FEDERAL EXEMPT ORGANIZATIONS REFORM
RESPONDING TO SARBANES-OXLEY
June 24-28, 2006
Dorothy K. Robinson1
Yale University
New Haven, Connecticut
A. Introduction.
Over the past two years, federal policy makers, including legislators and regulators, and at their
urging, opinion leaders in the nonprofit sector itself, have focused attention on reform of the
nonprofit sector in the areas of corporate governance, financial integrity, transparency and
accountability. These efforts have been loosely described as extending the “principles” of the
Sarbanes-Oxley Act of 2002 (“SOX”)2 which, with the exception of two provisions that apply to
public and private entities alike,3 applies only to publicly-traded companies. Since passage of SOX,
which imposed more rigorous regimes for governance and financial transparency for company
management, boards and auditors, many have argued for importation of the same concepts and
practices into the nonprofit sector, whether as requirements or best practices.
The broad range of nonprofit reform proposals under discussion, however, comprise not a
superimposition of SOX requirements onto the nonprofit sector, but an adaptation of some of those
requirements and, additionally, a grab bag of suggested solutions to an accumulation of problems
seen in the nonprofit sector, including abuses and lax oversight. Proposals such as the expansion of
self-dealing rules and the definition of “disqualified persons,” more severe regulations of “excess
benefit” transactions, Form 990 or 990-T reforms, annual disclosure of performance goals and
measurements, increased coordination between federal and state authorities, and others which do not
have an obvious analogy in SOX legislation, respond to certain highly visible scandals in the
nonprofit sector, including those involving many private foundations, The Nature Conservancy, the
American Red Cross and American University; some also have appeal as potential sources of tax
revenue.
This outline explores the wide-ranging federal reform “agenda,” focusing on those proposals of most
concern to colleges and universities.4
1
2
3
4
Dorothy K. Robinson is Vice President and General Counsel of Yale University. This outline was prepared with the
assistance of Deborah S. Chung, Associate General Counsel of Yale University.
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in various sections of 11, 15, 18, 28, 29
U.S.C.A.) [hereinafter Sarbanes-Oxley Act].
The Act provides that no person may (1) knowingly, with the intent to retaliate, take any action harmful to any person,
including interference with the lawful employment or livelihood of any person, for providing to a law enforcement
officer any truthful information relating to the commission or possible commission of any federal offense, see SarbanesOxley Act § 1107 (codified at 18 U.S.C.A. § 1513(e)), or (2) knowingly alter, destroy, mutilate, conceal, cover up,
falsify or make a false entry in any record, document, or tangible object with the intent to obstruct or influence any U.S.
governmental investigation or administrative procedure before any U.S. department or agency or any contemplated or
filed bankruptcy proceeding, see id. § 802 (codified at 18 U.S.C.A. § 1519).
This outline will not address the numerous proposals relating to private foundations, credit counseling organizations,
nonprofit conversions and other topics which have little relationship to colleges and universities. In addition, although of
interest to colleges and universities, treatment here of proposals dealing with donor-advised funds, support organizations
and valuation of in-kind donations is limited due to space constraints.
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B. Main Voices of Federal Reform.
1. SFC “White Paper”. The Senate Finance Committee (“SFC”), led by Sen. Charles Grassley,
prepared and released a staff discussion draft (“White Paper”) prior to a June 22, 2004 hearing
on the charitable sector, reflecting the staff’s investigation and research into possible reform
legislation directed toward tax-exempt organizations.5 The White Paper presented, for public
reaction and debate, over forty specific reforms covering a broad spectrum of issues. Some of
the proposals are the following, roughly organized into several categories:
a. Governance.
i) Board composition. Boards must be sized between three and fifteen members; no more
than one member may be directly or indirectly compensated by the organization; for
public charities, at least one board member or one-fifth of the Board must be independent
- i.e., being free of any relationship with the corporation or management that may impair
or appear to impair the director’s ability to make independent judgments.
ii) Board duties. Wide range of proposals prescribing board duties, to include: establishing
a conflicts of interest policy; establishing, reviewing and approving program objectives;
reviewing and approving auditing and accounting principles used in preparing financial
statements; establishing and overseeing compliance program to address regulatory and
liability concerns. Liability under federal law for breach of fiduciary duties.
iii) Expansion of self-dealing rules and definition of “disqualified person.” Private
foundation self-dealing rules would apply to public charities; definition of disqualified
person would be expanded to include a corporation or partnership with respect to which a
disqualified person is a “person of substantial influence” for “excess benefit” rules; and
penalties for self-dealing would be increased.
b. Financial Integrity.
i) Independent audits or reviews; certification of UBIT. For organizations with over
$250,000 of gross receipts, an independent audit of financial statements would be
required along with an auditor’s certification of unrelated business income tax (“UBIT”)
liability; a new auditor must be used at least every five years.
ii) Accommodation to tax shelters. Charitable organizations determined by the IRS to be
accommodating parties in “listed” or “reportable” transactions may lose §170 status and
be subject to 100% tax on accommodation fees.6
iii) Limit amounts paid for travel, meals and accommodation. Charities would be subject to
the applicable US government rate or an alternative published nonprofit corporate rate,
but such limitations would not apply if expenditure is approved by the Board and
disclosed on Form 990.
5
6
See Senate Finance Committee, 108th Cong., staff discussion draft (2004) [hereinafter White Paper].
Listed transactions involving tax-exempt organizations may be found at
http://www.irs.gov/charities/article/0,,id=128722,00.html. For a description of reportable transactions, see Treas. Reg. §
1.6011-4(b).
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c. Transparency.
i) Five year review of tax-exempt status. IRS can revoke exemption based on filing or
failure to file required information enabling IRS to confirm continued exempt status.
ii) Compensation of disqualified persons. Compensation to individuals above certain dollar
amount would trigger filing of additional supporting material with the IRS, which would
be publicly available; all compensation that is subject to special IRS filing requirements
must be approved annually and in advance by the Board.
iii) Form 990 reforms. Penalties for failure to file or failure to include required information
would increase; failure to file Form 990 for two consecutive years could result in loss of
tax exemption; IRS must promulgate standards for filing Form 990.
iv) Related organizations and insider transactions. Organizations must include as part of
Form 990 an affiliations chart, formation of taxable subsidiaries and the filer’s
transactions with such organizations, insider deals and ancillary joint ventures, all
partnership interests and filer’s role in the partnership.
v) Disclosure of performance goals, activities, and expenses in Form 990 and in financial
statements. Organizations with over $250,000 in gross receipts must include in Form 990
a detailed description of the organization’s annual performance goals and measurements
for meeting those goals for the past year and goals for the coming year.
vi) Public disclosure. The following would become publicly available: financial statements,
Form 990-T (with certain redactions, e.g., for trade secrets), tax returns filed by affiliated
organizations, results of audits and closing agreements with tax exempt organizations
(without redaction unless the audit is initiated pursuant to voluntary disclosure by the
organization to the IRS), charities’ investments, compensation to disqualified persons.
d. Accountability.
i) CEO must sign Form 990. The CEO must sign a declaration under penalties of perjury
that CEO has put in place processes and procedures to ensure that the organization’s
federal information return and tax return complies with the Internal Revenue Code and
that the CEO was provided reasonable assurance of the accuracy and completeness of all
material aspects of the return.
ii) Private action. A director/trustee may bring a complaint in the right of the corporation
subject to certain requirements; an individual may submit a complaint regarding a charity
to the IRS for review.
e. Coordination with Other Parties.
i) States with authority to pursue federal actions. States would be authorized to pursue
certain federal tax law violations with IRS approval.
ii) Government encouragement of best practices. In determining recipients of federal grants
and contracts, federal agencies would be required to give favorable consideration to
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organizations that are accredited by IRS designated entities that establish best practices
for exempt organizations.
iii) Accreditation. Authorization of $10 million to the IRS to support accreditation of
charities at state level and/or based on particular categories; IRS can base charitable
status on whether organization is accredited.
2. Independent Sector, Panel on The Nonprofit Sector. In September 2004, SFC Chairman Charles
Grassley (R-IA) and Ranking Member Max Baucus (D-MT) sent a letter to the Independent
Sector, a nonprofit organization of approximately 550 national public charities, foundations and
corporate giving programs, requesting that the Independent Sector convene an independent
national panel to consider and recommend actions to strengthen good governance, ethical
conduct and effective practice of public charities and private foundations.7 In response, the
Independent Sector organized the Panel on the Nonprofit Sector (the “Panel”), composed of 24
leaders from public charities and private foundations from around the country. The Panel
formed five Work Groups focusing on the areas of “governance and fiduciary responsibilities”,
“government oversight and self-regulation”, “legal framework”, “transparency and financial
accountability”, and “small organizations”.8 The Panel published an Interim Report in March
2005,9 a Final Report in June 2005 and a Supplemental Report in April 2006,10 in each case,
addressing a number of issues and proposals raised in the White Paper as well as other
congressional sources of reform ideas, such as the report of the Joint Committee on Taxation (see
below). (A comparison of the Panel’s recommendations against some of the White Paper
proposals is attached to this outline as Exhibit A.) The Panel’s proposals were broken down
according to recommendations for action by Congress, the IRS and/or the charitable sector. The
following is a brief description of certain recommendations for congressional or IRS action most
relevant to colleges and universities:
a. Governance.
i) Board composition. To qualify for 501(c)(3) tax exemption, an organization should be
required to have a minimum of three members on its governing board. To qualify as a
public charity (as opposed to a private foundation), at least one-third of the board should
be independent.11
7
8
9
10
11
Letter from Senators Charles Grassley and Max Baucus, chairman and ranking member of Senate Finance Committee, to
Diana Aviv, President and CEO of the Independent Sector (Sept. 22, 2004) (available at
http://www.nonprofitpanel.org/about/SFCltr.pdf).
See Panel on the Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable
Organizations: A Final Report to Congress and the Nonprofit Sector, June 2005 [hereinafter Final Report].
See Panel on the Nonprofit Sector, Interim Report Presented to the Senate Finance Committee, March 1, 2005.
See Panel on the Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable
Organizations: A Supplement to the Final Report to Congress and the Nonprofit Sector, April 2006.
The Panel elaborates that independent board members should be defined as individuals who have not received
compensation or material benefits directly or indirectly in the prior 12 months other than reasonable compensation for
board service, whose compensation other than for board service is not determined by individuals who are compensated
by the organization, who do not receive directly or indirectly material financial benefits from the organization except as a
member of the charitable class served by the organization, and who is not related to someone who received such
compensation from the organization. See Final Report at 75.
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ii) Board loans. Congress should prohibit loans to board members.12
iii) Self-dealing or excess benefit transactions. Congress should impose penalties on board
members and other managers of charitable organizations who approve self-dealing or
excess benefit transactions not only if they knew the transaction was improper but also if
they “should have known” it was improper. Satisfying the rebuttable presumption
procedures should protect the organization manager’s participation from penalty even if it
is subsequently held to be a self-dealing or excess benefit transaction; however, this
would not apply to board members compensated as such, since they have an inherent
conflict of interest and thus must demonstrate that the compensation they receive is
reasonable. Cap on first-tier penalties on board members and other managers for
approving self-dealing or excess benefit transactions should be raised from $10,000 to
$20,000.
b. Financial Integrity.
i) Financial audits and reviews. Congress should require charitable organizations that are
required to file Form 990 and have at least $1 million in annual revenues to have audited
financial statements and to attach such statements to their Form 990. Organizations with
at least $250,000 and under $1 million in annual revenues should be required by law to
have financial statements reviewed by an independent public accountant. The Panel
disagreed with any federal requirement for the rotation of auditors for charitable
organizations (although it should be considered as a best practice).
ii) Tax shelters. Congress should clarify that exempt organizations, including those not
required to file tax returns, are subject to the same requirements as taxable entities to
report their participation in “listed” and other “reportable” tax shelter transactions. If an
exempt organization participates in an abusive tax shelter, an excise tax equal to 100% of
the net income should be imposed. Failure to report participation where the manager
knew it was a listed transaction should result in revocation of tax-exempt status.
Individuals within an exempt organization who are responsible for participation in an
abusive tax shelter should face penalties as well.
iii) Travel expenses. IRS should require charitable organizations to disclose on Forms 990
whether or not they have a travel policy. IRS should provide specific information
regarding travel costs that are not permitted or that should be reported as taxable income.
c. Transparency.
i) Board compensation. IRS should revise Forms 990 to require disclosure of full amount
and reasons for compensation paid to any board member, indicating method used to
determine reasonableness of compensation.
ii) Board independence. IRS should require charitable organizations to disclose which of its
board members are independent.
12
Private foundations are already prohibited from compensating board members. This proposal would also be consistent
with SOX prohibitions against loans to directors or executives of publicly traded companies.
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iii) Officer compensation. IRS should revise Form 990 to require disclosure of full
compensation paid to the CEO and other officers, clearly distinguishing between base
salary, benefits, bonuses, long-term incentive compensation, deferred compensation, and
other financial arrangements treated as compensation (e.g., interest-free loans or
payments of a spouse’s travel expenses), as well as noting whether the organization
followed “rebuttable presumption” procedures in determining CEO compensation.13
iv) Other compensation. IRS should require disclosure on Form 990 of compensation paid
to the five highest compensated employees and to all employees who are related to a
board member or officer of the organization if they are paid more than $50,000
(including benefits) in the tax year.
v) Conflicts of interest policy. IRS should require disclosure on Form 990 whether or not
the filer has a conflict of interest policy.
d. Accountability.
i) Officer certification. Congress should direct IRS to require that the Form 990 series be
signed, under penalties of perjury, by the CEO, the CFO or the highest ranking officer (or
if the organization is a trust, by the trustee) of the organization.
ii) Form 990. Failure to correct incomplete or inaccurate returns for two consecutive years
should result in suspension of tax-exempt status.
e. Coordination with Other Parties.
i) Information sharing. Congress should allow state attorneys general and any other state
officials charged by law with overseeing charitable organizations the same access to IRS
information currently available to state revenue officers, under the same terms and
restrictions.
3. Other Congressional Sources.
a. Joint Committee on Taxation. The Joint Committee on Taxation (“JCT”) was asked by
Senators Grassley and Baucus in February 2004 to identify proposals to address the
significant and increasing gap between tax revenues and tax liability of taxpayers. JCT
presented “Options to Improve Tax Compliance and Reform Tax Expenditures” on January
27, 2005, which included among a long list of proposals some nonprofit sector reforms,
including the following:
i) Involvement in tax-shelter transactions. Exempt organizations and their managers would
be subject to penalties for participating in prohibited tax shelter transactions (defined as a
listed transaction or reportable transaction that is a “confidential transaction” or a
“transaction with contractual protection”) as accommodation parties. If an exempt
organization participates in a transaction, knowing or with reason to know that the
transaction is a prohibited tax shelter transaction, the entity would be subject to a tax of
13
The Panel noted that the summary chart required by Regulation S-K for reporting executive compensation on proxy
statements filed by publicly traded companies provides a good model. See Final Report at 67 n.6.
National Association Of College and University Attorneys
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100% of the net income attributable to such participation. Secretary may suspend
eligibility to receive tax deductible contributions for one year.
ii) Reform intermediate sanctions. There would no longer be a presumption of
reasonableness for following certain IRS procedures, although such performance would
establish that the organization has performed the minimum standards of due diligence.
Failure to establish minimum due diligence would result in a penalty tax on the
organization equal to 10% of the excess benefit.
iii) Increase excess benefit penalty. Dollar limitation on penalties imposed on organization
managers for participating in excess benefit transactions would increase from $10,000 per
transaction to $20,000 per transaction.
iv) Disclosure of Form 990-T and other certification requirements. With exceptions for
withholding certain information, the Form 990-T would become publicly available.
Organizations with annual gross revenues or gross assets of at least $10 million must
include with Form 990 and Form 990-T a certification by an independent auditor or
independent counsel that the filing accurately reflects UBIT liability. Failure to satisfy
this requirement would result in a penalty of 0.5% of the total gross revenues for the year
(excluding revenues from contributions and grants).
v) Deduction for certain property contributions. Under one of a couple of variations, the
deduction for charitable contributions of property would be limited to the lesser of the
donor’s basis or fair market value. (This would not apply to publicly-traded securities,
which would continue to be eligible for fair market value deduction.) Aimed at valuation
abuses.
b. House Ways and Means Committee. The House Ways and Means Committee, led by
Chairman Bill Thomas (R-CA), has been holding hearings examining the tax exempt sector,
touching on topics such as exempt hospitals, façade easements and charitable organizations’
response to Hurricane Katrina.
4. Internal Revenue Service. In a project launched in 2004 to assess tax compliance on executive
compensation, the IRS aimed to contact 2,000 501(c)(3) organizations with extensive inquiry
letters, in some cases followed by examinations.14 Other areas of focus by IRS include abusive
transactions, political activity of exempt organizations, intermediate sanctions, increased
transparency, sharing of information, executive loans and the revision of Form 990.15
5. 2006 Tax Reconciliation Legislation.
c. As of the end of April 2006, House and Senate conferees are working out differences
between the respective bills on tax reconciliation. The Senate’s version of H.R. 4297
14
15
See Mark W. Everson, Remarks at the Greater Washington Society of CPAs (Dec. 14, 2005).
See id.; see also Charity Oversight and Reform: Keeping Bad Things From Happening to Good Charities, 108th Cong.,
2d Sess. 4-7, 128-46 (2004) (oral and written statements of Mark W. Everson, Commissioner of Internal Revenue);
Charities and Charitable Giving: Proposals or Reform, 109th Cong., 1st Sess. 7-9, 160-71 (oral and written statements of
Mark W. Everson).
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(formerly S. 2020) as passed by the Senate on February 2, 2006, unlike the House version,16
includes charitable incentives and reforms, such as:
i) Require 990-T disclosure and certification relating to UBIT. Form 990-T would be
publicly available; organizations with annual gross revenues or assets of at least $10
million must include certification by an independent auditor or independent counsel that
the organization’s filings correctly reflect UBIT; certification must also include
description of material facts of tax opinion, if opinion was provided by certifier.
ii) Increased excise taxes. Dollar limitation on excise taxes imposed on organization
managers for participating in excess benefit transactions would increase from $10,000 to
$20,000 per transaction.
iii) Penalties for involvement in tax-shelter transactions. Exempt organizations will face
penalties for participating in listed or reportable transactions as accommodating parties.
iv) Other proposals directed at valuation and donor private benefits. Stricter rules regarding
valuation and recordkeeping for charitable contributions; other restrictions on donoradvised funds (DAFs) and on §509(a)(3) supporting organizations.
d. The Independent Sector has expressed support for the Senate version of H.R. 4297 but
encourages the modification or elimination of certain provisions, including dropping the
following: UBIT certification requirement, application of private foundation self-dealing
rules to support organizations, requirement that payments by DAFs to sponsoring
organizations will not count as qualifying distributions unless designated for use in
connection with a charitable purpose, restrictions on grants made by sponsoring
organizations of DAFs.
C. Reading the Tea Leaves
1. American University. American University came under the scrutiny of Sen. Grassley after the
debacle involving the review of the then president’s expenses, described in a series of leakinspired press accounts, and the severance package of approximately $3.75 million that resulted
from the board’s fractious handling of the matter. Sen. Grassley’s letter of October 27, 2005 to
American University reveals that the concerns go beyond compensation alone.17 In addition to
requiring copies of all compensation analyses (including compliance with IRC § 4958) used by
the board to determine Ladner’s employment contract, deferred compensation and severance
plans, Sen. Grassley also requested the following (of interest as indications of potential areas of
scrutiny):
a. Description of all no-bid contracts issued by the university and its affiliates and subsidiaries
over $100,000
b. Copies of conflicts of interest policies and expense reimbursement and travel policies
16
17
See H.R. 4297, 109th Cong., 1st Sess. (2005).
See Letter from Sen. Charles Grassley, Chairman of Senate Finance Committee, to Thomas Gottschalk, Acting Chair of
Board of American University (October 27, 2005).
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c. Description and biography of board members, including qualification and reasons for
selection, and disclosure of compensation, loans, or property leases provided by board
members to the university
d. Descriptions of all transactions with disqualified persons
e. Plans for conducting an audit of entire 11 years Ladner was in office
f. Detailed information regarding individuals listed in Part V of Form 990 (officers, directors,
trustees and key employees) and Part I (compensation of five highest paid employees other
than officers, directors and trustees), including whether rebuttable procedures were followed
g. Forms 990-T and 1120 of any affiliated or subsidiary organizations, as well as legal opinions
discussing UBIT implications including debt-finance income and REITs
h. Explanation of how quickly and for what purposes the $180 million proceeds from taxexempt bonds were used
2. American Red Cross. The American Red Cross (“ARC”) suffered negative media attention due
to alleged mishandling of funds it collected related to 9/11, tsunami relief and Katrina relief.
Investigation by Sen. Grassley also revealed a troubled governance structure illustrated by the
forced resignation of the president and CEO of ARC in December 2005, at a meeting where only
5 out of 50 board members were in attendance, with documentation of board action lacking.18
a. In his letter of December 29, 2005,19 Sen. Grassley requests information from ARC,
including the following:
i)
Board materials and attendance information for the past five years
ii)
Detailed discussion of chairwoman McElveen-Hunter’s office (e.g., staff) and duties
iii)
Last time the board conducted a self-evaluation and a copy of such evaluation
iv)
Internal audits for the past five years
v)
Detailed explanation of the departure of Marty Evans, former president and CEO, who
sought to initiate a series of governance reforms, as well as board’s response to Evans’
proposals
vi)
Compensation package, including severance, for Evans
vii) How federal grants were awarded
viii) How ARC plans to spend remaining $400 million raised for tsunami recovery; how
much raised for Katrina relief and how/when amounts will be spent
18
19
See Stephanie Strom, Senator Urges Red Cross to Overhaul its Board, N.Y. Times, February 28, 2006.
See Letter from Sen. Charles Grassley, Chairman of Senate Finance Committee, to Bonnie McElveen-Hunter, Chairman
of The American Red Cross, December 29, 2005.
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ix)
Detailed information regarding individuals listed in Part V of Form 990 (officers,
directors, trustees and key employees) and Part I (compensation of five highest paid
employees other than officers, directors and trustees), including whether rebuttable
procedures were followed
x)
More detailed follow-up of Form 990 and Form 990-T
b. In his letter of February 27, 2006 to ARC,20 Sen. Grassley raised particular concerns based
on his investigation to date, namely: (1) poor governance, manifested in lack of board
participation, large size and lack of board independence (between national and chapter
levels), (2) tangential connection between ARC’s activities and its original defined purposes
and (3) a culture that discourages openness and criticism. Sen. Grassley: “I have found
again and again in my oversight work that many organizations can trace their problems to
board governance.”21
c. March 3, 2006 Roundtable: SFC hosted a roundtable for more than ninety attendees,
including leaders from charitable organizations, legal experts and government officials, to
discuss nonprofit governance and accountability. Among topics addressed were ARC and
American University.
20
21
See Letter from Sen. Grassley, Chairman of Senate Finance Committee, to Bonnie McElveen-Hunter, Chairman of The
American Red Cross, February 27, 2006.
Id.
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EXHIBIT A
Senate Finance Committee “White Paper”
Panel on Nonprofit Sector Reports
Governance
Board
Composition
Audit
Committees
Between 3 and 15 members


No more than one member to be directly or
indirectly compensated
Must have minimum of 3 members on board
to qualify for 501(c)(3) status

At least one-third must be independent to
qualify as public charity (as opposed to
private foundation)

Federal tax laws should not impose a
maximum number of board members

Audit committees should not be defined or
required by law

Penalties on board members and managers
who approve self-dealing or excess benefit
transactions not only if they knew it was
improper but also if they “should have
known” it was improper

Meeting rebuttable presumption procedures
protects manager’s participation in
transaction even if subsequently held to be
self-dealing or excess benefit transaction
(but not for board members who have
inherent conflict)

Cap on first-tier penalties on board members
and other managers who approve selfdealing or excess benefit transactions should
be raised from $10,000 to $20,00022

Prohibit loans to board members

Compensated members cannot be chair or
treasurer

For public charities, at least one member or
one-fifth of board must be independent
N/A
Self-Dealing
Transactions
Loans to Board
Members


Private foundation excise taxes on selfdealing transactions would apply to charities

Private foundation definition of “disqualified
person” would apply to public charities (with
some modification)

Definition of “disqualified person” would
include corporation or partnership with
respect to which a disqualified person is a
person of substantial influence
N/A
Financial Integrity

Organizations with over $250,000 in gross
receipts must have audited financial
statements as well as certification regarding
UBIT liability23

Organizations with $1 million or more in
annual revenues should be required to have
audited financial statements and attach them
to their Form 990

Those with gross receipts between $100,000
and $250,000 must have its financial
statements reviewed by a CPA

Those with annual revenues between
$250,000 and $1 million should be required
to have their financial statements reviewed
by independent public accountants24
Rotation of
Auditors

Independent auditor should be hired at least
every five years

No legal requirement to rotate auditors
Tax Shelters

Charities determined by IRS to be
accommodating parties in listed or reportable

Must report participation in listed and other
reportable transactions and should face
Financial Audits
and Reviews
22
23
24
This is consistent with JCT’s proposal to increase cap on first-tier penalties to $20,000. See Staff of Joint Committee on
Taxation, 109th Cong., 1st Sess., Options to Improve Tax Compliance and Reform Tax Expenditures, Jan. 27, 2005 at
274-75 [hereinafter JCT Report].
This is also consistent with JCT’s proposals. See id. at 309 (proposing UBIT certification for organizations with annual
gross revenues or gross assets of at least $10 million).
The Independent Sector has advocated for the elimination of UBIT certification in the proposed Senate bill H.R. 4297
(formerly S. 2020). See Independent Sector, supra note 17.
Senate Finance Committee “White Paper”
Panel on Nonprofit Sector Reports
transactions may lose §170 status and may
be subject to 100% tax on accommodation
fees
Travel, Meals
and
Accommodation
Expenses

same penalties as taxable entities if
managers knew or had reason to know the
transaction was reportable

Excise tax of 100% on net income received
by the organization from the transaction25

If organization participates in listed
transaction and managers knew it was listed
but did not report its participation, the
organization’s tax exempt status should be
revoked
US government rate or alternative published
nonprofit corporate rate unless expenses are
approved by board and disclosed on Form
990

Disclose on Form 990 whether organization
has a travel policy

IRS to provide instructions about travel costs
that are not permitted or that should be
reported as taxable income
Transparency
Periodic Review

Five year review of tax-exempt status 26

Congress should not implement a new
periodic review system to verify continued
eligibility for exempt status
Financial
Statements

Financial statements should be disclosed to
the public

Audited financial statements should be made
available to the public
Compensation

Compensation to individuals above $200,000
(and above $75,000 for disqualified persons
– other than a person disqualified as a
manager) triggers filing of additional
supporting material with the IRS and would
be publicly available

Form 990 should require disclosure of
amount, reasons, and methods used to
determine reasonableness of compensation
to a board member

Form 990 should require disclosure of 1) full
compensation paid to CEO and other officers
in detail, 2) compensation paid to five highest
compensated employees and all employees
related to a board member or officer if paid
more than $50,000 (including benefits), 3)
whether organization followed “rebuttable
presumption” procedures in determining
reasonableness of compensation to CEO

Congress should increase penalties on board
members who receive or approve excessive
compensation

All compensation that is subject to special
IRS filing requirements must be approved
annually and in advance by board
Conflict of
Interest Policy

Board must establish a conflict of interest
policy which will be disclosed on Form 990
with a summary of conflicts determinations
for prior year

IRS should require disclosure on Forms 990
whether or not the organization has a conflict
of interest policy
IRS
Determinations

Results of audits and closing agreements to
be disclosed without redaction (or with
redaction if audit is initiated pursuant to
voluntary disclosure by exempt organization

Panel was unable to reach consensus on
whether the IRS should be required to
publicly disclose without redaction closing
agreements and related audit results
25
26
This is also consistent with JCT’s proposals. See JCT Report at 250 (proposing excise tax equal to 100% on net income
attributable to participating in prohibited transaction).
This was also recommended by the JCT but would only be effective with respect to organizations receiving tax exempt
status within ten years before or after the date of enactment. See id. at 226.
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Senate Finance Committee “White Paper”
Panel on Nonprofit Sector Reports
to IRS)
Performance
Data

Organizations with over $250,000 in gross
receipts must include in Form 990 a detailed
description of organization’s annual
performance goals, measurements for
meeting such goals; and material changes in
activities, operations or structure, etc.

More detailed information of program
evaluations or performance measures should
not be required as part of Form 990, but
organizations should provide it through other
means as a matter of recommended practice
Filing Form 990

Financial penalties for failure to file or to
include required information would increase;
failure to file for 2 consecutive years could
result in loss of tax exemption or § 170 status

IRS should enforce existing financial
penalties for failure to file complete and
accurate returns; if fail to comply for 2
consecutive years, IRS should suspend taxexempt status
Unrelated
Business
Activities

Form 990-T would be made public (with
appropriate redactions, e.g., for trade
secrets)27


Tax returns filed by affiliated organizations
would also be made public
Congress should not require that Form 990-T
and the tax returns of for-profit entities
owned by or affiliated with exempt
organizations be made available to the public

IRS should require more info on Form 990
regarding a charity’s unrelated business
activities

Public charities must report to the IRS of any
situation where an officer, director or trustee
owns 10% or more of an entity in which the
charity also has a 10% or greater ownership

IRS should require CEO, CFO or highest
ranking officer to sign Form 990 under
penalties of perjury
Accountability
Certification of
Form 990

CEO must sign a declaration under penalties
of perjury that CEO has put in place
processes and procedures to ensure that the
organization’s federal information return and
tax return complies with the Internal Revenue
Code and that the CEO was provided
reasonable assurance of the accuracy and
completeness of all material aspects of the
return
Coordination with Other Parties
State
Enforcement

States would be authorized to pursue certain
federal tax violations with IRS approval

Rather than giving states the authority to
pursue federal tax violations, states should
be encouraged to incorporate federal tax
standards such as section 4958 (prohibiting
excess benefit transactions) into state law
Information
Sharing

Increased funding to IRS Exempt
Organizations would be used in part to
increase information sharing with state
attorneys general, FTC and US Postal
Service for enforcement purposes

State attorneys general and other state
officials charged with overseeing charitable
organizations should be given the same
access to IRS information currently available
to state revenue officers
27
This is also consistent with JCT’s proposals. See id. at 308.
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RESOURCES
Legislative Materials

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in various sections of 11, 15, 18, 28, 29
U.S.C.A.) A summary of the Sarbanes-Oxley Act can be found at www.aicpa.org/sarbanes/index.asp.

Staff of Senate Finance Committee, 108th Cong., staff discussion draft (2004) (available at
http://finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf).

Staff of Joint Committee on Taxation, 109th Cong., 1st Sess., Options to Improve Tax Compliance and Reform Tax
Expenditures, Jan. 27, 2005 (available at http://www.house.gov/jct/s-2-05.pdf).

Letter from Sen. Charles Grassley, Chairman of Senate Finance Committee, to Thomas Gottschalk, Acting Chair of
Board of American University (October 27, 2005) (available at
http://finance.senate.gov/press/Gpress/2005/prg102805.pdf).

Letter from Gary Abramson and Thomas Gottschalk, Chairman and Vice Chairman of Board of Trustees of American
University, to Senators Charles Grassley and Max Baucus, Chairman and Ranking Member of Senate Finance
Committee (December 1, 2005) (available at http://www.senate.gov/~finance/press/Gpress/2005/prg120205alett.pdf).

The SFC’s press release on Sen. Grassley’s correspondence with the American Red Cross, along with copies of his
letters of December 29, 2005 and February 27, 2006, can be found at
http://www.senate.gov/~finance/press/Gpress/2005/peg022706.pdf.
Independent Sector

Board Source and Independent Sector, The Sarbanes-Oxley Act and Implications for Nonprofit Organizations, updated
January 2006 (available at http://www.independentsector.org/PDFs/sarbanesoxley.pdf).

Panel on the Nonprofit Sector, Interim Report Presented to the Senate Finance Committee, March 1, 2005 (available at
http://www.nonprofitpanel.org/interim/PanelReport.pdf).

Panel on the Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable Organizations:
A Final Report to Congress and the Nonprofit Sector, June 2005 (available at
http://www.nonprofitpanel.org/final/Panel_Final_Report.pdf).

Panel on the Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable Organizations:
A Supplement to the Final Report to Congress and the Nonprofit Sector, April 2006 (available at
http://www.nonprofitpanel.org/supplement/Panel_Supplement_Final.pdf).
Misc.

NACUBO, "On the Transparency Track", May 2005, available at http://www.nacubo.org/x6214.xml.

Marion R. Fremont-Smith, Governing Nonprofit Organizations (Cambridge: The Belknap Pres of Harvard University
Press, 2004).

Carl Oxholm III, "Sarbanes-Oxley in Higher Education: Bringing Corporate America's 'Best Practices' to Academia",
Journal of College and University Law, Vol. 31, No. 2, available at
http://www.drexel.edu/papadakis/sarbanes/sarbanes-oxley_in_hi224C06.pdf.

Materials relating to Drexel University’s implementation of Sarbanes-Oxley type reforms can be found at
http://www.drexel.edu/papadakis/sarbanes/.
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