SUBJECT: Senate Finance Committee Regulation of Nonprofits
DATE: September 29, 2005

For your information, the following letter has been sent to Senator Grassley.


September 21, 2005

The Honorable Charles E. Grassley, Chairman
Senate Committee on Finance
United States Senate
135 Hart Senate Office Building
Washington, DC 20510-1501

     Re:   Additional Regulation of Nonprofit Organizations

Dear Senator Grassley:

     I am writing on behalf of the Free Speech Coalition, Inc. (FSC), a broad alliance of ideologically-diverse nonprofit organizations and for-profit companies which help nonprofits raise funds and carry out their programs. FSC is particularly concerned with the preservation of the rights of nonprofit advocacy organizations. This diverse group was established in 1993 to defend the interests of Americans who want to participate fully in the formation of public policy in this country without undue governmental interference and restrictions.

     We are aware that there have been some abuses by certain organizations and individuals in the nonprofit sector, and that corrective measures may be warranted. However, it is important that we not create new problems in the desire to correct old ones. Further, it is critical that new regulations not add to the existing significant regulatory burden borne by nonprofits. Diverting a greater portion of funds toward satisfying regulations and away from legitimate missions would be counterproductive.

     As noted in our prior communications with the Committee, dated July 6, 2004, we believe that government should encourage, not discourage, citizens to work through nonprofit organizations, most of which are genuinely committed to meeting public needs. Tax exemption is one means of such encouragement. However, it seems that the acts of a small number of dishonest operatives are being misused by some to make the entire universe of nonprofits suffer, go out of business, or be discouraged from meaningful action. The field of regulation of nonprofits has become a growth industry at both the federal and state levels. It is high time that federal and state legislative bodies step back from the temptation to increase regulations, which often do not curb the abuses for which they were designed, and to reduce the burden imposed on them by government, not increase government control. It would be naive not to understand that new regulations are often proposed by those with a political agenda, particularly at the state level.

     Since the panel assembled by Independent Sector seems to have been given particular standing regarding recommendations to your committee, I wish to address some specific concerns related to this panel and some of its recommendations:

     1.   Objective Representation

     The Independent Sector's Panel on the Nonprofit Sector can hardly be considered as an objective spokesman for the nonprofit community. We are aware that the Panel and its various subcommittees included a large group of entities related to the nonprofit universe. However, that voice was very heavily weighted by the large nonprofits, large foundations, large accounting firms, and large law firms. There is virtually no voice from small IRC section 501(c)(3) and 501(c)(4) entities, for instance. It is not surprising that the Panel expressed little opposition to some new government controls. After all, a great many of the organizations represented receive federal funds. They have learned how to live with and accept a high level of government control. Why should they want to bite the hand that feeds them? Why should all nonprofits not be burdened as they believe they are burdened by controls on federal grants? It has been suggested, given the interest and involvement of those groups, that any new regulations should be applied only to nonprofit organizations that receive federal funding.

     2.   Competition

     The unbalanced representation by large organizations gives them the opportunity to encourage regulations which can be readily absorbed by their operations, even though grave hardships may be imposed on smaller nonprofits or those considering entry in the nonprofit field. In the world of free enterprise, competition is a key factor. The same is true in the nonprofit world. If the size of the universe increases, so does the competition for donor dollars. If, on the other hand, the big boys can make life difficult for the smaller competitors, it is likely to reduce the universe and reduce the competition. Theoretically, we have government regulations to protect businesses from predatory and monopolistic behaviors. Why is this not also true in the nonprofit universe? While it is seldom obvious to the masses, there is clearly a struggle for survival and a hidden tension between competing interests, with large private foundations and nonprofit organizations, which are subsidized by government entities and corporations, on one side, and small public charities and other nonprofit organizations on the other.

     3.   Monolith

     The nonprofit universe is not monolithic. Many smaller, independent nonprofit organizations are far more likely to be responsive to the needs of society than are larger entities. Public needs and opinions are far more likely to be reflected in programmatic efforts of the smaller nonprofits, while the larger ones are often heavily influenced or controlled by major donors, whether government, corporate, or individual.

     4.   FSC Response to Specific Recommendations of the IS Panel

     (a)   FSC opposes mandatory electronic filing of Form 990. The could impose a significant financial burden on small nonprofits which do not have the software, hardware or technical personnel to comply with such a requirement.

     (b)   FSC opposes the mandatory electronic filing of Application for Recognition of Exemption under Section 501(c)(3) (Form 1023), for reasons stated above. Further, it is unclear how the User Fee (currently $500 for a new organization), which is required to accompany the IRS Form 1023, would be paid to the IRS if the form is electronically filed. Such a requirement would clearly be an additional barrier to the formation of new nonprofit organizations.

     (c)   FSC opposes any requirement for additional information to the IRS in the form of financial statements that are either reviewed or audited by an independent public accountant to supplement that which is already required on the IRS forms. Audits or reviews conducted by an independent public accountant are expensive and would represent a significant addition to the administrative costs of a nonprofit organization. The annual IRS Form 990 (six pages plus attachments) already requires detailed information on an organization's revenues and expenses, balance sheet, program accomplishments, board members and officers, etc. Section 501(c)(3) organizations are also required to file Schedule A (six pages plus attachments) with the IRS Form 990. In addition, a nonprofit organization may be required to file a Schedule B (Schedule of Contributors) and an IRS Form 990-T (Exempt Organization Business Income Tax Return) (four pages plus attachments) along with its Form 990.

     (d)   FSC opposes establishment of federal qualifications for board members. Small nonprofits sometimes have difficulty in obtaining qualified board members who are committed to the goals and programs of the organization, and who usually serve without compensation. While it may not be difficult to find individuals to serve as paid or unpaid members of the board for a prestigious university, hospital, or large charity, this is not the case for many unpaid directors of small nonprofit organizations.

     (e)   FSC opposes the recommendation that the states "should be encouraged to incorporate federal tax standards for charitable organizations ... into state law." Replication of the provisions in the Internal Revenue Code regarding nonprofit organizations into the laws of each state would likely result in 50 versions of applicable tax laws plus the Internal Revenue Code. Large, national nonprofit organizations and nonprofit organizations operating in only one state, such as hospitals and universities, may be able to cope with such an environment without significant consequence, but start-up and small nonprofit organizations could be severely impacted in complying with numerous possible variations of applicable state laws.

     (f)   FSC opposes giving oversight authority to private accrediting agencies. Such agencies are often politicized to favor the largest nonprofits over the smaller, and are not objective.

     (g)   FSC opposes any requirement for periodic recertification of nonprofit tax-exempt status. If a nonprofit is found guilty of violation of laws, then a review of its tax-exempt status may be in order. But an automatic requirement for periodic recertification would impose an expensive and wholly unnecessary burden on both the nonprofits and the IRS. Further, such a requirement raises the specter of possible denial of future tax-exempt status, and could have significant impact on projected donations.

     FSC feels that nonprofit organizations should be presumed innocent until proven guilty of regulatory infractions. Abusers and violators should be punished but innocents should not. Please do not create unnecessary new regulatory burdens, particularly of the kind discussed above, for nonprofit organizations.

Sincerely yours,
Richard B. Dingman
Senior Counsel