On the Record: Charity Laws Face Changes

In June, the Senate Finance committee — which oversees the Internal Revenue Service’s regulation of tax-exempt organizations — released a draft staff report suggesting many drastic changes in the law that governs charities. Sen. Charles Grassley (R-Iowa), the chairman of the committee, announced at press time that he intended to introduce bipartisan legislation this fall to incorporate some of these changes. Here is a condensed look at some of the more wide-ranging, proposed changes.

1. Five-year review of tax-exempt status
The staff report proposes that every five years a tax-exempt organization must submit detailed information justifying its exempt status. This information would include conflicts of interest policies; management policies regarding best practices; financial statements; and a detailed narrative about all the organization’s policies and practices. This information would be made available to the public, and failure to file would result in loss of exempt status. Currently, exempt organizations have no such requirement, and many in the nonprofit community believe this will place an undue burden on organizations.

2. Apply private foundation, self-dealing rules to public charities
Under existing law, private foundations are subject to greater restrictions on transactions with “disqualified persons,” or insiders, than public charities. For public charities, disqualified persons are those who have substantial influence over the charity during a five-year period that ends on the date of the transaction in question and includes officers and voting members of the governing body, family members of these persons and entities in which these persons have a 35 percent or greater interest. For private foundations, disqualified persons include substantial contributors, trustees, directors, family members of these persons and, again, entities in which these persons have a 35 percent or greater interest.

For example, an insider is subject to excise taxes upon the sale of property to a private foundation, even if the sale price is below market value and thus benefits the foundation.