Supplemental Report Issues by Panel on the Nonprofit Sector
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The Panel on the Nonprofit Sector (the “Panel”) was convened in October 2004 at the encouragement of the Senate Finance Committee. Its purpose is to prepare recommendations for Congress to improve the oversight and governance of charitable organizations. The Panel is composed of an independent group of nonprofit leaders. In June 2005, the Panel issued a report that made more than 120 recommendations for actions to be taken by charitable organizations, Congress and the Internal Revenue Service to strengthen the nonprofit sector’s transparency, governance, and accountability. The Panel subsequent to the issuance of this report continued to meet and explore a number of additional areas. Recently, on April 24, 2006, it issued a supplemental report that addresses some of these additional areas and also indicates that additional review will be undertaken by the Panel in the area of self-regulation and financial reporting. The Supplemental Report makes a number of specific recommendations in the areas of charitable solicitation, compensation of trustees of charitable trusts, prudent investor standards, nonprofit conversion transactions, unrelated business activities and federal equity powers. The following discussion is a brief summary of some of these proposals.
The Panel recommends that a national uniform electronic filing system be funded by Congress where nonprofit organizations may register and report their charitable solicitation activities. This system would be administered by the Federal Trade Commission. The states would continue to have responsibility for oversight of charitable solicitation under this proposal as they do now, but the national filing system would eliminate the need for nonprofits to register in all states in which they solicit charitable contributions. In the area of trustee compensation, the Panel recommends that federal tax laws provide a way to evaluate the reasonableness of trustee compensation. It suggests that the intermediate sanctions provisions, which generally provide for the imposition of penalties upon excessive payments by charitable nonprofits to persons who control them, specifically deal with trustee compensation.
The Panel recommends that state legislatures amend state law to extend the prudent investor rule, which now applies to fiduciaries of trusts, to the directors of nonprofit corporations, thereby subjecting both to the same standard of care with respect to a nonprofit’s investments. With respect to dispositions of charitable assets to for-profit entities, the Panel recommends that all states have statutes requiring notice, disclosure and review. These are intended to address concerns of the Panel relating to both the loss and decline of charitable services and the improper diversion of charitable assets that may result from such asset dispositions. Regarding reporting requirements, the Panel recommends that the public disclosure requirements that generally apply to a charitable organization’s tax return not be extended to unrelated business income tax returns or to returns of for-profit affiliates of nonprofits. However, the Panel did recommend more reporting about such unrelated trades or businesses.
The Panel rejected proposals that have been made to grant the United States Tax Court equity powers over charitable organizations. In the view of the Panel these proposals would not increase the effectiveness of the Tax Court or the IRS in enforcing the tax laws. The Panel believed that sufficient tools such as intermediate sanctions already exist to protect charitable organizations. The Panel also rejected a proposal to grant charitable organization directors the right to challenge board action in Tax Court. The Panel observed that most States provide a forum for these challenges to be heard in their courts. Similarly, based on concerns about nuisance lawsuits, the Panel rejected a
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