- TAX EXEMPT ORGANIZATIONS

[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

TAX EXEMPT ORGANIZATIONS

=======================================================================

HEARING

before the

SUBCOMMITTEE ON OVERSIGHT

of the

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

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

MAY 16, 2012

__________

Serial No. 112-OS13

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Printed for the use of the Committee on Ways and Means

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COMMITTEE ON WAYS AND MEANS

DAVE CAMP, Michigan, Chairman

WALLY HERGER, California SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas CHARLES B. RANGEL, New York
KEVIN BRADY, Texas FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin JIM MCDERMOTT, Washington
DEVIN NUNES, California JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky XAVIER BECERRA, California
DAVID G. REICHERT, Washington LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana MIKE THOMPSON, California
PETER J. ROSKAM, Illinois JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania EARL BLUMENAUER, Oregon
TOM PRICE, Georgia RON KIND, Wisconsin
VERN BUCHANAN, Florida BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

Jennifer Safavian, Staff Director and General Counsel

Janice Mays, Minority Chief Counsel

______

SUBCOMMITTEE ON OVERSIGHT

CHARLES W. BOUSTANY, JR., Louisiana, Chairman

DIANE BLACK, Tennessee JOHN LEWIS, Georgia
AARON SCHOCK, Illinois XAVIER BECERRA, California
LYNN JENKINS, Kansas RON KIND, Wisconsin
KENNY MARCHANT, Texas JIM MCDERMOTT, Washington
TOM REED, New York
ERIK PAULSEN, Minnesota

C O N T E N T S

__________

Page

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

WITNESSES

Mr. Roger Colinvaux, Associate Professor, Columbus School of Law,
The Catholic University of America, testimony.................. 6
Ms. Diana Aviv, President & Chief Executive Officer, Independent
Sector, testimony.............................................. 16
Ms. Joanne M. DeStefano, Vice President for Finance and Chief
Financial Officer, Cornell University, Testifying on behalf of
the National Association of College and University Business
Officers, testimony............................................ 27
Mr. Michael Regier, Senior Vice President of Legal and Corporate
Affairs, VHA Inc., testimony................................... 33
Mr. Bruce R. Hopkins, Senior Partner, Polsinelli Shughart,
testimony...................................................... 43

SUBMISSIONS FOR THE RECORD

American Association of Museums.................................. 65
American Bankers Association..................................... 68
American Hospital Association.................................... 75
Association for Healthcare Philanthropy.......................... 77
Catalogue for Philanthropy....................................... 84
Cause of Action.................................................. 85
Charity Navigator................................................ 91
CharityWatch..................................................... 92
Community Catalyst............................................... 99
Credit Union National Association................................ 104
Jewish Federations of North America.............................. 107
National Association of Federal Credit Unions.................... 115
National Council of Nonprofits................................... 117
The Community Foundation for Greater Atlanta..................... 121

MATERIAL SUBMITTED FOR THE RECORD

Question for the Record:
Ms. Diana Aviv................................................... 123

TAX EXEMPT ORGANIZATIONS

----------

WEDNESDAY, MAY 16, 2012

U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 1100, Longworth House Office Building, the Honorable
Charles Boustany [Chairman of the Subcommittee] presiding.
[The advisory of the hearing follows:]

HEARING ADVISORY

Boustany Announces Hearing on Tax Exempt Organizations

Wednesday, May 16, 2012

Congressman Charles W. Boustany Jr., MD (R-LA), Chairman of the
Subcommittee on Oversight of the Committee on Ways and Means, today
announced that the Subcommittee will hold a hearing examining
operations and oversight of tax-exempt organizations. This will be the
first in a series of hearings by the Subcommittee on the tax-exempt
sector and IRS oversight of tax-exempt activities. The hearing will
take place on Wednesday, May 16, 2012, in Room 1100 of the Longworth
House Office Building, beginning at 10:00 A.M.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.

BACKGROUND:

Tax-exempt organizations have long played an important role in the
United States. Since the first income tax was imposed in 1913, certain
organizations have been exempt from taxation, including those organized
and operated for religious, charitable, scientific, or educational
purposes. Such organizations remain the most common types of exempt
organizations and are defined in section 501(c)(3) of the Internal
Revenue Code (``IRC''). In addition to the longstanding exemption for
such organizations under section 501(c)(3), there are 28 other types of
organizations that may qualify for tax-exempt status.

As of 2008, 1.85 million organizations qualified for tax-exempt
status, and 1.18 million qualified as charitable organizations under
section 501(c)(3). In 2008, charitable organizations had $2.5 trillion
in assets. It is estimated that tax-exempt organizations employ
approximately 10% of the U.S. workforce (charitable organizations
employ 7% of the U.S. workforce).

Tax-exempt organizations are subject to a variety of rules to
ensure compliance with Federal tax law and limit abuses, including
rules that prevent private inurement, limit certain activities, and
subject business income related to for-profit activities to income tax.

On October 6, 2011, Chairman Boustany sent a letter to the Internal
Revenue Service (IRS) seeking information related to the agency's
administration and oversight of tax-exempt organizations (including
charitable organizations). The letter sought information on a variety
of topics to help the Committee understand the current state of
relations between the IRS and tax-exempt entities, and provide a
foundation for further engagement in overseeing this important sector
of the U.S. economy. The letter focused on a number of issues related
to corporate governance and compliance, requested information related
to new reporting requirements for tax-exempt hospitals, and asked for
an update on the ongoing Colleges and University Compliance Project
that was launched in 2008.

In announcing this hearing, Chairman Boustany said, ``Oversight of
the tax-exempt sector is an important priority for the Subcommittee,
and it has been an area that both Republicans and Democrats agree needs
greater attention. In my letter to the IRS last October, I asked the
IRS about recent efforts to address certain concerns that have been
raised regarding the operation of tax-exempt organizations, including
corporate governance issues and mishandling of funds by officers. It is
now time for the Subcommittee to hear from members of the tax-exempt
community for a more complete picture of the current state of affairs.
This review allows us to examine the state of the tax-exempt sector, as
it currently exists today and consider this information as we continue
the Committee's efforts toward comprehensive tax reform. In both cases
the goal is the same--to ensure that the tax-exempt sector is operating
in an efficient manner and that the laws governing tax-exempt
organizations are being applied fairly and evenly.''

FOCUS OF THE HEARING:

The hearing will focus on certain current issues related to tax-
exempt organizations, including the current IRS compliance initiative
related to Universities, recently enacted reporting requirements for
tax-exempt hospitals, recent efforts by tax-exempt organizations to
design and implement good governance standards, and taxpayer
involvement in redesigning the Form 990. In addition, the hearing will
discuss the history of recent legislative changes to the Tax Code
dealing with tax-exempt organizations and what prompted those changes.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit
written comments for the hearing record must follow the appropriate
link on the hearing page of the Committee website and complete the
informational forms. From the Committee homepage, http://
waysandmeans.house.gov, select ``Hearings.'' Select the hearing for
which you would like to submit, and click on the link entitled, ``Click
here to provide a submission for the record.'' Once you have followed
the online instructions, submit all requested information. ATTACH your
submission as a Word document, in compliance with the formatting
requirements listed below, by the close of business on Wednesday, May
30, 2012. Finally, please note that due to the change in House mail
policy, the U.S. Capitol Police will refuse sealed-package deliveries
to all House Office Buildings. For questions, or if you encounter
technical problems, please call (202) 225-3625 or (202) 225-2610.

FORMATTING REQUIREMENTS:

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

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

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

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

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

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

Chairman BOUSTANY. The subcommittee hearing will come to
order. Welcome to this morning's hearing on tax-exempt
organizations. This hearing will be the first in a series of
hearings exploring tax-exempt issues and related IRS compliance
efforts.
Tax-exempt organizations, especially charitable
organizations, serve an important role in our society. From the
local Little League to nonprofit hospitals to major
universities, tax-exempt organizations are intertwined with our
communities and economy.
Tax-exempt organizations also control vast resources. It is
estimated that in 2008 charitable organizations had $2.5
trillion in assets. In addition, tax-exempt organizations
employ 10 percent of the workforce. With so many Americans
relying on, working for, and engaged in economic relationships
with tax-exempt organizations, taxpayers should have confidence
that tax-exempt organizations, especially charitable
organizations, are operating efficiently and hopefully using
good governance practices to maximize benefits provided to the
community. To support these goals it is important that this
committee review the substantive rules that apply to tax-exempt
organizations, IRS compliance efforts, and the operations and
governance of tax-exempt organizations.
In addition, Congress must ensure that the IRS has the
information it needs to effectively interact with tax-exempt
organizations. The IRS is charged with ensuring tax-exempt
organizations are operating in furtherance of their tax-exempt
purpose and it is important that tax-exempt organizations and
the IRS effectively communicate with each other to meet this
goal.
With this in mind, in October of last year I sent a letter
to Commissioner Shulman to discuss a variety of current issues
involving tax-exempt organizations and IRS compliance efforts.
Today we have invited witnesses who can provide information
from the tax-exempt sector's perspective on the issues that
were raised in my letter, such as good governance and
compliance, the IRS college and universities compliance
project, and new reporting requirements for nonprofit
hospitals.
In addition, we have a witness who can provide historical
background about recent changes in tax-exempt rules and the
general structure of the tax-exempt sector. This is an
opportunity to hear from the tax-exempt community on these
important issues and learn what the current landscape looks
like for tax-exempt organizations.
I want to thank all of our witnesses for joining us here
this morning. With that I will now yield to my friend Mr.
Lewis, the ranking member of the subcommittee.
Mr. LEWIS. Thank you, Mr. Chairman. Thank you, Chairman
Boustany, for holding this hearing today. Tax-exempt
organizations play an important role in our society. There are
many types of tax-exempt organizations and each type serves an
important role. There are organizations that help our poor and
feed our hungry. There are colleges and universities that
educate our young people and hospitals that care for our sick.
There are also organizations that touch every corner of our
life: religion, labor and the arts, and advocate on our behalf.
In total there are over 1.8 million tax-exempt organizations
that work to make our lives and our communities better.
Throughout the year I have been concerned about the IRS
budget and the effect of the budget cuts on tax administration.
The IRS currently has a budget of $100 million, and fewer than
900 employees to oversee nearly 2 million organizations that
have more than $1 billion in revenue and $2.5 trillion in
assets.
I continue to be concerned that, not if properly funded,
the Agency harms taxpayers and in this context harms the public
trust when bad actors are discovered. I look forward to
learning more about the tools used to ensure compliance with
the Federal tax laws.
In closing, I am mindful that tax reform is looming. If we
adopt a Republican goal of a top individual tax rate of 25
percent, some tax preferences will need to be eliminated.
However, I believe that tax-exempt organizations play a major,
valuable, and necessary role in our economy and in our country,
and charitable giving should be encouraged. I look forward to
hearing from the witnesses today and I want to thank each
witness for your testimony and thank you for being here.
And with that, Mr. Chairman, I yield back.
Chairman BOUSTANY. Thank you Ranking Member Lewis.
Next it is my pleasure to welcome the excellent panel of
witnesses seated before us today. Today's witnesses have
extensive experience studying or working with tax-exempt
organizations and their experience will be very helpful as we
examine the current state of the tax-exempt sector.
First I would like to welcome and introduce Mr. Roger
Colinvaux. Professor Colinvaux is an associate professor of law
at Catholic University and an expert on matters relating to
nonprofit organizations. From 2001 through 2008, Professor
Colinvaux served as legislation counsel with the Joint
Committee on Taxation. Mr. Colinvaux, welcome.
Second, we will hear from Ms. Diana Aviv. Ms. Aviv is the
president and CEO of Independent Sector, a national network of
nonprofit organizations, foundations, and corporate giving
programs. Before working at Independent Sector, Ms. Aviv worked
as the associate executive vice chair for the Jewish Council of
Public Affairs. Welcome, Ms. Aviv.
To introduce our third witness I am pleased to yield to my
friend, the gentleman from New York, Mr. Reed.
Mr. REED. Thank you very much Mr. Chairman for yielding.
And it is my honor and privilege to introduce to the committee
a witness, the third witness on our panel today, Joanne M.
DeStefano, Cornell University's vice president for finance and
chief financial officer. She has custody and control of the
university funds and has general responsibility for the
maintenance of the financial records of the entire university.
She oversees the comptroller's office, the treasurer's office.
She holds an MBA from Cornell University. And before that, she
worked for the private sector for Race Mark International, Inc.
and Slumberge, Incorporated. She and I both live in the
beautiful area of the Finger Lakes of New York. And it is my
pleasure to introduce her in one of her first testimonies to
the committee, and I know it will not be her last, having had
the privilege of reading her testimony before it was given here
today.
And with that, I yield back and welcome her for her
testimony.
Chairman BOUSTANY. Thank you Mr. Reed, and welcome, Ms.
DeStefano.
Fourth, we will hear from Mr. Michael Regier. Did I
pronounce it correctly?
Mr. REGIER. Yes.
Chairman BOUSTANY. Senior vice president of Legal and
Corporate Affairs for VHA, Incorporated. VHA is the Nation's
largest alliance of nonprofit hospitals serving members in 47
States. Welcome, sir.
And finally we welcome Mr. Bruce Hopkins, senior partner at
Polsinelli Shughart in Kansas City, Missouri. Mr. Hopkins has
published multiple treaties on nonprofit tax issues and is a
former chair of the American Bar Association's Committee on Tax
Exempt Organizations.
I want to thank you all for being here today and spending
time with us. The committee has received each of your written
statements and we will make those part of the formal hearing
record. Each of you will be recognized for 5 minutes for your
oral remarks. And Mr. Colinvaux, we will begin with you. You
are recognized for 5 minutes, sir. Thank you.

STATEMENT OF ROGER COLINVAUX, ASSOCIATE PROFESSOR, COLUMBUS
SCHOOL OF LAW, THE CATHOLIC UNIVERSITY OF AMERICA, WASHINGTON,
D.C.

Mr. COLINVAUX. Thank you. Thank you, Mr. Chairman, Mr.
Ranking Member, Members of the Committee. Thank you for
inviting me to testify today and for holding this hearing. The
(c)(3) sector is a vital and dynamic part of our civil society,
but it is also a sector with its share of business interests,
bad actors, and vested interests as well. In part for this
reason, the law governing our tax-exempt organizations is
increasingly complex and also adrift.
I am here today to express my concern that the law is
developing without a clear sense of the Federal role or a tax
policy towards (c)(3) organizations. Now, we first granted
exemption about 100 years ago and the law has changed a lot.
For one thing (c)(3)s have to apply for their status and report
annually. They didn't when we started. (C)(3)s face
restrictions on some of their activities like campaigning and
substantial lobbying, but initially there were no activity
restrictions. (C)(3)s must pay tax on some types of income,
their unrelated business income, and private foundations pay
tax on their investment income, so we don't have a blanket
exemption anymore. Some (c)(3)s also are preferred over others.
Public charities face many more restrictions than private
foundations, so not all charities are still treated equally.
So over time, Congress has placed limits on exemption. But
what is interesting is that these limits are mostly negative in
nature. That is, what we have said is, don't do this or don't
do that or please file a form with the IRS as you go along. But
we haven't really required anything affirmative of (c)(3)
organizations. That is, we don't say that they must do anything
to secure their status. Thus, we have kept the broad purposed-
based approach to exemption under which it is relatively easy
to become a (c)(3) and remain one.
We have also kept the all-or-nothing approach to exempt
status making the main tool IRS has for enforcement, revocation
of status, which because it is so drastic is also a somewhat
limited tool. The results I believe are legal standards that
facilitate growth but little in the way of oversight
capability, in large part because there is not much for the IRS
to measure. This can lead to problems and it has. In recent
years we have seen far too many (c)(3) organizations associated
with scandals and we have had legislation as a result.
Now, I want to talk about this legislation for a few
seconds because it highlights what I see as the current trends
in the law. First, Congress has shown frustration with the
breadth of the (c)(3) exemption standard.
First, in the case of credit counseling groups and then in
the case of hospitals, Congress decided to impose more rigorous
exemption requirements on these organizations than other
(c)(3)s. This, in my view, is very significant because it
treats some (c)(3)s worse than others based on the
organization's purposes. We haven't done that before. What this
means is that the sector can be broken down into its component
parts, disaggregated, with legal standards tailored to each
organization type.
Second, Congress has shown a willingness to blur the line
between public charity, and private foundation, in several
cases adopting the bright-line anti-abuse rules applicable to
private foundations and applying them to stop abuses at public
charities. This matters because it suggests that the old way
for distinguishing (c)(3)s as public or private is less
relevant today and that abuses can and do occur at public
charities.
However, rather than selectively applying foundation rules
to abuses of public charities, it might be better to reexamine
this distinction entirely. We can look at each abuse, decide if
it is still a concern, and, if so, for which type of (c)(3).
The final related trend to emerge is that Congress is
showing a preference for brighter enforcement lines, more
intermediate sanctions, and so frustration with the current
facts and circumstances approach to enforcement. All these
trends are important because they show the current direction of
the law. We have a disaggregation of the sector based on
purpose, a weakening of the public charity, private foundation
distinction and a preference for bright, if harsh, enforcement
lines.
Now, going forward, I think the question is whether to
continue on this path, and here I see a fork in the road. Right
now the path is focused on abuse. Policymakers respond to
abuses with new rules, and stopping abuse and protecting the
integrity of the sector are very important goals. And in my
written testimony I highlight some ways we might consider to
focus on that.
Another avenue for tax reform is to reconceive of the role
the Federal Government has to (c)(3) organizations. Our current
approach is somewhat monolithic. We tie all the tax benefits to
(c)(3) exemption. Why not instead focus on areas where the
Federal interest is the greatest: on support for charitable
contributions; and decide whether eligibility to receive
contributions should depend on the satisfaction of new
criteria, perhaps based more on activities and outcomes rather
than purposes?
I see I am out of time. I recognize the very important goal
of oversight. And thank you for inviting me to testify today.
Chairman BOUSTANY. Thank you Mr. Colinvaux.
[The prepared statement Mr. Colinvaux follows:]

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Chairman BOUSTANY. Ms. Aviv, you may proceed.

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

Ms. AVIV. Thank you, Mr. Chairman, Representative Lewis,
and Members of the Subcommittee for this opportunity to
testify. I serve as the president and CEO of Independent
Sector, which is a national coalition of nearly 600 public
charities, foundations, and corporate giving programs and,
that, with their affiliates, total tens of thousands of
charitable organizations across the United States.
Every day charitable organizations work to provide help for
families in need, assist victims of disaster, enhancing the
cultural, physical, and spiritual life of communities, and
foster the democratic values of justice and individual liberty.
These life-changing programs, as well as the 13.5 million
jobs and $670 billion in annual wages provided by the nonprofit
sector, are made possible in part by the generosity of
Americans who contribute millions of hours and billions of
dollars to support the charitable causes they care about.
The difficult economy has affected both charitable giving
and the need for services from charitable organizations. Annual
giving dropped $30 billion between 2007 and 2009, and has not
yet fully recovered to pre-recession levels. At the same time,
charitable organizations have struggled to meet payroll or hire
additional workers as they work to keep pace with the dramatic
increase in demand for services. According to a study by the
NonProfit Research Collaborative, human service organizations,
for instance, saw a 78 percent increase in demand in 2010.
Congress can help by immediately passing the expired tax
extenders package which includes the IRA charitable rollover
and enhanced deductions for donations of food.
As you look towards tax reform, we also ask you to keep in
mind the positive impact of tax incentives for charitable
giving on the people we serve, and explore ways to expand those
incentives.
Because charitable giving depends in part on the high level
of public trust in our sector, nonprofit organizations are
deeply committed to ensuring effective and transparent
governance, maximum accountability, and ethical conduct.
Independent Sector, with the encouragement of congressional
leadership, convened the Panel on the Nonprofit Sector, which
in 2005 issued a report that recommended improvements within
the sector, more effective oversight and changes in the law.
The Pension Protection Act of 2006 included many of the
provisions from our report, such as increased financial
penalties for bad actors, safeguards against the use of
charitable assets for personal gain, and improved information
sharing between Federal and State oversight agencies.
The recently redesigned IRS form 990 also reflects many
panel recommendations. As a publicly available document, the
Form 990 has become an important accountability and
transparency tool, and we are therefore keenly interested in
IRS efforts to make further improvements. One issue of
particular interest is removing barriers to electronic filing,
which will improve the quality and accuracy of data, promote
accountability and transparency, and save time and money for
donors, nonprofits, and the government.
Using data from the redesigned Form 990, the IRS is
evaluating whether good governance leads to better compliance.
Their preliminary analysis of data from 1,300 returns shows a
statistically significant positive correlation between a number
of governance practices and tax compliance.
The nonprofit community also recognizes the importance of
self-regulation. To that end, the Panel issued The Principles
for Good Governance and Ethical Practice: A Guide for Charities
and Foundations, which outlined 33 recommendations designed to
improve compliance, governance, financial oversight and fund-
raising practices. Almost 200,000 copies of the principles have
been downloaded and used to develop governance policies, adjust
board responsibilities, and offer guidance for those seeking to
improve their practices.
Taken together, the actions outlined in my written
statement--legislative, regulatory and voluntary--have
strengthened governance and improved oversight of tax-exempt
organizations, and they reflect a deep mutual commitment on the
part of Congress, the IRS, and charitable nonprofit
organizations to accountability, transparency, and good
governance. They have also allowed charitable organizations to
maintain the public trust that is key to continued confidence
in and support for our work.
Mr. Boustany, Mr. Lewis, and Members of the Subcommittee,
thank you for the opportunity to share these perspectives with
you.
Chairman BOUSTANY. Thank you Ms. Aviv.
[The prepared statement of Ms. Aviv follows:]

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Chairman BOUSTANY. Ms. DeStefano, you may proceed.

STATEMENT OF JOANNE M. DESTEFANO, VICE PRESIDENT FOR FINANCE
AND CHIEF FINANCIAL OFFICER, CORNELL UNIVERSITY, TESTIFYING ON
BEHALF OF THE NATIONAL ASSOCIATION OF COLLEGE AND UNIVERSITY
BUSINESS OFFICERS, ITHACA, NY

Ms. DESTEFANO. Thank you, Mr. Chairman, Ranking Member
Lewis, Congressman Reed, and Members of the Subcommittee, thank
you for the opportunity to testify today. As already mentioned,
my name is Joanne DeStefano, and I am the vice president for
finance and chief financial officer at Cornell University.
Today I am testifying on behalf of the National Association
of College and University Business Officers, known as NACUBO,
which represents more than 2,100 public and private nonprofit
colleges and universities.
NACUBO's mission is to promote sound administrative and
financial management at institutions of higher education.
Cornell University is among the top research universities in
the world with nearly $3 billion in annual revenue and
expenses.
But today I am here to represent my colleagues at
institutions across the country who are responsible for
ensuring compliance with Federal Tax Code regulations and
interpretations.
I want to stress to you three points today. First, many if
not most institutions have long had institutional policies and
practices in place reflecting a commitment to stewardship,
accountability, and the highest standard of compliance with
Federal and State laws and regulations.
Second, both public and private institutions had well
established, sound, and effective governing structures prior to
the IRS linking good governance to strong tax compliance.
Finally, although sometimes less visible to the public and
to students and families, compliance with tax and other Federal
rules, regulations, and requirements by institutions is a
factor in our cost for education.
Cornell received the compliance survey and just completed a
2-year audit. We closed the audit in March of 2012 and had no
findings on our 990 return and just one immaterial adjustment
to our net operating loss carry forward on our 990-T.
I believe at Cornell we have two of the Nation's best tax
experts in house, and we have a growing tax compliance office.
However, as the requirements for reporting and compliance are
ever more complex, the university has engaged the services of
an external auditor to review and sign both the Form 990 and
the Form 990-T, even though these forms are completed
internally. The costs are in addition to managing our in-house
expertise.
Many large institutions like Cornell are organized
similarly. The IRS is requiring not-for-profit organizations to
report more and more information on the 990-T. NACUBO has had a
history of working with the IRS to ensure its efforts add value
and increase understanding, rather than merely increasing
administrative costs and creating confusion.
With that in mind, I would like to raise a new concern with
Form 990 regarding the (k)(1). This is a new requirement to
report income and expenses and balance-sheet items related to
partnership investments based on schedule (k)(1) information.
Historically, partnership information on the Form 990 was
reported consistent with all other financial data based on the
organization's books and records. This new requirement will
create a number of inconsistencies and add substantially to
administrative burden. The IRS has even recognized the concerns
and actually took a step back for fiscal year 2011 and allowed
the reporting to be voluntary. We strongly encourage the IRS to
eliminate this proposed requirement that income on the 990 be
reported based on (k)(1)s.
In conclusion, as stewards of Federal education, research,
and student aid funding, as large employers, as significant
operators of massive physical plant operations, and as home to
our Nation's college students, institutions of higher education
take very seriously their approach to compliance with a host of
Federal rules and regulations, including those by the IRS. We
understand the privilege afforded by Congress for tax-exempt
entities. We understand and commend the objective of
transparency to enhance information available to the public. We
urge the Congress, the IRS, and all regulatory bodies to
understand that all their respective and many times redundant
requirements become a cost of delivery of services. In our
case, it is the cost of education.
Ultimately we hope the IRS uses all of the information it
has garnered as part of the compliance project to continue to
explore smart, sensible, and valuable approaches to
streamlining reporting and requirements. Thank you again for my
first opportunity to be a voice for all of the colleges and
universities at this hearing today.
Chairman BOUSTANY. Thank you Ms. DeStefano.
[The prepared statement of Ms. DeStefano follows:]

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Chairman BOUSTANY. Mr. Regier, you may proceed.

STATEMENT OF MICHAEL REGIER, SENIOR VICE PRESIDENT OF LEGAL AND
CORPORATE AFFAIRS, VHA INC., WASHINGTON, D.C.

Mr. REGIER. Good morning Chairman Boustany, Ranking Member
Lewis, and Members of the Committee. I am Michael Regier and I
am pleased to be here on behalf of VHA, a national network of
more than 1,400 not-for-profit hospitals and more than 23,000
nonacute health-care organizations. Based in Irving, Texas, we
at VHA exist to assure the success of nonprofit health care,
and we do this through 47 regional offices--through 15 regional
offices that cover 47 States and the District of Columbia.
This morning I wanted to speak to you primarily about two
topics: the new requirements that are applicable to nonprofit
hospitals under the Affordable Care Act, and then what we at
VHA believe matters most to tax-exempt hospitals in the context
of more comprehensive tax reform.
As I am sure you know, the Affordable Care Act imposed new
statutory requirements that have to be met by all hospitals
that seek to obtain or maintain income tax exemption under
section 501(c)(3). These requirements are in addition to and
not in lieu of the existing requirements already applicable to
those organizations.
We recognize the significant increase in the scope of
responsibilities assigned to the IRS under the Affordable Care
Act and we respect the good work the IRS has done to improve
oversight of our Nation's tax-exempt organizations. However,
during the more than 2 years since the Affordable Care Act was
signed, the IRS has issued various forms of informal guidance
and has revised the Form 990 annual information return filed by
tax-exempt organizations, but has not yet issued any proposed
or final regulations to implement most of the new requirements
that are already applicable to tax-exempt hospitals and health
systems.
Along with many other stakeholders VHA has worked with the
IRS to provide feedback on the informal guidance that has been
issued so far and to express our concerns about the potential
compliance burdens associated with these new requirements, as
well as how they will eventually be implemented and enforced.
And as an example just of the burdensome nature, I brought
with me this morning the blank Form 990 with the schedules that
must be completed and the instructions every year by tax-exempt
hospitals. This is the blank form and instructions. In
particular, we have expressed some serious concerns about the
way the revised Form 990 Schedule H was issued in February
2011, which we and many other organizations saw as supplanting
the ordinary notice and comment rulemaking process.
We also expressed our reservations about the overly
prescriptive nature of the more recent draft IRS guidance that
relates to the community health needs assessment. We expect
that hospitals will have a number of challenges complying with
these new requirements, especially given the increasing
financial challenges that they are facing. Now more than ever
before, we at VHA believe that Congress should ensure that
hospitals can direct their limited resources to actually
meeting their community's most significant health care needs
rather than spending them to document the process that they
used to identify those needs.
We support the goals of transparency and accountability,
VHA supports the efforts to make the Tax Code fairer, simpler
and more efficient, and particularly those provisions that
apply to our Nation's nonprofit health-care organizations.
And as the Ways and Means Committee continues its effort
toward comprehensive tax reform, we urge the committee to avoid
any action that would jeopardize the followings three key
benefits: first, the income tax exemption for charitable
hospitals; second, tax-exempt financing for hospital
facilities; and third, the deductibility of charitable
contributions and bequests for hospital donors.
Nonprofit hospitals and health systems need all three of
these key benefits to assure that they can serve their
communities well, whether that is through charity care or other
financial assistance on behalf of the uninsured or
underinsured, through subsidized health services, through
community health improvement services, through community
building services and activities, or through research and
education.
Every day in communities throughout the United States, not-
for-profit hospitals and health systems provide essential
services compassionately and efficiently. Their work to further
their charitable missions significantly contributes to the
public good and lessens the burdens on government. In view of
the expected cuts to Medicare funding under both the Affordable
Care Act and the Budget Control Act and in light of the great
financial demands that face the many State Medicaid programs,
nonprofit community hospitals and health care organizations are
going to be challenged to do more than they have ever had to do
before to maintain access to quality health care for all
Americans.
We have long encouraged our members to take their community
benefit obligations seriously and will be working with our
hospitals to facilitate their compliance. As we do so, however,
we will continue working to assure that the implementation of
the new requirements is not unduly burdensome or overly
prescriptive and does not go beyond congressional intent. We
look forward to working with the Oversight Subcommittee as well
as with the IRS to meet these goals. Thank you.
Chairman BOUSTANY. Thank you Mr. Regier.
[The prepared statement of Mr. Regier follows:]

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Chairman BOUSTANY. Mr. Hopkins, you may proceed.

STATEMENT OF BRUCE R. HOPKINS, SENIOR PARTNER, POLSINELLI
SHUGHART, KANSAS CITY, MO

Mr. HOPKINS. Thank you. And good morning, Mr. Chairman,
Ranking Member Lewis, and the other Members of the
Subcommittee.
My task as a private practitioner in the exempt
organizations area is to spend some time talking with you about
the basics of the law in this area and then also identify what
I believe to be the current developments in the field.
By my reckoning there are 67 different categories of tax-
exempt organizations. Obviously I lack the time to take you
through all of those. But what I have done in my prepared
remarks is focus first on 501(c)(3) entities, charities,
religious organizations, educational organizations, scientific
entities, to give you a feel for the detail and the criteria
for exemption under each one of these categories.
For example, in the paper I note that under the concept of
``charitable,'' there are 15 different ways that an entity can
qualify as a tax-exempt charitable organization. Aside from a
501(c)(3) there are a number of other categories of exempt
organizations, as I mentioned, and I highlighted in my paper
the ones that I think should be and are a primary concern to
you: 501(c)(4) and 501(c)(6). And so I have got some material
in there about social welfare organizations, the whole concept
of what it means to promote social welfare, what it means to
serve a community, and, in the context of business leagues,
discuss the rules about operating to promote a common business
interest, a line of business, and the rules dealing with not
performing particular services for individual persons.
There are plenty of other exempt organizations that could
be talked about: political organizations, social clubs,
fraternal organizations, labor groups, qualified health
insurance issuers. But I wanted to put in the material at least
a summary of the law dealing with what I consider to be the
main categories.
And then on the last page of my prepared remarks, I have
given a simple list of what I believe to be confirmed
developments in this area. I don't have time to go down the
entire list. But as you can see, items like governance, which
you have already heard about, and the Form 990 you have already
heard about are at the top of the list. This isn't necessarily
a prioritized list, but certainly those two are on the top of
any type of list like this. The whole IRS enforcement fees,
compliance checks, the whole matter of political campaign
activity, particularly the involvement of charitable entities
and social welfare organizations in that; the pending
regulation projects and other initiatives of the Internal
Revenue Service of which there are a lot; and then, of course,
the status of tax extenders legislation certainly impacts this
field, and the whole matter of tax reform obviously
interrelates with the law of tax-exempt organizations as well.
So with that I think I will end my oral remarks and will be
happy to take whatever questions the subcommittee might have.
Chairman BOUSTANY. Thank you, Mr. Hopkins.
[The prepared statement of Mr. Hopkins follows:]

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Chairman BOUSTANY. Clearly the tax-exempt area is a growing
and increasingly complex sector of our economy, and that is why
we feel it is important to have this oversight hearing as a
starting point to get a better understanding of the sector as
we contemplate fundamental tax reform. And all of you have
raised important questions and concerns.
I want to focus for a moment on the Form 990 specifically.
This question is for the entire panel, but I would like to
start with Ms. DeStefano and Mr. Regier to address this with
regard to universities and hospitals in particular.
The IRS has just completed a revision of the Form 990. It
took several years to complete and according to the IRS has
been redesigned to enhance transparency, promote tax compliance
and minimize the filing burdens. As part of this effort, the
form was reorganized and filers were given more opportunities
to explain their tax-exempt activities, but were also required
to provide more information regarding key issues such as
executive compensation and other things.
How is this process working from your perspective? Ms.
DeStefano, you can start.
Ms. DESTEFANO. Thank you for the question. We share our 990
before it is filed with our audit committee of our board of
trustees. There are approximately 12 members of the audit
committee. And I can say 3 or 4 years ago, we would have in-
depth conversations about the data and material within the 990.
Today the form is so complicated that our committee of our
board of trustees do not know where to begin. And I would say
we have less than one or two questions on the 990 today than
where we were 3 years ago.
Chairman BOUSTANY. Okay. Do you think that the form meets
the criteria set forth initially by the IRS?
Ms. DESTEFANO. I think there is too much information. And
if you could streamline to the key points, and if executive
compensation is an area that Congress feels is very important,
keep that.
We have some schedules, if you don't mind, if I could just
highlight that we feel are redundant. Schedule F, which relates
to foreign activity; Schedule I, which is subcontracts; and
Schedule K, which is tax-exempt bonds. They require a
tremendous amount of information and we are not exactly sure of
the value.
And I would like to point out, if I could zero in on
Schedule I, which is the subcontracts. It requires information
on grants and other assistance from organizations, governments,
and individuals within the U.S. Cornell's response is 20 pages
long. And it consists almost entirely of subcontracts through
the Federal Government as part of our research enterprise.
OMB already has a single audit act, with OMB A-133 that
audits States, local government and not-for-profit
organizations. If we could eliminate all of the reporting that
already goes through another phase of what is being audited, we
estimate this one change would save 40 hours of work preparing
our 990 plus 20 pages of reporting data.
Chairman BOUSTANY. Thank you. Mr. Regier.
Mr. REGIER. Mr. Chairman, to go back to the first question,
I think our members would say the form does make much more
information available. I don't think that they would agree that
it promotes efficiency or that it has lightened the filing
burden. The form has expanded significantly. That is why we
brought it this morning.
I think the experience in most tax-exempt hospitals is very
similar to what Ms. DeStefano outlined. This is not a form
that, despite your best efforts and expertise inside of your
organization, that you really can afford not to engage an
outside advisor to help you with, whether that is your outside
tax counsel, your outside auditors, or specialized tax
consultants.
Chairman BOUSTANY. I thank you. Any other members of the
panel want to comment?
Mr. HOPKINS. Mr. Chairman, I think one sentence might sum
it up. The Form 990, the new Form 990 has greatly enhanced my
law practice.
Chairman BOUSTANY. Others?
Mr. COLINVAUX. Well, I think one little bit of context,
which is where we were before the new Form 990. Which was, the
IRS was under a lot of pressure to revise the form because the
form was seen as very outdated and not providing enough
information. So it took years for them to come up with the new
form.
I think the other thing that is important to keep in mind
is the value of the Form 990 as an enforcement tool. One of the
difficulties here is that there is not a lot for the IRS to
enforce. And one of the things that--one of the ways that we
can keep oversight over organizations is through the disclosure
of information which is made public on the 990.
I think one of the problems that is being highlighted here
is the too-much-information problem. And I recognize that is a
problem. But I also think that it is a problem that the IRS is
trying to work out by continuing to revise the form in
discussions with stakeholders to find out what the most
relevant oversight information is.
And finally, I would say that the complexity of the form is
absolutely correct. The instructions are, you could say,
monstrous because they are so big. But what is going on here is
that the complexity is reflecting the complexity of the sector.
The sector is not a simple thing. And so the form is getting
more complex as the IRS learns how complex the sector is. So
there are a lot of issues at play here.
Ms. AVIV. Just a very quick comment. The Form 990 is the
only vehicle through which the public, donors and volunteers,
or people seeking jobs can actually find out what is going on
in an organization, or quite a lot about it. Now, there may be
some parts of it that are too detailed, but this revised form
has provided the first opportunity to get a really good picture
of the charitable sector. So as we go forward with this, let's
be mindful of the benefit of the public being able to see into
these organizations as well.
Chairman BOUSTANY. Thank you. Just a follow-up question,
Mr. Colinvaux. Obviously this is a very complex and growing
sector. Should there be--should we disaggregate to some extent
or should the IRS disaggregate in terms of trying to get
certain types of information from one sector of the tax-exempt
area versus another?
Mr. COLINVAUX. Well, I think that is what is happening. I
mean the IRS has been under a lot of pressure in recent years,
in part because of the scandals that have happened at
organizations. And so I think what the IRS is doing is they are
educating themselves and they are saying there are two very big
elephants in the room; it is namely the hospitals and big
colleges and universities. They take up most of the assets and
the revenues of the sector. And so there is disaggregation
going on not only in terms of exemption standards passed by
Congress but in terms of enforcement, so new compliance
initiatives are launched, we look at the hospital sector, they
look at the colleges and university sector. So disaggregation
is happening and it is happening on the Form 990, as well as
more tailored questions, depending on what you do, are
surfacing in the 990. So you can show the whole form, but a lot
of that form isn't relevant to a lot of organizations.
So, yes, I think the disaggregation is happening. It is one
of the facts on the ground, and it is something that
policymakers are going to continue to wrestle with.
Chairman BOUSTANY. Anybody else want to comment on that
issue? No. Mr. Colinvaux, the Ways and Means Committee, as you
know, is currently focused on comprehensive tax reform, and we
are definitely reviewing all areas of the code, including
provisions that apply to tax-exempt organizations. You have
recently looked at the tax-exempt sector over the last 10 years
and were on the Joint Committee on Taxation in 2006 when the
Pension Protection Act was enacted, which contained many new
provisions related to tax-exempt organizations. Are there any
lessons from the last few years we should keep in mind when
considering tax reform proposals in this area?
Mr. COLINVAUX. Well, one lesson based very much on my
experience is to continue conducting hearings such as this,
which is I think a really important form of oversight, because
it calls the sector together and it reminds the sector that
they need to do good and perform a public benefit. So I think
this is a very important form of oversight that really does
lead to better behavior. So that is one lesson.
Another lesson is--what struck me about the Pension
Protection Act was that it was very much focused on correcting
abuses. And there are and always will be abuses in any sector.
One of the challenges going forward, which was not addressed in
2006, really goes to the role the Federal Government has with
respect to (c)(3) organizations. So we can take the anti-abuse
path, which is the path that we are on, continue to write rules
that go to abuses, or we can start to ask harder questions such
as which organization should get which benefits, do we expect
certain public benefits to occur from our (c)(3)s? Those are
questions that were not really asked in the lead-up--they were
asked in the lead-up to 2006 but weren't really answered. So I
think those are--the lessons are we still have those questions,
maybe.
Chairman BOUSTANY. Thank you. I appreciate that. I am now
pleased to yield to the ranking member, Mr. Lewis, for
questions.
Mr. LEWIS. Thank you very much Mr. Chairman. And again I
would like to thank each member of the panel for being here and
for your testimony.
Mr. Hopkins, you are a noted expert on tax-exempt
organizations and you have worked in this area for over 42
years. I don't believe you worked there that long. Apparently
someone violated the child labor law and some law firm hired
you at an early age, but I don't want to get into all of that.
Now, the IRS has fewer than 900 employees to monitor more
than 1.8 million organizations. Can you tell the Members of the
Committee how you feel the IRS is doing in the oversight of
these organizations?
Mr. HOPKINS. Well, Congressman Lewis, I think based on the
resources the IRS has, I think the IRS overall is doing a very
good job. I have never worked for the IRS so I am not familiar
with the internal workings. But based on what I see and
certainly based on my years of practice working with the IRS,
both on the examination side and working with the IRS with
organizations that are applying for recognition of exemption,
the IRS I think is doing an excellent job in reviewing
entities, screening entities.
I would note that almost every week there are a number of
private letter rulings that are issued by the IRS. I review
each one of those, and almost all of them are adverse to the
nonprofit organizations that are applying. So the IRS is being
very aggressive, very active in applying the law and
determining which organizations comply and which ones don't. So
my impression overall is that the Agency is doing a good job, a
very good job actually with the resources that it has.
Mr. LEWIS. Now, I noticed someplace that you provide a
monthly newsletter?
Mr. HOPKINS. That is correct.
Mr. LEWIS. Do you get feedback from the private sector?
Mr. HOPKINS. I get a lot of email as a result of some of
the things that are mentioned in the newsletter, yes.
Mr. LEWIS. Are people pretty satisfied with what they get
from the IRS?
Mr. HOPKINS. Well, I think it depends on what kind of
entities you are talking about. I mean, I hear a lot from
organizations that are unhappy that they have been audited and/
or been denied recognition of exemption. But I think on
balance, probably the IRS position was correct. And then, of
course, I hear from organizations that are very happy with the
situation that they are in. So I think it just depends on how
the nonprofit organizations have fared with the IRS. Some
complain and some don't.
Now, I am talking now about compliance with the criteria
for exemption. This discussion about the Form 990 is a totally
different matter. I hear in my practice daily complaints about
the Form 990 overall, not just Schedule H but the parts of it
as being--and we have heard some of these words this morning--
burdensome, redundant, overreaching, and that kind of thing. So
there are lots of complaints about the Form 990; but leaving
the Form 990 aside, not a lot of complaining about the IRS.
Mr. LEWIS. Thank you. Ms. Aviv, you noted that charitable
organizations have struggled financially during the economic
downturn. How has the demand for service increased and what do
people need?
Ms. AVIV. Congressman Lewis, people need help. The economy
hasn't recovered. The demand for service has grown. And the
ability of these organizations to get additional funding has
been diminished. Individual donor giving is down, and public
funding has certainly not increased, particularly State
funding. And the ability of these organizations to charge
greater fees means that the people who are at the bottom of the
economic scale, who have nothing, wouldn't pay more because
many organizations charge fees on a sliding scale. Some of
these organizations have coped by doing more with less, but
there is only a limited amount of time that you can do that.
For the most part what we are being told is that these
organizations are finding themselves turning people away. And
with your permission, I just want to share with you a story
that was shared with us by Catholic Charities. They said that
in the fourth quarter of 2011, a snapshot survey of 44 local
Catholic Charity organizations located in 29 different States
that served about 3\1/2\ million clients annually, found that
the 44 responding agencies each maintained a waiting list or
turned away individuals for services during the fourth quarter,
with the greatest areas of unmet needs being in emergency
financial assistance and utilities assistance. Even the most
basic needs are going unmet in some communities. Three agencies
reported turning away at least 1,750 individuals that came to
them seeking food.
So what we are seeing is that organizations are not able to
keep up with the increased demand.
Mr. LEWIS. What more can Congress do to assist these
organizations, not just to do well in the entire private
sector, but also to do good?
Ms. AVIV. I mentioned in my remarks, and in my written
testimony, that immediately passing the tax extenders,
particularly the IRA charitable rollover and the other
provisions that affect the charitable community, would be a big
help.
When Congress first passed the IRA charitable rollover,
some of us had concerns that the only organizations that would
benefit were those who were attached to high-income
individuals, and that that might be universities, it might be
cultural institutions. But in fact what we have found is that
many different kinds of organizations, including health and
human services organizations, are the beneficiaries of those
kind of funds. That provision was not extended at the end of
last year and we are concerned that it still hasn't been
extended. It is an easy fix and it is certainly one of the ways
to help these organizations.
Mr. LEWIS. Thank you very much. Mr. Chairman, I yield back.
Chairman BOUSTANY. I thank the ranking member. I now
recognize Mrs. Black.
Mrs. BLACK. Thank you, Mr. Chairman. Let me go to you, Mr.
Regier. In your testimony you noted that VHA has worked with
the IRS in its design of the new Schedule H; yet you express
concerns regarding the clarity on the form. And I know that the
chairman talked about the 990. How receptive has the IRS been
with working with you and your organization and your other
members about your concerns?
Mr. REGIER. I think in our experience the service has been
very open to receiving input, and so they have in many ways
requested input and solicited input in advance of issuing their
formal guidance. And I must say the IRS did agree with the
request that we made to make certain provisions of the Schedule
H optional for certain filers for a year. Those are questions,
however, that are information gathering items in the Schedule H
which we believe makes the schedule confusing. We did ask the
IRS to extend that and make that voluntary or to eliminate it.
We did not get a favorable response there. I would say we have
had some success in shaping the form to the better as we see it
for our membership, but we would like to see more.
Mrs. BLACK. Well, other than the category you just spoke of
to make it voluntary, what other specific concerns do you have
on that schedule?
Mr. REGIER. I think the new Schedule H compared to the
former one has now expanded significantly in its length and
detail, so there is now I think more than 60 subparts to the
schedule. We saw the adoption of it as a pretty significant
increase in the filing responsibility for the exempt
organization.
Mrs. BLACK. Let me go to your testimony where you state
that many of the documentation requirements related to the
community health needs assessment are burdensome. And as you
know, these requirements are designed to ascertain whether each
tax-exempt hospital is truly providing the requisite community
benefit to qualify for tax exemption. So given this weighty
task, do you propose an alternative method of demonstrating to
the IRS that every tax-exempt hospital is meeting those
requirements?
Mr. REGIER. I think the concern that we have is not about
demonstrating that the requirements have been met, it is more
about the way that one--the process that is being prescribed
for the needs assessment. The guidance that has been issued by
the service so far for the community health needs assessment is
very detailed in what you have to do to document what you have
done. So for example, to list by name, by organization, the
persons that you consulted with who you thought were public
health experts; to list by name, and their indication of their
community or status, the persons that you consulted with that
represent low-income or specific disease populations. Leaving
aside the question of privacy concerns, that is a level of
detail about and prescribed detail about what you must supply
and report about your process of assessing community need that
we think really misses the point; the point of which is, here
are the needs that are present in the communities that we are
serving.
The other concern I would say we have about the guidance so
far really is the question of how this kind of assessment and
planning is done in particular in multi-hospital systems. So
multi-hospital systems that may extend through a State or
across many regions typically plan on a systemwide basis and
there are efficiencies to be obtained from that. The reporting
scheme, however, that is set up, which is driven by the
statute, is very siloed, so it is requiring reporting to be
done on a hospital-by-hospital-by-hospital basis, along with an
implementation plan that would be separate for the hospital-by-
hospital-by-hospital basis. We would love to see something that
would allow a system to have a greater degree of flexibility,
to show within the report how the individual hospitals are
meeting needs without having to do this kind of siloed
hospital-by-hospital kind of approach, which is how we see the
guidance shaping up so far.
Mrs. BLACK. And I think you make a very good point there.
In certain hospital systems, you may have one hospital in an
area that provides a great deal of community needs and maybe in
another sector of that same system not so much so. But if there
could be some coordination there, so the silo effect.
Is there anything else that you would like to offer in this
testimony to say how you think this could be made better on
that?
Mr. REGIER. I guess the overall concern I have is that
today we are asking health-care organizations to become much
more accountable in different ways to help manage and promote
the wellness of the community. We want to keep people well,
keep them healthy and be rewarded for that, or that is what
government seems to be telling health-care providers. The
community health needs assessment could be a very powerful tool
to inform that work. I am concerned and we are concerned that
it won't be if we ask our providers and multisystem providers
to look on this siloed hospital-by-hospital basis. We don't
achieve population health and wellness in that way, we don't
achieve and meet the needs of communities and regions in that
way. So that is the only thing I would say.
Mrs. BLACK. Thank you for your testimony. I yield back.
Mr. BOUSTANY. Thank you. Ms. Jenkins, you are recognized.
Ms. JENKINS. Thank you, Mr. Chairman. Thank you for holding
this hearing, and thank you all for joining us.
Mr. Colinvaux, in your testimony as well as in your recent
article in the Florida Tax Review, you raised the issue of the
distinction between public and private charities. You stated
that the distinction is one of form rather than substance and
that the distinction is beginning to collapse from its own
weight. As an example, you mentioned the different standard
that applies with respect to self-dealing between a charity and
the insiders. Can you just elaborate for us on the distinctions
in law between a public charity and a private charity?
Mr. COLINVAUX. Sure. Thank you for the question, Ms.
Jenkins. By saying that the distinction is one more of form
than substance, what I mean by that is that we take a public
charity and a private foundation. Well, what makes a public
charity public and what makes a private foundation private?
Well, the private foundation is private not because of what it
does but because it is funded really by one person or by a
family, not because of its underlying charitable activity. And
so Congress has looked at that shape, the form of the
foundation, and said that shape is more likely to result in
abuse because it doesn't have a donor community making
contributions to it, it also doesn't have a service community
so that there is no base to effectively oversee the foundation.
So the form of the foundation is then disfavored relative to
the public charity. So that is why it is a distinction of form
and not substance.
Why I think it is starting to collapse is because when
Congress made that distinction in the law in 1969, it was very
much an anti-abuse focus. That is, we said certain forms of
charity are more subject to abuse, so they should be subject to
the private foundation anti-abuse regime. What we have now seen
in recent years has been more abuses at public charities, and
one of the congressional responses, then, is to look to the
private foundation rules, say here we have a set of rules that
regulate abuse, why don't we apply those rules to public
charities? And so the self-dealing rules are an example of
that.
The private foundation approach to self-dealing is quite
harsh. It says if there is a transaction; that is, if there is
a loan between the charity and a disqualified person or a sale
of property between the charity and the disqualified person,
then it is self-dealing.
The approach under the public charity rules is different.
You have to decide whether there has been an excess benefit. So
it is a very different analysis, and by saying it is
collapsing, I am saying that the more we use the public--the
private foundation rules to regulate abuses, the less distinct
these two types of charities become.
Ms. JENKINS. Okay. So did I just hear you say that you
believe that the anti-abuse rules that pertain to private
charities should apply to public charities?
Mr. COLINVAUX. Well, not across the board. What I think
would make sense is to look at the types of abuses we have
identified. So there are a number of abuses: Self-dealing,
excess business holdings, the expenditures for nonexempt
purposes. We should look at those abuses, decide whether those
abuses, first of all, still matter. Some people would argue
that we don't--we are not worried about some abuses anymore. We
should look at the abuses, decide if they still matter, and if
they do, then maybe apply the private foundation rules not
based on whether you are a public charity or a private
foundation or not but just apply them because we want to
regulate the abuse.
Ms. JENKINS. I see. You also mentioned in the Florida Tax
Review article that a largely unexamined facet of the
charitable sector is the ownership by public charities of for-
profit enterprises. Given that is an area that has remained
largely unexamined, can you just elaborate on some of the
reasons why a tax-exempt organization would own a taxable, for-
profit enterprise and how prevalent this practice is?
Mr. COLINVAUX. Well, I can't really comment on how
prevalent it is, but I know it is fairly common. There is no
rule against it. So, first of all, there is a rule against it
for private foundations. Private foundations cannot have excess
business holdings. Public charities may, and because they may,
they do. So why? Well, I think one of the reasons is because
they want to do more than just the charitable work. They want
to do other activities that may be related to the charitable
work. So they set up a for-profit business and separately
incorporate it. There is no rule against it. It is not
necessarily bad, but it is something that we haven't thought
about a lot as to whether we want to encourage it or not
encourage it.
Ms. JENKINS. Okay, thank you so much. I yield back.
Mr. BOUSTANY. Mr. Reed, you are recognized.
Mr. REED. Thank you, Mr. Chairman. Ms. DeStefano, if I
could ask you a question in regards to your testimony, and I do
appreciate you being with us today, you had mentioned in your
testimony and when I read your testimony the compliance that
you had with the Form 990, and you had mentioned something in
your verbal testimony today about the K-1 and the side issues.
I wonder if you could elaborate for me a little bit more in
detail exactly what you are referring to in regards to that
additional requirement.
Ms. DESTEFANO. Currently the 990 is an informational
return, and it reconciles with our financial data and our
balance sheet of our audited financial statements. K-1 data
typically will be used for institutions like Cornell that have
large endowments where we are invested in partnerships, and we
receive K-1s. The K-1 data is not part of our official
university records. If we are required to now take a return
full of data that reconciles with our financial statements and
have financial statement data and other data commingled, the
reconciliation issues and the amount of time to validate the
accuracy of the reporting expands exponentially. So we are
recommending that for the informational return that we stay
with financial statement data that is already audited and can
tie to something that someone else has already reviewed.
Mr. REED. Well, that makes sense to me, and that is a
really a good common sense suggestion. Is there any way, in
your mind, that you could quantify the type of burden that you
would have to comply with if we went down----
Ms. DESTEFANO. I don't have the answer, but I can speak
with my staff----
Mr. REED. I would appreciate that.
Ms. DESTEFANO [continuing]. And provide a response back.
Mr. REED. And obviously any resources that you allocate to
this compliance issue is taking away from your educational
mission, correct?
Ms. DESTEFANO. Exactly, it is additive.
Mr. REED. And from your experience with the compliance
audit, could you offer any insights to us as to what worked,
what didn't work from your perspective in dealing with the IRS?
Ms. DESTEFANO. So we spent 2 years going through the
compliance audit. We had approximately 15 staff members
involved. The IRS looked at every single transaction for fiscal
year 2008. We spent a significant amount of time educating the
IRS on the higher ed industry. I think that the auditors after
2 years now understand our industry. The one thing, though,
that we felt might be helpful is apparently the 990 and the
990-T did not provide sufficient data to determine what should
be audited, and as a result, the IRS created a questionnaire
and at Cornell we felt that the way the questionnaire was, the
questions were phrased, and that is what determined what is to
be audited, the IRS should seriously take a look at what those
questions were phrased, was sufficient to determine areas of
audit if the return itself didn't identify the areas that they
should come in and take a look at the survey questions, perhaps
they were more effective.
Mr. REED. Very good. I appreciate that testimony, and I
look forward to receiving your additional material and that
estimate of impact on your K-1 compliance requirement.
With that, Chairman, I would yield back.
Ms. DESTEFANO. Thank you.
Mr. BOUSTANY. Thank you, Mr. Reed.
Mr. Kind, you are recognized.
Mr. KIND. Thank you, Mr. Chairman. I want to thank our
panelists for your testimony here today. I appreciate this
opportunity to have this hearing on tax-exempt organizations.
Mr. Colinvaux, I think you are right, I think we are going to
have to maintain lines of communication and learn more before
we are ready to dive into comprehensive tax reform and help us
to do that. But listening to almost all of you here today, I am
being left with the impression, especially with the 990 form,
that the IRS has not been all that responsive in receiving
feedback or suggestions on how we might be able to streamline
or simplify the 990 form.
Is that the impression that you have or have they been
responsive to feedback that various organizations have been
giving them on how they can help simplify the 990 form? Mr.
Regier, do you want to take that first?
Mr. REGIER. Sure. And I don't want to leave the impression
that the IRS has been unresponsive. They have not been. Through
our dialogue, we have clarified some pretty important issues
related to the Form 990 and the Schedule H, so, for example,
they have been helpful in clarifying just what kind of hospital
facility is required to comply with the new requirements in
helping to define what it means to widely publicize your
financial assistance policy. So I can point to, you know, four
or five areas in particular that we think have been very
helpful clarifications that have come out of that dialogue.
That said, there is still at least that many or more where
we believe there is some further help that is needed, and the
biggest degree of help would be if we were able to get actual
proposed or final regulations related to these new
requirements, most of which have been in effect since the
Affordable Care Act was signed in 2010.
Mr. KIND. Anyone else have an opinion on how responsive the
IRS has been? Ms. Aviv?
Ms. AVIV. Mr. Kind, our experience is actually quite
different from what the question might suggest. When the
Pension Protection Act was passed, we worked closely with the
IRS on the reform of the 990 the first time, and we found that
they invited us in and many other organizations in to talk to
them about what the concerns were, what the changes needed to
be. When we offered our comments during the public comment
period, they followed up with us. When they put in place the
Pension Protection Act requirement that organizations that
failed to file would lose their tax exempt status they went out
of their way to provide notices across the board and on their
web site to make sure that everybody knew when a number of
organizations got caught in that that still existed. The idea
was to clear out the inventory of those organizations that no
longer existed so we have an accurate count of how many
organizations there actually are. They worked assiduously to
try and get those organizations reinstated. We found them
responsive to our concerns, including questions, in a serious
way. I think that is different than the question of the
burdensomeness of the 990 form which many organizations feel is
beyond their capacity and the expense capability and takes away
from programs.
Mr. KIND. I am sympathetic, too. And obviously we get
testimony from the IRS themselves. It seems as if as a body we
are asking them to do more with less, and these things are
becoming more complex every year, and yet we are asking them to
render good, effective service and responsive service to all of
you, too.
Mr. Hopkins, let me turn to you real quickly on a different
line. Obviously, we have seen a real growth in (c)(4) activity
off of the social welfare organizations, and we are also
noticing stepped-up political involvement with a lot of the
(c)(4)s out there. Is that an area that the Congress should be
paying a little bit more attention to or even the IRS paying
attention to, in your mind?
Mr. HOPKINS. Well, absolutely. Certainly the IRS is paying
attention to it now. The IRS, as you probably know, has gotten
a substantial number of applications from organizations that
want to be 501(c)(4)s, and some of them have a substantial
amount of political campaign activity planned, and the position
of the IRS is that if that is the entity's primary purpose, it
can't qualify under 501(c)(4). There has been, for example, a
recent ruling, the first ruling of the current batch was
adverse to an entity that wanted to be a 501(c)(4). The IRS
decided that 80 percent of what it wanted to do consisted of
political activity. So the IRS is right now processing a lot of
applications in that area.
Mr. KIND. Well, what is your opinion on requiring
disclosure of contributions to (c)(4)s?
Mr. HOPKINS. Well, that of course is not the law at the
present time.
Mr. KIND. Right.
Mr. HOPKINS. And we do have the alternative, the 527
political entity, and that kind of an organization does have to
make its donors public, and public charities have to disclose
their donors but only to the IRS, and private foundations
have----
Mr. KIND. It just seems that a lot of the (c)(4)s are being
used in order to allow these anonymous contributions to be made
for, in essence, political activities.
Mr. HOPKINS. That is one of the principal reasons, frankly,
that (c)(4)s are being utilized in this regard is so that the
donors do not have to be disclosed. So if the question is--and
this is purely a matter of policy. Should donors or at least
large donors have to be identified to 501(c)(4) entities? I
mean, that is obviously well within the prerogative of
Congress' decision making, and certainly that rule could be
enacted.
The question to me is, you know, what would be the
consequence of that? Would it be to discourage contributions,
political contributions to (c)(4)s? Probably to some degree.
And maybe that is what is desired. But certainly as a matter of
transparency I personally don't have any problem with having
that sort of a rule, although probably as a matter of fairness
if that kind of rule were to be enacted, maybe some other
categories of exempt organizations ought to have the same rule,
(c)(5), (c)(6)s, for example, but as a matter of transparency
on balance it is probably a good idea.
Mr. KIND. Right, right. Thank you. Thank you, Mr. Chairman.
Mr. BOUSTANY. Thank you, Mr. Kind. We will go next to Mr.
Paulsen.
Mr. PAULSEN. Thank you, Mr. Chairman, also for holding the
hearing today.
Mr. Colinvaux, let me just shift back to something I think
you referenced in your testimony before about the enforcement
problems that are faced by the IRS than being due to a lack of
positive requirements for tax-exempt status. Can you elaborate
a little bit on that point, and do you agree or do you believe
that this is not an enforcement problem that can be resolved
simply by increasing the IRS budget to audit charities? Is
there more to it?
Mr. COLINVAUX. I do think there is more to it. I think a
lot of what we are hearing about the 990 and the information
burden, what is driving a lot of the information question to me
really goes to what we mean when we say compliance, what do we
mean by compliance. And partly what policymakers and others are
concerned about is whether or not an organization is providing
a public good. Well, there is no legal requirement, really,
that the organization provide a public good. They just have to
be organized for a good purpose. So we want all this
information in order to assess a substantive question, which
is, is the organization doing good. But there aren't really
legal requirements to back that up. Rather, the legal
requirements are more you may not pay excess compensation, you
may not engage in campaign activity, you may not engage in
substantial lobbying.
So a lot of the enforcement efforts are tailored to that
sort of compliance, and one quick note which I think is very
significant, the governance initiative, we have talked a lot
about governance. One of the reasons I think the IRS is looking
at governance is because if the IRS can decide that good
governance means better compliance, that means you will have a
better run organization, fewer abuses, and maybe also more
public good is being produced. So it is something the IRS can
do. It is something they can look at. I think part of what they
are doing with the 990 is gathering information to see what
information works and what helps them oversee the burden.
Mr. PAULSEN. You also noted that the new hospital
requirements are a recent example of Congress imposing a
positive requirement on organizations in order to support their
tax-exempt status. Do you think that this type of sort of anti-
abuse positive requirement structure would also be useful in
other areas of the tax-exempt sector?
Mr. COLINVAUX. I think potentially yes, although with
hospitals in a way the new rules fall short of a strict
positive requirement, and that is where some context is useful
there, too, because leading up to the new Section 501(r), the
question was whether an affirmative duty of charity care should
be imposed on hospitals, and Congress didn't go that route.
Instead they went the route of requiring more process-based
requirements; namely, more paperwork, more proof of the
community benefit without actually defining what the community
benefit is. So I think partly you are seeing more process being
layered on community and charitable organizations as a
substitute for requiring some affirmative duty.
Mr. PAULSEN. Thank you, Mr. Chairman. I yield back.
Mr. BOUSTANY. I thank the gentleman. Mr. Becerra, you are
recognized.
Mr. BECERRA. Mr. Chairman, thank you very much, and let me
congratulate you on this hearing. This is something that we
should be doing quite a bit more, I hope, and it is great to
have the testimony of all the witnesses.
Ms. Aviv, a pleasure to see you again, always a pleasure.
Let me make sure about something, and Mr. Colinvaux, maybe
this is a question I should direct at you. Close to two million
tax-exempt organizations, at least that was a 2008 number, and
my understanding is that in 2008 there were some 7,900 audits
by the IRS performed of these tax-exempt organizations. So if
my quick math is correct, less than 1 percent of organizations
that qualify for tax-exempt status are audited by the IRS. Is
that about right?
Mr. COLINVAUX. It sounds about right.
Mr. BECERRA. I actually know something more than you do on
this; okay, that is good. That is a good way to start. At least
those are the numbers I have, which to me is perhaps one of the
reasons why we do have these issues, that there isn't enough
oversight, and with these fuzzy rules on who qualifies and who
doesn't, it is not surprising that we have so many entities
applying to become tax-exempt organizations. Many of them do
great work. We are finding, unfortunately, that some don't. And
the sector, because it probably doesn't do as much as it can to
police itself and because the IRS hasn't focused on doing more
enforcement and oversight can't do it either or hasn't done it
either, it seems that there are a lot of entities operating
here that perhaps would not qualify, and the result is that a
lot of American taxpayers are watching their taxpayer dollars
go for noncharitable, nonpublic good purposes.
Let me ask, Mr. Colinvaux, a question to you because you
focused on this issue of enforcement, and having more effective
enforcement would include having brighter lines, more positive
requirements you have mentioned. Give me a sense, give me
something tangible in terms of brighter lines. For example,
what would you qualify, having, for example, a tax-exempt
organization have to provide some information on its outcomes
and activities that it is engaged in to have that status?
Mr. COLINVAUX. Well, it is very hard for me to judge, but
in part yes. I think what I am trying to argue is that our
current system is one that is based on purposes which, as you
suggest, means a lot of organizations can qualify, and once
they qualify they tend to remain exempt. So in terms of looking
at more positive requirements or brighter lines, one of the
things I think we ought to be thinking about is whether we
should shift away from just purposes and also towards
activities, which is to look at the activities of an
organization, maybe require a certain threshold of an activity,
maybe do more work in terms of defining what a charitable
purpose is. I also think it is important to remember that we
don't have to view all of the tax benefits together. Right now
we do. We put everything under 501(c)(3), and deductibility and
tax-exempt financing flow from that. We don't have to do that.
We could look at 170, the charitable deduction, and say are
there certain eligibility requirements we want to impose on
donations, on certain types of organizations that can receive
donations? Do we want to prioritize certain types of charitable
purposes over others? Those are the sorts of questions I think
we should be asking.
Mr. BECERRA. And that would help people understand where
those tens of billions of dollars that--well, actually even
more money that is being contributed by Americans to these
nonprofits, how it is being used and how it is that they are--
those entities are now getting to shield those resources from
taxation. So you make a charitable contribution, you get to
write off that on your taxes, the organization has tax-exempt
status, doesn't have to pay taxes the way a for-profit entity
would have to pay. Therefore, it is in a better leveraged
position than that for-profit entity. So taxpayers should be
entitled to some sense of what is being done with the money
since at the end of the day it is taxpayers who are covering
the cost of giving these entities this tax-preferred status.
Mr. COLINVAUX. Yes, I generally agree with that, and that
is why I think looking at 170, the charitable deduction in
particular, that is where the Federal interest is quite strong.
Mr. BECERRA. I do have a concern with these 501(c)(4)
organizations, these welfare organizations. We are finding more
and more how they are going into the political side of things
and, Mr. Hopkins, you testified to that. But I know my time is
about to expire.
Mr. Chairman, I know you are planning to have more hearings
on this issue. I hope we do. I hope we have the IRS here. I
believe that the more we do to examine this sector, the better
off those that are doing phenomenal work will be able to have
contributions made by Americans because they will know, in
fact, that their money is going to great purposes, and so I
hope we get on this. Thank you, Mr. Chairman.
Mr. BOUSTANY. Thank you, Mr. Becerra.
Mr. Marchant, you are recognized.
Mr. MARCHANT. Thank you, Mr. Chairman. This question is for
Ms. Aviv. As part of its Good Government Initiative, the
independent sector has identified 33 principles in its
Principles for Good Government and Ethical Practice Guide to
help tax-exempt organizations with operations and transparency.
Are any of the 33 principles reflected in the revised Form 990?
Ms. AVIV. Mr. Marchant, I would have to get back to you on
that, and I will check and do in writing to make sure that they
are there. Let me say that the general point of these
principles was for them to be applied to ourselves by
ourselves. This was a set of voluntary principles that we put
forward. We said that in order for this not to be a government
compliance area, we need to step up to the plate and support
standards of good governance and ethical practice that we
impose upon ourselves. So the purpose was not to encourage
further government action in this regard, believing that there
were whole areas of governance that organizations themselves
have a responsibility to fulfill. That is why we are so pleased
that so many organizations have stepped up, downloaded this
document, and are using it in order to improve their practice.
We believe the more we step up, the less need there is for
government to step in.
Mr. MARCHANT. Are there some principles not incorporated in
the form that you think should be?
Ms. AVIV. I will have to get back to you on that in
writing. I would be happy to do that.
Mr. MARCHANT. Well, thank you. Thank you very much.
Welcome to Mr.--how do you say it?
Mr. REGIER. It is Regier.
Mr. MARCHANT. Regier. Welcome. Your offices are in my
district on Las Colinas.
Mr. REGIER. Yes, absolutely.
Mr. MARCHANT. It is good to see you here today.
I have a couple of questions for Mr. Hopkins. Can you
briefly describe the distinction between a 501(c)(4) and a 527?
Mr. HOPKINS. I can do it. Whether I can do it briefly or
not is another matter.
Mr. MARCHANT. Well, in the amount of time that I have left.
Mr. HOPKINS. Let me put it this way, they are both discrete
categories of tax-exempt organizations. The 527 entity has as
its primary purpose political campaign activity. The flip side
is a 501(c)(4) cannot have that as its primary purpose and must
have as the promotion of social welfare its primary purpose. So
the primary purpose test takes those two organizations in
different directions.
We have talked about the donor disclosure rules. They apply
to 527s. They do not currently apply to 501(c)(4)s. The 527
organizations are taxable on all of their revenue from
nonexempt functions whereas a 501(c)(4) would be taxable only
on its unrelated business income. And the only other item that
I can--or element that I can think of that would differentiate
between the two is that the reporting for political
organizations is far more complex and frequent than is the case
for the 501(c)(4) organization.
Mr. MARCHANT. Well, there has been a lot of recent activity
out in the country among some of our activist groups that are
complaining that the IRS is putting an incredible paperwork
burden on them to prove that they should have the status that
they have, and I am assuming that these are 501(c)(4)s that
are--the accusation is that they are doing 527-type activity;
is that correct?
Mr. HOPKINS. That is absolutely correct.
Mr. MARCHANT. And the IRS, I am getting a lot of complaints
from my constituents that feel like that they are perfectly
justified and are following all the rules under 501(c)(4) but
that the IRS has singled them out for audit, for hundreds and
hundreds of pages of forms, and has this always been the case
or is this a recent phenomena?
Mr. HOPKINS. This is a recent phenomenon in my judgment for
two reasons. One, 501(c)(4)s, of course, do not have to file to
begin with, and so the practice in many, many instances up till
recent times has been for an organization to form as a
501(c)(4) and just go forward and not even go through the
application process. Why there has been this upsurge in
application activity is not entirely clear to me, but the
impression I have gotten based on the limited amount of
experience derived from my own practice is that for some reason
the IRS does seem to be asking for a lot more detail in this
context than they might otherwise.
Mr. MARCHANT. I would hope, Mr. Chairman, that at some date
we will have the IRS here so that we can specifically ask the
IRS, you know, why is there this sudden new focus on these
groups. Thank you. Thank you, Mr. Hopkins.
Mr. BOUSTANY. Thank the gentleman, and I share his concern.
This concludes all the questioning. I want to thank each of
you for coming here today and being witnesses and for your
testimony. I want to remind you all that members may have some
additional written questions that they might submit to you, and
your answers to those as well as the questions would be made
part of the official record.
This has been a very helpful hearing. The information you
provided to us has given us some good guidance as we look at
this whole area of tax-exempt organizations. This hearing is
now adjourned.
[Whereupon, at 11:30 a.m., the subcommittee was adjourned.]

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Credit Union National Association

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Jewish Federations of North America

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National Association of Federal Credit Unions

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National Council of Nonprofits

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The Community Foundation for Greater Atlanta

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MATERIAL SUBMITTED FOR THE RECORD
Questions for the Record:
Ms. Diana Aviv

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