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Since the federal government's oversight of charitable organizations,5 is exercised almost exclusively through administration of the Internal Revenue Code, a study of that oversight must begin with the Code and the Internal Revenue Service. In Chapter I I , we examine how the Internal Revenue Service functions. We study the Service in some detail, in part to document how we have derived our conclusions and in part because it illustrates the issues that would have to be dealt with — of policy and administration — if a new agency were created to assume the Service's present responsibilities for charitable organizations.
In December of 1974 the Internal Revenue Code was amended to establish, within the Internal Revenue Service, an Office of Employee Plans and Exempt Organizations under an Assistant Commissioner. In Chapter III, we examine the likely impact of philanthropy of the new office and assistant Commissioner, and the reorganization of repsonsibilities within the Internal Revenue Service.
The federal government also bears on charitable organizations in other ways. The Civil Service Commission authorizes participation in annual solicitation campaigns among federal employees; the Postal Service grants special mailing privileges to certain charitable organizations; organizations registered with the Advisory Com- mittee on Voluntary Foreign Aid are eligible for certain federal benefits. These activities we describe in Chapter IV.6
Chapter V considers alternatives — whether, for example, a new agency should be established to perform for charitable organizations the functions now entrusted to the Internal Revenue Service.
In Chapter V I , we consider whether there is a need for federal oversight, and if so what kind and by what agency, in an area that is not now regulated by the federal government: interstate charitable solicitations. Our recommendations in this regard appear in that Chapter.
Chapter VII contains our recommendations on enforcement powers for the Service and judicial review of adverse determinations of exempt status, both of which would require legislation. Our recommendations for administrative actions within the Service appear in Chapter VIII.
I
OVERVIEW AND SUMMARY OF RECOMMENDATIONS The Rationale for Government Oversight of Philanthropy
Philanthropy has a special character: although designed to serve public ends, it is a private activity carried out with private funds.
The assets of private philanthropy are sometimes characterized as "public funds,"
the expenditure of which has been delegated to private persons by virture of the charitable deduction and tax exemption. We find this characterization troublesome and misleading.
First, the Internal Revenue Code contains numerous credits, deductions, exemp- tions, and so forth, designed to stimulate activities regarded as socially desirable.
Insofar as it affects the private or public character of the funds, the deduction for charitable contributions is difficult to distinguish from other provisions of the Code.
As a leading jurist has noted, " [ l ] f the tax exemption given to charitable founda- tions converts their giving into government action, I see no really tenable basis for distinguishing the tax deductions allowed individuals and corporations.7
Second, private philanthropy is an important part of this nation's historic com- mitment to the diffusion of power, to the belief that numerous sources of private and governmental authority stimulate experimentation, test ideas in competition
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with each other, and provide flexibility in meeting our needs. To regard philan- thropic funds as public undermines this commitment. In his Report of the President of the Carnegie Corporation, 7968, Alan Pifer observed:Throughout our history we have believed in pluralism and have practiced it.
We have recognized that the nation's public purposes are considerably more extensive in scope than its governmental purposes, and, through the aegis of the state, we have enabled a wide variety of private institutions, including foundations, to be chartered to accomplish certain public, though non- governmental, purposes. We have also, through the aegis of the state, given tax exemption to these institutions to facilitate their work and have regarded this as being eminently in the public interest. Therefore, to attribute the public stake in the foundation to its tax-exempt status or to regard this status as a
"privilege" is wholly erroneous. It is, in Professor Milton Katz's pithy phrase,
" t o mistake an effect for a cause."
Third, to credit the tax system with determining the character of charitable funds reinforces the tendency to attribute the public stake in philanthropy solely to its tax-exempt status. In fact, that stake is much broader.
As the volume and public importance of philanthropic activity has increased, the legitimate interest of government in that activity has also increased. At one time, the objects and concerns of philanthropy and government were largely separate. In this century they have increasingly coalesced as a result of changing concepts of the government's social responsibilities and of the proper goals of philanthropy. Philan- thropy and government now share responsibility in areas such as health, social welfare, education, performing arts, minority rights, poverty programs, and en- vironmental and consumer interests. Government's interest in how philanthropy conducts itself in these area has understandably, and inevitably, increased. Moreover, the economic magnitude of philanthropic activity, stimulated in part by higher federal income tax rates since World War I I , has attracted the interest of gover- nment in the social and economic impact of such tax-free activity, and in the fund- raising practices that contribute to its support.
Finally, for much the same reasons that led to increased federal regulation in other areas — an increasingly complex, interdependent society; large institutions whose activities have national impact; the potential for abuse in the absence of supervision; and the failure or inability of state governments to regulate effective — it has become apparent that in many cases the only practical source of supervision is the federal government.
Historically, the federal government's increasing interest in how philanthropy conducts itself found a convenient vehicle in the tax requirement that philanthropic organizations be "organized and operated exclusively"8 for charitable purposes. This provided a nexus between the federal tax laws and philanthropy, and the Internal Revenue Service provided an administrative capability to implement new statutory controls. But the fact that the Internal Revenue Code became the statutory vehicle should not obscure the fact that many provisions concerning philanthropy have regulatory rather than revenue collection objectives. Thus, the tax on unrelated business income of exempt organizations was designed primarily to prevent unfair competition with business enterprises. Similarly, the Tax Reform Act of 1969 affecting private foundations were intended to regulate perceived abuses among donors and managers of private foundations.
Touchstones in Considering the Federal Oversight Role
Several experienced and thoughtful observers have called for a new federal agency or commission to regulate philanthropy and for the transfer to this agency
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of many functions presently performed by the Internal Revenue Service. It has been suggested, for example, that the determination of what constitutes charity should be made by such an agency rather than by the Service. Both in evaluating this alter- native and in considering generally the desirable federal role in oversight of philan- thropy, it is useful to identify at the outset certain touchstones against which both the Internal Revenue Service's performance and other proposals may be measured:
1. Federal oversight of philanthropy should be objective, nonpartisan, non- ideological. Recognition of charitable status is a license to operate — frequently in areas affecting free speech and expression — and should be granted or withheld without regard to political party. Not only must application of standards be objective, nonpartisan, and non-ideological, but it must be understood and perceived as such by the Congress, by charitable organizations, by the public, and by the regulatory agency itself. The government's role in this area should be characterized by legal and institutional self-restraint.
2. Philanthropy should not be overregulated. The flexibility, creativity, and initiative of private institutions are among the principal justifications for the special role of philanthropic organizations in our society and their tax-free status. Regula- tion should thus be designed to preserve and enhance the private character of charitable activity as well as to ensure that it serves public purposes. The govern- ment's primary role in regulating philanthropy should be procedurally oriented — the government should focus on seeing that procedures are followed to assure the integrity of philanthropy, without regulating the specific ends of objectives of philanthropic activity.
3. The regulation of 501 (c)(3) organizations, other exempt organizations, and nonexempt taxpayers must be coordinated, in view of the interrelationship of Code provisions affecting 501 (c)(3) organizations and other provisions of the Code.
4. The administrative magnitude of the oversight effort affects the nature of the structure. We now have some 230,000 active 501(c)(3) organizations - not includ- ing numerous churches or public charities with gross receipts normally below $5,000 per year, which have not been required to seek an exemption determination and have not done so.9 About 1,000 IRS employees administer the exempt organization provisions of the Internal Revenue Code; many more devote some time to the effort. The administrative tasks of overseeing such a universe of charitable organiza- tions could not be undertaken by a small, organizationally simple, federal oversight agency.
Summary of Recommendations
Our conclusions and recommendations from this study are presented in Chapter V through VIM. For conveniecne we provide here a summary of the principal recommendations, with cross-references to more detailed discussion on some points.
The Internal Revenue Service Should Continue to Supervise Charitable Organizations (pages 2640-44).
It has been suggested that a new commission be established to assume the present responsibilities of the Service for charitable organizations. We think it preferable to leave these responsibilities with the Service. The Service has a tradition of nonpartisanship and independence that seems especially important for philan- thropy. The Service's adherence to this tradition, although not perfect, has been good (pages 2613-19); it is uncertain whether a new commission could establish a similar