Building Strong and Ethical Foundations

1
Building Strong and Ethical Foundations

• June 13, 2005

Janne G. Gallagher Vice President and General
Counsel Council on Foundations
2
Setting the Stage

• Public Scrutiny of Abuses
• Private Foundations
• Donor-Advised Funds
• Supporting Organizations
• Gifts of Qualified Appraisal Property

3
Key Actors and Reports

• Senate Finance Committee
• June 22, 2004 hearing (discussion draft)
• July 22, 2004 roundtable
• April 5, 2005 hearing
• June 8, 2005 hearing on land donations
• House Ways and Means Oversight Subcommittee
• April 20, 2005 hearing (part of a series of
  hearings)
• Panel on the Nonprofit Sector
• Independent panel to address SFC proposals
• Interim Report - March 1
• Final Report - June

4
Supporting Cast

• Joint Committee on Taxation
• January 27, 2005 Options to Improve Tax
  Compliance and Reform Tax Expenditures
• Close 300 billion tax gap
• 12 exempt org provisions at 6.8 billion (over 10
  yrs)
• Government Accountability Office
• Congressional Research Service
• Congressional Budget Office
• Presidents Budget
• Bush Tax Reform Commission

5
Private Foundations
6
Senate Finance Key Proposals

• Administrative Expenses
• 990-PF reform and increased reporting
• No more than 35 count as qualifying
  distributions
• Trustee Compensation
• Prohibit or de minimis only
• Staff Compensation
• Limit family staff to federal comparables
• Additional reporting (and fee) if
• Family staff compensation exceeds 75,000
• Other staff compensation exceeds 200,000
• Increase self-dealing and other penalty taxes

7
Joint Committee on Taxation

• Increase self-dealing excise tax
• To 10 25 for excess compensation
• First-tier abatement above 10
• Reform intermediate sanctions and extend to
  private foundations
• Rebuttable presumption minimum due diligence
• Organization tax
• Reliance on advice a factor not a defense
• No initial contract exception

8
Joint Committee on Taxation

• Increase the other penalty excise taxes
• Payout excess business holdings jeopardy
  investments taxable expenditures
• Broaden base for tax on investment income
• No carrybacks
• Tax income from notional principal contracts,
  annuities and other substantially similar
  investments
• Tax capital gains from property held for
  appreciation and not for income, dividends, etc.
• Tax capital gains from dispositions of
  charitable use property

9
Council Supports

• Administrative Expenses
• Need for 990-PF reform
• Increased reporting
• Threshold set at 20 to 25
• Limits on qualifying distributions
• Threshold at 35
• Five-year average

10
Council Supports

• Trustee and Staff Compensation
• Adopt (with modifications) rebuttable presumption
  of reasonableness
• Improve compensation reporting on Form 990-PF
• Identify institutional trustees and improve
  reporting
• Separate board and staff functions
• Enforce existing requirements for reporting hours
  worked

11
Council Supports

• Increases in penalty excise taxes
• First-tier abatement for self-dealing

12
Nonprofit Panel Work Groups

• Board Compensation
• Mandatory
• Increased disclosure
• Qualifications
• Hours worked
• Method for determining compensation
• Separate staff and board functions
• Committee service and special assignments
• Best Practices
• How to determine compensation
• Periodic review of effect of comp on independence

13
Nonprofit Panel Work Groups

• Executive Compensation
• Keep rebuttable presumption
• Mandatory
• Annual approval of CEO compensation
• Full disclosure of compensation and all benefits
• Report on 990 re rebuttable presumption process
• Explain any reliance on for-profit comparables
• Compensation consultant independence
• Compensation consultant penalties
• Increase PF self-dealing tax to 25 for excess
  comp
• Best Practices
• Periodic board review of staff compensation
  programs

14
Nonprofit Panel Work Groups

• Manager Tax
• knew or should have known
• Safe harbors
• Followed rebuttable presumption process
• Relied on written opinion of counsel
• For private foundations
• Increase tax to 5
• Increase cap to 20,000
• First-tier abatement

15
Donor-Advised Funds
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Senate Finance Key Issues

• Limits on gifts of qualified appraisal property
• No grants from private foundations
• No grants to private foundations
• No grants to individuals
• No expenses for grantee selection
• No international grants
• Payout/minimum activity rules
• Supports satisfaction of binding pledges

17
Nonprofit Panel Supports

• No grants to private foundations
• Minimum activity rules
• Grantee acknowledgment
• No reimbursement of donors/advisors or related
  parties for grantee selection
• No compensation for donors/advisors or related
  parties for services rendered
• No satisfaction of binding pledges (does not
  support Senate Finance Committee proposal)
• Limit commission-based fees for referrals or
  transfers to donor-advised funds

18
Supporting Organizations
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Senate Finance Key Issues

• Abusive transactions
• Parking assets or minimum payout
• Loans to donor
• Investments benefiting donor
• Eliminate Type III supporting organizations

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Council Supports

• Non-legislative reform
• Letter to Commissioner Everson
• Consent of supported organization
• Revisions to Form 1023

21
Nonprofit Panel Work Groups

• Type III Supporting Organizations
• Do not abolish
• Require consent of supported organizations
• Increase reporting to IRS and supported
  organizations
• 5 payout excluding charitable use assets
• Prohibition on self-dealing
• Change responsiveness test for charitable trusts
• Seat on board
• Significant voice

22
Gifts of Qualified Appraisal Property
23
Senate Finance Key Issues

• Concern with valuation of qualified appraisal
  property
• Donations of vehicles, patents and intellectual
  property
• Legislation already enacted
• American Jobs Creation Act of 2004 (H.R. 4520)
• Conservation easements (Nature Conservancy
  investigation)
• Façade easements
• Land donations

24
Joint Committee on Taxation

• Limit deduction to basis for gifts of qualified
  appraisal property
• Limit charitable deduction for contributions of
  clothing and household items
• Modify deduction for conservation and façade
  easements

25
Proposed 2006 Federal Budget

• Indicates White House priorities
• Includes tax cuts, revenue raisers and tax
  incentives
• Penalties for not enforcing conservation
  easements
• Curb on paired life insurance/annuity contracts
• Bill by Senators Grassley and Baucus

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In Case You Were Wondering

• CARE Act and Charitable IRA Rollover
• S 6
• Rollover
• Nonitemizer
• Other provisions
• HR 1607 IRA Rollover
• Bush Administration
• Supporting IRA Rollover
• Nonitemizer?

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Contact Information

• Janne G. Gallagher, Esq. 202/ 467-0288
• Vice President and General Counsel gallj_at_cof.org
• Luis Maldonado.
• Director 202/ 467-0394
• Gov. Relations and Public Policy maldl_at_cof.org
• Andras Kosaras, Esq. 202/ 467-0399
• Director, Ethical Standards and kosaa_at_cof.org
• Philanthropic Outreach
• Council on Foundations
• 1828 L Street, NW Suite 300
• Washington, DC 20036