[Congressional Record Volume 141, Number 141 (Tuesday, September 12, 1995)]
[Extensions of Remarks]
[Pages E1765-E1766]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                 EXEMPT ORGANIZATION REFORM ACT OF 1995

                                 ______


                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                       Tuesday, September 12, 1995
  Mr. STARK. Mr. Speaker, today my colleague, Mr. Amo Houghton, and I 
will introduce the Exempt Organization Reform Act of 1995. This bill 
reforms three provisions of exempt organization law. The bill would 
first create a category of transactions that would be considered self-
dealing because of insiders involved in a transfer of 501(c)(3) or 
501(c)(4) organization assets; second, clarify that private inurement 
prohibitions apply to 501(c)(4) organizations; and third, impose 
intermediate sanctions on both private inurement and self-dealing 
transactions.
  Section 501(c)(3) of the Internal Revenue Code exempts from Federal 
income tax religious, charitable, educational and certain other 
organizations that meet statutory and regulatory requirements. A 
primary requirement for tax-exempt organizations is that the 
organization's net earnings may not inure to the benefit of any private 
shareholder or individual, and the organization may not be organized or 
operated for the benefit of private rather than public interests.
  Under current law, the only sanction available to the IRS to combat 
private inurement is revocation of the organization's exempt status. 
Revoking an organization's tax exemption is a severe penalty, which in 
many cases penalizes the wrong parties--the intended beneficiaries of 
its charitable work and the local community--while leaving untouched 
the insiders or other private parties who benefited from the diversion 
of the organization's assets and/or income. The IRS rarely imposes this 
sanction.
  Since 1950, Congress has been concerned with problems of self-dealing 
between private foundations and insiders, and as recently as 1993 and 
1994, the House Ways and Means Subcommittee on Oversight held public 
hearings that focused on compliance by public charities with the 
private inurement and private benefit prohibitions. Evidence presented 
at the oversight hearings documented numerous abuses of these 
prohibitions by a number of public charities. At the Oversight 
hearings, the IRS established a need for a wider range of enforcement 
tools--sanctions that do not require revocation of exempt status for 
violations of the private inurement and private benefit prohibitions.
  Problems of insiders inappropriately benefiting from a tax exempt 
entity are all too common among nonprofit entities. The following 
examples illustrate transactions in which individuals have enriched 
themselves at the public's expense while nonprofit organizations have 
been looted.
  An exempt 501(c)(3) health care organization operated a clinic at 
which the chief executive officer received total compensation in excess 
of $1 million. In addition, the organization made substantial payments 
for his personal expenses. The organization had sold its charitable 
assets and was purchasing physicians' private medical practices, often 
at more than fair market value.
  An exempt University gave its president a significant compensation 
package, including salary, deferred compensation, expense accounts and 
loans--many of which were non interest bearing. He also received the 
use of an expensive residence whose maintenance costs, including maid 
service, were paid by the University.
  A public charity provided assistance to the poor. A principal officer 
of the organization, along with relatives, used its funds to pay for 
personal expenses such as leasing of vehicles, educational expenses, 
vacations, home improvements, and rental of resort property.
  An exempt organization headed by a television evangelist raised large 
sums of money through fraudulent or misleading fundraising. Only a 
small part of the funds raised was used for charitable purposes. The 
organization paid the personal expenses of the officers and controlling 
individuals.
  Television evangelist Pat Robertson, chairman of Christian 
Broadcasting Network [CBN], and his son Timothy, turned a $150,000 
investment into stock worth $90 million by the 1992 sale to the public 
of cable TV stock they had originally bought from CBN.
  This story is complicated, with twists and turns that often exist in 
self-dealing and private inurement cases. A cable TV programming 
company, The Family Channel, was started in 1977 as a division of the 
nonprofit CBN and was financed with charitable donations of viewers. 
CBN wanted to sell the Family Channel in 1989, partly because the 
Family Channel was so lucrative that it jeopardized the tax exempt 
status of the CBN--IRS rules require charities to receive their 
revenues more from charitable activities than from business activities. 
The Family Channel reportedly generated $17.5 million in just 9 months 
of 1989.
  For the purchase in 1990, Pat and Tim Robertson formed a for-profit 
company, the International Family Entertainment, Inc., [IFE] with a 
minority shareholder and bought the Family Channel. The Robertsons put 
up $150,000--2.22 cents a share--and the minority shareholder put up 
$22 million.
  IFE/Family Channel went public at $15 a share in 1992, and the 
Robertsons' $150,000 investment became worth $90 million. They retained 
69-percent control of IFE/Family Channel. The Family Channel continues 
to be a cash cow. Pat Robertson's 1992 salary and bonus from IFE/Family 
Channel amounted to $390,611. His son Tim received $465,731 in 1992 
alone. All the while, Robertson remains chairman of the nonprofit CBN 
that created the lucrative family channel.
  The 1993 and 1994 Oversight hearings established the need for 
sanctions that fall short of revocation of exempt status for violations 
of private inurement and private benefit prohibitions. The health care 
bills reported in 1994 by the House Ways and Means and Senate Finance 
Committees both incorporated provisions on intermediate sanctions. The 
bipartisan effort in this area has been demonstrated time and time 
again--in hearings, in committee reports, and in proposed legislation. 
When unable to pass intermediate sanction legislation during health 
reform last year, a provision on intermediate sanctions was offered in 
the Ways and Means Committee's GATT bill, however it was not accepted 
by the Senate Finance Committee.
  The evidence of abuse in this area is compelling. We should move 
quickly to pass this legislation before insiders take further advantage 
of organization's tax exempt status.
                    Explanation of Bill: Present Law

       Under the Internal Revenue Code (the ``Code''), a tax-
     exempt charitable organization described in section 501(c)(3) 
     must be organized and operated exclusively for a charitable, 
     religious, educational, scientific, or other exempt purpose 
     specified in that section, and no part of the organization's 
     net earnings may inure to the benefit of any private 
     shareholder or individual. Organizations described in section 
     501(c)(3) are classified as either private foundations or 
     public charities. Organizations described in section 
     501(c)(4) also must be operated on a non-profit basis, 
     although there is no specific statutory rule prohibiting the 
     net earnings of such an organization from inuring the benefit 
     of shareholder or individual.
       Under the Code, penalty excise taxes may be imposed on 
     private foundations, their managers, and certain disqualified 
     persons for engaging in certain prohibited transactions (such 
     as so-called ``self-dealing'' and ``taxable expenditure'' 
     transactions, see sections 4941 and 4945). In addition, under 
     present law, penalty excise taxes may be imposed when a 
     public charity makes an improper political expenditure 
     (section 4955). However, the Code generally does not provide 
     for the imposition of penalty excise taxes in cases where a 
     public charity (or
      section 501(c)(4) organization) engages in a transaction 
     that results in private inurement. In such cases, the only 
     sanction that may be imposed under the Code is revocation 
     of the organization's tax-exempt status.


              i. excise tax on excess benefit transactions

       A. The bill would amend the Code to impose penalty excise 
     taxes equal to 25 percent of the excess benefit as an 
     intermediate sanction in cases where a public charity 
     described in section 501(c)(3) (such as a hospital) or 
     organization described in section 501(c)(4) such as an HMO) 
     engages in a ``self-dealing'' transaction with certain 
     disqualified persons. In the case where an organizational 
     manager knows of such a transaction, an additional tax equal 
     to 10 percent of the excess benefit may be imposed upon the 
     organizational manager.
       B. For purposes of the bill, ``excess benefit transaction'' 
     generally means any transaction in which an economic benefit 
     is provided by an applicable tax-exempt organization to or 
     for the use of any disqualified person if the economic 
     benefit provided exceeds the value of the consideration. The 
     term ``excess benefit'' includes loans and certain private 
     inurement.
       C. Under the bill, ``excess benefit'' also includes the 
     lending of money or other extension of credit between an 
     applicable tax-exempt organization and disqualified person.
       D. ``Disqualified persons'' would de defined under the bill 
     as any person who was an organization manager at any time 
     during the five-year period prior to the self-dealing 

[[Page E 1766]]
     transaction at issue, as well as certain family members and 35-percent 
     owned entities. The term ``organization manager'' means any 
     officer, director, or trustee of a public charity or social 
     welfare organization (or any individual having powers or 
     responsibilities similar to those of officers, directors, or 
     trustees).
       E. The bill would provide for a two-tiered penalty excise 
     tax structure, similar to the excess tax penalty provisions 
     applicable under present law to prohibited transactions by 
     private foundations and political expenditures by public 
     charities. Under the bill, an initial tax equal to 25 percent 
     of the amount involved would be imposed on a disqualified 
     person who participates in a self-dealing transaction. 
     Organization managers who participate in self-dealing 
     transactions, knowing that the transaction constitutes self-
     dealing, would be subject to a tax equal to 10 percent of the 
     amount involved (subject to a maximum amount of tax of 
     $10,000), unless such participation was not willful and was 
     due to reasonable cause.
       F. Additionally, second-tier taxes would apply under the 
     bill if the self-dealing transaction is not ``corrected,'' 
     meaning undoing the transaction to the extent possible, but 
     at least insuring that the organization is in a financial 
     position not worse than that in which it would be if the 
     disqualified person were dealing under the highest fiduciary 
     standards. If a self-dealing transaction is not corrected 
     within a specified time period (generally ending 90 days 
     after the IRS mails a notice of deficiency), then the 
     disqualified person would be subject to a tax equal to 200 
     percent of the amount involved. Any organization manager 
     refusing to agree to correction would be subject to tax equal 
     to 50 percent of the amount involved (subject to a maximum 
     amount of tax of $10,000). Under the bill, if more than one 
     person is liable for a first-tier or second-tier tax with 
     respect to any one self-dealing transaction, then all such 
     persons would be jointly and severally liable for the tax.


                 II. REPORTING OF CERTAIN EXCISE TAXES

       A. Specified organizations would be required to report 
     respective amounts of taxes paid by the organization 
     concerning lobbying and political expenditures during the 
     taxable year as specified in the bill.


      III. EXEMPT ORGANIZATIONS REQUIRED TO PROVIDE COPY OF RETURN

       A. During the three-year period beginning on the filing 
     date, applicable organizations must make available for 
     inspection during regular business hours a copy of their 
     annual return. If the request is made in person, the return 
     must be provided immediately. If the request is made in some 
     other fashion, the organization must produce the document 
     within 30 days.
       B. Advertisements or solicitations used by applicable 
     organizations must contain an express statement that the 
     organization's annual return is available upon request. 
     Penalties for failing to disclose this information are 
     doubled.


    IV. CERTAIN ORGANIZATIONS REQUIRED TO DISCLOSE NONEXEMPT STATUS

       A. If the organization advertises or solicits as a 
     nonprofit organization and the organization is not designated 
     by the IRS as tax exempt, the advertisement or solicitation 
     must contain an express statement indicating such.
       B. If the organization fails to meet the disclosure 
     requirement with respect to advertising or solicitation, the 
     organization would be required to pay $1,000 for each day 
     that it fails to disclose (not to exceed $10,000 per year 
     unless the organization intentionally disregards the 
     requirement).


 V. INCREASE IN PENALTIES ON EXEMPT ORGANIZATIONS FOR FAILURE TO FILE 
                   COMPLETE AND TIMELY ANNUAL RETURNS

       A. Penalties for organizations that fail to file their 
     return or who file incomplete returns is increased.
     

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