July 18, 2011

Proposal Takes Aim at Charities That Avoid Taxes Offshore

Sen. Charles E. Grassley, senior Republican on the Senate Judiciary Committee, has introduced legislation that would deny some federal money to charities that put money in offshore accounts to avoid paying income taxes.

The Iowa senator has proposed barring such charities from getting grants from a federal program that helps prisoners re-enter society. The proposal follows an inquiry that he and several other lawmakers conducted last year into Boys & Girls Clubs of America.

Mr. Grassley's move—an amendment to a bill pending in the Judiciary Committee to extend the so-called Second Chance Act—takes aim at unrelated business income tax, or UBIT.  Those are taxes that charities owe on income they earn from businesses that are not directly tied to their charitable missions.

While moving money offshore to avoid those taxes isn't illegal, Mr. Grassley said in a statement, "it's a loophole that I saw exploited in the many investigations and hearings I conducted as the chairman and ranking member of the Finance Committee." He added:. "As a senior member of that committee, I'll continue to work to close that loophole for all charities."

For now, he said, Congress should consider denying grant money to nonprofits that practice such tax avoidance.

The senator—who regularly investigated nonprofits as senior Republican of the Senate Finance Committee before moving to that role on the Judiciary Committee in January—said he and his colleagues discovered that Boys & Girls Clubs held more than $50-million in off-shore equities and partnerships in the Cayman Islands, British Virgin Islands, and Bermuda in an effort to avoid paying income taxes.

The charity acknowledged the investments last year, saying in a written response that they were "completely legal, routine, and widely implemented by large nonprofit organizations." However, the group said it was reviewing the practice because of stepped-up scrutiny from lawmakers.

The questions about UBIT arose after senators started investigating the charity's spending on executive compensation, travel, perks, and other items at a time when some local boys and girls clubs were closing due to budget shortfalls.

Mr. Grassley's proposal would also require nonprofits receiving grants from the prisoners' program to disclose what studies they used to determine executive compensation for their organization. He said that many audits of Department of Justice programs had raised questions about the salaries and fringe benefits paid to staff members of grant recipients.

The senators' inquiry last year highlighted that Roxanne Spillett, president of Boys & Girls Clubs, made more than $900,000 in pay, bonuses, benefits, and deferred compensation  in 2008.  At Ms. Spillett's request, the charity later cut back on payments to two supplemental executive retirement plans, the charity said.

Ms. Spillett has announced that she is leaving the organization next January, turning the reins over to James Clark, now president of Boys & Girls Club of Greater Milwaukee. In response to questions about Mr. Grassley's latest move, the charity said in a statement that it has "always complied with government rules and regulations fully and we will continue to do so should any laws or guidelines change."

It added: "We take our responsibility to spend and invest money seriously, whether from donors or from the government, in a thoughtful way that does the utmost to support the kids in our communities that need us most."

Chronicle investigation in 2008 found that more than half of 91 charities with unrelated business activities reported zero or negative taxable income.