Updated List of Various Ideas to Reform Philanthropy and the Nonprofit Sector

During the past several years, The Giving Review has tried to conscientiously track contemplated or proposed ideas to reform philanthropy and the nonprofit sector. Again acknowledging its partiality and anticipating its likely continued lengthening, an updated inventory is below. 

Floated by observers and analysts with differing underlying worldviews, its items are wide-ranging—too much so for some and not enough for others, of course. To some, the list itself is a “parade of horribles,” or a “slippery slope;” to others, a “menu of options.”

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Statutory and regulatory structure

Revoke and deny tax-exempt status to those Internal Revenue Code §501 organizations that are not public charities

Redefine or clarify that which constitutes charitable activities by §501(c)(3) groups, resulting in reclassification of many to §501(c)(4) social-welfare groups, in which case contributions to them would no longer be tax-deductible

Redefine or clarify that which constitutes social welfare in §501(c)(4), in wake of Memorial Herrmann decision earlier this year denying a group (c)(4) status because its nonexempt activities were nearly 80% ira total activities—significantly beyond what both the regulatory “substantial” and “primary-purpose” tests have historically permitted

Prohibit §501(c)(3) public charities from contributing to §501(c)(4) social-welfare groups

Disallow capital-gains exemption for contributions to §501(c)(4) groups, or require contributions to (c)(4)s be in cash—in which case assets like stocks and estates would have to be sold and taxed before any donation

“Sunsetting”

Condition exemption of private foundations on distribution of all assets within some specified period of time after their creation

Condition exemption of private foundations on distribution of all assets within some specified period of time after their original donor’s death

Exempt newly created private foundations from excise tax on investment income if they are time-limited to 25 years or fewer

Limits and expansions, deductions and credits

Set lifetime cap of $1 billion on charitable contributions

Set lifetime cap of $500 million on charitable tax deductions

Set lifetime cap on charitable tax deductions for contributions totaling more than $1 billion to a singular or related charity

Set annual cap of $10,000 on charitable deductions

Set cap on charitable estate-tax deductions

Permanently expand eligibility to claim charitable deductions, up to and including making it universal

Temporarily expand eligibility to claim charitable deductions, up to and including making it universal

Replace charitable tax deduction with charitable tax credit for all contributions, set as a percentage of such contributions, with total annual claimable credit capped at some level

Create universal tax credit for households charitably contributing more than 2% of their adjusted gross income

Tax closely held assets of private foundations and donor-advised funds (DAFs)

Remove exclusion of private foundations and DAFs from qualifying for IRA contributions

Payout

Condition tax-advantaged status of §501(c)(3) public charities with an endowment of more than $100 million on spending 20% of its endowment each year

Permanently condition exemption of private foundations on increased minimum annual payout rate from 5% to 10% of their assets

Exempt private foundations from excise tax on investment income in any year during which their payout tops a specified percentage of assets

Prohibit private-foundation grants to DAFs from counting toward payout condition

Prohibit or reduce private-foundation administrative and operating expenses from counting toward payout requirement

Prohibit private foundations’ program-related and impact investments from counting toward payout requirement

Prohibit private foundation contributions to endowments or capital projects

Governance

Require that private foundations be governed by independent boards, with rules similar to those for public-corporation boards in many states

Prohibit or cap compensation for private-foundation board members

Prohibit or cap compensation or payment of travel expenses for private-foundation board members from original donor’s family

Require disclosure of nonprofit boards’ gender breakdowns

Alternatively, prohibit requirements that nonprofit boards’ disclose gender breakdowns

Fiscal sponsorship

Prohibit fiscal sponsorship unless sponsored entity has filed an application for §501(c)(3) status with the Internal Revenue Service

Terminate fiscal-sponsorship duration upon determination of the sponsored applying entity’s status by the Internal Revenue Service

Require §501(c)(3)-organization fiscal sponsor and its fiscally sponsored entity to file separate Form 990s with the Internal Revenue Service

Modify Form 990 to include new schedule solely for listing any projects fiscally sponsored by the filing nonprofit, with amount of such support

Instruct filers who have provided support to a nonprofit for one of its fiscally sponsored projects to clearly indicate the nature of that support in the grant description/purpose column of their own Form 990/990-PF

More on DAFs

Prohibit perpetually endowed DAFs

Require DAFs to pay out donations at same rate as private foundations

Require DAFs to pay out donations within three years after they first went into fund

Create new category of DAFs allowing a donor to elect to claim an upfront income-tax deduction, including the avoidance of capital-gains taxes, provided the funds are distributed within 15 years

Allow tax deduction for contributions to DAFs only after distribution of funds to active charity, not to another DAF or impact investment

Require all contributions to and from donor-advised funds to be disclosed, on account-by-account basis, in way that protects donor privacy

Require disclosure of transfers from private foundations to DAFs

Limit tax deductions for donations of complex assets to DAFs to the assets’ sale value

Regulation and oversight

Increase excise tax from current 1.39% to 4% on investment income from private-foundation endowments to enhance Internal Revenue Service enforcement and oversight of philanthropy and nonprofits

Create new U.S. “Office of Charitable Oversight” or something similar, removing such responsibility from the Internal Revenue Service

Transfer Internal Revenue Service responsibility for oversight of tax-exempt, nonprofit groups’ political activity to the Federal Election Commission

Provide federal block grants to state charitable-oversight offices

Create new federal entity orchestrate and perhaps research on philanthropy and nonprofit sector, quantitatively and qualitatively analyzing benefits of charitable giving and the sector’s performance

Colleges and universities

Increase excise tax from current 1.4% to 35% on investment income from endowments of secular, private, nonprofit colleges and universities with at least $10 billion in assets under management

Hospitals

Eliminate tax-exemption for nonprofit hospitals

Condition exemption of nonprofit hospitals on their providing 5% charity care

Foreign funding

Require tax-exempt nonprofits to disclose contributions from foreign governments and foreign political parties in excess of a specified amount per year

Impose penalty on §501(c)(3) and (c)(4) groups that receive foreign funding and then transfer some or all of it to a political action committee or committees

Voting and elections

Prohibit §501(c)(3) funding of voter-registration projects and activities

On federal or state level, prohibit or restrict private, tax-advantaged, nonprofit funding of public election administration

Terrorism

Empower Secretary of the Treasury to revoke tax-exempt status of nonprofits engaged in or supporting terrorism

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This article first appeared in the Giving Review on December 9, 2024.

Source: https://capitalresearch.org/article/updated-list-of-various-ideas-to-reform-philanthropy-and-the-nonprofit-sector/