Charity in the 21st Century: Trending Toward Decay

 The turn of the century seemed to bring with it a sharply critical focus on charity.(FN1) Under federal tax law, a charity includes organizations that are "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes." This single phrase provides a standard not just for tax exemption for over 1.2 million organizations (which are diverse in purpose, size, function, complexity, and effectiveness) but also access to several tax and nontax preferences, including eligibility to receive tax deductible contributions (for income, estate, and gift tax purposes),(FN2) access to tax-exempt financing,(FN3) State property tax exemptions,(FN4) and regulatory relief, among other benefits.(FN5) The concerns about charities surfaced largely through press reports and are legion: spending of earmarked contributions for non-earmarked purposes; excess compensation to organization insiders; mission drift -- deliberate, or aided by faulty corporate governance; acceptance of property contributions when donors or others are the principal beneficiaries; participation in illicit tax shelter transactions; spending for non-charitable purposes; accumulations of income; failure to provide charitable services; use of the charitable form for non-charitable purposes; questionable investment practices; participation in political campaigns; and self-dealing transactions, to name a few.(FN6)    The response to ongoing scandals by the Internal Revenue Service (IRS) and the Congress was mixed. As the scandals unfolded, the IRS continually pointed to abuses and the need to address them,(FN7) but also asserted that the charitable sector is "compliant," notwithstanding a minimal examination rate.(FN8) As part of its enforcement efforts, the IRS completed an ambitious overhaul of the annual information return charitable (and other tax-exempt) organizations file each year (the Form 990);(FN9) undertook intensive studies on the two largest segments of the charitable sector: hospitals,(FN10) and colleges and universities;(FN11) made an inquiry into executive compensation practices;(FN12) and raised new questions about governance.(FN13) The IRS's continuing actions indicate, at a minimum, suspicion that the charitable sector indeed has large pockets of noncompliance and that oversight, or the perception of it, is necessary. But the IRS can only do so much. Meaningful change of any underlying weaknesses in the tax law of charities ultimately must come from Congress.