October 24,2005

Grassley Describes Goals for Reforms to Preserve Charitable Giving

Remarks of Sen. Chuck Grassley, Chairman, Committee on Finance
2005 Independent Sector Annual Conference, CEO Summit
Monday, Oct. 24, 2005

Thank you all for welcoming me here today. I have great respect for the Independent Sector. There’s no question that the charitable community has benefitted from the leadership of Diana Aviv. I’mpleased and honored to be here with you. When I spoke about charities in July of last year, Ihighlighted the charitable efforts by my fellow Iowan, President Hoover. History has a tendency tomake individuals two-dimensional. But it’s a terrible wrong if we forget Herbert Hoover’s work todirect relief after World Wars I and II.. That work saved millions of families in Europe.

However, I failed to mention the efforts of another Iowan, born in Waterloo – the first lady LouHenry Hoover. She was a partner in Herbert Hoover’s relief efforts in World War I, helping to raisefunds and organize shipments of food to Belgium. When the couple came to Washington, Mrs.Hoover became active in the Girl Scouts. She didn’t just get a title – she did everything from servingas a troop leader to President of the Girl Scouts. Scouting was only one aspect of Mrs. Hoover’sdiverse work in charity. She served on the National Amateur Athletic Federation. And sheestablished a school for children in the Blue Ridge Mountains. A recent biography says that at thestart of the Depression, Mrs. Hoover received many letters seeking relief. She had a group of trustedadvisers research these letters to determine which were legitimate and should receive charitable helpor even an anonymous donation from herself.

Lou Henry Hoover’s charitable work wasn’t known then and is little-known now. She believed thatphilanthropy shouldn’t be exploited for partisan, political gain. Why do I discuss the work of a FirstLady who was born in Waterloo, Iowa, well over a hundred years ago? Well, first as an IowaSenator, I’m always happy to talk about the good things that Iowans do. But second, I want to focuson Mrs. Hoover’s point on charities in a political context. Mrs. Hoover’s views then are close to thefeelings of most Americans now on this subject. She had it right when she made sure that thecharitable requests she received were subject to independent and trusted review for legitimacy. Sherecognized the responsibility of the donor and the charity to make sure that charitable funds wentto those truly in need. That view drives my work today -- I see the need for greater responsibilityof donors and charities to safeguard the public trust. Why press for greater responsibility? Becauseof the importance of charitable work.

As some of you may know, I travel to all 99 counties in Iowa every year. As you can imagine, inthose counties I see all walks of life. What I’ve found time and time again is that the helping handfor a neighbor is far more effective and humane when offered through charities and churches thanthe machinery of government. We’re all reminded of that simple truth with Hurricane Katrina. AsFinance Committee chairman, I’ve met with Senators from the affected areas. Time and again theytold me of how the local charities made such a difference for so many families. The recent Katrinarelief bill signed into law has language that will greatly encourage charitable giving across thecountry – not just the area affected by Katrina. This language lifted the limitation on cash charitabledeductions to public charities until the end of the year. It will allow, for example, individuals to givean IRA to a university or hospital. I anticipate that this one provision, even though time-limited, willmean well over a billion dollars in new charitable giving this year.

This provision was important because of what we saw after 9/11. There was great outpouring tocharities for the victims. Unfortunately that giving often meant that other charities not involved in9/11 relief -- but providing important services in their community -- saw a significant downturn insupport. I hope the provision in the Katrina bill will help prevent that from happening again.

Now I’ll turn to charitable reform and politics. It may sound like I’m blowing my own horn aboutthe charitable provisions in the Katrina bill. But these were bipartisan matters that I worked on withSenator Baucus, Chairman Thomas and Congressman Rangel. However, I raise the issue, first,because I’m proud that we got the legislation signed into law. But second, because there are a fewwho want to portray my work and the committee’s work on charities as one- dimensional -- onlyfocused on reform. A fair reading is balanced for both reform and encouraging charitable giving.

And just as my efforts to encourage charitable giving have been bipartisan, so have my efforts toconduct oversight and bring charitable reform. I’ve worked with Senator Baucus and other FinanceCommittee members on reforms and oversight. I view oversight as part of my constitutional roleas a Senator. I’ve been conducting oversight on a broad range of issues since I first came to theSenate. I’ve investigated the Department of Defense, FBI, IRS, you name it. I conduct oversightregardless of who’s in the White House. It doesn’t make you popular. You tend to be the skunk atthe picnic. But it’s my responsibility. My oversight continues today with an emphasis on mycommittee’s jurisdiction. On taxes, we’re looking at corporate tax shelters, the advanced pricingagreement program, tax-exempt organizations and more. I’ve given you the reason for oversight --my constitutional responsibilities. Now let me tell you the purpose of oversight as well as reformsin the charitable area. It’s to safeguard the public’s trust that charities are being operated in thepublic interest. I have a responsibility to make sure charitable donations actually help those in need.Part of that is ensuring that charities are managed in a way that’s in keeping with the charitable goalsof the organization. Unfortunately some people view charities and charitable gifts as a chance to helpthemselves, not others.

Reform and oversight also safeguard the donors and taxpayers. For the donors -- to safeguard thatthe money is being used appropriately. For the taxpayers – to safeguard that the tax benefits thatboth donors and charities receive are balanced by benefits to the community and especially those inneed. In considering reforms, the Finance Committee has conducted an open discussion calling onthe Nonprofit Panel to convene and provide a response from the charitable community. I’m pleasedwith much of the work from the Nonprofit Panel. There’s much common ground. There remainareas of disagreement -- and that’s to be expected -- but there are more areas of agreement thendisagreement. And even in those areas of disagreement, I’m listening closely to the Nonprofit Panel’scomments.

While I hoped to have a complete reform package ready this fall, Katrina has affected this and manyother plans. I hope to bring forward the first phase of reforms this fall and continue with a secondphase of reforms as a priority next year as well. In general, the reforms will focus on bettertransparency and improving board governance, particularly on self-dealing and high salaries. Inaddition, we’ll deal with three types of abuses. First will be abuses we’ve found in certain types ofcharities -- such as supporting organizations, donor-advised funds and credit counseling. Secondwill be abuses involving certain noncash donations -- such as facade easements and as many of youknow from my friend, the springbok -- taxidermy. And finally will be abusive transactions, such aswhat we’ve seen with life insurance and corporate tax shelters.

I hope that we’ll couple the reforms with incentives to encourage charitable giving. But let me beclear -- we’re seeing serious abuses in parts of the charitable sector. I’ll take action when and whereI can to deal with those abuses -- just as I did with corporate tax abuse. I anticipate that in the firstphase of reforms, there will be particular focus on stopping the most significant tax abuses. In fact,one of my great concerns is the growth of tax abuses that involve both corporations and tax-exemptorganizations. The IRS commissioner noted that more than 50 percent of all corporate tax shelterscould involve a tax-exempt organization. As a legislator, I’ve learned to take the long view. It tookme years to pass the bankruptcy bill and class action reform. I’m prepared to take the time neededto enact the right reforms for charities to safeguard the public trust.

In enacting reforms, I’m aware of the charities’ concerns -- they don’t want red tape that will makeit tougher to do their good work. As a legislator, I’m not looking to impose feel-good busy work thatwon’t be effective. I’m concerned about not overburdening smaller charities. I believe that workingwith the nonprofit panel helps us to find the right balance. However, in finding that right balancelet me address a comment I know is out there. It’s that all the problems in the nonprofit area can beaddressed with more money for enforcement. This ignores that we haven’t had a serious review ofthe tax-exempt laws since 1969. The world has changed since then, and so has the charitablecommunity. In looking at the laws we must consider three points: (1) do they deal adequately withthe current world?; (2) can the laws be easily enforced?; and (3) will they effectively deter badactors? We saw a similar situation with corporate tax shelters.

While there were laws to deal with corporate tax shelters, sharp lawyers and accountants workedaround the laws. The measures were hard to enforce and didn’t deter bad actors. The penalties wereso low for accounting firms involved in tax shelters that paying was just a small price of doingbusiness. They made millions from the shelters. That’s why we changed the law and still are lookingat more changes on corporate tax shelters. The same reality applies to the laws governing the taxexemptcommunity. Second, just as we saw stepped-up funding for corporate audits, the IRS hassimilarly increased funds for oversight of exempt organizations. Yes, that’s part of the solution – butjust that, a part. In the Senate version of the Katrina bill we added funding for IRS oversight ofexempt organizations. We provided that the $40 million in fees from charitable applications wouldgo to the IRS for exempt organization oversight. I would have expected that all those high-paidlobbyists who say the sole answer is more funding would have beaten a path to the House side toencourage them to accept the Senate provision. Unfortunately, it appears that calling for morefunding is nothing more than a good sound bite for lobbyists opposing reforms.

I’m unaware of a single phone call, email or letter sent to the House in support of the Senateprovision for more funding for IRS oversight of exempt organizations. I’ll continue to press forincreased funding for the IRS in this area as a partial answer. It’s natural for me to focus onlegislation given my position. However, everyone here today should remember that the charitiesthemselves remain in the best position to make many of the reforms. The nonprofit panel gave a hostof recommendations for reform that charities should make on their own.

It’s important for the charitable sector to look at ways of encouraging charities to implement thesereforms and best practices. In particular, funding organizations, such as private foundations andcommunity foundations, have an important role to play in emphasizing the need for these reformsas they make grant-making decisions. On a similar note, the charitable community should stopstanding silently on the sidelines when the newspapers are filled with stories of flagrant waste andabuse at a charity. I’m troubled that there was little to no criticism from the charitable communityabout the serious problems at American University and the Getty Foundation. Charitable leadersmust be strong-voiced in condemning inappropriate behavior in their sector.

Briefly, on the Finance Committee’s work looking at tax-exempt hospitals -- we’ve receivedresponses from the hospitals and have completed our first review of the answers. While it’s early tomake definitive statements, what we’ve seen so far raises more questions than it answers. I anticipatewe will write additional letters to those hospitals to seek clarification on the answers provided. Wemay also write to other hospitals as well as the Health and Human Services Department. In general,the answers from the hospitals and other material received by the committee show there is little tono common policy among hospitals. We’re finding that there aren’t even common definitions aboutsuch critical areas as charity care and community care. The public must have confidence that thesignificant tax breaks received by tax- exempt hospitals are balanced by community benefits. Istrongly encourage the nonprofit hospital community to take a page from the nonprofit panel. Itshould come forward with its own substantive proposals for common definitions and reforms inareas such as community benefit, charitable care, charges to the uninsured, debt collection and jointventures. Let me conclude by thanking you all for your hard work and dedication. You all are hereas representatives of our nation’s leading charities. The work of your organizations is vital to thewell-being of our country. The reforms we’re working on together will strengthen America’sphilanthropic network.

From launching college scholarships to boosting health care research and replenishing local foodpantries -- charities pull people together to reach a common goal. It’s because your work is soimportant to the nation that I believe it’s equally important for the Finance Committee to performoversight and seek reforms in this area. I know many of you share my views and support my effortsin this area and I greatly appreciate that and thank you. Our charitable community was built by thehard work of people like Lou Henry Hoover. Her legacy continues. Many of you are her equal indedication to a strong charitable community. And like Mrs. Hoover, you know that charity worksbest when you give with both your heart and your head. I’m confident that working together we cansafeguard the charitable sector we all cherish and that it will remain our nation’s strength. Thankyou. Now I’ll take your questions.