Carnegie Reporter, Vol. 3, No. 1 | A Dangerous Threat to Philanthropic Freedom

Adam Meyerson is president of The Philanthropy Roundtable, a national association of 500 foundations, philanthropic families, and corporate giving programs. Its mission is to foster excellence in philanthropy, to help donors achieve their philanthropic intent, and to help donors advance freedom, opportunity, and personal responsibility in America and abroad. This article is adapted from an editorial in the July-August 2004 issue of the Roundtable’s magazine, Philanthropy.

The Philanthropy Roundtable applauds the Senate Finance Committee for its leadership in working to reduce abuses of tax-exempt status in charities, private foundations, donor-advised funds, and other 501(c)(3) organizations. In many cases, the remedy for these abuses may require additional resources for the enforcement of existing laws and more timely and accurate reporting and disclosure. In other cases, as demonstrated by published reports on the overvaluation of donated vehicles, new laws may be needed to provide targeted remedies for specific categories of abuse. The June 22, 2004, Senate Finance Committee discussion draft describes several of the issues and identifies several possible solutions, and equally as important, provides interested parties such as The Philanthropy Roundtable with a valuable opportunity to share their views.

The Philanthropy Roundtable is strongly committed to protecting the philosophical diversity of the philanthropic sector, and to preserving the freedom of private foundations and other philanthropic vehicles to make fundamental decisions about how best to achieve their charitable objectives. And from this perspective, we have seven principal concerns about the Senate Finance Committee discussion draft.

First, we are troubled by a proposal giving the Internal Revenue Service the power to review foundations’ and other tax-exempt organizations’ “management policies regarding best practices” and “a detailed narrative about the organization’s practices” as part of a review process for determining continuation of tax-exempt status. We are not aware that the IRS has any expertise in judging a foundation’s internal management policies and procedures. Even more important, this new power would represent a substantial intrusion by federal authorities into the internal workings of a private organization. It has no place in a free society.

Second, we are concerned by a proposal to give the IRS the power to review and revoke the tax-exempt status of every foundation every five years—especially when this is combined with another proposal allowing state attorneys general to enforce federal tax laws. This automatic power, unless it is very carefully circumscribed, would give individuals in positions of authority an opportunity to use the IRS as a weapon against charities and foundations they disagree with philosophically. As recently as 1997, allegations were made that the IRS targeted for audit tax-exempt organizations that were critical of Clinton Administration policies. And while an investigation by the staff of Congress’ Joint Committee on Taxation “found no political bias in the IRS’s selection of tax-exempt organizations for audit or the conduct of such audits, the Joint Committee staff did identify certain procedural and substantive problems with IRS processes that may have contributed to a perception of unfairness.”

A likely greater danger, again unless the power to revoke tax-exempt status is very carefully circumscribed, is that state attorneys general would abuse this power to put inappropriate political pressure on private foundations. This is not an idle threat. Our members tell us they are frequently asked by state attorneys general to make contributions to charities of the AGs’ choosing, to change the composition of their boards (without any findings of wrongdoing by directors), and to open up the board meetings of private institutions to the public. Private foundations currently have the legal authority to make their own decisions about such important internal questions. We are concerned that a five-year review power in the hands of state attorneys general would put private foundations at their mercy. This is because the threat to revoke tax-exempt status of a foundation imperils its very existence and can tie it up in administrative knots, making it much more difficult to carry out its philanthropic mission.

Third, we are concerned about a proposal to make a foundation’s continued tax exemption contingent on approval by a private accrediting agency for charities or foundations. Unless there is a wide variety of philosophically diverse accrediting agencies, or unless there are very minimal standards for accreditation, an accreditation requirement could pose a serious threat to independent thought in charitable and philanthropic organizations. The experience of colleges and universities, which must be accredited in order for their students to be eligible for federal loan guarantees, illustrates the problem. Beginning in the early 1990s regional accrediting monopolies threatened to deny accreditation to some very fine colleges, such as Thomas Aquinas College in California, because they did not agree with the colleges’ curricula. The president of Stanford University, Gerhard Casper, wrote that the accreditors’ pressure for conformity “would ruin a system of higher education that allows Stanford and Thomas Aquinas College to serve students of different tastes.” This threat to academic and intellectual freedom diminished somewhat when the U.S. Department of Education authorized a new accrediting agency (the American Academy of Liberal Education) as a competitive alternative to the regional monopolies.

Fourth, we are concerned about proposed micromanagement by the federal government of internal decisions involving staff and trustee compensation and travel budgets. This is a departure from a long tradition in federal and state law of respecting the diversity of the philanthropic sector in terms of mission, philosophy, size, operating style, and division of staff and trustee responsibilities. The tax exemption has been framed broadly to encourage this diversity and flexibility, and regulations such as those guarding against self-dealing and investment abuse have not interfered with the ability of a foundation to make its own decisions about how to achieve its charitable objectives. By contrast, the Finance Committee discussion draft suggests that government knows better than foundation leaders how their organizations should be run.

To cite one example, the discussion draft would sharply limit, and perhaps eliminate altogether, compensation for foundation trustees. There is a long tradition in the foundation world of expecting trustees to make a gift of their time and serve on boards without compensation. There is another long tradition which believes in paying busy trustees for their time and judgment. Our experience is that philanthropic excellence—and philanthropic mediocrity—is well represented in both traditions. More important, this is a judgment for the foundation itself to make.

Some foundations might prefer to spend relatively more on trustees than on staff, or vice versa. The travel needs of a foundation with international charitable objectives will differ substantially from those of a foundation focused on a local community. These are judgment calls for the foundation. It would be better to have an overall cap on administrative expenses as a proportion of total expenses (allowing room for additional operating-foundation-type expenditures of a genuinely philanthropic nature), than for government to second-guess most individual expenditures on travel and compensation.

As demonstrated by the recent jury trial of former officers of the King Foundation in Texas, there are examples of fraudulent and grossly excessive compensation in the foundation world. In the King Foundation case, existing laws were sufficient to punish the wrongdoers. Should new laws be necessary to guard against other cases of excessive compensation, they should be narrowly targeted to address the abuses in question—without interfering with the discretion of foundations to make internal decisions about how best to carry out their charitable mission.

Fifth, we agree with the concerns articulated by Derek Bok of Harvard University at the June 22, 2004, hearing. “There is a danger,” Professor Bok argued, “that in enacting rules in response to a few particularly flagrant, widely publicized abuses, regulators will impose burdens of paperwork, record-keeping, and other costs on all non-profits that will more than equal any benefits achieved by government intervention.” We are particularly concerned that the imposition of Sarbanes-Oxley-type requirements on foundations with small staffs or boards would impose very substantial costs with very uncertain benefits.

Sixth, we are concerned by a proposal in the discussion draft to require the public disclosure of contributions by donor-advised funds. Private foundations have prospered under their public disclosure requirements of the past 35 years, and they would not suffer under proposals in the discussion draft to ensure more accurate and timely filing of IRS Form 990-PFs. However, individual donors have always enjoyed the right to keep their charitable contributions confidential if they wish. Disclosure requirements for donor-advised funds would most likely reduce charitable giving by taking away a highly efficient vehicle for living donors who cherish their privacy. Some other regulations may well be necessary to ensure that expenditures by donor-advised funds are made for charitable purposes.

Seventh, we are concerned by a proposal for government to subsidize efforts within the philanthropic sector to encourage best practices and set accrediting standards. The money would come from the tax on net investment income on foundations. The Philanthropy Roundtable believes that it would be totally inappropriate for the philanthropic sector to turn to government to raise resources for its own self-improvement. Philanthropists and the organizations that serve them have the resources to raise this money themselves. Turning to government for financial help would also be deeply corrupting to the spirit of independence and voluntary initiative that animates philanthropy at its best.

The Philanthropy Roundtable is not reflexively opposed to all regulation of foundations and other philanthropic vehicles. Our interest is in preserving the freedom and philosophical diversity of the philanthropic sector. Freedom thrives under the rule of law. Freedom thrives under conditions of robust debate, competition, and exchange of ideas. Freedom thrives when there are standards of excellence and vigorous watchdog groups monitoring performance. These watchdogs include the press, professional associations and gadflies, and, where necessary, regulatory agencies. There is a role for the public sector and a much larger role for the private sector in creating the conditions where philanthropic freedom will thrive.

In sum, The Philanthropy Roundtable applauds the Senate Finance Committee for its work
to reduce foundation and other abuses in the tax-exempt sector, and we are committed to ensuring that reforms of the law will preserve the freedom of philanthropists to make key decisions about how best to achieve their charitable mission.