posted on: Friday, October 02, 2009

by Niki Jagpal

On October 1, the Alliance for Justice posted some great news on their website: they received a ruling from the IRS regarding the rules that apply to the organization’s grants to groups that lobby. This was several years in the making. In 2005, AFJ had asked the IRS for a ruling to clarify whether public charities , like their private foundation counterparts, are allowed to provide grants to groups that lobby. As AFJ notes, private foundations have had this clarity from the IRS while public charities, including community foundations, have not.

Nan Aron, president of AFJ, stated in the press release: “This is an important clarification for the nonprofit sector … For the first time, public charities have guidance on how to treat grants to groups that lobby. We hope this clarification will give more grantmakers the confidence they need to fund aggressive advocacy."

Although the ruling only applies to AFJ, the press release states that it signals the IRS’s approach to evaluating similar re-granting work in the sector in the future. I certainly hope it does.

Since last year, we’ve produced a series of reports on the broad social benefits of advocacy, organizing and civic engagement under our Grantmaking for Community Impact Project. Although there is a clear distinction between advocacy and lobbying, and the rules governing each, lobbying isn’t a “four-letter’ word. It’s unfortunate that so many people just think of K-street “special interest” groups lobbying on behalf of mega-corporations. And right now, everyone’s hearing about PhRMA, and its unfettered influence on the healthcare reform conundrum. But lobbying is a perfectly valid and appropriate strategy. A lot of times, it’s a great tool for the advocacy and community organizing work that nonprofits do on issues such as access to better education, minimum wage and civil rights.

Congratulations to AFJ and a shout out to the IRS for clarifying the rules governing AFJ’s work. I share AFJ’s hope that this is a positive sign for IRS rules governing other public charities in our sector.

Do you agree that public foundations or public charities ought to be governed by the same rules that apply to private foundations? Share your thoughts with us in our comments – we’d love to hear from you!

Niki Jagpal is research & policy director at the National Committee for Responsive Philanthropy (NCRP).

posted on: Tuesday, April 07, 2009

In Criteria for Philanthropy at Its Best, NCRP makes the case that, in light of the tax exemption that foundations receive, foundation dollars should be viewed as “partially public” dollars.

One interesting response has been to point out that a 401(k) is tax-exempt and we get deductions on mortgages, but that doesn’t mean NCRP gets a say in your retirement portfolio and your wallpaper.

All of this is true. Unfortunately, critics conveniently forget the reasons behind these exemptions and deductions, at which point the argument falls apart. Foundation trustees commit to furthering some sort of charitable purpose when they create a foundation. I do no such thing when I open a 401(k) or purchase a home.

This isn’t the fringe viewpoint of some radical organization. It’s the law. From the IRS’ web site:

"To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual."

401(k) plans and mortgages are created for private benefit. The earnings of foundations, on the other hand, cannot inure to any private shareholder or individual, and we have adopted many rules and regulations over the years in order to insure that the nation’s foundations serve the public purposes for which they’re created.

For example, you don’t have to tell me how your 401(k) did this year, but you do have to tell people how your foundation did this year. Forms 990-PF are filed annually and subject to public inspection. I can’t tell you that your son can’t come back home and live in the room over the garage, but I can tell you that a family reunion can’t be paid for with family foundation dollars. There are rules against self-dealing.

Critics rightly ask, “I take tax deductions all the time. Why is this one any different?”

It’s an argument we hear often, and it’s easily answered: your 401(k) plan and your mortgage aren’t organized for public purposes; foundations are. The public has a say in how that tax exemption is used, and we all have an interest in seeing it used well for the benefit of as many as possible.

posted on: Friday, April 25, 2008

by Niki Jagpal

This week Project Streamline, a joint effort of grantmaking and receiving organizations to improve reporting and application procedures, released a new report Drowning in Paperwork, Distracted From Purpose. The report identifies ten ways that current application and reporting systems inhibit nonprofit effectiveness including insufficient net grants and lack of trust between nonprofits and funders. The report makes four recommendations for grantmakers based on the study’s findings.

Project Streamline’s report comes at an opportune time; a recent article in the Chronicle of Philanthropy (subscription required) highlights efforts by the Internal Revenue System (IRS) to increase the effectiveness and efficiency of charitable organizations. Steven T. Miller is the current commissioner of the IRS’s tax-exempt and government-entities division. As the Chronicle notes, he made a series of remarks at a conference on tax-exempt organizations convened by Georgetown University Law Center Continuing Legal Education Department this week. One strategy Miller suggests is for the IRS to “create and enforce a standard to ensure that organizations spend in line with their resources.” While monitoring is not currently the purview of the IRS, Miller said that the IRS would be “more aggressive” in keeping a watch over the “efficiency and effectiveness” of charitable organizations.

If nonprofits are to be truly empowered to achieve their missions by focusing on effectiveness and efficiency, it is clear that cumbersome application and reporting procedures have to be addressed. But the process of grant applications and reports is only part of the solution; as Miller states “[…] every charity should be make responsible and appropriate use of its resources to achieve its charitable purposes. That is what the tax-exempt subsidy is for.” [emphasis added]

Moreover, while the Chronicle article and Miller’s remarks discuss revisions to the IRS’s 990 form, the publicly available informational tax returns filed by nonprofit grant recipients, the same standard of effectiveness and efficiency ought to apply to the form 990-PF, the IRS’s tax form filed by private foundations. While efforts to include “efficiency indicators” in the revised 990 forms failed, the new forms will include questions about nonprofit governance and management policies. Miller sees the link between increased transparency and enforcement: “the question is no longer whether the IRS has a role to play in [governance] but rather what that role will be.”

Project Streamline’s work is commendable and adds value to sector-wide attempts to improve the grantmaker-grantee relationship. Now, imagine what the charitable sector would look like if we had simple criteria on the 990 PF forms for measuring philanthropic management and governance to support Miller’s vision of more effective and efficient charitable organizations?

Niki Jagpal is the research director at NCRP.