America, Alexandria, VA, and Brian O'Connell, president, Independent Sector, Washington, DC.

I remind the witnesses that we are operating now with the 3minute rule on each statement. Your written statements will be made part of the record, and you may proceed.

We will start with Mr. Delaney.

STATEMENT OF EDWARD N. DELANEY, CHAIRMAN, SECTION OF TAXATION, AMERICAN BAR ASSOCIATION, WASHINGTON, DC Mr. DELANEY. Good morning, Mr. Chairman. I am Edward Delaney, chairman of the Section of Taxation of the American Bar Association. I am accompanied by James Hanson, who is the chairman of our committee on exempt organizations. Our statement represents only the views of the section of taxation, and should not be construed as representing the position of the American Bar Association.

Generally, private foundations have complied with the 1969 Tax Reform Act, but some significant administrative problems do need attention. We support the administrative changes that are recommended by the General Accounting Office.

We submit that the 1969 private foundation legislation has accomplished the objective of Congress to ensure that foundations which receive the benefit of tax exemption operate strictly in the public interest. It is important to preserve the basic framework of the private foundation provisions of the 1969 legislation in order to avoid a situation in which infrequent abuses might recur. Nevertheless, certain aspects of the current rules are so complex or rigid as to impose unnecessary administrative costs on foundations or pose a significant inhibition to additional contributions to foundations. We urge that you remove these barriers to increased private charitable efforts in line with the recommendations set forth in our written statement.

A major step toward simplification of the Internal Revenue Code that Congress could take would be to reduce the complexity of section 170, the provision of the code which regulates the deductibility of contributions. Section 170 presently contains three separate limits on the percentages of one's income which can be deducted as a result of charitable gifts. Complex rules govern the interaction of these percentage limitations. The very complexity of section 170 is an inhibition to making contributions to charity. Section 1 of S. 1857 significantly advances the cause of simplification and we fully support that.

The tax expenditure provisions of the 1969 act prohibit foundations from making grants for lobbying or political purposes, and impose detailed restrictions on foundation grants to individuals or organizations which are not public charities. Interpreting and enforcing these provisions consumes an inordinate amount of foundation and Internal Revenue resources, and we think that such provisions could be cut back substantially.

The self-dealing provisions of the 1969 act impose stringent restrictions on economic relationships between foundations and related persons. The general structure of these prohibitions should be

preserved. Congress should, however, consider simplification of these rules.

Current law imposes an automatic first-level penalty tax on foundations that violate the restrictions on taxable expenditures and excess business holdings and certain other provisions of the private foundation rules. Because of the complexity of these rules, inadvertent violations occasionally occur. The Commissioner should be given authority to abate the first-level penalty tax imposed on a foundation where the violation is inadvertent and is corrected during the statutory period.

Revisions are needed in the public support rules of section 509 a(1) and a(2), which for many charities determine whether the organization will be treated as a charity or private foundation. We have detailed more comments on changes in that provision in our written statement.

The experience of our members suggests that private foundation rules have effectively prevented the foundation misconduct at which they were directed, accordingly we believe that the basic framework of these rules should remain intact. However, it is noted that many aspects strongly discourage foundations from supporting many worthwhile charities, and they should be modified accordingly. Thank you.

Senator DURENBERGER. Thank you, Mr. Delaney. Mr. Joseph. [Mr. Delaney's statement follows:]

PREPARED STatement of EDWARD N. Delaney

I am Edward N. Delaney, Chairman of the Section of Taxation of

the American Bar Association.

We are pleased to submit the views

of the Section with respect to the provisions of the Internal

Revenue Code affecting private foundations and, more specifically, with respect to the proposals contained in S.1857.

The Section's Committee on Exempt Organizations surveyed its members concerning the private foundation provisions of the Internal Revenue Code and S.1857. Comment has also been sought from other knowledgeable members of the Tax Section. As a result, I can report to you the experience of tax practitioners throughout the country with respect to the 1969 private foundation

law.

This statement represents only the views of the Section of Taxation, and should not be construed as representing the position of the American Bar Association.

Generally, private foundations have complied with the 1969 Tax Reform Act. Not the least of the reasons for this high level of compliance is the extensive administrative attention provided by the Internal Revenue Service, which is specifically structured to address the administration and supervision of foundations and other exempt organizations. Such an organizational structure is of considerable assistance in providing the proper focus and attention to private foundation issues.

There is also a high level of professionalism and competence among the Internal Revenue Service personnel dealing with foundation

matters, especially at the National Office level. In addition, the Internal Revenue Service has worked to improve its procedures, including the design of Form 990-PF and its instructions, and the quality of publications generally available to the public.

We

Some significant administrative problems do need attention. For example, the recently issued General Accounting Office study of IRS implementation of the foundation information reporting requirements identified some deficiencies in IRS procedures. support the administrative changes recommended by GAO, and endorse GAO's conclusion that these relatively minor changes will ensure full foundation information reporting. Overall, the Internal

Revenue Service has sought to interpret and apply the 1969

legislation in a reasonable and logical manner.

Before discussing some of the areas of concern, let me

give you a general overview of observations of Tax Section members. First, the 1969 private foundation legislation has accomplished Congress's objective ensuring that foundations which receive

the benefit of tax exemption operate strictly in the public

interest.

Second, it is important to preserve the basic framework of

the private foundation provisions of the 1969 legislation in order to avoid a situation in which even infrequent abuses might recur. Preservation of the integrity of the philanthropic community is important enough to justify the continuation of the current rules.

Third, certain aspects of the current rules are so complex

or rigid as to impose unnecessary administrative costs on foundations or pose a significant inhibition to additional contributions Private philanthropy is important, especially

to foundations.

as it motivates grass roots initiatives to solve society's

problems. We urge that you remove these barriers to increased

private charitable efforts in line with the following recommendations.

I

CONTRIBUTIONS TO FOUNDATIONS

A major step toward simplification of the Internal Revenue Code that Congress could take would be to reduce the complexity of section 170, the provision of the Code which regulates the deductibility of contributions to charity, as section 170 presently contains three separate limits on the percentage of one's income which can be deducted for charitable gifts. The deductible amount depends on the character of the donee and the nature of the donated property. Complex rules govern the interaction of these percentage limits. Contributions to private foundations are subject to the most stringent limitations.

Current law also provides different rules, depending on whether the donee is a public charity or a private foundation, with respect to the portion of the value of donated property which can be claimed as a charitable deduction. If the donee is a

public charity, the full fair market value is generally deductible; if the donee is a private foundation, the value of the deduction is reduced very significantly. Thus, there are almost insurmountable disincentives to lifetime contributions to foundations.