More law school seminar than hearing, on April 20, the House Ways and Means Committee examined the "legal history of the tax-exempt sector; its size, scope and impact on the economy; the need for congressional oversight; Internal Revenue Service (IRS) oversight of the sector; and what the IRS is doing to improve compliance with the law." According to Chairman Bill Thomas (R-CA), the hearing, was not meant to parallel a recent hearing by the Senate Finance Committee reviewing specific reforms. Instead the committee wanted to "establish a foundation from which members can systematically begin to examine the tax-exempt sector, and determine what remedies, if any, are needed to provide greater clarity, transparency, and enforcement." Throughout the hearing, the committee grappled with understanding how tax-exempt organizations function while attempting to identify the greatest problems in the sector. The hearing seems to be a reaction by the committee to the massive overhaul of the sector proposed by the Senate Finance Committee's staff draft. It forecasts an attempt by the House to make smaller, more piecemeal changes to the tax-exempt categories of the IRS code that would serve as a template for further reforms. In his opening remarks, Ranking Member Charles Rangel (D-NY) asked why representatives from the IRS had not been invited to testify and asked the Chairman if the panels would address the question of religious organizations. Thomas replied that the hearing was intended to provide an overview of the tax-exempt sector and subsequent hearings would focus on enforcement. He then noted that the status of religious organizations would not be discussed separately. U.S. Comptroller General of the Government Accountability Office (GAO) David Walker advocated the need to engage in a fundamental review of the sector. The review should ensure the effective and efficient running of nonprofits by focusing on strengthening sound governance practices, improving transparency, enhancing oversight by the IRS and examining the rationale of tax exemption, he said. Joint Committee on Taxation (JCT) Chief of Staff George Yin described the tax-exempt categories as a largely piecemeal attempt at regulation. According to Yin, there was no overarching reason for the creation of the tax-exempt categories. Yin did not discuss the JCT's proposals to reform the sector. Douglas Holtz-Eakin, head of the Congressional Budget Office (CBO) focused on the complex issues that arise when tax-exempt organizations sell goods and services that put them in direct competition with for-profit entities. He urged the committee to examine the impact nonprofit hospitals, credit unions and municipal utilities have on for-profit businesses and the effect of revocation of tax-exempt status. John Colombo, a law professor at the University of Illinois, made the distinction between organizations under 501(c)(3) of the tax code and all other tax-exempt organizations. He noted that public charities get their money from a broad cross section of the general public and are therefore more accountable to the general public than private foundations, which are funded by a single donor or family. He urged the committee to examine transparency levels in 501(c)(3)s and to determine whether the public is getting the information it needs to hold charities accountable. Colombo advocated a system which uses donative status to distinguish whether an organization should be tax-exempt. Under this system, charitable organizations under 501(c)(3) would be limited to entities that were substantially dependent on donations for their operating revenues each year. Francis Hill, a law professor at the University of Miami in Florida, said that the tax-exempt sector should be accountable but not improperly constrained. She stated that government oversight is vitally important and urged Congress to work with the IRS and Treasury to help define who is benefited by tax-exemption of charities and what the charitable class is. She also stated that greater numbers of specially trained IRS staff and increased IRS funding are critical in any revamping of the laws governing the nonprofit sector. Sheldon Cohen, a former IRS commissioner, talked about the history and complexity of the tax code as it relates to tax-exempt organizations. He noted the government's lack of information regarding small organizations and urged the committee to establish rules promoting greater transparency for small organizations. Bruce Hopkins, an attorney with Polsinelli Shalton Welte Suelhaus, P.C. in Kansas City, MO, reiterated that the tax code provisions on nonprofits have evolved over decades in a disorderly and unplanned fashion and that Congress has frequently modified and expanded the laws governing the sector. He called the current tax laws unbalanced and uneven, recognizing that many aspects of today's laws governing the sector are unclear. He specified six of 12 areas that could benefit from congressional overhaul:

• Create laws spelling out criteria for tax-exempt status
• Spell out the elements of private inurement and private benefit doctrine
• Amplify the political activities rules
• Codify a version of the commerciality doctrine
• Develop statutory law concerning tax-exempt organizations' use of the Internet
• Consider the need for more reporting and disclosure.

In response to questions from committee members, Hopkins suggested revising the definition of the "charitable, scientific, educational" standard for determining exempt status under Section 501(c)(3) and establishing intermediate sanctions. Thomas suggested the committee focus on charities, the largest segment of the tax-exempt sector, given the time and resource constraints of the committee. Walker agreed, saying that efforts focused on the charitable sector could be used as a template for other tax-exempt organizations. Thomas was particularly interested how nonprofit hospitals fit into the proposed "donative structure," and indicated nonprofit hospitals could be the first target of new legislation. Yin volunteered that the health arena, by assets and revenue, was the largest in the charitable sector, and the largest of that is hospitals. Rangel stated the panel had painted a picture of a sector that "screams out for correction" and indicated he would like more information on the reported violations and the panel's specific recommendations. Thomas suggested that the majority and minority committee staff work together to submit additional questions to the panel witnesses ostensibly in preparation for future legislation. Rep. Sander Levin (D-MI) asked each panelist to describe the major problem with the tax-exempt categories section of the code. Colombo, Walker, Holtz-Eakin, Yin and Hopkins cited the lack of an overarching rationale or criteria for tax-exemption in the current law. Yin also mentioned a lack of oversight and transparency in the sector. Hill pointed to the need to reduce abuse without stripping the sector of the capacity to do good works. Cohen mentioned the failure of congressional and IRS oversight. Rep. Dave Camp (R-MI) asked if most of the abuses would be eliminated by greater enforcement of current laws by IRS. Although that would certainly reduce the number of abuses, Walker replied, the sector needs more transparency and additional data sharing so that the IRS can have better targeting and more effective enforcement. Walker also advocated supplemental, intermediate sanctions available to the IRS. Rep. Ben Cardin (D-MD) questioned the need for Congress to create more sanctions while the IRS examination rate is so low and the chances of sanctions being used so minimal. He also noted the possible lack of national political will to be more stringent on tax-exempt organizations. Rep. Earl Pomeroy (D-ND) stated that the hearing highlighted two issues: one, the confused state of the tax code regarding nonprofits, and two, the lack of IRS enforcement of current laws. He urged the committee to consider enforcement and compliance problems immediately and hoped they would also support increased funding and resources for the exempt organization division. The committee continues to accept written statements, which must be submitted by May 4.