Submission in Response to June 2004 Discussion Draft of the Senate Finance Committee

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Note: This testimony is available in its entirety in the Portable Document Format (PDF).

I. INTRODUCTION

Unfortunately, it is impossible to determine how big a problem misfeasance and malfeasance by charity fiduciaries is, and how well government is doing to address it. Charity regulators themselves generally operate in secrecy (to the extent they act at all). Whether you regard the press as watchdog, sensationalist, or members of the prevailing social network, we know essentially the negative anecdotes we read in the newspaper. (See Fremont-Smith and Kosaras 2003; Boston Globe Staff 2003.) As charity operations gone wrong constantly make front-page news, however, we need to ask ourselves whether the proper response is a change in the law — or, instead, whether regulators need better funding and increased resources to enforce the laws that already exist.

Nonprofit organizations and their fiduciaries are subject to multiple levels of governmental supervision and scrutiny. State attorneys general have achieved important successes in educating the public about fraudulent fundraising and challenging wrongdoing; educating fiduciaries and staffs in meeting their legal obligations and improving charity governance; rectifying self-dealing and other breaches of fiduciary duty by charity insiders; and assisting charities that have lost their way to restructure or dissolve. The "biggest problem" of top State charity officials (according to a survey in which 38 States responded) relates to charitable solicitations, and whether charities spend their money as represented to donors. (See Mehegan, et al., 1994.) The Internal Revenue Service also functions as a regulator — often the only effective regulator — and as an important educator of the charitable sector.

The IRS has never had adequate resources to administer the tax-exemption regime. Just a few States fund and actively engage in charity enforcement. (See Fremont-Smith 2004.) However, the effective coverage is greater than it sounds: A disproportionate percentage of charitable assets is concentrated in a few States with active charity regulation, and, for the many charities operating across State borders, the inactive States can free-ride on the enforcement efforts of the few. To a large degree, legislatures are coming to view sunshine as the best disinfectant, and Congress and the States are increasing nonprofit or tax-exempt disclosure requirements to allow a better-informed public to provide oversight — although private parties cannot generally enforce nonprofit laws in court.

Note: This testimony is available in its entirety in the Portable Document Format (PDF).

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