1. The Times (and Minds), They Are A’Changin’ “Reform” Proposals for the Nonprofit Sector and Philanthropic Infrastructure King McGlaughon Chief Philanthropic Officer Wells Fargo Wealth Management December 2010

2. What is the Environment Today?  Increased and evolving regulations, oversight, and potential liability of officers and directors  Increasing competition for donors, other funding dollars.  Basic capitalization and fiscal challenges at the institutional level – Diminishing endowments and reserves (-30%) – Adoption of UPMIFA in most states by 2009 – Stresses on federal, state and corporate funding and grantmakers (2010 and forward)  Financial stress on individual donors  Nonprofits face increasing pressure for accountability and sound management from – Government – Donors  New donor demographics  Increased use of technology, expansion of the “local community” of nonprofits and donors

3. The Current Regulatory Environment Changes in overall federal tax regime 2010 as year of “no transfer tax” (maybe) 2011 as year of “reversion to ‘old transfer tax’” (maybe) – the “stepped-up basis” conundrum Projected increases in Income Tax (and Capital Gains Tax) rates Interest in income tax deductions will increase as tax rates climb, especially capital gains rates (collectibles currently at 28%) Changes in overall “charitable giving” infrastructure Gifts from IRAs and other “tax-benefitted” tools

4. The Current Professional and Business Environment: Philanthropy Increased scrutiny of nonprofit management, marketing, and business strategies Governance and board leadership challenges Increased complexity and sophistication in areas of financial management, investment management, etc. (Sarbanes-Oxley, for example) Increased potential liability and perceptions of risk on the part of nonprofit board members and leaders Heightened expectations and possible regulatory intrusions into fundraising and donor development activities With this comes increased opportunity for partnership, collaboration and professional services

5. Independent Sector Recommendations  1. Federal and State Enforcement— Effective oversight of the charitable sector requires vigorous enforcement of federal and state law. Congress should increase the resources allocated to the Internal Revenue Service for overall tax enforcement and oversight of charitable organizations, and it should create a federally funded program to help states establish or increase oversight and education programs for charitable organizations. Congress should also eliminate statutory barriers that prevent the IRS from sharing information about investigations of possible wrongdoing with state charity officials.  2. Disclosure of Performance Data— Every charitable organization should, as a recommended practice, provide more detailed information about its operations, including methods it uses to evaluate the outcomes of programs, to the public through its annual report, website, and other means. The Form 990 returns are not useful as a tool for reporting complex program evaluation information. Congress should not require charitable organizations to report more detailed statements of program evaluations or performance measures as part of their Form 990 series returns.  3. Donor-Advised Funds— Laws and regulations governing donor-advised funds should be strengthened to ensure that donors or related parties do not receive inappropriate benefits from these funds. Congress should amend tax laws to define and regulate donor-advised funds, including requiring sponsoring charities to make minimum distributions of 5 percent of aggregate donor-advised fund assets and enforcing minimum fund activity requirements. Congress also should prohibit sponsoring charities from making payments to a private foundation or directly or indirectly to the fund’s donors, advisors, or related parties. Further, tax deductions for contributions to donor-advised funds should be allowed only if the donor has a written agreement with the sponsoring charity clarifying these restrictions. Penalties should be imposed on donors, advisors, and managers who violate these prohibitions.

6. IS Recommendations (cont’d)  4. Abusive Tax Shelters— Congress should make clear that all tax-exempt organizations, including those not currently required to file tax returns, are subject to the same requirements as taxable entities with regard to reporting their participation in potentially abusive “listed” and other “reportable” tax shelter transactions, and should impose penalties on organization managers for failure to report if they knew or had reason to know that the transaction was a reportable transaction. Congress should impose penalties on taxable participants and material advisors who fail to notify tax-exempt participants that they would be engaging in a reportable transaction, and should ensure that appropriate sanctions are imposed on tax-exempt entities that knowingly participate in abusive tax shelters.  5. Structure, Size, and Composition of Governing Boards— To qualify for recognition as a 501(c)(3) tax-exempt organization, an organization should generally be required to have a minimum of three members on its governing board. Further, to qualify as a public charity (rather than a private foundation), at least one-third of the members of the organization’s governing board should be independent: that is, individuals who have not received compensation or material benefits directly or indirectly from the organization in the previous 12 months, whose compensation is not determined by other board or staff members, and who is not related to someone who received such compensation from the organization. Every charitable organization should be required to disclose on its Form 990 series return which of its board members are independent. Individuals barred from service on corporate boards or convicted of crimes related to breaches of fiduciary duty should be prohibited from serving on the boards of charitable organizations.  6. Conflict of Interest and Misconduct— As a matter of recommended practice, charitable organizations should adopt and enforce a conflict of interest policy consistent with its state laws and organizational needs. The IRS should require every charitable organization to disclose on its Form 990 series return whether it has such a policy. Charitable organizations should also adopt policies and procedures that encourage and protect individuals who come forward with credible information on illegal practices or violations of adopted policies of the organization.

7. IS Recommendations (cont’d)  7. Charitable Solicitation -- The Internal Revenue Service should enforce firmly the current legal prohibitions against private inurement, private benefits, and provision of excess benefits, particularly in the context of charitable solicitations.

8. Other “Recommendations”  Senate Finance Committee: “While college and university annual investment returns have averaged around 15.2%, colleges and universities have only been spending about 4.6% of their endowment assets each year.” This has drawn the attention of the Senate Committee on Finance, which recently held a hearing regarding the accumulation of endowment income at colleges and universities and debated whether endowments should be taxed or regulated (for example, by the use of the minimum distribution requirement that applies to private foundations). – Discussion items: Should endowments in excess of $x.00 become fully taxable as to earnings?  Various Congressional committees, nonprofit sector task force groups, etc: – Donor-Advised Fund regulation – mandate a minimum 5% distribution requirement at the individual DAF level (different from IS recommendation above).  The “Deficit Commission” and various Congressional bodies and committees: Proposed revisions and/or changes to the “charitable tax deduction” infrastructure. – “Tax Credit” versus “Tax Deduction” proposal – 15% tax “credit” would replace current income tax deduction, with IRS making a “grant” to the recipient charity to “make up the balance of the donor’s charitable gift.” (For a $100 gift, donor would donate $85 and IRS would pay $15 to the charity.) [Bipartisan Policy Center committee chaired by Pete Dominici (R) and Alice Rivlin (D).] Proposed in interest of “fairness” to lower income donors and smaller nonprofits. Committee points to British “Gift Aid” system as an analogous scheme. – Limited Deductibility of Charitable Gifts under Traditional Scheme – Deficit Reduction Commission Allow deductibility of charitable gifts only when they exceed 2% of AGI.