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The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance IssuesUnited Way, Oral Roberts University, the Smithsonian Institution, American University,the J. Paul Getty Trust, and the Nature Conservancy. 5At the same time, congressional attention to the nonprofit sector has increased, withhearings 6 in the Senate Finance <strong>Committee</strong> and in the House <strong>Committee</strong> on Ways andMeans, and its Subcommittee on Oversight, and the release of various discussion draftsaddressing possible remedies for perceived problems in the sector. 7 Senator Grassley,first as Chair of the Senate Finance <strong>Committee</strong> and then as Ranking Minority Member,and his colleague Senator Baucus, the current Chair of the Senate Finance <strong>Committee</strong>and former Ranking Minority Member, have emphasized the importance of governanceand transparency in the tax-exempt sector. 8A common thread in the media coverage, in testimony before (and written commentssubmitted to) congressional committees, 9 and in remarks by legislators of both parties 10has been a sense that those responsible for the charities in question have not lived upto their duties. They contend that better governance could have prevented, or at leastlimited, the harm caused by abusive transactions involving charities and their insiders.In fact, it is virtually tautological today that a significant failure by an organization is afailure of governance.The nonprofit sector has responded to this increased scrutiny with a number of selfregulatoryinitiatives. Independent Sector, in response to a request from SenatorsGrassley and Baucus in the summer of 2004, convened the Panel on the NonprofitSector to consider proposals for improving the effectiveness and accountability ofnonprofit organizations, with particular attention to self-governance. The Panel issuedreports in June 2005 and April 2006 with recommendations for legislative and regulatory5See, e.g., Gretel C. Kovach, Oral Roberts and President Part Ways, N.Y. Times, Nov. 28, 2007, at A22; Stephanie Strom, RedCross Head Quits; Board Woes, Not Storm, Are Cited, N.Y. Times, Dec. 14, 2005 at A32; Felicity Barringer, United Way FindsPattern of Abuse by Former Chief, N.Y. Times, April 4, 1992 at Section 1 Page 1; American University Investigated by IRS, TaxNotes Today, 2007 TNT 39-8, Doc 2007-4907 (Feb. 27, 2007).6See, e.g., Senate Finance <strong>Committee</strong> hearings: Taking the Pulse of Charitable Care and Community Benefits at NonprofitHospitals (Sept. 13, 2006); Charities on the Frontline: How the Nonprofit Sector Meets the Needs of America’s Communities (Sept.13, 2005); The Tax Code and Land Conservation: Report on Investigations and Proposals for Reform (June 8, 2005); Charities andCharitable Giving: Proposals for Reform (April 5, 2005); and Charity Oversight and Reform: Keeping Bad Things From Happening toGood Charities (June 22, 2004); House <strong>Committee</strong> on Ways and Means hearings: To Examine Whether Charitable OrganizationsServe the Needs of Diverse Communities (Subcommittee on Oversight Sept. 25, 2007); On Tax-Exempt Charitable Organizations(Subcommittee on Oversight July 24, 2007); To Review the Response by Charities to Hurricane Katrina (Subcommittee onOversight Dec. 13, 2005); On the Tax-Exempt Sector (May 26, 2005); On an Overview of the Tax-Exempt Sector (April 20, 2005)7See, e.g., Tax-Exempt Hospitals: Discussion Draft (July 18, 2007),http://www.senate.gov/~finance/press/Gpress/2007/prg071907a.pdf, recommending imposing an array of governance practices ontax-exempt hospitals; Staff Discussion Draft, (June 21, 2004),http://finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf, recommending sweeping governance proposals for allexempt organizations, including limiting board size to 15 members, only one of whom could be compensated by the organization,and requiring at least one-fifth of board members of public charities to be independent.8See joint letter of Senators Baucus and Grassley to the Treasury Secretary (May 29, 2007),http://www.senate.gov/~finance/press/Gpress/2007/prg052907a.pdf.9For example, Ira M. Millstein submitted comments to the Senate Finance <strong>Committee</strong> regarding the governance of The NatureConservancy and describing the changes that the organization had implemented, following congressional and media attention toalleged failures of oversight by TNC’s Board (June 8, 2005),http://finance.senate.gov/hearings/testimony/2005test/imtest060805.pdf.10See, e.g., Stephanie Strom, Senator Urges Red Cross to Overhaul Its Board, N.Y. Times, Feb. 28, 2006, at A12.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 8
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesaction as well as sector-generated educational and enforcement efforts. 11 In October2007, in an effort to “advance the state of governance and self-regulation,” the Panelissued Principles for Good Governance and Ethical Practice: A Guide for Charities andFoundations (hereinafter, “Panel Principles”). 12 The Council on Foundations releasedstewardship principles developed by its private foundation members; its communityfoundation members released standards for community foundations. 13 Organizationsaimed at increasing the effectiveness of nonprofit organizations, such as BoardSource,similarly have increased their efforts at improving governance practices, 14 and theAmerican Bar Association has issued various publications designed to educatenonprofit organizations about nonprofit governance. 15 The American Law Institute’sproject, begun in 2000, to develop Principles of the Law of Nonprofit Organizations,includes a strong educational component. 16State legislators, too, have responded to perceived abuses in the nonprofit sector withlegislation designed to require greater oversight from the governing bodies of charities.In California, for example, the Nonprofit Integrity Act of 2004 17 imposed detailedgovernance obligations on charities (whether organized as corporations or trusts) withany operations or assets in California, regardless of the state of incorporation orformation. These obligations include an annual compensation review of certain officersand the appointment of an audit committee (with specific limits on who may and may notserve on it) for charities with assets above a threshold amount. While other statesconsidered comprehensive reforms, 18 the threat of sweeping SOX-type legislation has11Supplement: Strengthening the Transparency, Governance, and Accountability of Charitable Organizations: A Final Report toCongress and the Nonprofit Sector (Panel on the Nonprofit Sector, Independent Sector ed., 2006); Report to Congress and theNonprofit Sector on Governance, Transparency and Accountability (Panel on the Nonprofit Sector, Independent Sector ed., 2005);Strengthening the Transparency, Governance, and Accountability of Charitable Organizations: A Final Report to Congress and theNonprofit Sector (Panel on the Nonprofit Sector, Independent Sector ed., 2005), www.nonprofitpanel.org.12Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations (Panel on the Nonprofit Sector,Independent Sector ed., 2007), at http://www.nonprofitpanel.org/report/principles/Principles_Guide.pdf.13Stewardship Principles and Practices for Independent Foundations (Nov.7, 2005),http://www.cof.org/files/Documents/Stewardship%20Principles%20%20Best%20Practices%20Initiative/Independent/Independent_Principles_-_FINAL.pdf, and National Standards for U.S. Community Foundations, athttp://www.cof.org/files/Documents/Community_Foundations/National_Standards/NationalStandards.pdf.14See, e.g., www.boardsource.org. Locally-based organizations that work to improve nonprofit management, such aswww.compasspoint.org in Northern California, also increased their efforts.15See, e.g., ABA Coordinating <strong>Committee</strong> on Nonprofit Governance, Guide to Nonprofit Corporate Governance in the Wake ofSarbanes-Oxley (2005).16American Law Institute, Principles of the Law of Nonprofit Organizations, Tentative Draft No. 1 (2007) (hereinafter “ALI DraftNonprofit Principles”).17Cal. Gov. Code Sections 12585-86, 12599; see generally California Registry of Charitable Trusts Nonprofit Integrity Act of 2004,http://ag.ca.gov.charities/publications/php.18See, e.g., the extensive nonprofit mini-SOX New York statute (S.B. 4836-B, 226 th Leg. Reg. Sess. (N.Y. 2004)) proposed by thenAttorney General Elliott Spitzer; Act to Promote the Financial Integrity of Public Charities, Summary of Draft 1,(http://www.cof.org/files/Documents/Building%20Strong%20Ethical%20Foundations/Mass_AG.Act_to_promote_fin_integ_pub_charities.pdf), suggested by then Attorney General Tom Reilly. See also Dana Brakman Reiser, There Ought to Be a Law: TheDisclosure Focus of Recent Legislative Proposals for Nonprofit Reform, 80 Chi.-Kent L. Rev. 559 (2005).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 9
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