[Congressional Record Volume 149, Number 116 (Thursday, July 31, 2003)]
[Senate]
[Page S10636]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mrs. HUTCHISON:
  S. 1514. A bill to amend the Internal Revenue code of 1986 to reform 
certain excise taxes applicable to private foundations, and for other 
purposes; to the Committee on Finance.
  Mrs. HUTCHISON. Mr. President, I am pleased to introduce legislation 
to address concerns regarding the operation of charitable foundations.
  Well-publicized incidents of abuse by a few foundations have raised 
legitimate concerns about whether these entities are properly focusing 
resources on their philanthropic missions. In come cases, excessive 
amounts have gone toward administrative costs, high executive salaries 
and expensive travel.
  My bill will help to ensure that more money is spent on charitable 
activities and that those who abuse the system are properly punished.
  One proposal I support is included in the House version of the CARE 
Act, H.R. 7, the Charitable Giving Act of 1003. It would reduce the 
excise tax on investment income for foundations from two percent to one 
percent, allowing foundations to keep more money so they can direct it 
to those in need.
  However, we must ensure this money actually goes toward the 
charitable activities for which it is intended. The House bill tries to 
do this by preventing any administrative costs from being counted as 
part of the five percent annual distribution requirement foundations 
must meet. While the legislation moves in the right direction, the 
language is too broad and may inadvertently punish some foundations 
that are acting responsibly.
  Many foundations will find it difficult to earn the returns necessary 
to maintain their underlying endowments and cover the five percent 
requirement in addition to all administrative costs. This could lead to 
a diminished ability to fulfill their missions over time, as underlying 
endowments are eroded as an unintended consequence. Some foundations 
may try to meet this challenge by reducing important, legitimate 
spending such as on legal compliance.
  The legislation I am introducing will better address these issues. 
First, I agree we should reduce the excise tax on foundations from two 
percent to one percent. I also agree we should consider limiting which 
administrative expenses are counted as distributions. However, I 
propose doing so in a more defined manner.
  My bill would exclude general overhead expenses, management salaries 
and excessive travel expenses from being counted as distributions. It 
will allow expenses directly attributable to administering grants and 
direct charitable giving, as well as expenses related to maintaining 
legal compliance, to continue to be included.
  By focusing these restrictions on the expenses which tend to be the 
source of abuse, we can deal with the root issues while minimizing 
unintended consequences.
  My bill also goes further than other proposals in penalizing 
wrongdoers. It will raise the penalty for those who abuse the system by 
``self-dealing'' from a five percent to a 25 percent excise tax on the 
amounts involved.
  My bill will lower the net investment tax, tighten the regulations 
allowing administrative expenses to be counted as distributions, and 
increase penalties for those abusing the system. It does so with 
drastic measures that could lead to a decline in foundations in the 
long-term. Together these measures will instill more discipline on the 
foundation community and result in more money going to worthy causes.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1514

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the 
     ``Philanthropy Expansion and Responsibility Act of 2003''.
       (b) Amendment of 1986 Code.--Whenever in this Act an 
     amendment or repeal is expressed in terms of an amendment to, 
     or repel of, a section or other provision, the reference 
     shall be considered to be made to a section or other 
     provision of the Internal Revenue Code of 1986.

     SEC. 2. REFORM OF CERTAIN EXCISE TAXES RELATED TO PRIVATE 
                   FOUNDATIONS.

       (a) Reduction of Tax on Net Investment Income.--Section 
     4940(a) (relating to tax-exempt foundations) is amended by 
     striking ``2 percent'' and inserting ``1 percent''.
       (b) Repeal of Reduction in Tax Where Private Foundation 
     Meets Certain Distribution Requirements.--Section 4940 
     (relating to excise tax based on investment income) is 
     amended by striking subsection (e).
       (c) Modification of Excise Tax on Self-Dealing.--The second 
     sentence of section 4941(a)(1) (relating to initial excise 
     tax imposed on self-dealer) is amended by striking ``5 
     percent'' and inserting ``25 percent''.
       (d) Modification of Excise Tax on Failure To Distribute 
     Income.--
       (1) Certain administrative expenses not treated as 
     distributions.--
       (A) In general.--Section 4942(g)(1)(A) (defining qualifying 
     distributions) is amended by striking ``(including that 
     portion of reasonable and necessary administrative 
     expenses)'' and inserting ``(including that portion of 
     reasonable and necessary administrative expenses which are 
     directly attributable to direct charitable activities, grant 
     selection activities, grant monitoring and administration 
     activities, compliance with applicable Federal, State, or 
     local law, or furthering public accountability of the private 
     foundation, except as provided in paragraph (4))''.
       (B) Limitations.--Section 4942(g) is amended by striking 
     paragraph (4) and inserting the following new paragraphs:
       ``(4) Limitation on administrative expenses treated as 
     distributions.--For purposes of paragraph (1)(A), the 
     following administrative expenses shall not be treated as 
     qualifying distributions:
       ``(A) Any compensation paid to persons who are considered 
     disqualified persons.
       ``(B) Any traveling expenses incurred for travel outside 
     the United States.
       ``(C) Any traveling expenses incurred for transportation by 
     air solely from one point in the United States to another 
     point in the United States via first-class transportation on 
     a commercial aircraft or via a private aircraft.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to carry out the purposes of 
     paragraphs (1) and (4). Such regulations shall provide that 
     administrative expenses which are excluded from qualifying 
     distributions solely by reason of the limitations in 
     paragraph (1) or (4) shall not subject a private foundation 
     to any other excise taxes imposed by this subchapter.''.
       (2) Disallowance not to apply to certain private 
     foundations.--
       (A) In general.--Section 4942(j)(3) (defining operating 
     foundation) is amended--
       (i) by striking ``(within the meaning of paragraph (1) or 
     (2) of subsection (g))'' each place it appears, and
       (ii) by adding at the end the following new sentence: ``For 
     purposes of this paragraph, the term `qualifying 
     distributions' means qualifying distributions within the 
     meaning of paragraph (1) or (2) of subsection (g) (determined 
     without regard to subsection (g)(4)).''.
       (B) Conforming amendment.--Section 4942(f)(2)(C)(i) is 
     amended by inserting ``(determined without regard to 
     subsection (g)(4))'' after ``within the meaning of subsection 
     (g)(1)(A)''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2003.
                                 ______