Hidden Agenda

The non-profit sector got a good look at sausage-making on Capitol Hill this fall during the health care debate. Whether the sector got ground up in the process is unknown at this writing, but the experience should not have been a surprise.

Will Rogers famously observed, "Congress meets tomorrow morning. Let us pray." He could have been thinking about how a "must pass" piece of legislation can easily become a Christmas tree--it attracts lots of legislative "ornaments" in the form of amendments having nothing to do with the underlying bill. These ornaments tend to pop up seemingly out of nowhere, and do so at the last minute when scrutiny is weak because attention spans become short as Congress rushes to adjourn. Then odd things happen.

One of the odd things that happened sent the entire non-profit sector scurrying when it found among the 500 amendments proposed for the Senate's "must pass" health care bill a few that attempted to rewrite tax-exemption law.

An innocuous proposal was one from Sen. Chuck Grassley, R-Iowa. It would give explicit authority to the IRS to ask the several governance questions on the Form 990 we had to answer last year, even though the IRS admitted it had no authority to ask them (see "Passive-Aggressive Regulation," March 2009). This led some charities to wonder what the consequences would be if they admitted on the form they did not have, for example, a conflict of interest policy or a document retention policy in place. There was talk of ignoring the questions. Some spoke of legal challenges. Grassley said he wanted to avoid "wasteful" litigation over the questions by inserting the provision in the health care bill. His proposal was essentially a technical change to which few would object.

Grassley went at it again with another amendment that addressed his well-known view that too many non-profit executives make too much money. The amendment would eliminate the safe harbor now in place for the calculation of reasonable executive compensation. The law now puts the burden on the IRS to challenge a non-profit's pay scheme if it is arrived at by following certain procedures. Apparently, Grassley and others didn't think this "rebuttable presumption" resulted in any real reduction of the alleged high salaries and perks, so they eliminated it. The rationale offered for the change was that it raised revenue.

The non-profit community had to scramble to thwart an idea some called cynical, misguided and divorced from reality. The primary objection was to using the complicated health care debate to effectively rewrite the compensation law for non-profits while avoiding any public debate on the issue. Opponents also said that if the change were to have the desired effect and result in significant cuts in executive pay, the Treasury would see a loss of revenue as incomes declined. Moreover, if the senator thought the extra revenue would come from the increased penalties executives pay under the system, he was mistaken there too, because it provided that the so-called "excess benefit" received by the executives be paid to the non-profit organization, not to the Treasury.

Finally, if Grassley really wanted to avoid "wasteful" litigation, the opponents pointed out, trying to eliminate the safe harbor on compensation was not the way to do it. The amendment would empower every IRS examiner to impose penalties whenever he thought a foundation, hospital or university CEO was overpaid. Tax lawyers warned it was a recipe for litigation disaster as an examiner's judgment was substituted for that of the board of directors, particularly if it was an independent board that relied on compensation comparables. The IRS's mediocre record in winning such lawsuits before the Tax Reform Act of 1986 did not help Grassley's case either, they claimed. And that's the story of just two links of the sausage.

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