IRS can even consider such a
proposal. Indeed, the extent and nature of the section's comments
suggest to us that the problems posed by the provision cannot be fixed
administratively.
We acknowledge there have been instances in which individuals have
misused supporting organizations for their personal benefit. We also
believe that many of the changes made by the PPA effectively address
these abuses. However, we think the changes made by the provision we
are discussing here go too far. They may have some corrective effect on
the abuses noted by Congress (although we believe those abuses are
adequately addressed elsewhere in the PPA). But they impede legitimate,
routine grant making by private foundations to supporting organizations
to such an extent that whatever corrective effect they have is far
outweighed by the restrictions they impose on foundation philanthropy.
For that reason, we recommend that Congress repeal this provision
of the PPA. If repeal is not possible, we join in the call from Steve
Gunderson, President and chief executive officer of the Council on
Foundations, in testimony before the Subcommittee on July 24, that
Congress temporarily suspend the penalties for making grants to certain
supporting organizations until the IRS can reliably identify those
organizations.
We appreciate the Committee's attention to this important issue,
and we thank you for the opportunity to provide these comments.

Respectfully submitted,
Phillip H. Peters
Group Vice President-Administration and Secretary/Treasurer

Statement of Studio Museum in Harlem
Thank you for your call for comments on provisions of the Pension
Protection Act of 2006 (PPA). My name is Thelma Golden, and I am the
Director and Chief Curator of The Studio Museum in Harlem. I am writing
with respect to section 1218 of PPA, which has restricted
``fractional'' gifts of art and collectibles to museums.
Section 1218's two major restrictions are:

Donors must complete gifts in ten years. Previously,
there was no time limit.
Donors may no longer claim a tax deduction for the fair
market value of the work after the initial fraction, no matter how much
it may have risen in subsequent years. Previously, each fraction could
be deducted at its actual fair market value.

By discouraging generosity, Section 1218 has practically destroyed
one of the most effective means of transferring private wealth to the
public sector. Further, it has greatly curtailed museums' ability to
build their collections, because most museums rely mainly on private
gifts, especially at a time of rising prices in the art market.
In the case of the Studio Museum in Harlem, we have 13 fractional
gifts in progress. We have had no new fractional gifts since the PPA.
These 13 gifts are a significant addition to our growing collection,
and represent works made by some of the leading artists of African
descent working today.
The old law worked well for museums, donors, and the public. It was
both flexible and fair. Now, works of art will remain in private homes
and hands, unseen by the public, and rarely used by scholars and art
historians, and people will not donate fractional gifts until much
later in their life. Meanwhile, the museum has no guarantee that the
gift will actually be made; it could fall victim to financial problems
or family disagreements. Allowing donors to give the first fraction
earlier rather than later has the effect of ``locking in'' the gift.
Finally the fact that PPA did not ``grandfather'' gifts that were
already in the process of being made means that many current gifts have
been stopped cold. In other words, people who gave an initial fraction,
relying on their future ability to give subsequent fractions and claim
deductions for fair market value, now have no reason to continue giving
while they are alive. The only way that they can preserve a full
deduction, instead, is to bequeath the work upon their death.
Thank your for your interest in this matter. I would be happy to
answer any questions that Members of the Subcommittee may have.

The Meadows Foundation
Dallas, Texas 75204
August 6, 2007

The Honorable John Lewis, Chairman
Subcommittee on Oversight, Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Lewis:

I am writing today on behalf of the Meadows Foundation, Inc. (The
Meadows Foundation), of Dallas, Texas, in response to your
Subcommittee's request of June 12, 2007, for comments regarding the
Pension Protection Act of 2006, P.L. 109-280 (``2006 PPA''). We would
first like to express our appreciation to you and Members of your
Subcommittee for your willingness to consider and re-evaluate the
provisions of the 2006 PPA, many of which are complex and most of which
were not the subject of Committee hearings in the House of
Representatives during the 109th Congress.
The Meadows Foundation, Inc. is a private foundation. Accordingly,
while there are likely a number of provisions in the 2006 PPA that
deserve re-examination, our comments focus on two provisions of the
2006 PPA that directly impact private foundations and that we believe
to be based on unsound policy. Our comments are as follows.
Grants from Private Foundations to Supporting Organizations
Since 1969, private foundations have been significantly limited in
the types of charitable grants they can make. Under section 4945,
certain grants to individuals can be made only under programs pre-
approved by the IRS, and grants to charitable organizations have been
limited to public charities and exempt operating foundations, unless
the foundation complies with the detailed requirements for exercising
expenditure responsibility.\1\ Grants that do not comply with these
limitations are subject to prohibitive excise taxes under section 4945.
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\1\ Except as otherwise indicated, all references herein to
Sections refer to sections of the Internal Revenue Code 1986, as
amended (``I.R.C.'').
---------------------------------------------------------------------------
The 2006 PPA amended Section 4945(d) to further limit the types of
charitable grants that can be made by private foundations. As amended,
Section 4945(d)(4) now also prohibits private foundations from making
grants to certain types of supporting organizations unless the
foundation complies with the detailed requirements for exercising
expenditure responsibility. Technically, this new limitation applies to
grants to type III supporting organizations that are not ``functionally
integrated'' and grants to any other supporting organization that is
directly or indirectly controlled by, or whose supported organization
is directly or indirectly controlled by, a disqualified person of the
foundation that makes the grant. I.R.C. Sec. 4945(d)(4).\2\
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\2\ The 2006 PPA added a similar provision to Section 4942 so that
grants to those same supporting organizations will also fail to be
treated as qualifying distributions. That treatment applies even if the
foundation complies with the detailed requirements for exercising
expenditure responsibility. I.R.C. Sec. 4942(g)(4)(A).
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As a practical matter, the Section 4945 rules added by the 2006 PPA
have created a situation where a private foundation cannot make a grant
to any supporting organization without risking a Section 4945 excise
tax. This is because (a) the IRS has only recently begun including in
determination letters of supporting organizations a statement of which
``type'' they are; (b) the IRS has not included in determination
letters of supporting organizations a statement of whether they are
``functionally integrated''; and (c) even if those details were covered
in determination letters, there could still be a risk in some
situations because of the above-described control prohibition. The
Meadows Foundation is concerned that a number of our current and former
grantees and other nonprofits organizations fall into this category.
Let me give you some examples.
The Center for Nonprofit Management Assistance Loan Fund was
created as a support organization to provide cash flow loans to
nonprofits dependent on contracts that were slow to pay. It is a
support organization that has proven very effective in raising funds to
loan out yet remains controlled by the Center for Nonprofit Management.
It was created by The Meadows Foundation.
The Children's Medical Center Foundation of Central Texas is a
support organization that was created to assist in the development of a
new children's hospital to serve the central part of Texas. It is
located in Austin and has been a good funding partner for the
Foundation.
The College For All Texans: Closing The Gaps is a support
organization located in Austin to serve the entire State. It raises
funds to help students attend college who normally would not have
considered it. It is a support organization that has worked well to
raise funds and public awareness of this issue. It has also been a good
partner in assisting the Foundation in its work in education.
Presbyterian Healthcare Foundation is a support organization that
assists in fundraising for one Dallas' largest public hospitals. The
Foundation's founder, Algur Meadows, gave the land for the original
campus that is still in use. This support organization does a wonderful
job and remains a longstanding partner of The Meadows Foundation.
Starr County Historical Foundation is located in Rio Grande City,
along the border, and supports historical preservation and adaptive
reuse strategies in border communities. It is an excellent partner of
The Meadows Foundation as it works in the border region of Texas.
There are many other examples that I could have provided, but I
hope these make the point.
IRS Notice 2006-109 sets forth procedures that a private foundation
can use to conclude that a supporting organization is not covered by
the above-described limitations. Those procedures, however, require the
private foundation to, at a minimum, review supporting documents and
make a legal judgment unless the foundation or its grantee incurs the
added expense of obtaining an opinion of counsel. Many private
foundations will simply choose not to make grants to any supporting
organizations rather than comply with the burdensome rules that govern
which supporting organizations may receive grants. Because of the new
Section 4945(d)(4) rules added by the 2006 PPA, The Meadows Foundation
will no longer consider a grant to a supporting organization unless
there is an extraordinary reason for the grant.
Charity functions best when organizations are able to identify and
support a variety of different needs. Each new restriction on grants
reduces the ability of a foundation to identify and support the needs
of its community. Accordingly, restrictions should not be placed on
foundation grants absent a compelling need. In the case of the 2006
PPA, there was no compelling need for the restrictions against grants
from private foundations to supporting organizations.
There is also no obvious reason for the distinction created by the
2006 PPA between grants to functionally integrated and non-functionally
integrated type III supporting organizations. The term ``functionally
integrated type III supporting organization'' is defined by new Section
4943(f)(5)(B) to include any type III supporting organization that ``is
not required under regulations established by the Secretary to make
payments to supported organizations--due to the activities of the
organization related to performing the functions of, or carrying out
the purposes of, such supported organizations.'' The definition
apparently refers to the integral part test of Treas. Reg.
Sec. 1.509(a)-4(i)(3). That test requires, in part, that a type III
supporting organization either (a) perform the functions of or carry
out the purposes of its supported organizations; or (b) pay
substantially all its income to or for the use of its supported
organizations. In other words, type III supporting organizations that
are not functionally integrated are already required to pay
substantially all their income to their supported organizations. Given
that requirement, the complexity involved in differentiating between
functionally integrated and non functionally integrated type III
supporting organizations does not seem justified.
In summary, the restrictions added by the 2006 PPA to grants from
private foundations to supporting organizations should be repealed. The
restrictions are highly complex and burdensome, and there was no
compelling need for the restrictions. The restrictions serve only as
additional burdens on private foundations that further restrict the
ability of private foundations to identify and support the needs of
their communities.
In a time of limited federal and state resources, private
foundations are being asked to do more and more through their
grantmaking. As we did when Katrina struck and are currently doing now
in the wake of the disastrous flooding in Texas, The Meadows Foundation
has voluntarily responded by providing funding and assistance to our
nonprofit partners who are helping the families hurt by this natural
disaster. Please allow us to remain flexible and able to respond when
necessary without tying our hands in burdensome regulations.
Taxation of Charitable Use Assets
Section 4940 imposes a 2% excise tax on the ``net investment
income'' of private foundations. The term ``investment income''
historically included only dividends, interest, rents, payments with
respect to securities loans, royalties, and capital gains from the sale
of properties used for the production of such income. The Treasury
Regulations specifically excluded any capital gains from the sale of
property used for charitable purposes. Treas. Reg. Sec. 53.4940-1(f)(1)
(not yet updated for the changes made by the 2006 PPA).
The 2006 PPA amended Section 4940(c) so that the section 4940
excise tax is now also imposed on capital gains from the sale of
property used in a charitable activity if the property produced
dividends, interest, rents, payments with respect to securities loans,
royalties, or similar sources of income. The only exception to this
taxation appears to be new Section 4940(c)(4)(D), which allows the tax
to be deferred in the event of certain like kind exchanges.
We believe the extension of the section 4940 tax so that it now
taxes the capital gains of charitable use property reflects a poor
policy decision that should be reversed. There is no policy objective
achieved by the tax, other than raising additional revenues for the
Federal government. The decision to raise those revenues from charities
was regrettable. Charitable organizations have traditionally been
looked upon very favorably in this country, and have been granted tax-
exempt status since 1894.\3\ The imposition of a tax on the sale of
charitable use property is far out of line with that traditional
treatment. It also creates a disincentive for foundations to use
property directly for charitable purposes. And it will increase the
amount of funds that foundations must pay to the Federal government at
a time of growing charitable needs in the communities supported by
foundations. The likely end result will be an increased need for
governmental assistance in those communities. Accordingly, we encourage
the Committee to reconsider the expansion of the Section 4940 excise
tax and to revise Section 4940 to reverse that expansion.
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\3\ See Revenue Act of 1894, ch. 349, Sec. 32, 28 Stat. 509, 556
(1894).
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Mr. Chairman, one of the great traditions that sets our nation
apart from others is our nonprofit sector and the spirit of
philanthropy that generously donates billions of dollars each year to
provide assistance and address real problems. We are privileged to do
this work and take this responsibility very seriously. We appreciate
the fact that private foundations are tax-exempt, although we do pay
excise tax to the federal government each year, and are subject to
oversight.
I am concerned that the burden of over regulation and unnecessary
restrictions will having a chilling effect on philanthropy as we go
forward. Please protect this important sector and allow it to flourish
with Congressional support.
We appreciate your consideration of our comments and your
willingness to reexamine some of the more complex and burdensome
provisions of the 2006 PPA.

Sincerely,
Linda P. Evans
President and Chief Executive Officer

Una Chapman Cox Foundation
Corpus Christi, Texas 78470
August 7, 2007

The Honorable John Lewis, Chairman
Subcommittee on Oversight
Committee on Ways & Means
U.S. House of Representatives
343 Cannon House Office Building
Washington, D.C. 20515

The Honorable Jim Ramstad
Ranking Member
Subcommittee on Oversight
Committee on Ways & Means
U.S. House of Representatives
103 Cannon House Office Building
Washington, D.C. 20515

Dear Chairman Lewis and Congressman Ramstad:

I am writing to you to provide comments from the Una Chapman Cox
Foundation (``UCC'') pursuant to your request for comments from the
nonprofit sector on the charitable provisions of the Pension Protection
Act \1\ (the ``PPA''). For more than 25 years, UCC, a type III
supporting organization to the United States Foreign Service, has been
dedicated to enhancing the recruitment, professionalism and
effectiveness of the Foreign Service; improving the well-being and
retention of its best employees and their families; and increasing
public knowledge and understanding of the Foreign Service and its role
in supporting U.S. foreign policy and national security interests.
Throughout this period UCC has had a close working relationship with
the leadership of the Foreign Service, especially the State Department,
and we have repeatedly received expressions of appreciation for UCC's
efforts on the Foreign Service's behalf from State Department
officials.
---------------------------------------------------------------------------
\1\ Pub. L. No. 109-280, 120 Stat. 780 (2006).
---------------------------------------------------------------------------
We thank the Subcommittee for this opportunity to voice our
concerns regarding some of the new supporting organization provisions
of the PPA and the broad discretion given to the Treasury Department to
interpret these provisions in ways that may be harmful to efficient and
effective supporting organizations like UCC.
Summary of Recommendations
For the reasons detailed below, we respectfully suggest that the
supporting organization provisions of the PPA be revisited, as follows:

1. Congress should amend the PPA to define ``functionally
integrated'' supporting organizations more specifically, so that
organizations like UCC with a bona fide close operating relationship
with their supported organization are not denied that status simply
because they have an endowment or fail to meet other criteria imposed
by Treasury from time to time. Specifically, type III supporting
organizations like UCC that are performing activities in support of
government entities should be classified as functionally integrated.
2. Congress should apply the favorable treatment of functionally
integrated type III organizations to other type III organizations that
satisfy the existing responsive requirement and that have no
substantial contributor (nor any individual or entity that is a
disqualified person by virtue of a relationship with a substantial
contributor) involved in the management of their operations.
3. Congress should also direct Treasury not to impose a payout
requirement on functionally integrated supporting organizations or, in
the alternative, only to impose a flexible payout requirement that can
be appropriately responsive to the needs of the supported
organization(s).
Introduction
UCC supports both the recent revisions to the Form 990 that improve
the transparency of supporting organizations as well as the IRS's
increased scrutiny of supporting organizations and enforcement of the
current regulatory standards. Certainly reports of individuals or
families who used charities, in some cases supporting organizations, to
enrich themselves are sobering and these abuses should be stopped. I am
concerned, however, that in seeking to stop the abuses perpetrated by a
few, the onerous restrictions imposed on type III supporting
organizations by the PPA (and by new regulations the Treasury
Department has been given broad discretion to develop) will also
squelch the efforts of legitimate organizations, which provide vital
support for countless charitable and governmental entities. Many harsh
PPA provisions--such as those that have caused many private foundations
to refrain from funding all type III supporting organizations (and
sometimes all supporting organizations, whatever the type)--impair the
good and the bad alike. And the Treasury Department has indicated in
its recent Advance Notice of Proposed Rulemaking \2\ that it is poised
to extend by regulation the most onerous PPA provisions to an unknown
number of additional organizations by denying functionally integrated
status to many organizations that perform essential functions of their
supported organizations, merely because they have more than 35% of
their assets in an endowment or because the varying annual needs of the
supported public charity (and thus the expenditures of the functionally
integrated supporting organization) do not necessarily fluctuate
directly with the supporting organization's annual income stream or
stay above a fixed percentage of the supporting organization's
assets.\3\
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\2\ Internal Revenue Service, Advance Notice of Proposed
Rulemaking, ``Payout Requirements for Type III Supporting Organizations
That Are Not Functionally Integrated,'' 72 Fed. Reg. 42,335, 42,338
(Aug. 2, 2007) (``Advance Notice'').
\3\ Id.
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Background
UCC was established in 1980 by Mrs. Una Chapman Cox of Corpus
Christi, Texas as a private foundation and, after her death, the bulk
of her estate was added to UCC. After her death, there was no longer
anyone who could control UCC who was a disqualified person (other than
by virtue of being a foundation manager).\4\ By letter dated July 8,
1988, the IRS recognized UCC's termination of its private foundation
status, its close and continuing historic relationship with the Foreign
Service, and its conversion to be a supporting organization of the
Foreign Service described in Code section 509(a)(3).
---------------------------------------------------------------------------
\4\ Mrs. Cox was married twice but had no children, and her second
husband died before she did.
---------------------------------------------------------------------------
UCC's focus is strengthening American diplomacy by enhancing the
professionalism and effectiveness of Foreign Service officers and
increasing public awareness of the Foreign Service. To do this, UCC
functions as a think tank that both generates and stimulates ideas for
improving the effectiveness of the Foreign Service and its personnel.
UCC's Executive Director, the Honorable Clyde Taylor, a retired
ambassador himself, and its policy council, comprised of distinguished
current and former Foreign Service officers and respected academics,
work together not only to identify opportunities for improvement of the
Foreign Service, but also to evaluate a wide range of possible projects
for UCC to undertake annually. The most promising projects are
discussed in advance the Director General of the Foreign Service or
with the appropriate officials at the supported government offices
before recommendations are made to the UCC Board. The UCC Board meets
regularly with the Director General, and UCC's Executive Director and
staff maintain a continuous liaison with the Director General and his
or her staff to obtain guidance as necessary throughout the year.
Projects undertaken by UCC range from the annual sabbatical leave
Fellowships initiated by Mrs. Cox that allow promising mid-level State
Department officers to come home to the United States for a year to
conduct outreach projects to several projects recently designed to
support the recruiting of young officers. These include sponsoring
overseas internships in the Charles Rangel Fellowship Foreign Service
recruitment program at Howard University and working with the State
Department to strengthen and enhance the officer intake process, which
formerly has taken an average of 28 months.
Because the costs and expertise required for the various projects
can vary significantly, UCC relies not only on its own resources but
often works in collaboration with other organizations and with various
governmental agencies. For example, for the production of ``Profiles in
Diplomacy,'' a documentary on the Foreign Service made for national
television, UCC had to raise money from other organizations. For
another project, the Commission on Advocacy of U.S. Interests Abroad,
commonly called the Carlucci Commission, which reviewed the role of
United States foreign assistance in advancing our National interests,
UCC partnered with another funding organization. UCC also provides
funding for some projects administered directly by the State Department
(or another governmental agency), while for some other projects UCC
implements them itself by engaging or funding third parties to perform
the necessary activities.
UCC, like other supporting organizations for governmental entities,
found the type III classification to be the most appropriate because
such supporting organizations have governing boards that are
independent of those of their supported entities, and it is often this
independence from the government that allows organizations such as UCC
to be most effective in supporting the designated governmental entity.
As discussed further below, supporting organizations to governmental
organizations, unlike supporting organizations to non-governmental
organizations, also often cannot choose to be type I or type II
supporting organizations, whose governing boards are controlled by or
overlapping with those of the supported organizations, because of
limitations on government employees serving on the boards of non-
governmental entities.
Although not controlled by their supported organizations, type III
supporting organizations such as UCC nevertheless must demonstrate that
they have sufficiently close relationships with their supported
organizations to justify public charity status. Under existing Treasury
Regulations, a type III supporting organization does this by meeting
two tests: a ``responsiveness test'' and an ``integral part test.'' The
responsiveness test requires that the supporting organization be
responsive to the needs and desires of its supported organizations,
while the integral part test requires that the support actually
provided by the organization is substantial and necessary to the
conduct of the supported organization's exempt activities. Together,
these two tests ensure that, despite a supporting organization's
independent management, it is operating closely with the supported
organization in much the same way as a controlled subsidiary would.
Distinguished panelists at the Subcommittee's hearing on July 24,
including Steven T. Miller, Commissioner of the Tax Exempt and
Government Entities Division of the Internal Revenue Service, noted
that the charitable sector is generally ``very compliant'' with the tax
laws. Thus, although we support ridding the sector of those that enrich
themselves at charities' expense, we do not understand the PPA's harsh
treatment of all supporting organizations, and all type III supporting
organizations in particular. UCC has for many years functioned hand in
hand with the State Department (and other federal government agencies)
to leverage its relatively modest resources to produce significant
improvements in America's current and future diplomatic resources, and
we urge you to allow us to continue to do so efficiently and
effectively. For reasons described below, certain of the PPA provisions
relating to type III supporting organizations, particularly as the
Treasury Department is suggesting they be interpreted, will
significantly impair UCC's ability to provide this assistance in the
best manner possible.
Functionally Integrated and Non-Functionally Integrated Type III
Supporting Organizations
When it enacted the PPA, Congress brought into the Code the
longstanding regulatory distinction between type III supporting
organizations that are ``functionally integrated''--those that carry on
activities that perform the functions of or carry out the purposes of
their supported organization--and those that are not, directing the
Treasury Secretary to revise the payout requirement that has always
applied to the latter.\5\ As noted above, type III supporting
organizations must be both responsive to and an integral part of their
supported organizations in order to demonstrate the close relationship
with a supported charity or governmental entity that is the defining
characteristic of supporting organizations.\6\ Those type IIIs that are
not functionally integrated have effectively been subject to a payout
requirement under the integral part test,\7\ although many, including
the Treasury Department in its recent Advance Notice of Proposed
Rulemaking, have asserted that a payout requirement based on a
percentage of the organization's assets (or on the lesser of a
percentage of the organization's assets or its income) may be a more
appropriate measure than the current regulatory requirement based on a
percentage of income.\8\
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\5\ PPA, Sec. 1241(d), 120 Stat. at 1103; I.R.C. Sec. 4943(f)(5).
\6\ See Treas. Reg. Sec. 1.509(a)-4(i)(2), -4(i)(3).
\7\ See Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii).
\8\ Advance Notice, 72 Fed. Reg. at 42,338-42,339.
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In addition to a revised payout requirement, harsh new
restrictions, including a virtual ban on private foundation funding and
application of the private foundation limits on excess business
holdings, were also imposed on non-functionally integrated supporting
organizations.\9\ This presumably reflects a view that non-functionally
integrated supporting organizations are more likely to be subject to
donor abuses and less likely to be effectively supervised by their
supported organizations than are functionally integrated organizations.
However, the recent Advance Notice of Proposed Rulemaking reveals
Treasury's disposition to eliminate abusive situations regardless of
the collateral damage done to legitimate supporting organizations.
Treasury would vastly broaden the number of organizations subject to
the new PPA restrictions by redrawing the definition of ``functionally
integrated'' exceedingly narrowly.\10\
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\9\ See I.R.C. Sec. Sec. 4942(g)(4), 4943(f), 4945(d)(4). While
private foundations are not categorically prohibited from making grants
to non-functionally integrated type IIIs, they receive no credit toward
their 5% payout for such grants, destroying their incentive to make
them.
\10\ See Advance Notice, 72 Fed. Reg. at 42,338.
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Where the proper relationship of accountability and responsiveness
exists, however, the new provisions of the PPA that apply to non-
functionally integrated type III supporting organizations are
inappropriate. In such cases, the PPA's per se prohibitions are more
likely to prevent activity that is actually in the supported entity's
best interests than to stop abuse. The PPA and the pre-existing law
recognized this fact with respect to type I and type II supporting
organizations--entities controlled by, or under common control with,
their supported organizations. With narrow exceptions, such
organizations are not subject to any payout requirement nor to the
PPA's restrictions on private foundation funding and business holdings.
Similarly, if a type III supporting organization is functionally
integrated (as such term is now defined with reference to current
Treasury Regulations) and thus providing functional support to a
charity or governmental entity in a manner that is consistently
responsive to that entity's needs, it can be presumed that an
accumulation of income in any given year is a proper means of
conserving resources in order to provide the needed support at a later
date. For such organizations, no payout requirement has ever been
required and indeed is unnecessary, as such a payout requirement may
force an organization to be less responsive and effective, providing
more funds than the supported entity needs in one year at the expense
of support in subsequent years. This puts the directors or trustees of
the supporting organization in the difficult position of choosing
between fulfilling their fiduciary duty to be a responsive and
effective supporter and federal tax compliance.
Assuming Congress continues to distinguish between favored and
disfavored type III organizations, it should recognize that there are
type III supporting organizations that do not meet either of the
proposed tests for functionally integrated status but which should be
treated as functionally integrated because for them additional
regulation is unnecessary. Already, both the American Bar Association
and the Internal Revenue Service have identified parent organizations
of hospital groups as organizations that should be treated as
functionally integrated even if they do not technically meet the
proposed tests for that status.\11\ Similarly, we believe that Congress
should extend similar protection to type III supporting organizations
to governmental organizations, which--like hospital parent
organizations--often do not have the option of becoming type I or II
organizations.
---------------------------------------------------------------------------
\11\ Letter from the American Bar Association Section of Taxation
to Kevin Brown, Acting Commissioner of Internal Revenue at 53 (June 4,
2007); Advance Notice, 72 Fed. Reg. at 42,338.
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Type III supporting organizations are particularly important in the
governmental context for several reasons. First, federal or state
government conflict of interest rules may prohibit control of a
particular organization by government employees. This is true for UCC,
where due to federal conflict of interest statutes it is the State
Department's position that current Foreign Service employees (the
people that the Foreign Service would most naturally appoint to control
UCC) cannot be appointed to serve on the UCC Board. More fundamentally,
putting the organization under governmental control would often defeat
the purpose of providing support to a government entity in the first
place. Often type III organizations are created to provide targeted
support for a single purpose--in UCC's case, the strengthening of the
Foreign Service--but if such organizations were controlled by the
government, their funds could be redirected to other unrelated
government purposes.
If this were allowed to occur, then private support for
governmental programs would cease. Mrs. Cox was passionate about the
value to America of a strong Foreign Service and was willing to devote
her hard-earned assets to its support. She would not have made the same
gift to the United States Treasury to fund any and all federal
government programs. As was observed at the Subcommittee's hearing, our
country's needs are too great for the government alone to meet and it
is essential for private charitable organizations to partner with the
government if we are to effectively meet the many challenges that we as
a nation face. Imposing inflexible payout requirements can have a
similar effect, as such requirements can force supporting organizations
to transfer funds to a government entity that are not currently needed
for additional programs and so may lead to government funds being
reallocated to other government entities or priorities, undermining the
very purpose of the private support, which is to provide additional
support for particular government programs.
Governmental control may also make a supporting organization less
effective. For example, UCC identified the need for a website to
provide information about the Foreign Service to the public in order to
increase the general knowledge of and support for the diplomatic corps,
and more specifically to assist in recruiting talented young persons
for Foreign Service careers. UCC then appropriately addressed this need
by developing a website which provides a variety of information on the
Foreign Service, its challenges, needs, and opportunities. One reason
the website is effective is precisely because the content was produced
by an independent, non-governmental entity, not by the Foreign Service
itself. Similarly, in many cases it is essential that a supporting
organization be strictly non-partisan. When an organization is
controlled by the government, it may not be able to stay above the
political fray--and even if it does, the mere fact of government
control may be enough to create at least the appearance of
partisanship.
Furthermore, governmental entities are unattractive supported
organizations for donors who wish to use a supporting organization to
provide improper benefits to themselves. While a type III supporting
organization's support can be crucial in funding supplemental programs,
governmental entities typically have their own large budgets and highly
qualified staffs, making them immune to domination (or even undue
influence) by a supporting organization's substantial contributors.
They also typically have well-developed mechanisms for monitoring the
appropriate use of funds, making them ideally suited to hold the
supporting organization accountable for any abuses.
Recommendations with Regard to the Definition of Functional Integration
Congress should clarify the definition of ``functionally
integrated'' by incorporating the current regulatory standard into the
Code and by directing Treasury to clarify by regulation that supporting
organizations performing activities that support governmental entities
and which satisfy the existing responsiveness test will be considered
``functionally integrated,'' particularly where, as is the case with
UCC, there is no involvement of any substantial contributor or a
related person. At the very least, such organizations should be
presumed to be functionally integrated, subject to the IRS's right to
challenge that presumption in particular cases.
Alternatively, in targeting the impact of the PPA toward abuses, it
may be more effective to allow all supporting organizations that meet
the responsiveness test and have no substantial contributors or their
family members on their governing bodies to receive the same treatment
as functionally integrated type III organizations. Almost all of the
publicized abuses of type III organizations seem to have involved
operation of those entities for the benefit of the single donor and his
or her family members or other related parties. Thus, there seems to be
no ground for applying the PPA's special restrictions on private
foundation funding or the private foundation excess business holding
rules when substantial contributors have no continued voice in the
supporting organizations' affairs. For instance, since the death of Una
Chapman Cox, the UCC Board of Trustees has not included any substantial
contributors nor anyone else who would be a disqualified person (other
than by virtue of their position as trustees). Indeed, no descendents
or spouses survived Ms. Cox. Thus, UCC should not be subject to
restrictive rules designed to prevent her from improperly using UCC for
the advantage of her and her family, which is simply not a realistic
concern in case of organizations like UCC.
By providing more guidance to the Treasury Department regarding the
definition of a functionally integrated type III supporting
organization, Congress will ensure that legitimate classes of type III
organizations are properly protected. One defect of the PPA is that it
does not specifically delineate the class of ``functionally
integrated'' organizations that should be exempted from the new type
III anti-abuse provisions. Rather, it simply identifies them as those
not subject to a payout requirement under rules promulgated by the
Treasury Department.\12\ Since Treasury has the discretion to impose a
payout requirement on all type IIIs, as a practical matter it has the
power to ignore Congress's intention not to apply the PPA's new
restrictions on non-functionally integrated type III organizations to
all type IIIs simply by defining functionally integrated type III
organizations very narrowly. Given the Treasury Department's
institutional role in combating abuse, it is likely that the
definitions it crafts will err on the side of preventing abuse, taking
inadequate consideration of the important functions served by many
legitimate type III organizations like UCC. We therefore urge Congress
to give Treasury additional statutory guidance as detailed above.
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\12\ See I.R.C. Sec. 4943(f)(5).
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Considerations for an Appropriate Supporting Organization Payout Rule
Although a payout requirement has long been considered unnecessary
for functionally integrated organizations, and can even be counter-
productive for organizations like UCC that are effectively matching
their support with the needs of their supported organization, rather
than the ebbs and flows of their own income, the recent Advance Notice
of Proposed Rulemaking, which suggests imposing a payout requirement on
all type III supporting organizations, prompts us to include the
following observations regarding appropriate payout requirements for
supporting organizations. We agree that a percentage of assets payout
may be an easy way address concerns that a non-functionally integrated
organization with continuously low distributions may not really be
closely connected with its supported organization and may signal an
abusive situation. However, because the vast majority of the sector is
compliant with the existing tax laws, any payout requirement will be
applied primarily to legitimate supporting organizations. Thus, any
supporting organization payout should take into account the differences
between supporting organizations and private foundations in setting the
appropriate payout percentage.
While private foundations are free to grant their funds to any of a
potentially unlimited pool of charitable beneficiaries, type III
supporting organizations are, by design, dedicated to specifically
named publicly supported charities. In addition, a type III supporting
organization must be responsive to the needs and demands of its
supported public charities. In many private foundation funding
situations this is reversed: it is the charity that must be responsive
to the goals and demands of the foundation funder.
Non-functionally integrated organizations typically perform
functions similar to those of an endowment, assuring that the supported
organization will continue to have the funds needed to support
particular programs both now and in the future. As noted above,
functionally integrated supporting organizations, which perform the
functions of the supported organization, not only are committed to
performing their supportive activities over the long-term, but also to
providing support as and when needed by the supported entity. A
university press is most effective if it is free to publish the number
of books ready for publication in a given year; a strict requirement
that it publish 50 volumes each year would hardly be appropriate.
Similarly, UCC's primary contribution to the Foreign Service is not the
amount of money it spends in any given year. Its budget is never more
than a drop in the bucket compared to that of the State Department.
UCC's primary contribution to the Foreign Service is the function of
generating, stimulating and providing a clearinghouse and a unique
capability for evaluating a wide range of ideas for strengthening and
enhancing American diplomacy and the effectiveness of American
diplomats. UCC is most effective if it can choose to implement the most
promising projects identified in a given year and to implement only
those projects that are determined to be likely to produce the desired
impact for the Foreign Service. It would be a waste of resources to
spend the time and resources of UCC on an ineffective project simply
because the Tax Code required money to be spent this year.
Recommendations with Regard to a Payout Requirement
For the foregoing reasons, we recommend that Congress clarify that
functionally integrated supporting organizations should not be subject
to a payout requirement, including a payout requirement imposed as part
of the definition of ``functionally integrated,'' as Treasury has
suggested should be the case.
Alternatively, we recommend that Congress direct Treasury to adopt
a flexible payout requirement for all type III supporting organizations
so that such organizations can appropriately respond to the needs of
their supported organization(s). Such a flexible payout requirement
should be no more than 4%, i.e., significantly less than the 5% of net
assets requirements for private foundations, as private foundations may
be controlled by their substantial contributors and are therefore more
open to abuse than type III supporting organizations. To permit
variation in payout amounts to match the needs of the supported
organization(s), type III supporting organizations should also be able
to meet this payout requirement by averaging this payout over a
significant period (e.g., 7 years).
Thank you for providing exempt organizations with an opportunity to
comment on the hardships and uncertainties created by the PPA. If you
should have any questions regarding the above, please feel free to
contact me at (361) 888-9261.

Very truly yours,
Harvie Branscomb, Jr.
Chairman of the Board

Statement of United Jewish Communities
United Jewish Communities is the national organization representing
and serving 155 Jewish Federations (referred to also as
``Federations''), their affiliated Jewish community foundations, and
400 independent Jewish communities in more than 800 cities and towns
across North America. In their communities, the Jewish federations and
volunteers (collectively, the ``UJC System'') are the umbrella Jewish
fundraising organizations and the central planning and coordinating
bodies for an extensive network of Jewish health, education, and social
services.
Federations are the heart and soul of North American Jewry's
philanthropic and humanitarian activities. They embody a 3,500-year-old
tradition of caring--translating today into the pursuit of Jewish
community, values, and peoplehood. Federations build and strengthen the
community by reducing poverty and hunger, rescuing and resettling new
immigrants, and spurring Jewish renaissance worldwide. Federations also
are involved in the general community, funding and supporting local
social service programs as well as helping in times of national and
international disaster such as Hurricane Katrina and the 2004 Asian
Tsunami.
The endowment departments of Federations and their affiliated
Jewish community foundations maintain numerous charitable vehicles
including donor advised funds (``DAFs''), supporting organizations
(``SOs'') (together referred to as ``participatory funds''), funds to
support one or more specified public charities or programs, and
charitable income plans. Endowment gifts enable donors to support a
general or specific area of interest. Participatory funds allow donors
and their families to partner with Federations to fund areas most
deserving of support.
UJC appreciates the House Ways & Means Subcommittee on Oversight
(``the Subcommittee'') examination of the impact on the tax-exempt
sector of the charitable giving provisions contained in the Pension
Protection Act of 2006 (``the PPA''). As the second largest
philanthropic network in North America, virtually every one of the
charitable giving provisions in the PPA has an impact on the UJC
system. In general, UJC applauds Congress for including several
important tax incentives for charitable giving in the PPA and supports
many of the reforms enacted last year. However, UJC remains concerned
that some of the provisions: (1) are overreaching and have caused, and
will cause, significant impediments to potential donors who plan to
make gifts to important and well-established charitable vehicles; and
(2) will require tax-exempt organizations to refrain from making grants
to worthy projects. UJC remains committed to the overriding principles
of transparency and good governance in the tax-exempt sector and looks
forward to working with the Subcommittee to address many of the issues
contained in this submission.
Organization of our comments: UJC has a keen interest in many of
the charitable giving provisions contained in the PPA. UJC has been an
active participant in the debate over reforms in the non-profit sector
over the last several years. UJC filed comments on the Senate Finance
Committee staff White Paper on Reforms for Tax-Exempt Organizations in
2004 (``the White Paper'') and the Tax Reconciliation Act of 2005 (S.
2020) proposals relating to nonprofits, among others. Of particular
interest are the reforms with respect to participatory funds. Our
comments will (1) provide background on and outline the importance of
participatory funds to the UJC System; (2) address charitable giving
items of general interest; and (3) provide specific detailed
recommendations regarding participatory funds.
1. Background and importance of participatory funds
Participatory funds are essential fundraising tools for the UJC
System and have been a vital funding source for health, education, and
social service programs. Many of the provisions contained in the PPA
provide needed statutory definitions and operational rules for
participatory funds as well as a penalty tax framework that can be
applied to discourage unwarranted acts of self-dealing. However, it is
in the public interest to continue to provide incentives for donors to
contribute assets to vehicles in which a public charity has control,
such as participatory funds, rather than to place or leave such assets
in vehicles in which a public charity has no control, such as private
foundations.
DAFs and SOs provide numerous benefits to the community, charities,
donors, and the government. First, the Jewish community and its
philanthropic and social service mission benefit because such vehicles
provide a reliable pool of dollars to fund a variety of social service
activities. Second, the particular Federation benefits because the
relationship with the donor fosters an ongoing dialog about community
priorities and challenges of securing adequate funding. Efficient
administration, sound investment policies, stewardship, and donor
educational programming in both general and specific philanthropy
issues--all provided by the sponsoring organization--building
relationships of trust with current and future donors, increasing the
likelihood of enhanced giving and involvement, raising additional
opportunities for donor engagement in the community, and gaining
insight into individual donor priorities. Third, individual donors
benefit because participatory funds provide cost-effective alternatives
to private foundations and offer on-going educational benefits
regarding community philanthropic activities. This includes ready
access to the knowledge and experience of Federation professional and
volunteer leadership regarding the needs of the community as well as a
means to engage succeeding generations in the philanthropic process.
Relieved from burdensome administration and recordkeeping, donors are
free to concentrate on the substance of charitable giving. Finally,
there is the added benefit to the public of efficient tax
administration, as well-administered DAFs and SOs have policies and
procedures in place to assure qualified grants are made and
impermissible material benefits to donors are not present. This
oversight function is an important component of the overall tax
compliance system operating in concert with the goal of furthering
philanthropic endeavors. Participatory funds encourage an on-going
partnership between public charities and donors. These and other
benefits distinguish participatory funds from private foundations and
other charitable giving vehicles. It is an unfortunate, and perhaps
unintended, consequence that certain PPA provisions are forcing some
donors to move away from the public charity environment toward private
foundations.
Federation-managed participatory programs make periodic
distributions approved by an appropriate committee or the governing
body itself. UJC has provided leadership in the field of DAFs by
assisting Federations and donors in expressing and following good
philanthropic practices, and this, in turn, has created an expanded
donor base. SOs that support Federations and other public charities
provide many of the same benefits as DAFs. Almost all SOs affiliated
with the UJC System are organized as ``Type I'' SOs and were created by
individual families. They meet the Type I SO requirements of Internal
Revenue Code Section 509(a)(3) (hereinafter referred to as ``Section'')
because they are ``controlled'' by the Federation or affiliate they
support, and their distributions are made to, for the benefit of, to
perform the functions of, or to carry out the purposes of the
Federation or the affiliate they support.
Participatory funds represent critical fundraising tools for the
UJC System. Collectively, the UJC System raises over $2 billion each
year and manages over $11 billion in endowment assets. Included in
total endowment assets are both restricted and unrestricted funds,
donor advised funds, and funds held by supporting organizations. Assets
in DAFs and SOs amount to approximately 60% of the endowment assets
held by Jewish Federations, yet these participatory funds were the
source of 80% or just over $1 billion of the $1.24 billion in grants
made from endowment assets to support Federation programs or other
charitable activities. Distributions from DAFs and SOs represented
20.5% of their combined assets at the prior year-end. This spending
rate compares favorably with the spending rate of all Federation
endowment vehicles, which exceeded 14.5%. It is also important to note
approximately 30% of the funds from Federation DAFs and SOs were
distributed to the general community while 70% were distributed within
the Jewish community.
UJC does not support the development or continuation of DAFs formed
to provide personal benefits to the donor and applauds the enforcement
efforts of the IRS in prosecuting such abusive DAF arrangements. We
note with favor the comments on ``charities established to benefit the
donor'' including ``abusive DAFs'' and ``SOs established to benefit the
donor'' in the prepared testimony of Steven T. Miller, Commissioner,
Tax Exempt and Government Entities Division, before the Subcommittee on
July 24, 2007. Our concerns relate to DAFs and SOs established and
administered by our Federations and those established by other
community foundations and recognized publicly supported and broad-based
charities. We are exceptionally proud that agencies within the UJC
System employ the highest ethical standards of self-regulation in the
governance and operation of participatory funds. We regularly share
expertise with other charities and policy makers outside the Jewish
community on a variety of charitable giving issues. To meet these high
standards, appropriate rules and best practices are set forth in two
separate UJC publications, Donor Advised Funds: A Guide for Jewish
Federation Endowment Professionals, and Handbook on Supporting
Foundations, for use by the UJC System. These publications are now
being revised to reflect the new requirements of the PPA.
2. Items of general interest
As noted above, UJC applauds Congress for including a number of
important charitable giving incentives in the PPA. We recommend that
the following incentives be made permanent. In addition, we believe the
tax-free Individual Retirement Account (IRA) charitable rollover be
expanded as discussed below.

Tax-free Individual Retirement Account charitable rollover.
Under the PPA, individuals age 70\1/2\ or older may make direct
charitable gifts from an IRA of up to $100,000 per year to public
charities other than DAFs and SOs. This provision is set to expire on
December 31, 2007. The IRA charitable rollover should be made permanent
and it should be expanded to permit direct gifts to DAFs and SOs.
Participatory funds play a vital role in philanthropy in general, and
in Jewish philanthropy in particular, and such funds should not be
treated adversely as compared to other public charities. The numerous
statutory safeguards on such funds contained in other provisions of the
PPA render moot the arguments for excluding DAFs and SOs from the IRA
charitable rollover. In addition, we recommend that Congress consider
expanding the IRA charitable rollover provision to cover life-income
gifts by individuals who have attained age 59\1/2\. Gift vehicles such
as charitable annuity trusts, pooled income funds, and gift annuities
are well-recognized and well-regulated under existing law. We support
the enactment of H.R. 1419 and S. 819, ``The Public Good IRA Rollover
Act,'' which makes the changes noted above and removes the $100,000
annual cap on rollover gifts.
Increased adjusted gross income ceiling for qualified
conservation easements. Two provisions in the PPA provide increased
incentives for gifts of qualified conservation easements: (1)
individuals may deduct the fair market value of any qualified
conservation contribution to charity described in Section 170(b)(1)(A)
to the extent of the excess of 50% of adjusted gross income (AGI) over
the amount of all other allowable charitable contributions and such
contribution is not taken into account in determining the amount of
other allowable charitable contributions; and (2) individuals may
carryover any conservation contribution exceeding the 50% of AGI limit
for up to 15 years. These provisions, set to expire at the end of
December 31, 2007, should be made permanent.

Numerous provisions in the PPA are intended to tighten the general
rules for charitable donation. In addition to the statutory changes
made to participatory funds, we believe that a number of these
provisions are causing donors and some charities to spend an inordinate
amount of time, effort, and expense in order to meet the statutory
requirements. We especially note:

Penalty taxes and reporting requirements for Donor Advised
Funds and Supporting Organizations: There is a fine line between
preventing abuses by certain ``tax-exempt organizations'' and
preventing or inhibiting much-needed charitable giving. Given the
essential role for public charities in our society, it is regrettable
that several of the provisions of the PPA applicable to participatory
funds have made oversight increasingly expensive and, in some cases,
virtually impossible to manage. Numerous professionals within the UJC
System are expending a great deal of time and energy to make ``more
than a good-faith effort'' to comply with the provisions of the PPA.
The experience of the past eleven months demonstrates, however, that
these provisions impose severe administrative burdens that translate
into a great expense for the UJC system with little or no corresponding
benefit to the public treasury. Additional due diligence requirements
represent an ``opportunity cost'' that is being paid for with a drain
on the resources available to fulfill our charitable mission.

In addition to imposing new oversight responsibilities on fund
administrators, the provisions of the PPA have complicated a donor's
choice of philanthropic vehicles. It is important to note in many
cases, DAFs and SOs are now subject to more restrictive penalty
provisions and excise taxes than other types of public charities, as
well as private foundations, historically the most restricted of
Section 501(c)(3) tax-exempt entities.
Examples include: (1) grants to individuals are, per se, taxable
rather than restricted; (2) expenditure responsibility is required for
certain grants to Section 509(a)(3) public charities; and (3)
compensation, including expense reimbursement, paid to disqualified
persons is considered, per se, an excess benefit transaction as to the
entire amount of the payment. At a minimum, existing DAFs and SOs must
at the least review and rewrite operating agreements and by-laws in
light of the PPA provisions. Some have abandoned DAF or SO status and
have sought private foundation status.

Cash contributions. The PPA provides that regardless of the
amount of a cash gift, a donor must maintain a record of the
contribution, bank record, or a written communication from the donee
showing the name of the donee and the date and amount of the
contribution. Even though the PPA does not require charitable
organizations to make any changes to their current policies for issuing
tax receipts to donors, certain charities, including some religious
organizations and others dependant upon cash donations, will likely be
forced to spend additional time and expense on administrative duties to
make sure they satisfy donor requests for receipts. Unless the
charitable organization provides a written communication, cash
donations put into a ``Christmas kettle,'' collection plates, and pass-
the-hat collections will not be deductible. We recommend Section
170(f)(17) be stricken.
Clothing and household items. A charitable deduction for
donated clothing or household items is not permitted unless such items
are in ``good used condition or better.'' Most donee charities will
issue receipts for qualified clothing and household donations including
the descriptive statement ``good used condition or better.'' However,
the statute, existing IRS regulations, and the tax form instructions do
not provide any guidance as to the definition of ``good used
condition.'' Although we acknowledge some taxpayers may have claimed
inflated charitable contribution deductions for gifts of clothing and
household items, we believe such a vague standard should either be
further defined by Congress or the Treasury Department, or eliminated
from Section 170(f)(16).
3. Specific recommendations regarding donor advised funds and
supporting organizations
Definition of a donor advised fund/clarification of grants for
travel, study or similar purposes. A DAF, defined in Section
4966(d)(2)(A), is prohibited from making a grant to an individual. A
fund will not be considered a DAF and will be permitted to make grants
to individuals for travel, study, or other similar purposes if the fund
meets certain requirements including that the fund is advised by a
``scholarship committee'' not controlled, directly or indirectly, by
the donor. See Section 4966(d)(2)(b). There is some ambiguity whether
the sponsoring organization can agree in advance to appoint the donor
to the scholarship committee. UJC believes such an appointment should
be permitted so long as the donor or persons appointed or designated by
the donor do not control the committee, whether directly or indirectly.
In addition, there can be situations where DAF funds are granted to
another charity which in turn makes the final scholarship selection.
UJC believes it should be permissible for the DAF donor to be appointed
to the other charity's selection committee, again provided the control
provisions of Section 4966(d)(2)(B)(ii) are not violated. Such a
situation would be similar to the existing law governing private
foundations. Section 4945(g) provides that taxable expenditure rules do
not apply to certain individual grants awarded on an objective and
nondiscriminatory basis pursuant to a procedure approved in advance by
the IRS. Treasury Regulation Section 53.4945-4(a)(4) provides a grant
by a private foundation to another organization, which the grantee
organization uses to make payments to an individual, is not regarded as
a grant by the private foundation to the individual grantee if the
foundation does not earmark the use of the grant for any individual,
and there is no agreement the grantor foundation can cause the
selection of the individual grantee by the grantee organization. Such
grants are not considered a grant by the foundation to an individual
grantee even though the foundation has reason to believe certain
individuals would derive benefits from the grant so long as the grantee
organization exercises control, in fact, over the selection process and
actually makes the selection independent of the private foundation.
UJC understands the Council on Foundations (CoF) is also
recommending proposed changes to the definition of a DAF, including an
exception for funds created by public charities and government entities
and a clarification regarding the designation of scholarship committee
members by position or title. UJC has reviewed both of these proposed
changes and agrees with the conclusions of the CoF.

Distributions and prohibited benefits from donor advised funds. New
Section 4967 imposes an excise tax if a DAF makes distributions
providing a ``more than incidental benefit'' to a donor, donor advisor,
and related party. Although the statute does not define the term ``more
than incidental benefit,'' it is important to note the Joint Committee
on Taxation Technical Explanation (JCX-38-6) provides on pages 349-350
that ``there is more than incidental benefit if as a result of a
distribution from a donor advised fund, a donor, donor advisor, or
related person with respect to such fund receives a benefit that would
have reduced (or eliminated) a charitable contribution deduction if the
benefit was received as part of the contribution to the sponsoring
organization.'' Use of this so-called ``Section 170'' test to determine
no goods or services have been provided to the donor is the most
administrable and effective means to preclude the provision of
impermissible benefits to donors under Section 4967. UJC urges that
guidance be provided to make it clear that a grant from a DAF (or an
SO) does not provide any benefit to the donor if the amount of the
grant would have been fully deductible as a charitable contribution.
Illustrative of our concern is the discussion in Revenue Ruling 77-
160, 1977-1 C.B. 351. As summarized in this ruling, fees and dues or
other payments to a public charity are deductible under Section 170,
including membership fees where any rights and privileges obtained are
incidental to making the organization function according to its
charitable purposes, and the only return benefit is the satisfaction of
participating in furthering a charitable cause. Examples permitted
under Section 170 include rents, building fund assessments, and
periodic dues paid to a church. Such payments, if made by a private
foundation relating to a disqualified person, would be prohibited. What
is considered by this ruling as a ``direct economic benefit'' for
private foundation purposes would be considered only an incidental
benefit for purposes of Section 170 and, we submit, should be
considered incidental for purposes of Section 4967.
UJC also believes a public charity's approval of a recommendation
to make a distribution to a charity would be permitted even though in
some venues such a distribution might be considered as satisfaction of
a legally binding pledge. The definition as to what constitutes a
pledge or legally binding pledge varies significantly among various
state laws and depends upon particular facts and circumstances. It is
unrealistic to expect that a public charity would be in a position,
while running large fundraising campaigns, to be able to determine
whether a pledge or a legally enforceable pledge has been created under
applicable state law in each and every case. Whether a pledge exists or
whether such a charitable pledge is legally enforceable is a matter of
state law. Many public charities sponsoring DAFs run annual charitable
giving campaigns and conduct other fundraising events. In response to
solicitations for contributions, some donors make cash contributions
and others indicate their intention to contribute in the future. A
donor thereafter may recommend a DAF make a distribution, which may be
deemed to satisfy a charitable pledge. The DAF may be a fund sponsored
by the public charity to which the pledge has been made or it may be a
DAF sponsored by a different public charity. In either case, a donor's
recommendation is not binding upon the board of the public charity. The
board makes the decision as to whether to distribute funds which would
be deemed to satisfy a pledge. It is administratively infeasible for a
public charity to make such a determination on a contribution-by-
contribution basis, given the conflicting state laws on what makes a
pledge ``legally binding.''
Originally, the White Paper proposed to make clear that DAFs should
be permitted to make distributions satisfying a charitable pledge of a
donor, whether or not such pledge is enforceable under state law. Such
a clarification would drastically reduce the administrative burden on
public charities sponsoring DAFs and, in so doing, would serve the
interest of charitable beneficiaries and the public at large. Any
concern that a donor would realize a prohibited benefit under Section
4967 should a DAF be permitted to make a distribution which, in turn,
might be deemed to satisfy a pre-existing charitable pledge, does not
comport with the legal principles that should apply to this question.
By definition, a public charity enjoys broad public support and is
subject to significant public oversight. Unlike a private foundation, a
public charity is not subject to the control of a major donor. In this
respect, we refer to federal income tax authorities, which concluded
satisfaction of another party's legally-binding charitable obligation
is not treated for federal income tax purposes as resulting in adverse
tax consequences. See Revenue Ruling 55-410, 1955-1 C.B. 297, Revenue
Ruling 64-240, 1964-2 C.B. 172 and Wekesser v. Commissioner, T.C. Memo
1976-214. At a bare minimum, it would be erroneous to conclude the
position we support would change existing tax law, although, as in the
case of the White Paper recommendation, it would clarify the confusion
currently surrounding this issue.
UJC understands that the CoF is also recommending proposed changes
to the rules covering distributions from a DAF, including permitting
distributions for which the sponsoring organization receives
consideration, the value of which equals or exceeds the amount of the
distribution. In addition, CoF is proposing funds be permitted to make
distributions to individuals for relief of poverty or distress. UJC has
reviewed both of these proposed changes and agrees with the conclusions
of the CoF.

Reliance and certification by donors and grantees. In addition to
the excise tax imposed on a donor, donor advisor, or related person
where there is a prohibited benefit, a tax is also imposed on any fund
manager of the sponsoring organization who knowingly agrees to make the
distribution. See Section 4967(a)(2). This provision will require
sponsoring organizations to devote additional time and resources to the
administration of grants in order to identify individuals and entities
related to the donor or donor advisor. New Section 4966 imposes a 20%
excise tax penalty on sponsoring organizations for each ``taxable
distribution'' from a DAF and a 5% excise tax on a fund manager who
knowingly approves a taxable distribution. A taxable distribution
includes distributions to a ``disqualified supporting organization''
(an organization directly or indirectly controlled by the donor, an
advisor to the fund, or any persons related to the donor or the
advisor, unless the sponsoring organization implements expenditure
responsibility over such distribution meeting the requirements of
Section 4945(h)). It is important to note the burdens of Section
4945(h), previously applicable only to private foundations, may prove
to be costly for many sponsoring organizations and could result in such
organizations adopting policies precluding any distributions from DAFs
to SOs.
To prevent an unwanted chill on the philanthropic endeavors of DAFs
and SOs, it is essential that charities administering such funds not be
burdened with unnecessary procedures and requirements when accepting
gifts, approving grants, or making distributions in their normal course
of activities. This would include determining whether: (1) the
objective standard of Section 170 noted above has been satisfied with
respect to the donor; (2) distributions from DAFs are not made to
disqualified SOs: and (3) the SO is in receipt of a gift from a donor
or related party who controls directly or indirectly the governing body
of the supported organization. This third compliance task is essential
because newly enacted Section 509(f) could potentially recharacterize
the SO as a private foundation if it were to receive contributions from
persons ``in control'' of the SO. We recommend either Congress clarify
or that the Treasury Department promulgate regulations that permit
sponsoring organizations to rely on written certification from the
donor that the requested grant will not be used for a prohibited
purpose or result in a ``more than incidental benefit.'' For example,
the grant distribution form could include language such as the
following:

``As a person authorized to make this request, I hereby suggest
that you make the grant distribution indicated below. I
understand that by making this request, I am certifying that no
tangible benefit, goods, or services (including any grant,
loan, compensation, expense reimbursement or similar payment)
are being received by the Donor or by any individuals or
entities related to the Donor or the above mentioned donor
advised fund.''

A similar statement could also be included in the grant transmittal
letter, indicating to the recipient organization that acceptance of the
grant is conditioned on the understanding the donor will receive no
more than an incidental benefit. Such an example could include the
following:

``By accepting this check, your organization certifies that (1)
the Donor, Donor Advisor and parties related to the Donor or
Donor Advisor shall not receive more than incidental benefit
(specifically, no tangible benefit, goods or services), (2) no
grants, loans, compensation, expense reimbursements or similar
payments shall be made to the Donor, Donor Advisor or parties
related to the Donor or Donor Advisor, and (3) that your
organization is not a disqualified supporting organization
within the meaning of Code Section 4966(d)(4) of the Internal
Revenue Code 1986, as amended (the ``Code''), or a private
foundation not described in Section 170(b)(1)(A)(vii) of the
Code.''

In addition, sponsoring organizations of a DAF should be permitted
to rely on a written representation from a prospective grantee SO that
it is not directly or indirectly controlled by the donor, the advisor
to the fund, or any persons related to the donor or the advisor as
defined by Section 4966(d)(4). Providing sponsoring organizations with
safe harbor rules based on the certification of others is not without
precedent. Treasury Regulations contain numerous examples where
taxpayers are permitted to rely on the certification of another that
there has been or will be compliance with the technical provisions of
the tax law or the information provided is correct. One example of
third party reliance is the exemption from backup withholding based on
payee certification (see Treasury Regulation Section 31.3406(h)(3)).
Indeed there is an example in the PPA itself. Newly-added Section
170(e)(7)(d) provides an exception from the rules requiring a donor to
recapture some tax benefits for contributions of appreciated tangible
personal property not used for an exempt purpose if the donee
organization certifies the use of the property was related to the
organization's exempt purpose or how such use became impossible or
infeasible to implement.

Excess business holdings rules. Owners of closely held businesses
sometimes meet their charitable objectives through gifts of a part of
their business interests. Under prior law, such objectives could be
obstructed by the rules prohibiting a private foundation from having
``excess business holdings,'' defined as holdings in any business
enterprise exceeding ``permitted holdings.'' These complex rules and
excise taxes were designed to limit private foundation holdings of
interests in business activities and the conduct of unrelated business
activities.
UJC believes the excess business holdings rules should not apply to
DAFs and recommends the repeal of new Section 4943(e). Sponsoring
organizations of such funds do not predicate decisions on how long to
retain certain assets based on the private interest of the donor, but
in fact seek to maximize the long-term value of assets held in such
funds. Tax policy and IRS regulations should not discourage donors from
making gifts of property to tax-exempt organizations, especially as a
substantial portion of personal wealth is in the form of ``illiquid
assets'' such as real property and closely-held business interests.
Although reduction or elimination of tax incentives for gifts of
such types of property should be resisted, it is also important that
sponsoring organizations maintain gift acceptance and investment
management policies fostering the prudent stewardship of all donated
assets as well as achieve the goal of investment portfolio balance.
Adherence to such policies, which are prevalent throughout the UJC
System, should be sufficient to assure that DAFs operate in a manner
which would obviate the need for application of the excess business
holdings rules. We would also note the revised Form 990, released for
comment by the IRS in June 2007, would create a new required schedule
asking for detailed information on gifts of property with a claimed
value of $5,000 or more. Disclosure by charities through instruments
such as this new schedule should provide the IRS with sufficient
information to target abuses in this area.
Specific recommendations regarding supporting organizations
Certain provisions should be restricted to certain supporting
organizations. UJC believes several of the provisions in the PPA
adversely impact long-existing SO arrangements established by public
charities for sound legal and policy reasons. We further believe that
the provisions that substantially restrict the operation of SOs should
be limited to non-functionally integrated Type III SOs. Concerns about
donor control are not applicable to Type III SOs established by public
charities or third parties, such as courts of law, to carry out
specific charitable objectives. Similar to many public charities, a
number of Federations and their beneficiary agencies within the UJC
System hold their endowment funds in separate charitable entities
structured as SOs, generally Type I or Type II, but in some cases Type
III. Often this is done for important legal reasons, such as to
separate endowment assets from activities creating liabilities or other
creditor protection reasons. Separate endowment funds are also
established for programmatic reasons, such as to enable a separate
community-based governing body to oversee endowment fund investments
and distributions, or to keep endowment development activities separate
from annual fundraising campaigns. Similarly, SOs are used as the
parent organizations in health care systems and other multi-entity
systems of public charities providing direct services.

Intermediate sanctions. The Internal Revenue Code imposes excise
taxes on certain excess benefit transactions between disqualified
persons and charitable organizations where the transaction is one in
which a charity directly or indirectly provides a disqualified person
an economic benefit exceeding the value of the consideration (including
the performance of services) received for providing such benefit. New
Section 4958(c)(3) provides any grant, loan, compensation or other
similar payment from a SO to a substantial contributor or related party
is automatically considered to be an excess benefit transaction,
whether or not it exceeds in value the consideration given in exchange.
UJC believes the restrictions of Section 4958(c)(3) should not
apply to Type I, Type II, and functionally integrated Type III SOs. The
concern that substantial contributors or disqualified persons can
control these organizations is unfounded. The element of control
exercised by the supported organization in the case of a Type I and
Type II SO, and the functional integration present in such a Type III
SO is sufficient to provide the essential oversight of such SOs.
Precluding substantial contributors and other disqualified persons from
receiving appropriate compensation or reasonable expense reimbursement
on the same basis permitted by a private foundation is an unnecessarily
harsh result and could force some newly-formed organizations to refrain
from applying for SO status and force existing organizations to convert
to private foundation status.
UJC also believes Congress or the IRS should clarify whether the
rules of Section 4958 apply in the case of circumstances where an
officer or director of an SO attends a charitable event in a
representative capacity. We believe such an individual who is not a
substantial contributor or related party should be able to attend such
an event and the SO should be able to treat any such cost as
administrative expense without the individual being required to include
such reimbursement in gross income. Similarly, where the officer/
director pays the nondeductible portion of an event ticket, the
``Section 170 test,'' as discussed above, should apply.

Reliance and certification by donors and grantees. Procedures
assuring certain SOs (Type I and Type III) do not receive contributions
from persons in control of a supported organization also need to be
implemented reasonably. Gift acceptance forms from potential donors to
Type I and Type III SOs could require a certification that neither the
donor, their family members, nor their controlled entity, either
directly or indirectly, control the governing body of its supported
organization. This would alleviate the need for the SO to decline any
contribution proffered by any person connected with the supported
organization simply because it lacks the resources to engage in
extensive investigation that could involve any number of persons other
than the donor.

Summary. UJC supports the overall objective of the provisions of
the PPA and appreciates the concern expressed by the House Ways & Means
Subcommittee on Oversight in examining the impact of these provisions
on the tax-exempt sector. We are concerned however that several of the
PPA provisions have imposed administrative burdens or penalty taxes
inhibiting charitable giving and grantmaking to deal with what arguably
may have been a limited number of abusive situations. The added
administrative costs and the fear of potential penalty taxes has slowed
the flow of funds to certain types of organizations, resulting in a
diminution in the level of social services provided to the general
public. UJC urges the Members of the Subcommittee and others in
Congress to carefully consider the suggested changes noted above.

Statement of Wisconsin Alumni Research Foundation

The Honorable John Lewis, Chairman
The Honorable Jim Ramstad, Ranking Member
Subcommittee on Oversight
Committee on Ways & Means
U.S. House of Representatives
343 Cannon House Office Building
Washington, D.C. 20515

Dear Chairman Lewis and Congressman Ramstad:

Thank you for your invitation to comment on the exempt
organizations provisions of the Pension Protection Act of 2006 (the
``PPA''). I am the Managing Director of the Wisconsin Alumni Research
Foundation (``WARF''), a Type III supporting organization to the
University of Wisconsin--Madison (the ``University''). For over 80
years, WARF has worked closely with the University, patenting and
licensing University discoveries and using the resulting income to
enrich scientific research and education at the University. On March
14, 2005, WARF received the National Medal of Technology--the nation's
highest honor for technological innovation--from President George Bush,
recognizing WARF's support of research at the University, and WARF's
``pioneering'' technology transfer of university ideas to U.S.
businesses ``to improve the human condition, benefit the U.S. economy
and fund further scientific inquiry.''
My comments focus on the PPA's provisions affecting supporting
organizations like WARF. Some of the PPA's new provisions were aimed at
particular abuses, often involving a single donor or family funding a
supporting organization that was effectively, if not formally, under
their control. That organization would then operate to benefit the
donors in various ways. I applaud attempts by both Congress and the
Treasury Department to stop this kind of abuse. However, I am concerned
that many of the new provisions are drafted so broadly that they also
significantly impede the efficient functioning of legitimate
organizations such as WARF.
Already the new PPA provisions have cost WARF and the University
millions in current and future foregone funding, as well as needlessly
complicating a variety of WARF's activities in support of the
University. Given that many of the PPA's provisions were introduced
without any extended discussion with the charitable sector, there is
real concern that over time WARF will continue to find its ability to
provide efficient and effective support to the University impaired by
unforeseen consequences of the PPA. More fundamentally, I must object
to the apparent premise of the PPA that all supporting organizations,
especially Type III organizations, are somehow suspect and in need of
regulation akin to the private foundation rules--regardless of how
closely or successfully they have worked with their supported
institutions. Having successfully supported the University for over 80
years, WARF should not be treated equivalently to a newly-formed
supporting organization created as a charitable giving device to
maximize some donor's tax benefits while making minimal distributions
for charitable purposes.
While I propose specific fixes to some of the problems noted below,
it would be better to start anew with provisions targeted much more
narrowly on the abuses Congress means to stop. Indeed, it may be that
the PPA's provisions requiring increased disclosure to the IRS and to a
supporting organization's supported organizations \1\ will allow the
IRS to stop these abuses through redoubled enforcement of existing
standards, notably the rule preventing direct or indirect control by
substantial contributors and other disqualified persons.\2\ Even if
Congress does not undertake a global revision of the PPA's supporting
organization provisions, at a minimum Congress should amend or clarify
these provisions so that they will not further disrupt successful
supporting relationships like the one between WARF and the University.
---------------------------------------------------------------------------
\1\ See I.R.C. Sec. Sec. 509(f)(1)(A), 6033(l).
\2\ I.R.C. Sec. 509(a)(3)(C).
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I. WARF Fulfills an Essential Technology Transfer Role Under the Bayh-
Dole Act
WARF was organized as a Wisconsin not-for-profit, nonstock
membership organization on November 14, 1925, to own and manage patents
arising out of University research on behalf of the University in order
to support further research at the University and to benefit the
public. At that time, the University had no mechanism to administer a
patent that Professor Harry Steenbock wanted to contribute to the
University so that it could be licensed to generate funding for future
University research. Technologies made available to the public by WARF
have had an incalculable impact on the general welfare; Dr. Steenbock's
discovery alone--a process for creating Vitamin D through ultraviolet
light irradiation--has led to the virtual elimination of rickets in the
United States. WARF's successes have also allowed it to provide
supplemental funding to the University for scientific research and
education, propelling the University to its current stature as one of
the nation's leading scientific universities.
One of the most important ways WARF supports the University is by
fulfilling the University's obligations under the Bayh-Dole Act.\3\
That Act encourages utilization of inventions arising from federally-
funded research, including research conducted by universities and other
nonprofits, by allowing the researching institutions to take title to
any resulting intellectual property provided certain conditions are
met. Under the Bayh-Dole Act, such organizations must report all
inventions arising from federal funding and notify the government
whether they intend to take title to such inventions. If they take
title, they must promptly patent the inventions, report periodically to
the government on their utilization, and use the net income received
from the licensing or other use of such inventions (after
administrative expenses and payments to inventors required by the Act)
to support further scientific research or education.\4\
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\3\ The Bayh-Dole Act is officially known as the Patent and
Trademark Law Amendments Act, P.L. 96-517, 94 Stat. 3015 (Dec. 12,
1980), codified at 35 U.S.C. Sec. Sec. 200 et seq.
\4\ See 35 U.S.C. Sec. 202(c).
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The Bayh-Dole Act and the regulations thereunder expressly allow a
research organization such as the University to delegate its right to
take title to an invention (and its attendant responsibilities) to a
nonprofit organization with a principal function of managing
intellectual property.\5\ The University has made such a delegation to
WARF, allowing and requiring WARF to fulfill its responsibilities under
the Bayh-Dole Act.
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\5\ 35 U.S.C. Sec. 202(c)(7)(A); 37 C.F.R. Sec. 401.14(k)(1).
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II. Congress Has Not Adequately Protected Legitimate Functionally
Integrated Type III Supporting Organizations Such As WARF
Many new restrictions under the PPA apply only to certain Type III
supporting organizations, namely those that are not ``functionally
integrated'' with one or more supported organizations. Such
organizations are now (1) limited in the amount of stock in a company
they and their disqualified persons can hold; \6\ (2) virtually
prohibited from receiving grants from a private foundation grantor
because any such grantor must exercise expenditure responsibility and
cannot count the grants toward its payout requirement; \7\ and (3)
subject to an annual payout requirement that the PPA makes
mandatory.\8\
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\6\ I.R.C. Sec. 4943(f)(1), (3)(A).
\7\ I.R.C. Sec. Sec. 4942(g)(4)(A)(i), 4945(d)(4)(A)(ii).
\8\ Treas. Reg. Sec. 1.509(a)-4(i)(3)(iii); PPA, Sec. 1241(d)(1),
120 Stat. at 1103.
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Under any reasonable definition of the term, WARF is ``functionally
integrated'' with the University. The vast majority of WARF's staff
time is spent on its core technology transfer activities. Such
activities are an essential part of any major scientific research
university's program in the twenty-first century. Indeed, WARF's
activity fulfills the University's legal responsibility to patent and
license its federally funded inventions under the Bayh-Dole Act; WARF
has been specifically delegated those responsibilities as expressly
contemplated by the Bayh-Dole Act. Moreover, because WARF is
responsible for this crucial component of University operations, it has
continuous contact with University administrators, professors, and
researchers. Thus, one would expect WARF to qualify as the prototypical
organization that is ``functionally integrated'' with its supported
organization.
However, Congress left Treasury great discretion in defining the
term ``functionally integrated''; the statute defines the term
exclusively by reference to the definition in the Treasury Regulations,
and the Joint Committee on Taxation's Technical Explanation
(``Technical Explanation'') suggests that Treasury has the authority to
narrow its definition of functional integration and even to abolish the
class of functionally integrated organizations altogether.\9\ Treasury
has recently indicated in an Advance Notice of Proposed Rulemaking (the
``Treasury Proposal'') \10\ that it intends to use this broad
authority, grafting extraneous new requirements onto the concept of
functional integration in ways that could exclude WARF and numerous
other organizations despite longstanding and close operational
integration with their supported organizations.
---------------------------------------------------------------------------
\9\ I.R.C. Sec. 4943(f)(5)(B); Staff of the Joint Committee on
Taxation, Technical Explanation of H.R. 4, the ``Pension Protection of
2006,'' as Passed by the House on July 28, 2006, and as Considered by
the Senate on August 3, 2006 (JCX-38-06) at 360 n. 571.
\10\ Internal Revenue Service, Advance Notice of Proposed
Rulemaking, ``Payout Requirements for Type III Supporting Organizations
That Are Not Functionally Integrated,'' 72 Fed. Reg. 42,335, 42,338
(Aug. 2, 2007).
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Under current regulations, an organization would be considered
functionally integrated if it conducts activities ``to perform the
functions of, or to carry out the purposes of, [its supported]
organizations,'' and if such activities are so important to the
supported charity that ``but for the involvement of the supporting
organization, [they] would normally be engaged in by the publicly
supported organizations themselves.'' \11\ Treasury proposes to
maintain this test, but to graft in two additional requirements taken
from the private operating foundation context. First, the organization
would have to spend substantially all (85%) of its income, up to at
most 4.25% of its net assets not in charitable use, on direct conduct
of activities meeting this ``but-for'' test rather than on providing
financial support to the supported organizations.\12\ Second, at least
65% of the assets of the organization would have to be used directly in
the conduct of those activities. This proposed definition is alarming
for multiple reasons.
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\11\ Treas. Reg. Sec. 1.509(a)-4(i)(3)(ii).
\12\ Treasury Proposal, 72 Fed. Reg. at 42,338.
---------------------------------------------------------------------------
The Treasury Proposal effectively applies a payout requirement to
all Type III supporting organizations. While Congress did give Treasury
considerable discretion in defining the term ``functionally
integrated,'' it also instructed Treasury to impose a payout
requirement on the subset of ``Type III supporting organizations which
are not functionally integrated.'' \13\ Despite this apparent intention
to distinguish between functionally integrated and other Type IIIs,
Treasury's proposal effectively subjects all Type III supporting
organizations to some sort of payout requirement. This seems at odds
with Congress's explicit instructions.
---------------------------------------------------------------------------
\13\ PPA, Sec. 1241(d), 120 Stat. at 1102 (emphasis added).
---------------------------------------------------------------------------
The Treasury Proposal unfairly penalizes broad classes of Type III
organizations without regard for their relationship to their supported
organizations. Treasury's proposal seems to mandate that all
functionally integrated Type III organizations provide support in the
same way. If an organization's principal asset is an endowment that it
uses to fund functionally integrated activities, it cannot qualify as
functionally integrated--no matter how responsive to and closely
integrated with its supported organization it might be.
Similarly, an organization that uses only half of its income to
operate its functionally integrated activity and distributes the excess
to the supported organization could also fail to qualify. This rule
leads to especially strange consequences in the case of Bayh-Dole
patent management organizations like WARF. Paradoxically, an
organization like WARF could qualify as functionally integrated if its
patent licensing activity were unprofitable enough to absorb most of
its investment income. But a successful patent management organization
does not spend substantially all of its net income on its technology
transfer activity because it has substantial amounts of income over and
above those expenses--net income that is turned over to the supported
university, potentially causing the organization to fail the proposed
payout test. This bizarre result would unfairly penalize Bayh-Dole
patent management organizations for successfully doing what they are
required by federal law to do.
The Treasury Proposal will also prevent universities and other
charities from using Type III supporting organizations to hold
interests in for-profit subsidiaries. Such charitable holding entities
would often be impermissible: they would not be functionally integrated
if more than 35% of their assets would be interests in an unrelated
business, and therefore they would be prohibited by new section 4943(f)
from owning more than 20% of that business. These restrictions
needlessly limit how a university system can structure ownership of its
own for-profit subsidiaries.
More generally, the Treasury Proposal seems to subscribe to a
mistaken notion that functionally integrated organizations should be
limited in their ability to provide direct financial support. In my
experience, WARF has been successful precisely because it provides both
financial and operational support. Unquestionably, WARF's close working
relationship with the University gives it a familiarity with the
University and its needs that allows WARF to be far more responsive
than the typical organization that simply writes a check to its
supported organization each year. But it would be absurd to say that
WARF would be either more responsive to or more integrated with the
University if it limited its support to its technology transfer
activities. Rather, because of WARF's close involvement with the
University's science programs, WARF has been able to identify a variety
of programs it can support for which other funding is generally not
available. Recent examples include a competitive research grant
program, faculty and graduate student fellowship programs, and the
construction of major new biotechnology and interdisciplinary research
facilities on the University's campus. WARF-supported programs have
become a mainstay of the research program at Wisconsin, and the campus
is dependent on them to keep its competitive edge, to retain faculty,
and to recruit new faculty. WARF works closely with the University to
tailor these programs to the University's evolving needs. Surely this
kind of financial support, informed by WARF's extraordinarily close
operational relationship with the University, counts in favor of
treating WARF as a full-fledged public charity, not against it.
Treasury's criterion for determining which activities are
functionally integrated is inadequate for supporting organizations of
governmental entities. Under current law and the Treasury Proposal, a
functionally integrated organization must conduct activities that the
supported organization would otherwise conduct itself. Normally, this
rough test serves to screen out those organizations that do not have
activities essential enough to the supported organization to give it
the incentive to monitor those activities. In the governmental context,
however, the supporting organization's activities may be crucial to the
governmental entity precisely because the governmental entity could not
(or could not easily) perform those activities itself due to
restrictions specific to governmental entities. In such cases, the
Treasury Department's test would apparently yield the wrong result.
Recommendation: Congress should define ``functionally integrated''
supporting organizations more specifically, ensuring that organizations
are not denied that status simply because they have an endowment,
generate revenue through their integrated activities, provide a
combination of financial and functional support, or perform essential
functions that their supported organization could not perform
themselves. Specifically, that definition should clarify that Bayh-Dole
patent management organizations like WARF qualify as functionally
integrated.
III. Restrictions on Non-Functionally Integrated Type IIIs Unfairly
Harm Legitimate Organizations_Especially Those Supporting
Governmental Entities
The PPA deprives legitimate organizations (and the public interests
they serve) of needed funding. WARF is concerned about Treasury's
apparent willingness to narrow the class of functionally integrated
organizations because of the serious consequences to legitimate
organizations that fail to obtain that technical status. Perhaps most
seriously, such organizations will be effectively foreclosed from
seeking private foundation funding, since private foundations would
receive no credit for such grants in meeting their own payout
requirements. For instance, one private foundation has pledged to give
WARF $50 million to help pay for a new state-of-the-art
interdisciplinary research center that WARF is building on the
University's campus. That grant is possible because WARF is
functionally integrated under the current regulations; if the Treasury
Proposal is not modified, WARF's endowment will prevent it from
receiving such grants in the future. This will not prevent any abuses
of which I can conceive; it will simply decrease the amount of funds
available to advance research and build the University.
Furthermore, the restriction on private foundation funding will
negatively impact WARF and other organizations even if they are
functionally integrated, because many private foundations will not be
willing to perform the necessary due diligence to determine what type
of supporting organization the potential grantee is. The University has
already felt the impact of this restriction; one private foundation is
terminating a $1 million annual grant formerly paid to WARF and used to
fund University research because the PPA has made it too complicated to
give grants to Type III supporting organizations.
The PPA's new payout requirements can actually harm governmental
and other supported organizations and other charities with needs that
fluctuate over time. The PPA directs Treasury to impose a payout
requirement on all non-functionally integrated supporting
organizations; currently, Treasury is proposing to apply the same 5%-
of-assets payout requirement to supporting organizations that applies
to private foundations.\14\ This importation of the private foundation
rules overlooks the fundamental difference between private foundations
and supporting organizations. Unlike the typical private foundation, a
Type III supporting organization is dedicated to specifically named
charities or governmental entities, so any current spending directly
impacts the amount that will be available to those entities in the
future. When a supported organization can be expected to have varying
needs over the years, requiring a fixed payout can actually harm it,
keeping it from saving its resources for when they are needed most.
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\14\ PPA, Sec. 1241(d)(1), 780 Stat. at 1103; Treasury Proposal, 72
Fed. Reg. at 42,338.
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These concerns are especially pressing for state universities and
other governmental entities dependent on annual budget appropriations.
There is a constant risk that state legislature appropriations may be
frozen or cut with the next economic downturn or change in
administration. Furthermore, it can be difficult for state universities
to find room in tight state budgets to obtain supplemental
appropriations for special projects, leaving them able to cover core
operating expenses but not to undertake the kind of major capital
projects necessary to ensure that university facilities remain
technologically current.
A Type III supporting organization with an endowment that can be
used to supplement the standard appropriations process can play a key
role in filling these gaps. For instance, in addition to its normal
annual support of the University's programs, WARF is currently spending
$80 million to construct three new buildings on the University's
campus, and is committed to construction of a major new research
institute to which it will contribute an expected $100 million. It is
precisely because WARF was free to accumulate its income in prior years
that it now has amassed an endowment large enough to meet these special
needs as they arise and to compensate for cyclical variations in
Wisconsin's funding for the University.
Type III supporting organizations offer unique advantages and
should not be treated as second-class citizens of the charitable
sector. The PPA demonstrates unmistakable hostility to Type III
supporting organizations, as if there are no valid reasons for choosing
Type III status. As Managing Director of WARF, I witness the benefits
of that status every day. Some of those benefits are specific to WARF's
patent management role. A major problem for modern universities is
dealing with institutional conflicts of interest--roughly, the fact
that universities and other research institutions may have commercial
interests that could, if unmanaged, taint the objectivity of their
research interests in commercializing and profiting from their
research. The separation between WARF and the University helps to
mitigate these concerns by making an independent organization, WARF,
responsible for commercializing the University's research, leaving the
University free to focus on its educational and scientific mission.
Type III status also allows WARF to avoid being treated as a
Wisconsin state entity itself. If it were a state entity, it could
become subject to public information laws, making potential licensees
reluctant to risk disclosing their proprietary information by licensing
with WARF; public procurement laws, as noted above, could limit its
ability to negotiate licenses; and civil service rules would affect its
ability to deal with employees. WARF's freedom from state bureaucracy
has also been especially important in enabling it to put together
retention packages to keep star scientific faculty at the University.
Because of their financial and bureaucratic constraints, state
universities have perennially had difficulty quickly assembling
compensation packages that can compete with those offered by private
institutions. In two recent instances, the University would have lost
key faculty members without WARF's help. Given the many legitimate
reasons for choosing Type III status, that status alone should not be
enough to single out an organization for special regulation.
Recommendation: The PPA's new restrictions on Type III non-
functionally integrated organizations (especially the payout
requirement and limit on private foundation funding) are
counterproductive and should be repealed. They are particularly ill-
suited for Type III supporting organizations to governmental entities
and patent management organizations, which should therefore be exempted
from these restrictions even if they are not repealed.
IV. Section 4958(c)'s New Restrictions on Transactions with Supporting
Organizations are Stricter Even Than Those Applicable to
Private Foundations
Prior to the PPA's enactment, section 4941 prohibited most
transactions between a private foundation and its ``disqualified
persons''--directors, officers, substantial contributors, and certain
related parties. Section 4958, on the other hand, allows public
charities to engage in such transactions but imposes a 25% tax against
the disqualified person for any amount he or she receives in excess of
fair market value.
Under new section 4958(c)(3)(A)(i)(I), the 25% excise tax
automatically applies to the entire amount of ``any grant, loan,
compensation, or other similar payment'' that a supporting organization
provides to a substantial contributor or a related party, and to any
loan to the organization's disqualified persons--regardless of whether
the payment is reasonable in amount. It thus appears intended to impose
a regime on supporting organizations similar to the one that applies to
private foundations. In fact, though, it overshoots that mark, treating
WARF and other supporting organizations even more harshly than they
treat private foundations.

Definition of Prohibited Payments. Section 4958(c)(3)(A) does not
define what payments are ``other similar payments'' subject to penalty.
The Technical Explanation cryptically indicates that the term was meant
to include expense reimbursements but not bona fide sale or lease
payments--without any explanation as to why the former but not the
latter are considered similar to grants, loans, and compensation.\15\
The result is a regulatory regime for insider transactions that makes
no sense from a policy perspective: private foundations can pay
compensation and reimburse legitimate expenses, but cannot buy or sell
property, whereas supporting organizations can buy or sell property but
cannot pay compensation or reimburse expenses. The Technical
Explanation also raises questions about which other forms of payment
might be covered. Since it apparently approves fair market rental
payments to a substantial contributor, it seems other payments for the
use of property, such as royalties, should be permissible. But given
the draconian penalties that apply to these new payments, it behooves
Congress to identify the disfavored payments more precisely.
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\15\ Technical Explanation at 358.
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Recommendation: Section 4958(c) should be repealed, or at a
minimum, amended to include an express provision stating that no
rental, lease, sale, purchase, royalty, or interest payments shall be
considered a ``grant, loan, compensation, or other similar payment''
under section 4958(c)(3)(A)(i)(I).

Reasonable Compensation and Expense Reimbursement. Charities, like
other employers, often reimburse expenses that their employees,
officers, and directors incur out-of-pocket costs in the course of
their duties. To take just one example, WARF typically will pay the
costs associated with bringing its Board of Trustees--prominent
business and community leaders from across the nation--together for
periodic board meetings. In some cases WARF pays for the travel
directly; in other cases it is more convenient for the trustee to book
the travel arrangements and then obtain reimbursement. Other
organizations may provide their trustees with a small amount of
compensation for time spent serving the organization.
The PPA complicates these routine matters for WARF. As is the case
for many other charities, WARF's trustees are among those most likely
to be enthusiastic enough about WARF's work to contribute to it. Such
charitable contributions should be encouraged, not penalized. However,
under the PPA, even a relatively minor donation to WARF could turn a
donor-trustee into a substantial contributor, because the relevant test
requires only that the trustee have contributed at least $5,000 and at
least 2% of all contributions to the organization. Section 4958(c)(3)
of the Code punishes such a donor-trustee for his or her generosity;
from the time he or she becomes a substantial contributor, that trustee
is relegated to second-class status, becoming ineligible to have his or
her WARF-related out-of-pocket travel expenses reimbursed or to receive
the same compensation paid to other trustees. Even WARF's direct
purchase of plane tickets for such a donor-trustee could be considered
an in-kind grant under section 4958(c)(3). This seems bizarre; the
purpose of the new rules should be to prevent improper benefits to
substantial contributors, not to prevent a charity from holding board
meetings at its own expense. In WARF's case, the new rules will
discourage trustees from making personal commitments to funding the
charitable and educational endeavor of scientific research at the
University.
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\16\ WARF has acquired its assets primarily in return for future
royalties or by investment. Thus, a donation of well under 1% of WARF's
total assets could easily be over 2% of its total contributions.
\17\ I.R.C. Sec. 4941(d)(2)(E).
\18\ I.R.C. Sec. 62(c); Treas. Reg. Sec. 1.62-2(c)(4).
\19\ Treas. Reg. Sec. 53.4958-4(a)(4).
\20\ Treas. Reg. Sec. 53.4946-1(a)(8) (for purposes of Sec. 4941,
``disqualified person'' does not include 501(c)(3) organizations other
than certain organizations that test for public safety); Treas. Reg.
Sec. 53.4958-3(d)(1) (501(c)(3) organizations are deemed not to have
``substantial influence,'' and thus prevented from becoming
disqualified persons except by relationship to some other person).
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This disincentive for board-level giving is as unprecedented as it
is perverse. Even in the private foundation context, where concerns
about donor control of charitable resources are at their highest, the
Code allows substantial contributors to be paid reasonable compensation
for personal services rendered in furtherance of the organization's
exempt purposes, and to be reimbursed for out-of-pocket costs
associated with providing those services. There is no reason to impose
a stricter rule simply because an organization has a connection to a
public charity.
Recommendation: Congress should avoid treating supporting
organizations worse than private foundations by amending section
4958(c)(3) so that it does not apply to reasonable compensation for
services or to reimbursement of reasonable and necessary out-of-pocket
expenses, at least when made on the same terms available to other
similarly situated, non-substantial contributors.
Alternative Recommendation: Even if the prohibition on compensation
is retained, Congress should clarify that it does not apply to non-
personal expense reimbursements. U.S. tax law generally excludes such
reimbursements from an individual's income when he or she is paid under
an accountable plan, which requires the reimbursed individual to
substantiate the business purpose of the expense. The current section
4958 regulations take the same approach, disregarding reimbursements
under an accountable plan and other similar benefits that are excluded
from income. Congress should confirm that these kinds of proper
reimbursement arrangements will continue to be disregarded for purposes
of section 4958(c)(3). Substantial contributors should not be penalized
if they are reimbursed for legitimate, properly substantiated expenses
or if they use property provided by the charity in the course of
performing their duties.

Transactions among charities. Section 4958(c)(3)(C)(ii) provides
that public charities other than supporting organizations are not
considered substantial contributors, thus implying that private
foundations and supporting organizations are substantial contributors,
and therefore loans, grants, or compensation paid to them are subject
to penalty. This is a marked departure from prior law. Until now,
sections 4941 and 4958 have applied to protect against transactions
between charities and private parties that could divert charitable
funds to private use, but neither section 4941 nor section 4958 covered
transactions between charities.
This expansion of section 4958 prohibits many innocent
transactions, particularly in the common context of a system of
affiliated charitable entities. For instance, WARF is the parent of
another Type III supporting organization of the University, WiCell
Research Institute, Inc. (``WiCell''). Because WARF provided initial
funding to WiCell, WARF is a substantial contributor to WiCell. WiCell
pays WARF service fees for bookkeeping and similar administrative
services as part of a cost sharing arrangement so that the two
organizations do not have to duplicate their efforts in such areas.
Congress should encourage, not punish, this kind of consolidation and
efficient use of charitable resources. Yet under the PPA, WiCell's
service fees paid to WARF, a substantial contributor, would presumably
be ``compensation'' subject to draconian penalties. By reaching
transactions between supporting organizations to the same University,
the PPA creates artificial and senseless barriers to the efficient flow
of funds and services among charitable affiliates.
Recommendation: The cleanest solution to this problem, and the one
Congress should adopt, is to return to the previous policy of sections
4941 and 4958, excluding all charities from the definition of
substantial contributor. At the very least, however, an exception
should apply to transactions within a system of related charities.
V. Conclusion
We at WARF believe that there is something immensely valuable about
the collaborative relationship that WARF and the University have
enjoyed over the past 80 years. That relationship attests that Type III
supporting organizations can make unique contributions to their
supported organizations, particularly when they support state
universities or other governmental entities. I urge you to consider
amending the PPA so that it will not disrupt or penalize these kinds of
longstanding support relationships.

Sincerely,
Carl E. Gulbrandsen
Managing Director

Statement of Zimmerman-Lehman, San Francisco, California
I have worked all my life in the public interest arena primarily
with small and effective nonprofit organizations. Currently, I consult
with a wide range of small to midsize nonprofits, many of them social
change organizations that have small administrative staff.
I am concerned any time I see major regulatory changes since I know
each and every time there is a change, regardless of the reason, there
is a cost to learning and implementing the change which means more
overhead expenses and less resources for programs. This is particularly
true for the types of organizations for which I work. Both the Pension
Protection Act of 2006 and now the revised draft Form 990 will and do
have the unintended consequence of requiring organizations with limited
capacity to divert resources to accountants, auditors and others to
collect, track and process the data required to meet the suggested
reporting standards. The proposed changes will reduce service delivery
and increase administrative overhead. Also very few changes add value
other than more transparency (the largest value added new regulatory
change in the Pension Act, the IRA rollover, is limited to only two
years).
Generally, when I study the background on these changes the
intentions are good and fit with the types of governance procedures I
promote. However, I also feel they are often addressing problems that
are faced more often by large, financially comfortable organizations
such as colleges, hospitals and foundations. It is the rare small
nonprofit that need worry about over ``compensation.'' More often I
worry about under-compensation and assisting organizations to not only
run their programs effectively and efficiently but raise all the money
they can to increase their capacity for service. I work with many many
honest hard working fundraisers who struggle every day to increase
resources for services that used to be provided by the government. In
recent years, many public schools and even cities have needed
assistance in raising private funds.
I ask you to do a ``cost-benefit analysis'' of every proposed
change before it is made--especially the cost to smaller agencies.

Is this new regulation really needed?
How will it benefit the public?
Will compliance reduce services to the public?
Will this new regulation really promote more effective as
well as transparent services?
Should the same information be required from all
nonprofits regardless of size, type or focus?

Thank you for your consideration,
Ann Lehman
Partner

p.s. At the hearing on July 24, 2007 I read that nonprofit abuses
``. . . included inflated valuation of non-cash donations, charities
that are established primarily to benefit a single donor, abusive
donor-advised-fund arrangements, the blurring of the line between tax-
exempt and commercial activities, excessive compensation, and improper
political activities. . . .'' These abuse should not be dismissed, but
rarely affect small to midsize nonprofits and do not warrant the
increase in regulations and scrutiny that has been recently heaped on
all nonprofits. Rather than increasing overhead expenses for all--which
donors hate to fund--the IRS should do a better job ferreting out the
bad players.