Questions About Some Charities' Activities Lead to a Push for Tighter Regulation | gnh2104 | August 13, 2011

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Questions About Some Charities' Activities Lead to a Push for Tighter Regulation


State and federal officials charged with overseeing charitable activities around the country are promoting legislation to enhance accountability, encourage greater limits on executive compensation and place greater responsibility on nonprofit boards.


The moves come after a string of reports over the last year or so have called into question nonprofit practices ranging from making favorably priced loans to insiders to overvaluing noncash donations like land, cars and patent rights for tax deductions.


"We are seeing more mischief in this area than I think we've seen before," said Thomas F. Reilly, the attorney general for Massachusetts.


Mr. Reilly is circulating draft legislation that is similar to measures passed two years ago by Congress to tighten accountability in the corporate sector after scandals at Enron, WorldCom, Tyco and other companies raised questions about governance standards and ethics.


The Massachusetts legislation would require charity and foundation executives to certify the accuracy of their financial statements, create independent audit committees at nonprofit groups with more than $750,000 in revenue, and maintain tighter control over compensation, among other things.


Similar bills are pending in California and New York, and Congress is reviewing several charity issues with an eye toward imposing stricter rules on the nonprofit sector.


"We've recently had two fairly significant scandals in the nonprofit area," said the California attorney general, Bill Lockyer, referring to a fund-raiser who pleaded guilty to defrauding high-profile contributors through Hollywood charity galas and to the collapse of a nonprofit group that used donations intended for other charities to cover its own costs. "It seemed like there needed to be some review of the law to strength it."


Senator Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee, said the committee's staff would be investigating charitable affairs "over a long period of time." He said the committee might conduct hearings, which charities had hoped to avoid.


"In Congress, we legislate so much and delegate, but we need to do more oversight to make sure checks and balances work and supervise the tax credits we're giving," Mr. Grassley said. "We give tax deductions for charitable giving, so there's a public policy interest in how the money gets used."


Charities and foundations have been bracing for stronger regulatory intervention in their affairs, and many are already taking steps to beef up their governance, adopting or strengthening policies on conflict of interest, creating audit committees and adding independent directors to their boards.


But lawyers who work with them say that while they anticipated some action from Congress, the state moves surprised them. Eliot Spitzer, New York's attorney general, proposed a package of bills to increase accountability at nonprofit groups, setting off alarms when it was introduced last summer. New York has tended to lead state regulation of charities, and some charity leaders feared that other states would follow.


The bills have stalled in the New York Legislature, though, easing some of those fears. "When his efforts didn't go anywhere, I think some charities decided it was just a fad," said Michael W. Peregrine, a lawyer in Chicago who represents many nonprofit groups. "But the confluence of high-profile, notorious developments among charities is giving these attorneys general and congressmen the ammunition they need to push these measures through."


If Mr. Grassley has his way, federal and state regulators may begin working together more closely to oversee charities. He is trying to find ways to better coordinate the activities of the attorneys general and the Internal Revenue Service, which oversees tax-exempt organizations at the federal level. Measures that would let the I.R.S. share more information with state regulators are included in pending legislation. "If they don't get through there, we'll have other tax bills and we'll incorporate them in those," the senator said.


Many of Mr. Grassley's plans include ways to raise money to finance greater oversight. For instance, he may propose that a foundation that pays its board members must file a more extensive return with the I.R.S. and pay a higher fee for its processing than a foundation that does not pay its trustees.


Another possibility for financing the I.R.S. division that oversees charities may be to charge nonprofit groups a fee for extensions for filing their returns. Many nonprofits receive multiple extensions each year, which frustrates oversight by the authorities and by the public, which has access to the returns.


Congress is also likely to consider tighter definitions for what constitutes self-dealing, who is a truly independent board member, even what defines a charity.


Representative Bill Thomas, Republican of California and chairman of the Ways and Means Committee, unnerved the charity world in early March when he said the committee would look into what benefit taxpayers get from a nonprofit hospital or credit union compared with a for-profit hospital or bank.


"They're in direct competition with institutions that pay taxes, and what is the good and worthy cause for which they were given the nonprofit, therefore tax-preferred, status?" he asked, referring to credit unions in a speech to the Federation of American Hospitals. "I think some of it's gotten murky or lost in their attempt to build and grow and provide services to the point that if I put one down on paper and said profit or nonprofit, you couldn't tell the difference."


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June 14, 2013

STEPHANIE STROM

2004-03-21

attorney general non-profits

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