[WPRT 106-11]
[From the U.S. Government Publishing Office]
106th Congress
2d Session COMMITTEE PRINT WMCP:
106-11
_______________________________________________________________________
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
__________
WRITTEN COMMENTS
ON
JOINT COMMITTEE ON TAXATION DISCLOSURE STUDY
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
MAY 19, 2000
Printed for the use of the Committee on Ways and Means by its staff
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed record of written comments remains the
official version. Because electronic submissions are used to prepare
both printed and electronic versions of the hearing/written comments
record, the process of converting between various electronic formats
may introduce unintentional errors or omissions. Such occurrences are
inherent in the current publication process and should diminish as the
process is further refined.
C O N T E N T S
__________
Page
Advisory of February 3, 2000, announcing request for written
comments on Joint Committee on Taxation Disclosure Study....... 1
Alabama Policy Institute, Birmingham, AL, Christian S. Spencer,
letter......................................................... 3
American Family Association, Tupelo, MS, Patrick J. Vaughn,
letter......................................................... 4
American Hospital Association, statement......................... 4
American Society of Association Executives, Jim Clarke, letter... 7
Anderson, John, Yucaipa, CA, letter.............................. 11
Bjorklund, Victoria B., Simpson, Thatcher & Bartlett, New York,
NY, and Committee on Exempt Organizations, Section of Taxation,
American Bar Association, joint statement...................... 14
Boris, Elizabeth T., Urban Institute, letter and attachment...... 93
Cecil B. Day Foundation, Inc., Norcross, GA, Edward L. White,
Jr., letter.................................................... 18
Christian Alert Network (TCAN) Inc., Killeen, TX, Rev. Curt
Tomlin, letter................................................. 18
Clarke, Jim, American Society of Association Executives, letter.. 7
Coalition for Fair Competition in Rural Markets, statement....... 19
Coalition for Nonprofit Health Care, Boone Powell, Jr., statement
and attachment................................................. 21
Concerned Women for America, Beverly LaHaye, letter.............. 28
Council on Foundations, Dorothy S. Ridings, statement............ 28
Courter, Hon. J. Carlton, III, Virginia Department of Agriculture
and Consumer Services, Richmond, VA, letter.................... 98
DeWitt, Leonard W., Ventura Missionary Church, Ventura, CA,
letter......................................................... 95
Donovan, William, Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
Dunn, David C., Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
Emerson, Karl E., National Association of State Charity
Officials, Harrisburg, PA, letter.............................. 71
Family Research Council, Washington, DC, Stephen W. Reed, joint
letter......................................................... 41
Ferguson, Robert H.M., Patterson, Bellknap, Webb & Tyler, New
York, NY, and Committee on Exempt Organizations, Section of
Taxation, American Bar Association, joint statement............ 14
First Baptist Church, Groton, VT, Pastor Chris Paine, letter..... 30
First German Congregational Church, Lincoln, NE, Rev. James
Pedersen, letter............................................... 31
Fishman, Linda, Los Angeles, CA, letter.......................... 32
Focus on the Family, Pasadena, CA, Stephen W. Reed, letter....... 41
Free Speech Coalition, Inc., McLean, VA, statement and attachment 43
Goldman, Karin K., New York State Office of the Attorney General,
letter and attachment.......................................... 74
Goodman, Edward N., VHA Inc., statement.......................... 96
Hall, LeeAnn, Northwest Federation of Community Organizations,
Seattle, WA, letter and attachment............................. 78
Howard, John, Branson West, MO, letter........................... 48
Hyatt, Gil, Piercy, Bowler, Taylor & Kern (CPAs), Las Vegas, NV,
statement and attachments...................................... 83
Independent Sector, statement.................................... 49
International Health, Racquet & Sportsclub Association, Boston,
MA, statement.................................................. 63
Istook, Hon. Ernest J., Jr., a Representative in Congress from
the State of Oklahoma, letter.................................. 65
Jestes, Michael L., Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
Jestes, Velonia, Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
Josephson, William, New York State Office of the Attorney
General, letter and attachment................................. 74
LaHaye, Beverly, Concerned Women for America, letter............. 28
Lampkin, Linda M., Urban Institute, letter and attachment........ 93
Lehrfeld, William J., Bethesda, MD, statement.................... 66
Mauldin, Alan, Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
McAlister, Lloyd G., Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
National Association of State Charity Officials, Harrisburg, PA,
Karl E. Emerson, letter........................................ 71
National Club Association, statement............................. 72
New York State Office of the Attorney General, William Josephson,
and Karin K. Goldman, letter and attachment.................... 74
Northwest Federation of Community Organizations, Seattle, WA,
LeeAnn Hall, letter and attachment............................. 78
Oklahoma Family Policy Council, Bethany, OK, Lloyd G. McAlister,
Alan Mauldin, Michael L. Jestes, William Donovan, David C.
Dunn, Stephen Prentice, Jeanne R. Young, and Velonia Jestes,
letter......................................................... 79
Paine, Pastor Chris, First Baptist Church, Groton, VT, letter.... 30
Pedersen, Rev. James, First German Congregational Church,
Lincoln, NE, letter............................................ 31
Philanthropic Research, Inc., Williamsburg, VA, Arthur W.
Schmidt, Jr., letter and attachment............................ 81
Piercy, Bowler, Taylor & Kern (CPAs), Las Vegas, NV, Gil Hyatt,
statement and attachments...................................... 83
Powell, Boone, Jr., Coalition for Nonprofit Health Care,
statement and attachment....................................... 21
Prentice, Stephen, Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
Reed, Stephen W., Focus on the Family, Pasadena, CA; Family
Research Council, Washington, DC; and Reed & Brown, LLP,
Pasadena, CA, joint letter..................................... 41
Ridings, Dorothy S., Council on Foundations, statement........... 28
Schmidt, Arthur W., Jr., Philanthropic Research, Inc.,
Williamsburg, VA, letter and attachment........................ 81
Sheldon, Rev. Louis P., Traditional Values Coalition, letter..... 92
Spencer, Christian S., Alabama Policy Institute, Birmingham, AL,
letter......................................................... 3
Steuerle, Eugene, Urban Institute, letter and attachment......... 93
Tomlin, Rev. Curt, Christian Alert Network (TCAN) Inc., Killeen,
TX, letter..................................................... 18
Traditional Values Coalition, Rev. Louis P. Sheldon, letter...... 92
Urban Institute, Eugene Steuerle, Elizabeth T. Boris, and Linda
M. Lampkin, letter and attachment.............................. 93
Vaughn, Patrick J., American Family Association, Tupelo, MS,
letter......................................................... 4
Ventura Missionary Church, Ventura, CA, Leonard W. DeWitt, letter 95
VHA Inc., Edward N. Goodman, statement........................... 96
Virginia Department of Agriculture and Consumer Services, Hon. J.
Carlton Courter, III, Richmond, VA, letter..................... 98
White, Edward L., Jr., Cecil B. Day Foundation, Inc., Norcross,
GA, letter..................................................... 18
Whiting, Stephen C., Whiting Law Firm, P.A., Portland, ME, letter 99
Young, Jeanne R., Oklahoma Family Policy Council, Bethany, OK,
letter......................................................... 79
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 3, 2000
No. FC-18
Archer Announces Request for
Written Comments on
Joint Committee on Taxation Disclosure Study
Congressman Bill Archer (R-TX), Chairman of the Committee on Ways
and Means, today announced that the Committee is requesting written
public comments for the record from all parties interested in the study
and recommendations released on January 28, 2000, by the Joint
Committee on Taxation concerning disclosure of Federal tax returns and
return information, including disclosures relating to tax-exempt
organizations.
BACKGROUND:
The Internal Revenue Service Restructuring and Reform Act of 1998
(P.L. 105-206 ) required the Joint Committee on Taxation and the U.S.
Department of the Treasury to conduct separate studies on the present-
law provisions regarding disclosure of Federal tax returns and return
information, including whether the public interest would be served by
greater disclosure of information relating to tax-exempt organizations.
The studies were to include legislative and administrative
recommendations and were due on January 22, 2000. On January 28, 2000,
the Joint Committee on Taxation released its three volume analysis,
Study of Present-Law Taxpayer Confidentiality and Disclosure
Provisions, JCS-1-00, which includes numerous recommendations
concerning both general disclosures and disclosures relating to tax-
exempt organizations. That study is available at the Joint Committee's
internet site at http://www.house.gov/jct or may be purchased at the
Government Printing Office. The Committee anticipates requesting
further comment once the U.S. Department of the Treasury has submitted
its required study.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record should submit six (6) single-spaced copies of
their statement, along with an IBM compatible 3.5-inch diskette in
WordPerfect or MS Word format, with their name, address, and comments
date noted on label, by the close of business, Wednesday, March 15,
2000, to A.L. Singleton, Chief of Staff, Committee on Ways and Means,
U.S. House of Representatives, 1102 Longworth House Office Building,
Washington, D.C. 20515.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or
MS Word format, typed in single space and may not exceed a total of 10
pages including attachments. Witnesses are advised that the Committee
will rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
Alabama Policy Institute
Birmingham, AL 35223
March 7, 2000
A.L. Singleton, Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth Bldg.
Washington, DC 20515
Dear Mr. Singleton,
This letter is to oppose the Joint Committee on Taxation Staff
Proposals, JCS-1-00 (January 28, 2000) concerning the further
regulation of tax exempt organizations.
The Joint Committee on Taxation staff has prepared a report
entitled ``Study of Present Law Taxpayer Confidentiality and Disclosure
Provisions as Required by Section 3802 of the Internal Revenue Service
Restructuring and Reform Act of 1998.'' Volume II deals with the
disclosure provisions related to Tax-Exempt Organizations.
The report contains recommendations in three major areas which are
of concern to us. The proposals would require tax-exempt organizations:
1. To provide detailed narrative descriptions of their lobbying
activities on their 990 forms,
2. To track and report amounts spent on self-defense lobbying, and
3. To track and report the amounts spent on nonpartisan research
which includes an ``indirect'' call to action.
The first item is overreaching and goes beyond the intent of
Congress to simplify, not complicate tax code compliance. The second
item would require an inordinate amount of staff time and expense for
organizations which depend primarily upon multiple small donations for
their existence, as well as complicating their Form 990 tax reporting.
The third item not only has the problems of items number one and two,
but is in fact impossible to achieve except on the most subjective of
standards. This creates a non-compliable standard for research and
education organizations whose purpose is to educate about issues of
general public interest.
As proposed, the regulations will intimidate nonprofit
organizations from exercising First Amendment rights on politically
sensitive issues. This would substantially censor healthy and robust
dialogue on matters of national, state and local import as intended by
the Framers of the Constitution, and consistently supported by the
United States Supreme Court.
Under the current regulations, as the above mentioned report also
concedes, a nonprofit organization may provide nonpartisan analyses of
issues and be excepted from the lobbying reporting requirement even if
a particular analysis includes a limited or implicit ``call to action''
based on the fair and balanced weighing of both sides of an issue. In
every case the regulations have been held to permit exempt
organizations to communicate to their constituents a view on
legislation which does not include a specific call to action, and such
communication does not constitute lobbying.
The staff report would add the onerous burden of reporting all
communications which identify a legislator and his or her positions on
an issue, the relation of the legislator to the elector, or the
relation of a legislator to a committee or subcommittee considering
legislation on the issue. None of these activities are currently
considered lobbying, a fact acknowledged by those who compiled the
report. (Staff Report, Vol. II, p. 119) Consequently, there is no
substantial reason to add such a burden to nonprofit organizations.
In short, as proposed, the recommendations are bad because they:
complicate the reporting requirements of nonprofits in contradiction to
the move of Congress toward tax simplification; extensively increase
needless regulatory control over nonprofits; produce heavy new economic
burdens on nonprofits; substantially cloud the standard by which
nonprofit lobbying activity is judged with vague and overbroad
definitions; intimidate and curtail free speech in an illegitimate
manner; irresponsibly increase needless paperwork and record keeping by
nonprofits; complicate the ability of nonprofit organizations in trying
to determine which, if any, of their policy studies are reportable as
lobbying and which are not; and, such changes would confuse the public
as to the actual lobbying activities of an organization, rather than
clearly informing the public of the organization's lobbying activities.
If Congress wishes to pursue more regulatory control over the
activities of nonprofit corporations in regard to lobbying activity, it
should focus those efforts toward nonprofit organizations that are
funded with taxpayer dollars. Organizations that receive a substantial
part of their funding from state and, particularly, federal grants
should be viewed differently than other nonprofits that raise their
funds from the private sector whose purpose is education rather than
advocacy.
Sincerely,
Christian S. Spencer, Esq.
General Counsel
cc: Joint Committee on Taxation: Sen. William V. Roth, Jr. Chairman,
Rep. Bill Archer, Texas, Chairman, Sen. Charles E. Grassley, Rep.
Philip M. Crane, Sen. Orin G. Hatch, Rep. William M. Thomas, Sen.
Daniel Patrick Moynihan, Rep. Charles Rangel, Sen. Max Baucus, Rep.
Fortney Pete Stark, Hon. Lindy L. Paull, Chief of Staff, Hon. Bernard
A. Schmitt, Deputy Chief of Staff, Hon. Mary M. Schmitt, Deputy Chief
of Staff, Hon. Richard A. Grafmeyer, Deputy Chief of Staff
Alabama Delegation: Sen. Richard C. Shelby, Rep. Sonny Callahan, Sen.
Jeff Session, Rep. Terry Everett, Rep. Bob Riley, Rep. Robert B.
Aderholt, Rep. Robert E. Cramer, Jr., Rep. Spencer Bachus, Rep. Earl
Hilliard
American Family Association
Tupelo, MS 38803
March 14, 2000
A. L. Singleton, Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Ref: Study of Disclosure Provisions Relating to Tax-Exempt
Organizations
Dear Mr. Singleton:
The Committee's recommendation that public charities disclose
expenditures for nonpartisan study, analysis, and research that
includes an ``indirect'' call to action, would implicitly expand the
definition of grassroots lobbying and chill the free speech rights of
educational organizations that study and teach about society and
current events from a particular viewpoint, such as a Biblical
worldview, or a feminist perspective. When such study, analysis and
research teaches citizens how to consistently make choices that apply
their principles, the study could easily be interpreted as including an
``indirect'' call to action, if government happened to be addressing
related issues at the same time. The effect of expanding the definition
of lobbying to include an ``indirect'' call to action, would be that no
``substantial part of the activities'' of a public charity could
address subjects that the government chose to address. The free speech
rights of public charities clearly outweigh any public interest in
expanding the definition of lobbying.
The recommendation that small charities (below the filing threshold
for Form 990-EZ) be required to file an annual IRS report will either
throw thousands of small organizations into noncompliance, or force
them to shut down out of fear of the IRS. It is in the public interest
that small charities be allowed to focus on their exempt purpose,
unencumbered by bureaucratic paper work.
In 1998, Congress passed legislation to simplify the tax scheme.
The Committee's proposals appear contrary to the direct intent of
Congress and would prove costly and burdensome to charitable
organizations.
Sincerely yours,
Patrick J. Vaughn
Assistant General Counsel
Statement of American Hospital Association
The American Hospital Association (AHA) represents nearly
5,000 hospital, health system, network and other health care
providers. This statement comments on the Study of Disclosure
Provisions Relating to Tax-Exempt Organizations (the ``Joint
Committee Study'') published by the staff of the Joint
Committee on Taxation on January 28, 1999. The Joint Committee
Study was required by section 3802 of the Internal Revenue
Service Restructuring and Reform Act of 1998.
General principle governing disclosure
The Joint Committee staff recommends that ``the general
principle governing disclosure of information regarding tax-
exempt organizations is that such information should be
disclosed unless there are compelling reasons for nondisclosure
that clearly outweigh the public interest in disclosure.'' This
proposed standard would establish a presumption that all return
information of tax-exempt organizations should be publicly
disclosed, unless this presumption can be overcome by
compelling policy reasons for nondisclosure. While the AHA
acknowledges that many special policy considerations apply to
tax-exempt organizations, a general presumption in favor of
public disclosure of all return information is not appropriate.
The Joint Committee staff properly acknowledges that many
policy considerations weigh towards confidentiality. These
considerations include respect for privacy rights,
encouragement of voluntary compliance, and the avoidance of
imposition of additional administrative burdens on exempt
organizations. The AHA acknowledges that other considerations
weigh towards public disclosure, including public oversight of
the activities of exempt organizations. We submit that it is
appropriate for Congress to impartially weigh these policy
considerations in determining the extent of required public
disclosure, but that it is not helpful or appropriate to begin
with the premise that public disclosure of all information
gathered by the IRS is presumptively the better policy.
The Joint Committee staff appears to assume that exempt
organizations have no significant legitimate ``privacy
rights.'' We acknowledge that exempt organizations may not have
privacy rights in exactly the same sense and to the exactly the
same degree as individuals. Exempt organizations do, however,
have a legitimate interest to be free from excessive regulatory
intrusion by the federal government. For example, the prospect
of public disclosure of all material contract terms could
adversely affect exempt organizations in negotiating with
providers of goods and services which, for bona fide business
reasons, prefer not to make all terms of their contracts
public. The approach of the Joint Committee staff appears to
disregard this legitimate interest, and instead in effect
posits a presumption in favor of increased regulation.
The Joint Committee Report discusses the tax benefits
provided to exempt organizations at some length, listing the
exemption of income from business level income taxes, the tax
deductibility of charitable contributions, and access to tax-
exempt financing. We question whether the level of tax benefits
provided to tax-exempt organizations is a factor that is
appropriate to consider in determining whether public
disclosure is appropriate. Many industries (e.g., oil and gas,
timber and pharmaceutical) effectively receive significant tax
expenditures and other tax benefits under the Internal Revenue
Code; in other contexts, magnitude of tax benefits is not taken
into account in distinguishing the level of public disclosure
required of different types of taxpayers. Instead, we believe
that Congress should focus on whether increased public
disclosure will enhance tax compliance, and whether the
improvement in tax compliance is sufficiently significant to
outweigh the policy reasons for preserving confidentiality.
In general, we believe that the starting point of the
Joint Committee staff--that public disclosure of all
information is presumptively the better policy--leads to
certain recommendations in the Joint Committee Study that are
overreaching.
Disclosure of audit results and closing agreements
The recommendations of the Joint Committee staff that are
most objectionable to exempt healthcare organizations concern
disclosure of return information related to IRS examinations
and closing agreements.
In general, we believe that the Form 990 is a more
appropriate vehicle for meaningful disclosure to the public.
Consideration of refinements to that form to make it more user-
friendly would be more appropriate than wholesale disclosure of
all information gathered by the IRS.
We fully acknowledge that it is appropriate for the IRS to
disclose to the public a change or revocation in the exempt
status of an exempt organization. This disclosure is in general
permitted under existing law. The Joint Committee staff,
however, recommends required disclosure that reaches far beyond
core concerns about whether an organization qualifies as an
exempt organization. Many exempt health care organizations have
varied and complex operations. It will commonly be the case
that, at the conclusion of an IRS examination of an exempt
health care organization, some technical adjustments are made
but the exempt status of the organization will be maintained;
such an organization will then be in compliance with the
requirements of the Internal Revenue Code. It is difficult to
see how the additional disclosure recommended by the Joint
Committee staff will assist the public in the core concern of
knowing whether an organization qualifies as an exempt
organization.
Both Congress and the IRS Commissioner have emphasized the
need for the IRS to adopt measures that will enhance voluntary
compliance of stakeholders. We believe that the disclosure of
the results of an IRS examination will in many instances
discourage exempt health care organizations from cooperatively
and flexibly resolving disputes with the IRS. We concur with
the views expressed by other commentators that the publication
of such information in many cases will lengthen the examination
process because both sides will negotiate with a view towards
what information will ultimately become public.
We in particular believe that disclosure of closing
agreements is inconsistent with the policy of encouraging
voluntary compliance. We note that in recent years the IRS has
instituted a number of innovative programs that in effect
foster voluntary compliance by encouraging stakeholders to
voluntarily enter into closing agreements with the IRS to
resolve disputes. We have no doubt that the viability of such
approaches would be compromised if the recommendation of the
Joint Committee staff on disclosure of closing agreements is
enacted.
Moreover, in general, the Joint Committee staff recommends
that closing agreements should not be publicly disclosed
because they are not an effective means to provide guidance to
taxpayers regarding the law. The Joint Committee staff
acknowledges that closing agreements are negotiated, and do not
necessarily represent the IRS view of the law. Because closing
agreements are fact specific and may not contain all relevant
information, they may be misleading if relied upon by others.
The Joint Committee staff proposes, however, that disclosure of
the closing agreements entered into by an exempt organization
is appropriate, because the general public, including potential
contributors, have an interest in full disclosure about all of
the activities of an exempt organization. We concur with the
view that closing agreements are potentially misleading to
taxpayers because they often represent compromise positions and
do not purport to state all the relevant facts. For these
reasons, disclosure of closing agreements can be misleading to
potential contributors and the general public as well as to
other similarly situated exempt organizations.
The Joint Committee staff recommends that ``the IRS
disclose the documents reflecting the results of an audit at
the conclusion of the administrative examination process (i.e.,
after the audit is closed and the time for filing an
administrative appeal has expired).'' The basis for this
recommendation is that ``information regarding the outcome of
an audit would assist the public in determining whether the
organization is in compliance with the law and how the
organization is using funds.''
Disclosure of the results of an IRS examination may be
misleading for the same reasons that disclosure of closing
agreements may be misleading. As a practical matter, the
results of an IRS examination may often reflect compromise
positions and the results of the examination presented to the
public may not state all relevant facts.
One implicit justification for the recommended additional
disclosure appears to be that it arguably could assist the
public in determining whether an organization is in compliance
with laws other than the Internal Revenue Code. Although
Congress may choose to expand public disclosure of federal tax
return information in the Internal Revenue Code to facilitate
compliance with other laws, we suggest that it should do so
only for the most compelling policy reasons; in general, the
presumption should be against increased regulation in the
Internal Revenue Code to speculatively facilitate compliance
with state and local laws. The Joint Committee staff makes
other recommendations that would appear to adequately address
the objective of greater federal and state coordination of
oversight of exempt organizations. For example, the Joint
Committee staff recommends that the IRS should be able to
disclose to Attorneys General and other state officials audit
and examination information concerning tax-exempt
organizations. Although compelling policy reasons may justify
such sharing of information with state officials, the policy
reasons for public disclosure of all information gathered by
the IRS are not as compelling.
There are two other recommendations on which we would like
to comment. The Joint Committee staff recommends that
determinations be disclosed without redaction. If the name of
the exempt organization and others with whom it does business
are made public, it will adversely affect the ability of exempt
organizations to find business partners and significantly limit
the opportunity for exempt organizations to seek IRS guidance
on business activities and relationships they are
contemplating. In the spirit of furthering tax compliance, it
does not make sense to require unredacted disclosures when that
will have a chilling effect on seeking advance guidance.
With respect to the recommendation that the tax return of
a taxable affiliate of an exempt organization be publicly
disclosed, we do not see a sufficient public policy basis for
doing so. Presently, the tax returns of taxable organizations
are not subject to public disclosure. Merely being an affiliate
of a tax-exempt organization should not deny the company the
typical and traditional confidentiality protections.
American Society of Association Executives
Washington, DC 20005-1168
March 15, 2000
The Honorable Bill Archer, Chairman
Committee on Ways and Means
United States House of Representatives
Room 1102
Longworth House Office Building
Washington, DC 20515
Dear Chairman Archer:
The American Society of Association Executives (``ASAE'') is a
Washington, D.C.-based association comprised of more than 25,000
professionals who manage approximately 11,000 trade, individual, and
voluntary organizations. Almost all the associations represented by
ASAE's membership are exempt from taxation under section 501(c)(3),
501(c)(4) or 501(c)(6) of the Internal Revenue Code.
ASAE welcomes this opportunity to comment on the Joint Committee on
Taxation (``JCT'') Staff Study on Disclosure by Tax-Exempt
Organizations, issued January 28 of this year, pursuant to the 1998 IRS
Restructuring and Reform Act.
I. Introduction
ASAE is a strong believer that reasonable disclosure
requirements for the tax-exempt community are beneficial.
Disclosure can be an effective tool for ensuring public trust
in the exempt community. In fact, ASAE was among the
organizations that supported the tax law change included in the
1996 Taxpayer Bill of Rights 2 legislation (Public Law 104-168)
that brought about the rule requiring exempt organizations to
provide copies of certain exempt organization documents to
requesters.
Still, ASAE does not support disclosure for disclosure's
sake, especially when disclosure requirements are overly
burdensome and offer little to benefit the public. A number of
the disclosures called for in the JCT report will indeed help
better inform the public without undue burden on the exempt
community. But, many of the recommendations offer little
benefit compared to the paperwork and other compliance
difficulties placed on the exempt community.
These comments seek to point out those areas where ASAE
agrees with the JCT Staff report, as well as those areas where
ASAE takes issue. Not all recommendations by the JCT Staff are
addressed in these remarks. The fact that ASAE does not discuss
some recommendations should not be an indication of support or
lack of support for those particular items. Rather, ASAE has
chosen only to address those recommendations which it feels
have the greatest impact on its members.
Two final notes before addressing the specific
recommendations:
A. ASAE believes that any recommendation for increased
disclosure should look to balance the public's right to know
with the burdens placed on the exempt organization community.
However, ASAE takes issue with the JCT Staff assertion that the
tax benefits received by exempt organizations essentially
create disclosure obligations akin to those placed on the
public sector by virtue of the tax benefits they receive (JCT
Staff Report, page 80). Associations and other exempt
organizations are private entities, facing the same economic
realities as their for-profit counterparts. Though the JCT
Staff report states that it takes into consideration the
privacy interests of exempt organizations, the sheer breadth
and number of new disclosures called for in the report suggests
that the JCT Staff values those interests as very minor when
compared to the obligations exempt organizations have to the
public as a result of their tax status.
B. As ASAE noted in its comments to the JCT Staff prior to
the formulation of this report, it is important to remember
that the enhanced disclosure provisions of the Taxpayer Bill of
Rights 2 law have only recently (June 8, 1999) taken effect.
Those provisions require tax-exempt organizations to mail to
legitimate requesters, or else make widely available, copies of
their three most recent Form 990's and/or Form 1023 or 1024.
Previously, tax-exempt organizations could require requesters
to come in person to the organization's headquarters in order
to conduct such a public inspection. Given that these
provisions only became effective very recently, it might be
beneficial to allow some time in order to accurately determine
the effect that these requirements have on the availability of
exempt organization information.
II. Recommendations Which ASAE Supports
A. ASAE supports the JCT Staff recommendation that taxpayer
identification numbers of tax-exempt organizations should not
be subject to disclosure (JCT Report, page 88), particularly
because of the real potential for unauthorized use of such
numbers.
B. ASAE strongly supports the JCT Staff recommendation to
accelerate the timetable for optional electronic filing of the
Form 990 (JCT Staff Report, page 91). It should be noted,
however, that some of the disclosures called for within this
report would have the effect of delaying the implementation of
electronic filing, especially where the information called for
is in narrative form, such as the information regarding
heightened disclosure of 501(c)(3) activities that the JCT
Staff believes to be related to lobbying.
C. ASAE supports the JCT Staff's call for general revisions
to the Form 990 to ensure that it provides more relevant and
comprehensible information to the public (JCT Staff Report,
page 91).
Specifically, ASAE agrees with a particular suggestion by
the JCT Staff which states that it would be ``...appropriate to
consider whether the need for information relating to an
organization should also vary depending on the paragraph of
section 501(c) under which the organization qualifies for tax-
exempt status'' (JCT Staff Report, page 81).
ASAE believes that if the Form 990 is to be revised at some
time to make it more relevant and comprehensible to the public,
the first step toward that objective should be a clearer
expression on the face of the form as to the nature of the tax-
exempt organization filing it. Currently, the only such
expression appearing on the face of the form is the code
section category ``501(c)(3),'' ``501(c)(4),'' ``501(c)(6),''
etc., which appears on a relatively inconspicuous line just
below the organization's name and address. ASAE suggests that
only a small minority of the general public is familiar with
the differences between those categories. Furthermore, even if
the reader does understand those distinctions, the code section
category does not describe in full the nature of the
organization, the makeup of its membership (corporate vs.
individual vs. nonprofit), or whether it solicits contributions
(deductible or non-deductible) from the general public.
A clearer expression of the nature of the organization on
the face of the form would go a long way to informing the
public as to the differences between tax-exempt organizations,
and would help the public to focus on matters in which it is
truly interested. The category in which the organization falls
should then dictate which of the remaining pages of the Form
990 would be subject to public disclosure, thus helping the
public to focus its gaze more precisely on issues of interest
to it. At present, ASAE suggests, the majority of the general
public draws no distinction between tax-exempt organizations
which receive charitable contributions and those which do not.
The unrefined exposure of all Form 990 filings, which tend to
look alike to the untrained eye, will only exacerbate that
confusion.
Under a separate heading below, ASAE offers some more
specific suggestions as to possible revisions to the Form 990,
and to the separate categories of disclosure that might be
required of each distinctive type of tax-exempt.
III. Recommendations Which ASAE Opposes
ASAE joins a great many others in the tax-exempt community
in expressing its general concern that certain of the JCT Staff
recommendations go too far in giving precedence to the public's
right to know, and do not give sufficient recognition to the
value of certain areas of privacy in promoting compliance and
fair administration of the laws.
A. ASAE opposes the public disclosure of all Form 990-T's
filed by tax-exempt organizations, as well as any Forms 1120,
1065, and others filed by affiliates of tax-exempts (JCT Staff
Report, page 93). The purpose for requiring that those business
activities not related to an organization's exempt purpose
should be taxed like any other similar activities in the non-
exempt sector is to provide a level playing field for
competition between the two sectors. If tax-exempt
organizations are required to disclose their business income
tax returns, and non-exempts are not so required, that purpose
of even and fair competition would be undermined.
The JCT Staff states that the disclosure of these returns
will ``facilitate comprehensive oversight by the public of the
full range of activities by tax-exempt organizations'' (JCT
Staff Report, page 93). This goal is already served, however,
given that unrelated business income and affiliated taxable
organizations are required disclosure items on the current Form
990. Also currently reported on the Form 990 is the volume of
revenues reported on the tax returns associated with each. That
disclosure should be more than sufficient to inform the public
about such side activities.
B. ASAE also joins with many others in opposing the
unredacted disclosure of audit results and closing agreements
(JCT Staff Report, page 84). Such a step might well impede,
rather than aid, the objective of maximum voluntary compliance
with the laws. Also, this disclosure would not have the
intended effect of assisting ``in the public oversight'' of
exempt organizations, as the JCT Staff predicts. On the issue
of closing agreements, the JCT Staff notes in its own report
that they are negotiated and ``may not contain all relevant
information'' (JCT Staff Report, p. 85, FN 186). Exempt
organizations might decide to negotiate rather than take on a
costly battle with the IRS, even though the organizations
firmly believe they have done nothing wrong. Of course, the
public is apt to be misled when viewing such negotiated
settlements, and many will likely believe from the mere
existence of a closing agreement that the exempt organization
ran afoul of tax law. Without the promise of confidentiality,
exempt organizations will be far less willing to negotiate
(and, in the eyes of the public, admit wrongdoing), thus
forcing more disagreements into an already overburdened court
system.
Under this scenario, the exempt organization pays more, the
government pays more, and the public gains nothing. The JCT
Staff contradicts itself in its reasoning for requiring this
disclosure. It states that it will not recommend such
disclosure for non-exempt organizations, citing the potential
for this information to be misleading, and thus, presumably,
not beneficial to the public. But the JCT Staff then goes on to
state that this information would be beneficial to the public
if it involves exempt organizations (JCT Report, p. 86).
C. ASAE opposes also the recommendation that public
charities be required to disclose expenditures which meet
certain exceptions to the definitions of reportable lobbying,
such as self-defense and nonpartisan study, analysis and
research that includes a limited call to action (JCT Staff
Report, page 118). By definition under current tax law, these
items do not constitute reportable lobbying, and should not be
characterized as such for disclosure purposes.
It might be true that IRS enforcement would be aided by an
explicit enumeration, but if that reporting were made subject
to public disclosure, its most common use would be by opponents
of the organization's views, to point to its use of presumed
``loopholes.'' It should be up to the IRS, not to self-
appointed public advocates, to determine if an organization is
legitimately asserting these duly considered legal exceptions.
This increased disclosures would also significantly increase
the recordkeeping requirements currently faced by 501(c)(3)
organizations regarding tracking lobbying activities. The
recommended disclosures would require the organizations' staff
to track separately (1) lobbying activities as defined in
501(c)(3), (2) ``self-defense'' lobbying activities, (3)
certain nonpartisan research and analysis, and (4) lobbying as
defined under the Lobbying Disclosure Act of 1995 (Public Law
104-65).
D. ASAE maintains a similar position with respect to the
recommended additional disclosure of transfers among various
organizations ``so that the public and the IRS can better
assess whether contributions are being used to fund political
activities'' (JCT Staff Report, page 97). Any such transfer by
a 501(c)(3) organization is a violation of the requirements of
its exemption, risking loss of exempt status and possible fines
under section 4955. The present Form 990 requires disclosure of
any transfers to non-501(c)(3) exempts and requires disclosure
of the amount of any such transfers that are made available for
lobbying or political expenditures. It should be up to the IRS,
not to public advocates, to determine if the organization has
complied with the law in this respect.
IV. ASAE's Suggestions on General Revision of the Form 990
As noted above, ASAE believes that any major changes to the
disclosure obligations of exempt organizations should only be
done after sufficient time has passed for an accurate
evaluation of the impact regarding the new, enhanced public
availability rules for exempt organizations' Form 990's and
other documents. At such time, Congress should ask how the
public has benefited from this increased access, and how the
publicly available information can be more beneficial in the
future.
In an effort to at least start that analysis, ASAE raises
certain specific suggestions below that it believes will begin
to make the Form 990's more relevant and comprehensible.
The Form 990 and the Schedule A attachment required of
501(c)(3) organizations have grown in length considerably over
the past 20 years. This enlargement is traceable in part to the
number of statutory provisions added over that time period, but
is also traceable to the addition of more in-depth and detailed
questions designed to enhance the IRS's and the state
regulatory agencies' ability to discern pertinent information
without conducting a first-hand inquiry. The Form also serves
as a road map for such inquiries and for full-blown
examinations. The Form was not designed, nor should it have
been, to be user-friendly to the general public.
ASAE does not dissent from the general proposition that
informed, focused public opinion, as it does in almost all
areas of a free society, would not only be an essential aid to
the regulators, but would enhance the overall level of
compliance with the laws relating to tax-exempt organizations.
Focused, self-interested public opinion, it is generally
agreed, promotes rational outcomes to political and legislative
contests, and is beneficial in helping to regulate the behavior
of publicly-traded companies in compliance with the securities
laws. Absent the self-interest, however, public opinion tends
to lack the focus required to produce rational and desirable
outcomes.
Presented with a Form 990 filed by an organization that
solicits tax-deductible charitable contributions from the
general public, any member of the general public has a
legitimate self-interest in attempting to make a determination
whether those contributions are in fact used for the purposes
intended, and not diverted to private purposes, because every
member of the public should be presumed to be a potential
contributor. With that self-interest in mind, those members of
the public possessed of the patience to examine all those areas
of the current Form 990 that are subject to public inspection
will reach an informed decision, in the main.
Presented with a Form 990 filed by an organization that
does not solicit any funds from the general public, charitable
or otherwise, but only solicits funds from the professional or
commercial members it represents, ASAE believes that most
members of the general public would be at a loss as to what to
look for, primarily because their interest is not so clear. The
most common reaction would probably be to approach it as if one
were inspecting another filing from an organization that
solicits public contributions.
ASAE suggests that the public inspector will be able to
focus on his or her interest and make an informed decision if
the Form makes clear on its face certain essential facts about
the organization, such as whether or not it is eligible to
receive charitable donations, whether it solicits funds from
the general public, whether its membership/constituency is
composed primarily of individuals, corporations, or other tax-
exempt groups, and if its individual members belong in a
business or personal capacity. None of those items is clearly
evident from the face of the form today.
If, for example, the tax-exempt organization is composed
primarily of corporate members from a particular industry, then
the public would likely direct its self-interested focus to the
nature and size of the organization's efforts to influence the
legislative and regulatory process, and to influence consumer
attitudes, as well as to other areas like the organization's
research, statistical information, standard-setting and self-
regulatory endeavors. That focus would only be impeded by such
extraneous information as the approximate risk composition of
the investment portfolio; the distribution of revenue sources
between dues, voluntary contributions, program service
revenues, and investment income; the organization's ownership
of buildings and other fixed assets and the degree to which
that ownership is debt-financed; and even by what the Board
members have agreed to pay the exempt organization's top
executives in order to compete with comparable positions within
their own industry. Yet, those latter items are much more
clearly quantifiable and evident in the public inspection copy
of the present Form 990 than is anything about the
organization's participation in those areas that are likely of
greater interest to the public.
(Regarding the issue of exempt organization staff salaries,
it should be noted that disclosure of such information is not
mandated by statute for most categories of exempt
organizations. As ASAE noted in its October 1, 1999, comments
to the JCT Staff: ``The most popular portion of any
organization's Form 990 will likely be the Part V listing of
compensation received by certain organization leaders. This
information is required by law to be disclosed by
Sec. 501(c)(3) organizations under Sec. 6033(b)(7) of the
Internal Revenue Code. However, such information is not
required by statute to be provided by other tax-exempt
organizations (like Sec. 501(c)(4) or Sec. 501(c)(6)
organizations), it is only required by regulatory fiat. ASAE
believes that compelling individuals to disclose publicly
information that is as private as their own annual salaries
should only occur when they are required by statute to do
so.'')
For all tax-exempt organizations, ASAE suggests that the
first page of the 990 be used to identify the organization and
delineate the general category into which it falls. To quantify
the sources of support without identifying the dollar
contribution of each member, some use of the North American
Industry Classification System (``NAICS'') codes to sort
revenues by general source might be used. The category in which
the organization falls should then dictate the additional
public disclosure.
For a trade association composed almost entirely of
corporate members from a given industry, ASAE suggests that the
additional financial disclosure be confined to the volume of
annual revenues and expenditures, and then to the magnitude of
expenditures on legislative lobbying, regulatory lobbying,
public relations to improve the industry's image, research of
potential benefit to the economy, standards-setting to improve
public safety, and all other areas of activity.
For a 501(c)(3) professional organization that does not
solicit funds from the general public, and which receives
little charitable contribution money, if any, the public
inspection version of the Form 990 might be organized as
follows: After the general description of the nature and
sources of support, the public inspector should then be
directed to the categories of expenditure to enhance the
profession (continuing education programs, research, standards
setting, lobbying, etc.) and the volume of expenditures for
fundraising and administration. The overall volume of revenues
and expenditures and the salaries of officers should be subject
to disclosure pursuant to existing law, but the precise
composition of the balance sheet and the distribution of
revenues between contributions, program fees and investment
income should be given much lesser attention.
A list of specific disclosure items should be designated
for every other major category of exempt organization.
V. Conclusion
ASAE believes that the intent of increased public disclosure of
Form 990 filings is to enhance public understanding of exempt
organizations and their activities. ASAE is concerned, however, that
much of this increased disclosure will have the effect of further
confusing the public, while placing tremendous additional burdens on
exempt organizations. If the public disclosure portions of the Form 990
are made more comprehensible to the general public, and the bulk of the
information available to it is focused on answering its most common
self-interested questions, then the public will be in a much better
position to reach informed judgments than it would be if it were
forced, by the sheer volume of information, to rely on the opinions of
a few self-appointed guardians.
Thank you for the opportunity to provide our remarks on this issue.
Please feel free to contact me at 202/626-2703 if you have any
questions.
Sincerely,
Jim Clarke
Vice President, Public Policy
Yucaipa, CA 92399-1783
The Honorable Bill Archer
Chairman, Committee on Ways and Means
c/o A.L. Singleton, Chief of Staff
Committee on Ways and Means
United States House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Re: Public Comments Regarding JCS-1-00 Per Chairman Bill Archer's
Request of Feb. 3, 2000
Dear Congressman Archer:
Thank you so much for this opportunity to submit public comments on
the recently published Study of Present-Law Taxpayer Confidentiality
and Disclosure Provisions as Required by Section 3802 of the Internal
Revenue Service Restructuring and Reform Act of 1998 by the Joint
Committee on Taxation (JCS-1-00), published in three volumes on January
28, 2000.
It was with great surprise and a sense of appreciation that I
learned the Joint Committee on Taxation published in Volume III of
their Study, page 272, my previous public comments submitted to the
Chief of Staff, Ms. Lindy L. Paull, on October 25, 1999 regarding the
public disclosure requirements pertaining to tax-exempt organizations
in the United States. I wish to add to my previously published comments
and to clarify one in particular. However, before I do that, I want to
commend the Joint Committee for the incredible work that they
accomplished in producing JCS-1-00. I am just amazed at what they did!
What a tremendous accomplishment! This is absolutely incredible! We as
U.S. citizens are forever in their debt. I wish to heartily endorse
their many recommendations, especially the recommendation regarding the
making of completed Federal Forms 990-T (Exempt Organization Business
Income Tax Return) available to the general public for their inspection
so that anyone can then conduct further personal due-diligence on those
exempt organizations that they have an interest in. If (or when) this
recommendation is enacted into law it would help to further motivate
all exempt organizations to be circumspect and above reproach in the
way that they report their unrelated (or non-exempt) business
activities on this Federal Form. The way the law now stands, plus the
fact that the Internal Revenue Service is able to audit less than 1% of
all exempt organization tax returns, many of these organizations are
not being above reproach in the way that they report their activities
on Form 990-T.
I wish to clarify one of my previous public comments found on page
272 of Volume III of JCS-1-00. I mentioned in this comment that exempt
organizations should be required to disclose all governmental grants on
Federal Form 990 and then I listed the types of information that should
be presented. In addition to governmental ``grants,'' I would add
governmental ``contracts'' as well. Also, in meeting this
recommendation of mine, I would accept the information disclosures be
shown on some web site that is widely available to the general public
and easily accessible instead of having to make it an integral part of
Form 990 itself, as long as the web site address was clearly given
somewhere on the completed Form. I fully realize that the amount of
this information could be rather voluminous for some exempt
organizations and could be quite a burden if page after page after page
were added as supplementary statements to the Form 990. So, to
alleviate this burden I would accept posting of the recommended
information disclosures be made on a web site where anyone with an
interest in doing so could easily download the information for their
own personal use.
In response to the Committee's Study (JCS-1-00), I wish to submit
six further recommendations regarding the public disclosure
requirements pertaining to tax-exempt organizations:
Recommendation Number One: Conflict-of-Interest Policy
I recommend that a new question be added to Part VI (the
Part entitled ``Other Information'') of Form 990, page five.
The question to read as follows: ``Does the organization have
in effect a Conflict-of-Interest Policy which is duly enforced?
If so, then please attach a copy of the current Policy. Also,
please indicate whether or not all Corporate Officers,
Directors, Trustees, and Key Employees are in compliance with
this Policy. If there is any non-compliance, then please attach
a summary explanation of the non-compliance AND HOW IT WILL BE
RESOLVED.''
Recommendation Number Two: Audited Financial Statements
I recommend that an additional new question be added to
Part VI of Form 990, page five. This question to read as
follows: ``Is a copy of the organization's audited financial
statements available for public inspection? If so, then please
indicate how a copy can be obtained by listing the appropriate
mailing address or e-mail address or web site address (if it is
already widely available and easily accessible directly over
the world wide web somewhere).''
Recommendation Number Three: IRS Computer Programs for Compliance
Checking
Once electronic filing of all Forms 990 and 990-T are
required, the Internal Revenue Service should put in place
computer programs that will automatically reject or return an
organization's information or tax return when it is obviously
inaccurate or incomplete, with the necessary summary
explanations. Unfortunately, as it now stands, many exempt
organizations submit returns that are OBVIOUSLY inaccurate or
incomplete. This practice is absolutely disgraceful and needs
to be remedied as soon as possible in the most effective and
efficient manner. Only when the IRS starts to reject returns
automatically will these organizations finally sit up and take
notice as to the terrible condition of their returns. I'm sorry
to say this, but it is true. Over the last three or four years
I have acquired a number of Forms 990 at my own expense from
the Ogden Service Center in order to learn the practices of
other exempt organizations. And, to see how their returns
compared with the ones I prepared for a prominent tax-exempt
organization in southern California that was my employer until
I recently returned to graduate school at Golden Gate
University in San Francisco, in order to fulfill the program
requirements for an M.S. degree in Taxation.
Recommendation Number Four: Composition of Board Committees
I wish to recommend that the composition of all Board
Committees be disclosed on completed Forms 990, especially the
composition of the Internal Audit and Corporate Compliance
Committees so that legitimate concerns regarding an
organization's Forms 990 and 990-T can be taken to the
appropriate Committee Chairperson when the organization's
present administration is unresponsive to these concerns. I
have learned that in some cases that an organization's Board
Members have no idea that their organization is filing, and has
been filing for quite some time, inaccurate, incomplete and
non-compliance information/tax returns with the Federal
Government. I'm sure many Board Members would be aghast at what
was taking place in their organization, if they only knew. And,
if they just knew about the situation, then they might be in a
position to help bring about needed change.
Recommendation Number Five: Threshold for Meeting Filing Requirements
of Form 990
I wish to recommend that the threshold for meeting the
filing requirements for Form 990 be raised from the present
threshold of $25,000 in gross receipts to $100,000 in gross
receipts and then indexed for inflation in $1,000 increments
thereafter, unless the organization possesses any wholly owned
or partially owned taxable subsidiary organizations or, unless
the organization has any lobbying or self-defense lobbying
expenditures. Many of the new legislative proposals for
expanding and improving the public disclosure requirements for
exempt organizations would prove to be especially burdensome
for the smaller organizations who are just barely scraping by.
In respect to their plight, I would recommend that the
threshold for filing be substantially raised. Many smaller
exempt organizations are teetering on the edge of solvency. If
they wanted to voluntarily file Forms 990, then they should be
allowed to do so--so that their financial statistics can be
included in the IRS's Business Master Files and Statistics of
Income databases. I would encourage them to make these filings,
but only if they have the time and the resources and the
determination to do so.
Recommendation Number Six: Churches' Exemption for Filing Form 990
Should be Removed
My last recommendation is a very controversial one, to say the
least, but one that I feel very strongly about in light of the
inability of many church members to acquire meaningful financial
information regarding their church, or convention of churches, or
association of churches, or even integrated auxiliaries of churches.
This is another absolutely disgraceful situation. Any member should be
able to conduct meaningful financial due-diligence on their own church!
By having the present exemption for filing Forms 990 for churches
removed would go a long ways in helping church members to conduct their
own due-diligence. I just do not understand why any organization in the
United States exempt from income tax should be exempted from filing
Forms 990. This should be a basic requirement.
Thank you for taking the time to consider my public comments
regarding JCS-1-00. If you should have any questions regarding my
comments, then please feel free to contact me at the telephone number
or e-mail address listed below. I would be more than happy to answer
any of your questions.
Please give my regards to your staff and the staff of the House
Ways and Means Committee. How they are able to accomplish all that they
do is beyond my comprehension. The organizational challenges must be
staggering. Best wishes to each one.
Sincerely,
John Anderson
Statement of Victoria B. Bjorklund, Simpson, Thatcher & Bartlett, New
York, NY; Robert H.M. Ferguson, Patterson, Bellknap, Webb & Tyler, New
York, NY; and Committee on Exempt Organizations, Section of Taxation,
American Bar Association
I. Introduction
These comments are submitted in response to a request made
by Congressman Bill Archer, Chairman of the Committee on Ways
and Means, for public comments on the study, released on
January 28, 2000 by the Joint Committee on Taxation (the ``JCT
Study''), concerning disclosure of federal tax returns and
return information. The comments that follow are directed
specifically to the portion of the study that relates to tax-
exempt organizations.
As a matter of form, our comments follow the order in which
recommendations were made in the JCT Study. Each comment begins
by restating the recommendation of the Joint Committee Staff
and then stating whether we agree or disagree with the
recommendation. In those cases where we disagree, our reasons
are indicated.
II. Disclosure of IRS Materials
1. Recommendation: All written determinations, including
background file documents, should be disclosed in unredacted
form.
Comment: Agree as to disclosure, especially with respect to
rulings that have heretofore been undisclosed because they
``affect tax-exempt status,'' but disagree that such materials
should be disclosed without redaction.
Reasons: The principal benefit to be derived by the public
from the disclosure of written determinations issued to tax-
exempt organizations is a more complete and current
understanding of how the Service is administering the tax laws
and what activities exempt organizations are, or are not, being
permitted to engage in by the Service. This benefit can be
fully realized without disclosing the specific identity of the
organization or the specific monetary and valuation details of
the transaction. The additional information that would be
available from an unredacted private letter ruling will be
available from the recipient organization's Form 990 for the
year(s) covered by the transaction. Similarly, the details of
any transaction that is the subject of a technical advice
memorandum or a field service advice will be available from the
returns to which that determination relates. In our view, the
highlighting of this additional detail by including it in the
published versions of these determinations will add little of
material value or benefit to the public; however, it is likely
to generate significant correspondence to the Service from
individuals and organizations that may have philosophical
differences with the organization which have no legal
significance. Involving the Service in such philosophical
disputes will absorb staff time which would be better spent on
administration of tax laws. Objections to legal reasoning or
activities can still be identified from redacted determinations
so the public's interest is not impaired by redaction. To
enable members of the public to direct criticism at a ``rifle
shot'' target where a shotgun approach is actually required, is
both unfair to the target and would result in an uneven and
clearly undesirable method of administering the tax laws. The
JCT staff's explanation ``recognizes that certain exceptions to
this general rule [that disclosure should be made without
redaction] may be appropriate ... [and that the items currently
specified] in section 6110(c) ... provide a guide as to the
type of information that it may be appropriate to redact,'' but
the proposal would appear to contemplate redaction only with
respect to determinations issued during the audit and
examination process, and that ``[o]nce the examination process
is completed, ... such ruling should be disclosed publicly in
unredacted form.'' We respectfully disagree. The public's
interest and oversight function will be more than adequately
fulfilled by the timely publication of these materials in
redacted form.
2. Recommendation: Disclose the results of audits and all
closing agreements in unredacted form.
Comment: Tentatively agree as to audit results but disagree
as to closing agreements, unless unredacted disclosure is a
condition to the agreement.
Reasons: Disclosure of audit results in unredacted form
runs the risk of publicizing unagreed or inaccurate, and
therefore unfair, information about the audited organization.
Embedded in the JCT staff's recommendation regarding the
publication of audit results is the assumption that examining
agents apply the tax laws in generally accurate and consistent
manners. Experience indicates that this is frequently not the
case. Within any group of tax-exempt organizations engaged in
substantially similar activities, many will never be audited,
and those that are will frequently end up with markedly
different audit results because of differences in the
experience and training of, and positions taken by, the agents
conducting the audits and the quality of their representatives.
Further, the public may incorrectly draw a negative inference
merely from the fact that an organization was selected for
audit where such an inference is not warranted (e.g., the
Service's recent sampling of private foundations with assets
less than $1 million). For this reason, we believe that if
audit results are to be disclosed in unredacted form, such
disclosure should be made only as a part of the disclosure of
the entire return or returns affected by such adjustments, and
that public disclosure should occur only after the audit
results have been subject to internal Service review by
appeals, if not the closing of the audit. To highlight audit
adjustments in any more limited context, particularly if the
audit issues are unagreed, would create an unwarranted
presumption of wrongdoing by the organization in question.
The disclosure of closing agreements presents a different
issue. Because the use of closing agreements is optional to the
exempt organization and the Service, the possibility of
unfairness is lessened considerably. However, because of the
wealth of detail that is frequently contained in such
agreements, a requirement that they be disclosed in unredacted
form could frequently result in an organization's unwillingness
to enter into a closing agreement because of the adverse
publicity involved. To counter this possibility, the JCT staff
suggests that any organization that declines to enter into a
closing agreement will perforce be placed in the position of
having to litigate the issue or lose its exemption, with either
such course of action resulting in public disclosure. We
believe that this reasoning is basically flawed in that it
assumes that closing agreements are never seriously considered
as a way of resolving an issue unless there also exists a real
threat of loss of exemption. Once again, experience shows that
there are many situations in which closing agreements are
clearly the best way of resolving an issue but where loss of
exemption is not an issue. For example, an organization might
believe that it has a very strong position as to an item for
which the amount in dispute is too insignificant to warrant
litigation of the issue. Closing agreements are frequently
helpful in the CEP context. In these cases, the publicity
attendant to the disclosure of a closing agreement presents the
very real possibility that the tax-exempt organization will
choose not to enter into such an agreement but instead will opt
for some other method of dispute resolution that is in neither
its nor the Service's best interests. In those situations where
loss of exemption is a real possibility, the Service's
bargaining position is usually strong enough so that it can
require disclosure as an overall condition to the agreement.
However, where loss of exemption is not a real issue, we
believe that any benefit resulting from requiring public
disclosure in unredacted form is far outweighed by the
deterrent effect on prompt dispute resolution that would result
from such a requirement. We would recommend leaving with the
Service the flexibility as to whether a particular closing
agreement should or should not be disclosed in unredacted form.
3. Recommendation: Disclose exemption applications (with
supporting documents) at the time of filing, together with
action taken on the applications by the IRS.
Comment: Agree as to disclosure, but disagree as to timing.
Reasons: Disclosure of applications and accompanying file
materials is appropriate and desirable in any case where the
exemption is granted. In those cases where an application is
filed either by a new organization or by an organization that
has previously operated without exemption and where exemption
is denied, the disclosure of these materials would result in
the involuntary public release of return information of a
taxable entity, although the disclosure of the denial itself
would normally be unobjectionable. Obviously, such disclosure
would have to occur if the entity in question elects to contest
the denial, such as by filing a petition for declaratory relief
under Section 7428, but we believe that in this situation, the
decision to precipitate such disclosure should remain the
prerogative of the organization. Even in those cases where
exemption is ultimately granted, disclosure of material in the
application file prior to the time that the exemption is
granted would be of limited benefit to the general public and
could result in a highly undesirable politicization of the
determination process. The Joint Committee staff argues that
early disclosure is warranted because the processing of
exemptions occasionally takes a considerable length of time,
and disclosure is required to alert the public that
contributions to organizations seeking exemption under section
501(c)(3) are not yet deductible. This position fails to take
into account that adequate procedures already exist to put
members of the public on notice of this fact (i.e., Publication
78, which is easily accessible in public libraries and online
at the Service's website, and the Internal Revenue Bulletin),
and we think it is unlikely that the early disclosure of
application files would provide any significant measure of
additional protection or warning to members of the donor
public. Early disclosure could also put the Service in the
middle of correspondence campaigns initiated by individuals or
groups with philosophical, but not legal, objections to
applicants. Such campaigns could require attention from Service
staff whose time could be better spent in administration of the
tax laws.
4. Recommendation: Apply section 6110 disclosure rules to
third party communications relating to determinations and
applications that are subject to section 6104.
Comment: Agree.
5. Recommendation: Do not disclose employer identification
numbers of exempt organizations.
Comment: Agree.
III. Form 990 and Related Forms
1. Recommendation: Accept Forms 990 and related forms for
electronic filing after 2002, and revise such forms to
``provide relevant and comprehensible information to the public
as well as the IRS.''
Comment: Agree, but it must be recognized that the process
by which these forms are approved for use by state agencies
(attorneys general and the like) may result in their revision
being considerably more difficult, from a procedural viewpoint,
than is envisioned by the JCT Study.
2. Recommendation: Expand the scope of section 6104 to
require the disclosure of all Forms 990-T and any returns filed
by ``affiliated organizations.''
Comment: Disagree.
Reasons: The Joint Committee staff's recommendation fails
to take into account the essential differences between the
information contained on Form 990, which is an information
return, and Forms 990-T, 1120 and 1065, which are income tax
returns. The public's ``right to know'' extends to the manner
in which a tax-exempt organization is operating--how it is
utilizing its assets and personnel. Consistent with this right,
we agree that it would be appropriate to revise the information
return (Form 990) to increase the amount of disclosure
concerning the nature of any unrelated trade or business
activities (potentially including disclosure of a trade or
business conducted in connection with or through a taxable
affiliate). However, once that information is released, then we
believe that the ``balancing of interests'' referred to in the
JCT Study shifts and the organization's right to, indeed its
need for, privacy outweighs the public's need for additional
detail. In our view, it would be basically unfair to require
disclosure of the income tax return of an organization or its
affiliates where no disclosure is required of returns of
unaffiliated entities that are engaged in similar activities.
3. Recommendation: Expand the scope of section 6104 to
require disclosure of returns filed by section 527
organizations; require such organizations to file returns even
if they have no taxable income; and revise the form of such
returns to disclose more of the activities of such
organizations.
Comment: Agree, as this return is essentially an
information return, not an income tax return.
4. Recommendation: Require disclosure of both legal and
business names.
Comment: Agree.
5. Recommendation: Require the IRS to instruct the public
that Forms 990 are publicly available.
Comment: Agree.
6. Recommendation: Require the disclosure, and publication
by the IRS, of World Wide Web site addresses.
Comment: Agree.
7. Recommendation: Require the disclosure on Form 990 of
``more information concerning the transfer of funds among
various tax-exempt organizations ... [to] better assess whether
contributions ... are being used to fund political
activities.''
Comment: Tentatively disagree.
Reasons: We believe that this proposal is too vague. It is
not clear what information an organization filing Form 990
could contain as to organizations not under the control of the
filing organization. A better alternative would appear to
require more detail on the activities of or grants made by
filing organizations.
8. Recommendation: Require annual notification to the IRS
by organizations (other than churches) that are below the
filing threshold.
Comment: Agree. In addition, we suggest that a similar kind
of notification be made available on a voluntary basis to any
church that wishes to use it. We also recommend that
organizations that terminate their existence or have their
exemptions revoked be deleted from the hard-copy version of the
Cumulative List (IRS Publication 78) in a timely manner.
Further, the filing instructions for terminating organizations
should be made clearer as many are not aware that they should
check the box on line B marked ``FINAL RETURN'' on the Form
990.
9. Recommendation: Permit private foundations to disclose
only a summary of capital gains and losses, with details
available on request.
Comment: Agree. We believe that this proposal would
encourage copying of Form 990-PF by interested parties. We note
that the Forms 990-PF filed by endowed foundations can be
several inches thick when securities schedules are included.
Where a private foundation holds a position of 10% or more in a
single company, however, that fact could be required disclosure
in the summary.
10. Recommendation: Extend the tax-return preparer
penalties for omission, misrepresentation and willful disregard
of rules to preparers of Form 990.
Comment: Agree.
IV. Disclosure of Returns and Return Information of Tax Exempt
Organizations to Nontax State Officials or Agencies
Recommendation: Disclose audit and examination information
to attorneys general and other nontax officials with
appropriate jurisdictional needs prior to the completion of the
audit and when the IRS determines that the disclosure may
facilitate resolution of the case.
Comment: Agree.
V. Lobbying Expenditures
Recommendations: Require public charities to provide a
general description of their lobbying activities on Schedule A
to Form 990.
Require public charities to disclose expenditures for self-
defense lobbying.
Require public charities to disclose expenditures for non-
partisan study, analysis and research if it includes a limited
``call to action.''
Comment: The members of our Committee who were consulted on
the above recommendations had differing views with regard to
these lobbying proposals.
Reasons: Some members agree with these proposals so long as
they are limited to lobbying-related information. However, a
majority of those consulted are seriously concerned that
requiring electing charities to report on their lobbying
activities may defeat the purpose of the section 501(h)
expenditure test as the alternative means for determining
substantiality. Requiring charities to disclose expenditures
for self-defense lobbying could have a chilling effect on their
advocacy. Those members who disagree fail to see either the
tax-policy reason or the overriding benefit to tax
administration of these proposals, especially in a climate in
which the Service is seeking to encourage public charities to
make the section 501(h) election.
These comments are the individual views of members of the
Section of Taxation who prepared them and do not represent the
position of the American Bar Association.
Primary responsibility was exercised by Robert H.M.
Ferguson and Victoria B. Bjorklund. Substantive contributions
to these comments were made by Brian Menkes. These comments
were reviewed by Terrill Hyde for the Committee on Government
Submissions and by Council Director Douglas M. Mancino.
Although the members of the Section of Taxation who
participated in preparing these comments may have clients who
would be affected by the federal income tax principles
addressed, or have advised clients on the application of these
principles, no such member (or firm) has been engaged by a
client to make a government submission with respect to, or
otherwise to influence the development or outcome of, the
specific subject matter of these comments.
Cecil B. Day Foundation, Inc.
Norcross, GA 30092
March 14, 2000
Mr. A.L. Singleton
Chief of Staff
Committee of Ways and Means
U.S. House of Representatives
1102 Longworth
Washington D.C. 20515
Dear Mr. Singleton:
It is my understanding that regulations for implementing the IRS
Restructuring and Reform Act of 1998 contain provisions requiring
nonprofit organizations (including churches) to notify the IRS every
time they encourage their membership to contact a member of Congress on
any issue. I am writing this letter to voice strong objection to such a
requirement.
As you most certainly know, this issue would not only have effect
upon freedom of speech and freedom of religion issues for churches in
requiring them to report upon their particular statements, but also
would extremely infringe upon these rights.
Furthermore, the churches that the Foundation deals with have an
average size of between 75 and 125 members (which also matches the norm
for approximately 65 to 70 percent of all U.S. churches). This
burdensome reporting requirement upon such a small organization would
be rather intrusive and cumbersome.
It is respectively requested that this request be stricken from the
IRS's consideration.
Sincerely,
Edward L. White, Jr.
President
ELWjr/ksh
The Christian Alert Network (TCAN) Inc.
Killeen, TX 76547-1746
9 March 2000
A. L. Singleton, Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth
Washington, DC 20515
Re: Comments on IRS reform act proposals for 501 (c) (3)
organizations--churches
Sir:
Summary: these proposals would create burdensome new record keeping
requirements for non-profit organizations, such as churches.
The Internal Revenue Service restructuring and Reform Act of 1998
was intended to consider methods to restructure the IRS to make it more
responsive to the needs of Americans and less intrusive in their lives
but they have done just the opposite.
There is a clear potential that every time a church asks its
members to call or write their elected officials [local, state, and
federal] concerning a piece of legislaion, they would be required to
report that activity to the IRS. I believe the purpose of this
intrusion seems to be to frighten the churches and keep pastors away
from expressing their 1st Amendment Rights.
I call upon The Joint Committee NOT to adopt the changes,
requirements, or proposals presently being considered as noted below.
1. Provide information about their lobbying activities on their
annual tax form (Form 990), described in the Joint Committee's report
as ``a detailed description of the legislation addressed in their
lobbying efforts and the manner in which organizations engaged in
lobbying activities.'' Currently 501(c)(3)s that have elected to use
the 501(h) expenditure test for lobbying need only report their
lobbying expenditures, and non-electing 501(c)(3)s must provide a
narrative description of their lobbying that is probably less detailed
than the report envisioned by the Joint Committee's proposal.
2. Disclose the amount of money the organization spends on
activities under the ``self-defense'' exception to the lobbying rules.
Currently advocacy involving legislative proposals that effect a
501(c)(3)'s rights or existence are not considered lobbying and need
not be reported. Under the Joint Committee's proposal, self-defense
advocacy would still not count against a 501(c)(3)'s lobbying limits,
but 501(c)(3)s would now have to report all such expenditures.
3. Disclose expenditures for nonpartisan research and analysis if
the research or analysis includes a ``limited `call to action.' ''
Currently under the exception for nonpartisan research and analysis, a
``full and fair'' discussion of an issue that provides sufficient
information for readers to come to their own conclusions about this
issue will not be considered lobbying, even if it includes an
``indirect'' call to action. An indirect call to action is identifying
certain legislators that will vote on the issue. The Joint Committee's
proposal would require 501(c)(3)s to report expenditures for this
educational activity.
In short, these proposals would create burdensome new record
keeping requirements for non-profit organizations, such as churches.
Sincerely,
Rev. ``Curt'' Tomlin
Major USA Ret.
President TCAN Inc.
Statement of Coalition for Fair Competition in Rural Markets
Overview
This statement is submitted by the Coalition for Fair
Competition in Rural Markets (the ``Coalition''). The Coalition
currently has more than 150 members including more than 140
companies, nine state propane trade associations and the
National Propane Gas Association.
This statement is submitted in response to the Committee's
February 3, 2000 request for comments on the January 28, 2000
study and recommendations prepared by the staff of the Joint
Committee on Taxation (``JCT'') with respect to disclosure of
tax returns and tax return information, particularly with
respect to tax exempt organizations (JCS-1-00).
The Coalition strongly supports the JCT staff's
recommendation that unredacted copies of private letter rulings
and other written determinations (along with background
documents) related to exempt organizations be publicly
disclosed (Volume II, pages 83-84).
Our support for this recommendation arises from our recent
experience in which public disclosure of the IRS's ruling that
an exempt rural electric cooperative can maintain its exempt
status when entering the propane retailing business is
prohibited by Treasury regulations, notwithstanding the
statutory provision providing for disclosure of Internal
Revenue Service (the ``IRS'') determinations when an entity is
granted exempt status initially. Given the special nature of
exempt status, we believe everyone--other exempt entities, tax
practitioners, taxable companies, the general public--should
have access to written determinations affecting exempt
organizations.
Background
The Coalition's interest in this particular recommendation
arises from our efforts to encourage the IRS to develop clear,
direct and public guidelines which describe the scope of the
exemptions available under Internal Revenue Code section
501(c)(12) in general and particularly the limitations on the
term ``like organization'' in (c)(12)(A) under which rural
electric cooperatives (``RECs'') have been granted exemptions.
The following presents the history of these efforts and the
factors which led to this statement.
Taxable propane companies encountered the first REC
competitor in 1996. Our concerns about the significant
competitive benefits available to RECs (the tax exemption, the
substantial business assets built up in the exempt environment
and the subsidized loans from the Rural Utilities Service)
prompted us in 1998 to seek a thorough review of what federal
law allows the RECs to do with their special benefits.
With respect to the income tax exemption, our counsel
undertook an extensive research project regarding the sec.
501(c)(12) provisions and its predecessors all the way back to
the original 1916 income tax legislation. This project made
clear to our counsel and to our members that there is no
overall policy statement regarding the (c)(12) exemption in
either Treasury regulations or a published revenue ruling.
Indeed, much of the available history detailing the IRS's views
on what ``like organization'' means and what RECs can do within
their exempt status is found in private letter rulings.
By early September 1999, our counsel had completed a
memorandum for delivery to the IRS. That memorandum discussed
the law, court decisions, revenue rulings and private letter
rulings related to the issues under consideration. It concluded
that an exempt REC's entry into the propane retailing business
was not allowed under sec. 501(c)(12) because such activity was
not permitted for a ``like organization'' under the statute;
RECs' tax exemptions derive from this term because electricity
is not explicitly enumerated in sec. 501(c)(12)(A). This was a
growing controversy because more than 30 RECs had been
identified as having entered the propane business, with the
first apparently doing so as recently as 1996. The memorandum
and cover letter strongly urged that the IRS promptly develop
an overall policy statement in this area and, in the process,
make clear the limitations on exempt RECs that enter the
propane business.
As they prepared the memorandum for delivery, our counsel
saw a memorandum prepared by REC representatives (posted on an
REC-related web site) reporting that the IRS had agreed to rule
that propane sales are a ``like activity'' after having refused
to do so on previous occasions. Anticipating that we would soon
see at least a redacted copy of such a letter ruling, the
memorandum was revised to state explicitly that additional
commentary would be delivered to the IRS as soon as public
release of a letter ruling confirmed the web site's report and
enabled our counsel to review the analysis.
The Problem
The problem which prompts our support for the JCT staff's
recommendation became clear soon after the memorandum was
delivered to the IRS on September 28, 1999. We had assumed
that, within a few weeks, a redacted copy of the text of a
letter ruling would be released in the normal course of IRS
activities.
Our assumption was incorrect, as our counsel found through
further research and telephone conversations with IRS officials
in the Exempt Organizations/Employee Plans division. In fact,
IRS officials were prohibited from even discussing the
existence or nonexistence of such a letter ruling.
Then, in early November 1999, we read an October 22, 1999
REC newsletter article which reported that the IRS had issued
four private letter rulings holding that sales of propane by an
REC are considered to be a ``like activity'' for purposes of
sec. 501(c)(12). A brief quotation in the article from one
letter ruling provided us with the only insight into the IRS's
analysis and conclusion that propane sales qualify as a ``like
activity'' for purposes of sec. 501(c)(12). Knowing that the
IRS would neither confirm nor deny the accuracy of such
reports, Coalition members and counsel were left to ponder only
the published report that such letters had been issued.
We disagree strongly with the reported ruling and
particularly with the reason quoted in the article. Although
that quotation generally confirms what our counsel had
concluded earlier was the IRS's incorrect analysis, we continue
to be hampered in our ability to challenge the ruling in
communications with the IRS because we do not have any
documents from the IRS which provide that analysis in detail.
The source of this problem is the anomalous interaction of the
general disclosure rules of sec. 6110 (which ordinarily provide
for the redacted disclosure of private letter rulings following
issuance to the requesting taxpayer) with that section's carve
out of those matters that fall under sec. 6104 (which governs
disclosure of applications for exempt status and annual
information returns). Treasury regulations issued under sec.
6104 effectively extend nondisclosure to virtually all IRS
determinations related to an organization's continuing exempt
status.
This result appears to be unintended, given the emphasis on
disclosure of information by exempt entities. Allowing
interested parties to see approved exemption request forms and
other information emphasizes the special nature of the public
support and subsidy that is inherent in income tax exemptions.
However, in our situation where the IRS was asked to rule
explicitly on whether a new activity would or would not qualify
as a ``like activity'' for purposes of an REC's continuing
exempt status under sec. 501(c)(12), the law prohibits release
of even redacted texts.
This is a very troubling problem. From the Coalition's
perspective, the IRS apparently has ruled that an REC can
engage in direct competition with the taxable companies which
comprise our industry and can do so with the continuing benefit
of an exemption under sec. 501(c)(12). We believe the IRS's
ruling incorrectly interprets and applies current law, but we
are hindered greatly in challenging that conclusion when we
cannot read the rulings themselves. The non-precedential nature
of such rulings does not change the importance of making public
a ruling in which the IRS says, in essence, that an exempt
entity can begin to engage in direct competition with taxable
companies in a sector in which there is neither historical
precedent nor, we believe, a sound argument for such action.
Tax practitioners and other exempt organizations, as well
as taxable companies and the general public, should be afforded
every opportunity to examine guidance issued by the IRS,
particularly with respect to rulings which expand, limit or
otherwise define the scope of an exemption from the income tax.
This would be a natural and parallel rule for the principle of
statutory construction which holds that exemptions are to be
applied narrowly. For other exempt organizations (and tax
practitioners advising those organizations), disclosure allows
information to spread more efficiently. But the Coalition's
primary interest is that disclosure of such rulings also will
allow taxable competitors to have some notice that an exempt
entity is, in effect, being granted a new tax exemption for a
new business activity.
Coalition members believe that the public, including
taxpayers competing with exempt organizations, have a right to
know the types of transactions and activities that the IRS
endorses and the rationale for such decisions. Taxpayers should
not be forced to wait (possibly for years) for formal Treasury
regulations, published revenue rulings or technical advice
memoranda addressing permitted types of activities, or worse
yet, to speculate both as to the types of permitted activities
and the IRS's underlying analysis endorsing such activities.
Conclusion
The JCT staff's recommendation to provide for the
unredacted disclosure of most types of guidance issued by the
IRS to exempt organizations is consistent with current law
requiring public disclosure of exempt applications and annual
information returns. Exempt organizations should not continue
to be subject to less disclosure than fully taxable taxpayers.
There exists a strong policy argument in favor of disclosure by
exempt organizations that supports the notion that such
organizations are publicly accountable. The Coalition strongly
supports the JCT staff's recommendation with respect to exempt
organizations and urges the Committee to act favorably on it.
Statement of Coalition for Nonprofit Health Care, Boone Powell, Jr.,
Chair
The Coalition for Nonprofit Health Care appreciates this
opportunity to comment for the record on the recommendations
concerning tax-exempt organizations contained in the Joint
Committee on Taxation Staff Disclosure Study (``JCT Study'')
released on January 28, 2000. As discussed below, the Coalition
generally supports increased disclosure that advances tax
administration or the public interest in a meaningful way while
respecting the legitimate privacy rights of tax-exempt
organizations and their employees and avoiding undue burdens on
them. However, the Coalition has serious concerns about certain
of the recommendations in the JCT Study, and would oppose their
enactment into law.
The Coalition for Nonprofit Health Care
The Coalition for Nonprofit Health Care (``CNHC'' or the
``Coalition'') champions the role of nonprofit, mission-driven
health care and works to preserve our nation's primarily
nonprofit health care delivery system through an active agenda
of research, education, and advocacy. CNHC is a national
membership organization of health care providers and
associations of providers, including hundreds of hospitals,
academic medical centers, HMOs, physician clinics, integrated
delivery systems, nursing homes, and home health agencies, as
well as other organizations interested in nonprofit health
care. CNHC believes it is in the public interest to preserve a
strong charitable, nonprofit health care delivery system
because nonprofit providers are mission-driven, provide
individuals and communities access to treatment that otherwise
would not exist, are responsible for the vast majority of
clinical and educational innovation, and provide considerable
charity care and other community benefits.
Coalition members are located throughout the United States
and include some of the most respected and most innovative
health care organizations. A list of Coalition members is
attached. They include hundreds of institutional and thousands
of individual health care providers, including:
the nation's largest HMO and nonprofit health care
system;
several of the most respected physician clinics
and academic health centers;
the nation's largest consumer-governed health care
organization;
three of the ten largest health care systems in
the nation; and
four of the nation's largest operators of skilled
nursing facilities.
Recommendations the Coalition Supports
Disclosure of all written determinations
The JCT Study recommends that all written determinations
(and background file documents) involving tax-exempt
organizations, such as private letter rulings and technical
advice memoranda, be disclosed. The Coalition supports this
recommendation. This expanded disclosure would fix a technical
gap between Internal Revenue Code Sections 6104 and 6110 and
place all IRS written determinations issued to taxpayers on a
level playing field. In addition, consistent disclosure of
written determinations furthers the goal of enabling the public
to obtain guidance as to the views of the IRS on particular
issues.
Disclosure of certain third-party communications to the IRS
The Coalition supports the JCT Study recommendation to
disclose third-party communications (e.g., Congressional,
Executive Branch) to the IRS with respect to final IRS written
determinations and approved applications discloseable under
Section 6104, applying rules similar to current rules under
Section 6110(d) applicable to taxable organizations.
Expanding IRS authority to share information with state non-tax
officials or agencies
The Coalition generally supports the recommendation in the
JCT Study to expand IRS authority to share information with
state non-tax officials or agencies before reaching a final
determination with respect to revocation or denial of
exemption. Any such information sharing should remain subject
to the confidentiality and nondisclosure provisions of Section
6103 applicable to state officials and agencies. The Coalition
believes that such information sharing is in the public
interest because it aids in the administration by appropriate
governmental officials of both the tax laws and a state's laws
governing charitable organizations. In the rare but egregious
case in which a charitable organization's assets are being
diverted, earlier disclosure to appropriate governmental
officials may help preserve charitable assets.
Requiring IRS to revise Form 990 and accept Form 990 via
electronic filing
The Coalition supports the JCT Study recommendation that
would require the IRS to accept Form 990 via electronic filing
and to revise the form to make it more relevant and
comprehensible to the public as well as the IRS.
The Coalition respectfully submits that wide dissemination
of a more relevant and comprehensible Form 990 would achieve
most of the goals set forth in the JCT Study without the need
for many of the additional disclosures we have identified in
this submission as potentially causing more harm than good. The
disclosure of a Form 990 containing more relevant and
comprehensible information would achieve the primary goal of
publicizing the information that is of greatest public
interest. Though sometimes difficult to decipher, the Form 990
elicits the types of information identified by the JCT staff as
relevant to the public's oversight of tax-exempt organizations.
Such information includes financial information similar to that
available for publicly traded companies, a description of the
organization's activities and use of funds, and a description
of how those activities further its exempt purposes. We would
be happy to work with the IRS and other interested parties to
help redesign the form to improve its relevance and clarity.
Requiring small tax-exempt organizations to file annual status
note cards
The Coalition supports the JCT Study recommendation to
require exempt organizations having receipts of less than
$25,000 to file a small note card annually updating the IRS
with respect to the organization's continued existence,
termination, address, etc.
Requiring notification that Forms 990 are publicly available
The Coalition supports the JCT Study recommendation that
the IRS be required to notify the public that tax-exempt
organizations' Form 990 are publicly available.
Requiring disclosure of both a tax-exempt organization's legal
name and names under which it does business
The JCT Study recommends that a tax-exempt organization be
required to report on Form 990 both its legal name and any
names under which it does business, and that the IRS be
required to publish both names in Publication 78.
The Coalition generally supports this recommendation. To
avoid unnecessary burdens on large health care corporations
with multiple small service sites and to avoid public
confusion, we suggest that a tax-exempt organization be
required to disclose only names under which the organization
(1) solicits contributions or (2) conducts substantial
activities.
Requiring disclosure of World Wide Web site addresses
The Coalition supports the JCT Study recommendation to
require disclosure of the address of a tax-exempt
organization's Web site (1) by the organization on its Form 990
and (2) by the IRS in Publication 78.
Expanding preparer penalties for known omissions and
misrepresentations on Form 990
The Coalition supports the JCT Study recommendation to
expand preparer penalties for (1) known omissions or
misrepresentations on Form 990 and (2) willful or reckless
misrepresentation or disregard of the rules and regulations
with respect to Form 990, in each case regardless of whether
there is an understatement of tax.
Recommendations the Coalition Opposes
Disclosure of all written determinations in unredacted form
As discussed above, the Coalition supports the JCT Study
recommendation to disclose all written determinations, placing all IRS
written determinations issued to taxpayers on a level playing field.
The JCT Study further recommends, however, that all written
determinations (and background file documents) with respect to tax-
exempt organizations be disclosed without redaction. The Study does not
make this recommendation with respect to taxable organizations.
The Coalition opposes disclosure of names and identifying details
in written determinations because such additional disclosure would
undermine the level playing field described above, would do little to
advance the public interest, and is unnecessary to achieve the goal of
providing guidance on IRS positions. Written determinations, unlike the
information contained in Forms 990 and 1023, typically involve specific
isolated transactions and address technical issues for which existing
precedents provide no clear guidance. Although the Coalition recognizes
the public interest in oversight of tax-exempt organizations, the
narrow scope of written determinations would not provide a meaningful
opportunity for increased public oversight.
Further, the highly regulated competitive environment in which
many health care organizations operate makes confidentiality of
proposed business arrangements important. The knowledge that any IRS
written determination will name names may discourage private
individuals or taxable organizations from doing business with tax-
exempt organizations or have a chilling effect on an organization's (or
the other party's) willingness to seek advance guidance in gray areas.
The advance ruling process is an important means by which the IRS keeps
up with emerging developments involving exempt organizations. The
Coalition believes that this process should be encouraged.
Disclosure of the results of IRS audits of tax-exempt organizations
(without redaction) and all closing agreements involving exempt
organizations (without redaction)
The JCT Study recommends that all IRS examination results involving
tax-exempt organizations be disclosed without redaction after the
administrative appeal rights have expired. The JCT staff further
recommends that all closing agreements involving exempt organizations
be disclosed without redaction. This information is not subject to
disclosure with respect to taxable organizations.
The Coalition opposes disclosure of IRS audit results and closing
agreements and believes existing law regarding confidentiality of these
materials should be preserved. The JCT Study asserts that information
regarding the outcome of an audit would assist the public in
determining whether the organization is in compliance with the law and
how the organization is using funds. The Coalition respectfully
disagrees that disclosure of audit results and closing agreements will
add in a meaningful way to the information otherwise available to the
public regarding a tax-exempt organization's compliance with the law
and its use of funds. In the absence of such a benefit, the Coalition
believes that the negative effects of such disclosure far outweigh any
meaningful increase in the public's ability to oversee tax-exempt
organizations.
First, only a limited number of tax-exempt organizations are
examined in any year. A disproportionate number of those organizations
are large organizations, such as universities and health systems, that
are subject to coordinated examination procedure (``CEP'') audits. The
unredacted disclosure of examination results would create two classes
of exempt organizations--those that have been examined and those that
have not. Whether an organization has been examined typically is no
indication of its compliance with the law. Thus, a meaningless and
potentially misleading classification would be established that adds
little or nothing to the public's oversight ability.
We are very concerned that release of this information with respect
to a small number of tax-exempt organizations each year invites
misinterpretation and misuse of the information. Audit findings that
may be minor or insignificant from the IRS's perspective, but could be
damaging to an exempt organization's reputation or business
nevertheless, will make their way to the front pages of newspapers, and
could escalate into significant public relations problems. Worse, this
information is ripe for misuse by litigants, philosophical opponents,
and competitors. Nonprofit health care organizations increasingly face
competition from for-profits in their local or regional markets (15% of
hospital beds and 75% of HMOs are operated by for-profit companies).
Releasing IRS audit information and closing agreements involving tax-
exempt organizations, while holding confidential the same information
involving taxable organizations, places exempt organizations at a
disadvantage and could weaken charitable health care providers, invite
further conversions to for-profit status, and erode public confidence
in the remaining nonprofits.
Further, many of the issues addressed in an IRS examination,
particularly a CEP examination, are not unique to tax-exempt
organizations and do not even relate to tax-exempt status. For example,
there appears to be no compelling public interest in publicizing
whether a particular tax-exempt organization has properly characterized
certain individuals as employees or independent contractors, a common
issue for colleges, universities, and hospitals. Certainly such
information would not be subject to disclosure for any other taxpayers,
including taxable schools or hospitals.
Most importantly, disclosure of audit results and closing
agreements likely would have a harmful effect on tax administration and
voluntary compliance. Such disclosure likely would result in a
lengthening of the audit process and added litigation because tax-
exempt organizations would have a disincentive to compromise with the
IRS on disputed matters. An organization may reasonably be concerned
that such a compromise could be misconstrued as an admission of failure
to comply with the law. Similarly, a tax-exempt organization would be
less likely to come forward, independent of the audit process, to
resolve with the IRS potential tax issues it may discover on its own.
Under current law, a tax-exempt organization may choose to
compromise a contested position during an examination or as part of a
closing agreement without any implication that its original position
was not in compliance with the law. Many, if not most, disputed issues
compromised during the course of an examination relate to areas in
which the law is not clear. In the case of a closing agreement
initiated by the taxpayer, the organization has identified an area of
possible noncompliance and seeks the assistance of the IRS in resolving
the matter, including through implementation of agreed-upon
corrections. Where the tax-exempt organization has made a good-faith
attempt at compliance or correction, the public interest is best served
by a compromise acceptable to both the taxpayer and the IRS. In fact,
the legislative history of the intermediate sanctions excise tax states
that revocation of an organization's tax-exempt status should be
reserved for situations in which the organization no longer operates as
a charitable organization. The decision to resolve any disputed issues
without revoking exempt status indicates that the IRS has determined
that the organization continues to operate as a charitable organization
or that the dispute did not involve issues relating to the
organization's tax-exempt status. Thus, it is difficult to see how
disclosure of examination results or closing agreements adds in any
meaningful way to the public's interest in compliance by tax-exempt
organizations.
Disclosure of pending applications for tax-exempt status
Though applications for tax-exempt status and supporting documents
are disclosed upon receipt of a favorable IRS determination under
present law, the JCT Study recommends that applications and supporting
documents be disclosed when the application is made. In addition, the
Study recommends that any IRS action taken on the application be
disclosed.
The Coalition opposes disclosure of exemption applications prior to
a final determination by the IRS. The review of an organization's
application involves a legal determination as to whether the
organization has met the applicable requirements for tax-exempt status.
This legal determination is made in the first instance by the IRS and
is reviewable by the courts. There is little, if any, public benefit to
be derived from disclosure of an application while it is pending. In
fact, such disclosure could be misleading, particularly in situations
in which the IRS requests clarifications or changes during the
application process (for example, when a legally unsophisticated
applicant has inartfully described activities that do in fact qualify
for exemption). In addition, disclosure of applications during the
review process would interfere with fair and efficient tax
administration by increasing the potential for inappropriate
interference by competitors or philosophical opponents and for
politicization of a legal process.
Though the IRS appears to have done a good job in recent years in
resisting inappropriate political interference, releasing pending
exemption applications invites such interference and increases the
possibility of inconsistent legal determinations. An application that
is accompanied by well-orchestrated opposition or political pressure
may receive a different determination than one unaccompanied by such a
response. Present law requirements for disclosure of applications and
the underlying file aftera final determination by the IRS help ensure
consistency of determinations and public understanding of the standards
applied.
The release of a Form 1023 or 1024 submitted by an organization
that the IRS ultimately does not recognize as exempt, either because
the organization withdraws its application or does not qualify for
exemption, needlessly discloses information about an organization that
is not tax-exempt. If an organization withdraws its application or the
IRS denies exemption, the applicant is taxable, and should be treated
like any other taxable organization.
The Coalition is aware of one circumstance in which the public may
have a limited interest in an organization's pending application. A
potential donor has an interest in knowing whether a donation is
deductible as a charitable donation under Section 170 of the Code. For
most Section 501(c)(3) organizations, tax-exempt status is effective as
of the date of incorporation, while the actual IRS determination is not
made until a later date. Thus, an organization that believes it meets
the qualifications for tax-exempt status under Section 501(c)(3) may
solicit or receive contributions from donors while its application is
pending. Even in this circumstance, however, disclosure of the
application itself would not meaningfully advance the public interest.
A donor could not predict, with any greater certainty than the
organization itself, whether the IRS will approve the application. In
such cases, requiring a public statement that the application is
pending and that a final determination letter has not yet been received
may be appropriate to alert donors to the possibility that the
application may be withdrawn or rejected. Donors may then make an
informed decision as to whether deductibility of the donation is
important and if so, whether to make the donation currently, defer the
donation, or require a redirection of the donation if a favorable
determination is not received.
Disclosure of related returns and returns of affiliated organizations
The JCT Study recommends requiring disclosure of (1) a tax-exempt
organization's Form 990-T, Unrelated Business Income Tax Return; (2)
Form 1120 for any taxable affiliate of a tax-exempt organization; and
(3) Form 1065 for any partnership in which a tax-exempt organization
participates.
The Coalition opposes these recommendations. Tax-exempt
organizations are expressly permitted to engage in non-exempt
activities, through conduct of an unrelated trade or business or
through a separate organization such as a partnership or taxable
corporation. Such activities are treated in the same manner as the
activities of other taxable entities and are subject to the same tax
liabilities. Taxation of these activities in the same manner as the
activities of any other taxable entity preserves a level playing field
and prevents unfair competition. To subject the tax returns for these
taxable businesses to disclosure, when other taxable businesses are not
subject to disclosure, creates a non-level playing field and would
place nonprofits' subsidiaries and other affiliates at a competitive
disadvantage. Disclosure of the detailed information in these returns
may also make it more difficult for affected organizations to attract
skilled managers and may inhibit relationships with potential investors
or business partners, who may be reluctant to enter into transactions
if the details will be made public. There is no meaningful public
benefit from such disparate treatment and any bases for the public's
interest in an organization's exempt activities do not apply to taxable
activities.
The nonprofit health care sector, in particular, would be unduly
burdened and harmed by required disclosure of taxable affiliates'
returns. Health care organizations have developed complex multi-
corporate structures as a legitimate means to address liability
concerns and the unique regulatory environment in which they operate.
Moreover, investor-owned organizations are aggressively moving into
some of the more profitable venues in health care, and could use
increased disclosure by taxable affiliates of nonprofits as a road map
to cherry-pick financially attractive activities, leaving a diminished
nonprofit sector to conduct the money-losing activities. It is
difficult to identify a public interest that justifies this kind of
potential harm.
Requiring additional information to be reported on Forma 990 regarding
the transfer of funds among organizations exempt under Section
501(c)(3), Section 501(c)(4), and Section 527
The JCT Study recommends that Form 990 should be revised to require
tax-exempt organizations to clearly identify conduit arrangements in
which funds are being transferred among Section 501(c)(3), Section
501(c)(4), and Section 527 organizations. The JCT staff expressed
concern that existing reporting requirements, which apply only to
transfers to affiliated organizations, do not require disclosure of
more complex arrangements that may be used to circumvent restrictions
on political campaign activities and calls for reporting more
information on transfers.
The Coalition believes that expanding the required disclosure to
include any transfer among Section 501(c)(3), Section 501(c)(4), and
Section 527 organizations would be unduly burdensome and is not
necessary to address the concern identified in the JCT Study. Many
nonprofit health care providers are parts of multi-corporate systems in
which funds are routinely transferred back and forth. Any expanded
reporting or disclosure should be narrowly crafted to address only the
specific perceived abuse related to political campaign activities and
to exclude transfers that occur in the ordinary course of legitimate
activities and operations.
Requiring Section 501(c)(3) public charities to provide a detailed
description of their legislative activities on Schedule A to Form 990
The JCT Study recommends that Section 501(c)(3) public charities, a
classification that includes most nonprofit health care providers, be
required to provide on Schedule A, Form 990, a detailed description of
legislation addressed and activities involved in their lobbying
efforts. This would include information regarding expenditures for
self-defense lobbying and expenditures for nonpartisan study, analysis,
or research if it includes a limited ``call to action,'' even though
these activities are excluded under certain circumstances from the tax
law definition of lobbying.
The Coalition opposes these proposals as unnecessarily broad,
burdensome, and in many cases duplicative of information already
required to be reported under the Lobbying Disclosure Act of 1995
(``LDA''). Information about activities that fall outside the tax law
definition of lobbying likely is not collected at present. Thus, we are
concerned that the additional record keeping requirements would be
burdensome and unnecessarily expensive for charitable organizations of
all sizes. A narrow proposal to disclose only the information required
to be disclosed under the LDA in a format that conforms to existing tax
and LDA reporting requirements and the method elected by the reporting
entity would be far less burdensome, expensive, or chilling of lobbying
activities by smaller charities. Moreover, the IRS would likely have
little use for lobbying expenditure information beyond that already
reported on Schedule A.
We are particularly concerned that the JCT staff's latter two
proposals, concerning self-defense lobbying and nonpartisan study,
analysis, or research appear to be a backdoor approach to broadening
the existing tax law definitions of lobbying, at least for reporting
and public disclosure purposes. The recommendation to report and
disclose expenditures for nonpartisan study, analysis, and research
even though it falls outside the existing tax law definition of
lobbying would be a particular problem for membership organizations and
associations. Our concern is that, ultimately, collection and
disclosure of this information could result in calls for congressional
expansion of the definition of lobbying. This could have a chilling
effect on organizations like the Coalition and its member associations
that seek to review, summarize, and inform their members about
legislative proposals affecting issues their membership cares about.
This proposal, instead, would discourage open, informed discussion
about legislative issues.
If information concerning expenditures for self-defense activities
is required to be disclosed, it is likely that the primary persons
interested in obtaining or using it would be those who are challenging
the organization's exempt status. If those persons or organizations
(likely to include for-profit competitors or philosophical opponents)
are for-profit, they would not be required to disclose amounts spent
challenging exemption.
Coalition for Nonprofit Health Care
List of Members
Provider Members
Banner Health System
Fargo, North Dakota
Baptist Health Systems of South Florida
Miami, Florida
Baylor Health Care System
Dallas, Texas
Catholic Health Initiatives
Denver, Colorado
Catholic Healthcare Partners
Cincinnati, Ohio
Catholic Healthcare West/St. Joseph Health System
San Francisco, California/Orange, California
The Children's Hospital
Denver, Colorado
Dartmouth-Hitchcock Medical Center
Lebanon, New Hampshire
Deaconess Billings Clinic
Billings, Montana
Fairview/Lutheran Hospitals
Cleveland, Ohio
Group Health Cooperative of Puget Sound
Seattle, Washington
Kaiser Foundation Health Plan, Inc.
Oakland, California
Marshfield Clinic
Marshfield, Wisconsin
The Mayo Foundation
Rochester, Minnesota
Memorial Hermann Health Care System
Houston, Texas
Mercy Health Services
Farmington Hills, Michigan
Moses Cone Health System
Greensboro, North Carolina
PeaceHealth
Bellevue, Washington
Scott & White Memorial Hospital
Temple, Texas
Organizational Members
Alliance of Catholic Health Care (ACHC)
Sacramento, California
Alliance of Community Health Plans (ACHP)
New Brunswick, New Jersey
American Association of Homes and Services for the Aging (AAHSA)
Washington, D.C.
American Protestant Health Alliance (APHA)
Washington, D.C.
Premier, Inc.
San Diego, CA
Catholic Health Association of the United States (CHA)
St. Louis, Missouri
VHA, Inc.
Irving, Texas
Visiting Nurse Associations of America (VNAA)
Boston, Massachusetts
Concerned Women for America
Washington, DC 20005
March 14, 2000
Mr. A.L. Singleton, Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Re: Comments on Joint Committee on Taxation Staff Proposal, JSC-1-00
(January 28, 2000) regarding Taxpayer Confidentiality and
Disclosure Provisions
Dear Mr. Singleton,
Concerned Women for America (CWA) is the nation's largest public
policy women's organization and enjoys the support of well over 500,000
members nationwide. In 1999, CWA celebrated 20 years of service to the
nation, representing the voice of hundreds of thousands of women and
like-minded men who refuse to remain silent when radical feminists
attempt to speak on their behalf.
CWA has been able to perform this service to its members and the
nation as a 501(c)(3) non-profit H-electing organization. The committee
staff recommendations relating to non-profit disclosure drew our
attention, and we offer the following observations and urge the
Committee members not to accept the recommendations.
Organizations such as CWA actively engage in self-disclosure of our
lobbying activities to our members as well as often to the general
public. Thus, additional disclosures are largely unnecessary. Unlike
government agencies, CWA is directly accountable to its members whose
financial support will cease the moment their organization ceases to
achieve its promised mission. Unlike taxpayer-supported non-profits,
CWA has never requested nor received taxpayer dollars to engage in its
member-directed work. Additional disclosure would surely better serve
the taxpaying public's interest if it is directed towards those
organizations which receive taxpayer support and engage in lobbying.
(e.g., Planned Parenthood affiliates or Legal Services Corporation-
grantees).
Additional disclosures, as recommended by the Committee staff, are
both duplicative and an unnecessary added financial and organizational
burden which will tend to distract CWA from achieving its mission. CWA
would have to begin to track for reporting purposes potentially
multiple issues which it has never had to track and report before.
Congress is engaged in a process of simplifying tax-related
requirements. The staff recommendations are the precise opposite: they
call for more complex reporting which will require a more complex
Schedule A. This additional complexity does not come with efforts to
clarify definitions, let alone provide any which may be missing. On the
contrary, the additional demands with which the recommendations would
burden non-profits come with more terms which are left undefined. For
example, a ``limited call to action'' is apparently different from a
``call to action.'' The statute at least mentions a ``call to action.''
Nowhere does it mention a ``limited call to action.'' This new term
could affect the meaning of ``lobbying'' as defined for H-electing non-
profits such as CWA.
CWA and other non-profits are already chilled in expressing their
opinions for fear of crossing IRS regulations which are largely
undefined, thus allowing federal agencies such as the IRS wide leeway
to punish non-profits after the fact. This is an unconscionable
situation which will only worsen if the staff's recommendations to
further complicate reporting with largely undefined demands upon non-
profits.
Respectfully submitted,
Beverly LaHaye
Chairman and Founder
Statement of Dorothy S. Ridings, President & CEO, Council on
Foundations
The Council on Foundations is a national membership
organization representing the collective interests of more than
1,900 community, family, independent and company foundations as
well as corporate giving programs. The Council has always had a
strong commitment to promoting the accountability of
grantmakers to donors, grantees and the public. Consistent with
its support for accountability, the Council has routinely
supported initiatives to improve public access to information
about the financial and programmatic operations of its members.
In particular, the Council has supported efforts to make both
Form 990 and Form 990-PF more easily available. It also has
supported, and continues to support, increased funding for IRS
oversight of tax-exempt entities, including reviews to ensure
that the returns filed by both private foundations and public
charities meet the legal requirements for full and accurate
disclosure. Finally, the Council supports electronic filing of
exempt organization tax returns in order to speed the public
disclosure process, as well as reduce the burden of filing
paper returns.
We have reviewed the volume of the disclosure report
addressing issues related to tax exempt organizations and we
support a majority of its nineteen recommendations, although we
respectfully disagree with some. We will not, in this
submission, discuss the Council's position on each
recommendation since our positions are fully reflected in the
detailed statement submitted by Independent Sector. We submit
this supplementary comment in order to provide more detail on
two of the disclosure recommendations that are of particular
interest to grantmakers.
However, before discussing those two issues, the Council
wishes to underscore two important points in the Independent
Sector analysis. First, while the Council has long advocated
public disclosure of information about grantmakers, we have
done so because we believe that disclosure fosters public
trust, and that maintaining public trust is essential to the
effective operation of charitable organizations. We disagree
with the report's premise that tax exemption and the
deductibility of charitable contributions transform private
institutions into quasi-public ones that should be completely
transparent to the public. We also strongly disagree with the
presumption that the burden should be on tax-exempt entities to
justify the withholding of any information about their
activities and operations. While we support greater public
disclosure than that required from taxpaying institutions, we
firmly believe that the burden should be on the advocates of
disclosure to demonstrate significant public benefit from
additional revelations--particularly in areas such as audits,
the conduct of activities on which tax is paid, and
participation in the public policy process, where privacy would
normally be assumed.
Second, we affirm the opposition in Independent Sector's
comments to disclosure requirements that could have a chilling
effect on charities' participation in the public policy
process. Many of the Council's members are public charities, as
is the Council itself. Adopting the report's recommendations
would have a significant negative effect on these members'
educational and policy activities, and on the Council's ability
to advocate for its members. Moreover, extension of the self-
defense lobbying recommendation to private foundations would
further restrict the limited capacity of these institutions to
participate in the formation of public policy that directly
affects their ability to operate.
Simplifying and Streamlining Form 990-PF
As part of its effort to improve public disclosure of
relevant financial information, the Council drew the attention
of both the Joint Tax Committee staff and the Department of
Treasury's Tax Policy Office to two specific changes to the
requirements of Form 990-PF that we believed would
substantially lessen the filing burden, while improving public
access to information about private foundations. Part II of
Form 990-PF (Lines 10 through 15) requires all private
foundations to submit to the IRS each year a detailed listing
of all of their assets. Particularly for larger foundations
with substantial assets, these lists, which catalog the
foundation's holdings on a single day during the tax year, add
considerable bulk to the foundation's return. The same is true
for the requirement in Part IV of the form that private
foundations provide a complete list of all of their capital
gains transactions during the year. Together, these two
schedules can add hundreds of pages of tiny-type schedules to
Form 990-PF, burying the reader in such a morass of detail that
it becomes difficult to focus on the important parts of the
return. Eliminating these schedules would improve public access
to information about foundations by making the form easier to
read and comprehend and by making it substantially easier to
post on a web site. A further compelling reason for eliminating
the schedules is that despite the cost and burden of supplying
the data, there is every indication that the Internal Revenue
Service makes little, if any, use of it.
The Joint Committee Report acknowledges the need for change
in this area, recognizing that disclosing voluminous data can
obscure more important information. Accordingly, the report
proposes that private foundations routinely disclose only a
summary of their capital gains transactions to the public (the
complete list would have to be supplied to an interested member
of the public, upon request). However, this recommendation does
not go far enough to solve the problems that the Council
identified, because all of the underlying data about capital
gains still must be supplied to the IRS. Moreover, the Joint
Committee Report did not address the issue of the schedules of
assets held. These lists are at least as voluminous and
uninformative as the lists of capital gains transactions.
We strongly recommend that Form 990-PF be amended to
substitute a requirement that private foundations provide
summaries of their assets and their capital gains transactions
rather than complete lists. Recognizing that this information
could be valuable in the event of an audit, we also recommend
that private foundations continue to be required to retain this
information in their files until the statute of limitations
runs out on the return. The Council would be happy to work with
the IRS to devise appropriate ways of summarizing the data that
meet the enforcement needs of the Service and the public's
interest in information about private foundations.
Disclosures with respect to returns filed by affiliated organizations
The report recommends that section 6104 be expanded to
require the disclosure of Form 990-T (unrelated business income
tax) if a tax-exempt organization files that form. The report
also recommends disclosing Form 1120 (the corporate tax return)
and other returns filed by taxable entities affiliated with
tax-exempt entities. For all of the reasons stated in
Independent Sector's comments, the Council opposes required
disclosure of business tax returns.
There is, however, an additional problem with the
recommendation. The report does not elaborate on the basis on
which a taxable organization would be deemed to be affiliated
with a tax-exempt entity. While we do not believe the Joint Tax
Committee staff intended the result, the Council notes for the
record that corporations are affiliated with their corporate
foundations. Thus, a literal interpretation of the report could
lead to the required disclosure of the Form 1120 filed by a
significant number of major U.S. corporations simply because
they are affiliated with a tax-exempt entity, a result that
would quickly lead to the termination of most existing
corporate foundations and would certainly chill the formation
of new ones. The absurdity of this outcome underscores the
complexity of the recommendation to require disclosure of
information about the business activities of tax-exempt
entities.
First Baptist Church
Groton, VT 05046
To: The Joint Committee on Taxation:
The Chairman of the House Ways and Means Committee, Representative Bill
Archer (R-TX)
Re: IRS reform act proposals for 501 (c) (3) organizations--churches
Summary: these proposals would create burdensome new record keeping
requirements for non-profit organizations, such as churches.
The Internal Revenue Service restructuring and Reform Act of 1998
was intended to consider methods to restructure the IRS to make it more
responsive to the needs of Americans and less intrusive in their lives
but they have done just the opposite.
There is a clear potential that every time a church asks its
members to call or write their elected officials [local, state, and
federal] on a bill, they would be required to report that activity to
the IRS. This danger is coming from the Congressional Joint Committee
on Taxation which is recommending possible laws that could seriously
impact churches. I believe the purpose of this intrusion seems to be to
frighten the churches and keep pastors away from expressing their 1st
Amendment Rights.
I call upon The Joint Committee not to adopt changes, requirements,
or proposals as you have considered below.
1. Provide information about their lobbying activities on their
annual tax form (Form 990), described in the Joint Committee's report
as ``a detailed description of the legislation addressed in their
lobbying efforts and the manner in which organizations engaged in
lobbying activities.'' Currently 501(c)(3)s that have elected to use
the 501(h) expenditure test for lobbying need only report their
lobbying expenditures, and non-electing 501(c)(3)s must provide a
narrative description of their lobbying that is probably less detailed
than the report envisioned by the Joint Committee's proposal.
2. Disclose the amount of money the organization spends on
activities under the ``self-defense'' exception to the lobbying rules.
Currently advocacy involving legislative proposals that effect a
501(c)(3)'s rights or existence are not considered lobbying and need
not be reported. Under the Joint Committee's proposal, self-defense
advocacy would still not count against a 501(c)(3)'s lobbying limits,
but 501(c)(3)s would now have to report all such expenditures.
3. Disclose expenditures for nonpartisan research and analysis if
the research or analysis includes a ``limited `call to action.' ''
Currently under the exception for nonpartisan research and analysis, a
``full and fair'' discussion of an issue that provides sufficient
information for readers to come to their own conclusions about this
issue will not be considered lobbying, even if it includes an
``indirect'' call to action. An indirect call to action is identifying
certain legislators that will vote on the issue. The Joint Committee's
proposal would require 501(c)(3)s to report expenditures for this
educational activity.
In short, these proposals would create burdensome new record
keeping requirements for non-profit organizations, such as churches.
Sincerely,
Pastor Chris Paine
First German Congregational Church
Lincoln, NE 68522
March 7, 2000
A.L. Singleton, Chief of Staff, Committee on Ways and Means
U.S. House of Representatives
1102 Longworth
Washington, DC 20515
Dear Sir:
I have just been informed of proposals from the IRS regarding
reporting requirements for 501(c)(3) organizations. It seems to me that
charitable organizations do their members a favor to inform them and
invite their participation in the political process when legislation
that affects their functions are proposed. And the IRS has been trying
to persuade us that they are seeking to make the job of reporting to
them easier, that they are trying to serve the public! The latest
proposals to require reporting of all efforts by charitable
organizations to involve the public in public policy with legislators
is one of the most onerous requirements ever put forward by this
elitist organization.
This is a gross violation of free speech rights. Does the
Constitution of this great country mean nothing to the IRS? This is by
far not the only attempted violation of Constitutional provisions from
the IRS. The fact is, our government has created a monster that it
hardly controls. And the citizens are made to feel that we no longer
have government ``of the people, by the people, for the people.''
If the IRS has its way, we will no longer be able to tell our
people what legislative actions need their response to their
congressman and/or senator without the messy business of reporting it.
With stupid laws like this, are you really interested in raising up new
levels of lawbreaking, even if it is inadvertent? And is adhering to a
law that grants freedom on the one hand to be overturned by another law
by a subsidiary of the government? We know that such laws get passed
because they are slipped into a larger package in the hope that they
won't get noticed. Why lay such stupidity on the courts to resolve when
it can be properly handled in committee before it ever slips into law?
It is my sincere hope that your committee will keep the IRS from
tyrannizing 501(c)(3) organizations. Our political process is good, but
we need to keep using it as intended. Thank you for your attention.
Sincerely yours,
Rev. James Pedersen
Pastor
Los Angeles, CA
March 12, 2000
A.L. Singleton
Chief of Staff
Committee on Ways and Means
House of Representatives
1102 Longworth House Office Building
Washington, DC 20515
Dear Mr. Singleton:
I am writing in response to the Committee's advisory of February 2
requesting comments on the Joint Committee on Taxation's Disclosure
Study hereafter referred to as JCT Study. I am writing as a private
citizen with both a public interest and very personal interest in
disclosure provisions relating to tax-exempt organizations.
In summary, my positions are:
1. In strong support of the Joint Committee staff's recommendations
for full public disclosure without redactions by the IRS of all audits,
closing agreements, determinations, and background file documents.
2. In strong support of full public disclosure of all Form 990s for
section 501(c)(3) organizations including salaries of their officers.
3. In support, in general principle and with some modification, of
the suggestion made by John D. Anderson in his comments in Vol. III of
the JCT Study that Form 990s should be expanded to include detailed
information on all federal grants made to the organization. I would
favor a summary of how many grants an organization has from various
departments/entities within the federal government and full posting of
these at an appropriate government website. As government is re-
invented/downsized, etc., it is even more important that disclosure be
made in a similar fashion for all federal contracts held by tax-exempt
organizations.
4. In support of the comments made by Dr. Lee Lillard of the
Michigan Retirement Research Center to make available to researchers,
with strict confidentiality protection in plans approved by
Institutional Review Boards, IRS data for use in linked data research.
The working paper presented by Dr. Lillard deals with aging research;
however, researchers studying younger populations also have similar
needs.
I hope my comments will be especially helpful because they involve
a current and real case study related to the JCT Study's
recommendations. No one regrets more than I that they must be made in
the only capacity in which I can speak as a ``disgruntled former
employee alleging.'' However, I believe that this and subsequent
related information will assist the Ways and Means Committee, the
Appropriations Committee, the Committee on Government Reform, and the
Committee on Education and the Workforce in the 107th Congress.
In November 1996, I went to the Pension and Welfare Benefits
Administration (PWBA) of the U.S. Department of Labor (DOL) and filed a
complaint against my former employer, the RAND Corporation, a tax-
exempt 501(c)(3) organization. I alleged that
1. I was misclassified as an independent contractor and thus
illegally denied benefits in violation of ERISA
2. That I represented a class of unknown size of RAND employees who
were similarly misclassified and denied benefits in violation of ERISA
3. That Section 510 of ERISA was violated against me, i.e., I was
threatened, harassed, and ultimately terminated from employment while
attempting to clarify my eligibility for ERISA benefits.
For the past 33 months the PWBA has been conducting an audit/
investigation as a result of those allegations that are very similar to
the ones in the Vizcaino v. Microsoft and Herman v. Time Warner. I
provided the PWBA with a large amount of documentary evidence at that
time and subsequently. As Members of Congress are well aware, while an
audit by DOL, IRS, or any government agency is in progress, nothing can
be known or revealed until the investigation is completed. I am
providing the only thing I can know to the Committee, i.e., the audit/
investigation case number is 72-12099. It is not my purpose herein to
in any way interfere with or influence the audit or to rehash material
that already is in the hands of the appropriate enforcement agency.
Everything that I present herein either as fact, theory, or opinion
already has been communicated to the PWBA. No one has assisted me in
writing this document except one close family member. Since I learned
of this request for comments only on March 3, I have not had time to
ask anyone's permission to use his/her name; therefore, no one's name
will appear unless publicly identified and then only law firms that are
publicly named as legal counsel in federal courts. I am attempting to
write with the objectivity of a professional with a background in
government, research and public policy. At the same time, I am writing
with the subjectivity of a citizen with a very personal and vested
stake in these issues. I hope it will be clear when I switch from one
of these perspectives to the other. Finally, while I will cooperate
fully with government agencies and Congressional staff, I will make no
further public comment while the PWBA audit is in progress.
All the research I have done for my case in the past three and a
half years has been done from available public information from the
media, the Internet, or public libraries. I have never had access to a
law library or Lexis-Nexis. Obviously I have learned a great deal about
RAND and a great many topics. I am not including references or doing
footnotes; however, I can provide sources of all data to the
Committee's staff.
Indeed it is amazing how much can be learned about a high-profile
tax-exempt organization from public sources; however, I am advocating
for even more public information and access. Tax-exempt status is
granted only for specific purposes to benefit the public good. It is
given in the name of the federal government and all citizens. I learned
from the JCT Study that the charitable donation tax deduction for
individual income tax was enacted in 1917. There always has been a
strong ethos of charity and volunteerism in our country as well as a
suspicion of government as a ``necessary evil'' about which Garry Wills
recently has written in depth. Therefore, we as a society should and do
expect more of tax-exempt organizations and those who manage them.
1. Public Disclosure of IRS Audits and Closing Agreements
Please note that this section is lengthy and could benefit
from some subheadings. I have spent the most time and effort on
it because I know that the JCT Report's recommendation is a
large change that probably will be opposed by tax-exempt
organizations and their associations on general principle.
A key issue in my case is whether or not members of my
class and I were employees as defined by IRS criteria. (Please
excuse me if I forget to include ``alleged'' all the time and
understand that it always should be assumed.) Since I had
previous management experience and was responsible for
regulatory compliance (including Medicare) for a large home
health agency, I had a working knowledge of the IRS criteria
long before I came to RAND. I also thought that everyone knew
IRS had been cracking down in this area since at least the late
1980s. I had worked as an independent contractor, done my own
tax returns, etc.
Therefore on coming to RAND in September 1995, I questioned
why I was required to complete a W-4 if I was considered an
independent contractor. As a ``consultant'' (RAND's term for
independent contractors), my income should be reported to IRS
on a Form 1099. Someone in RAND's personnel department by
telephone answered my question: RAND was caught by either the
Franchise Tax Board or the IRS two years earlier, i.e., in
1993, and that I was legally an employee. Over a year later
when speaking with lawyers and the PWBA, I could not recall
whether she said that it was the Franchise Tax Board or the
IRS. I still don't know which it was. It would have been
helpful for me to have access to IRS audits and closing
agreements regarding this matter.
However, I knew that I was an employee. A year later I had
a W-2, W-4, pay stubs showing that RAND paid its share of FICA,
and even evidence that the California was paying me an
unemployment compensation claim that RAND never challenged. I
also met every single other one of the 15-20 IRS criteria for
being an employee. Although RAND's ERISA plans had two
different types of employees, I should have been given the
benefits package of at least one of them. Instead I was told a
lot of strange things such as in a pre-employment interview
that I would get benefits unless I already had them through a
university appointment or a spouse. I said that I had neither
and needed benefits because I had COBRA. But they still didn't
give me benefits. I wondered if they ask men in pre-employment
interviews about benefits from a spouse. I still don't know. I
do know that there was nothing about that in RAND's ERISA
plans, nor was there anything that said that RAND would not
give benefits to a new employee who came with COBRA benefits
from prior employment.
My supervisor promised me that I'd get benefits in two
months. When that time came, my supervisor and an
administrative person told me very different things. The
supervisor, who was the principal investigator on the National
Cancer Institute grant on which I was the study director, told
me that she wanted to give me benefits but RAND wouldn't let
her. The administrative person told me that RAND wanted to wait
to give me benefits because my boss had high turnover of
persons on her projects and she was not satisfied with my job
performance. Suffice it to say, that none of the above are
provisions in RAND's ERISA plans.
By then I also knew that the person before me in the same
position of study director on the same NCI grant had benefits.
And after I was gone, the person who succeeded me in that
position had benefits. Good human resources and administrative
practices, whether for ERISA, federal grants or any other
purposes, deal with positions and persons in positions. Once
they start being about a specific person, they can become
arbitrary, chaotic, unfair, and possibly discriminatory and
illegal.
I wanted to know a lot of things that I still don't know,
and having IRS or FTB audit reports would have helped. I don't
think the woman in personnel would have told me the tax
authorities caught RAND if it weren't true. Later I asked
someone at IRS what happens when they find a case of
misclassification. I'm not sure I recall the time IRS goes back
(three years perhaps) to assess the employer's part of FICA
that should have been paid for each misclassified person plus a
pretty hefty fine or penalty. I wondered about issuing revised
W-2s so that the misclassified people could file amended
returns and get back the half of FICA they overpaid. The IRS
person told me that they require the employer to do that but
don't really have the staff to know if it is ever done. I don't
think the government should keep that extra FICA and that the
employee should not only get a revised W-2 but also advice on
how to file amended returns to get that money refunded. So I
also am suggesting that when there are misclassifications, the
IRS notify each employee.
Obviously, IRS presently needs more staff to even assure
that cases is has under investigation can be completed before
statutes of limitation expire. Later in this document I will
make a very strong case for additional funding and staffing for
PWBA. Since I don't often have the opportunity to address many
members of Congress, I might as well add my opinion that
enforcement of federal civil laws is not something that can be
privatized or contracted out. Not only the IRS and PWBA, but
also many other federal agencies, for example, the Office of
the Inspector General of HHS, do excellent work. They are cost-
effective, and the dollars they spend generate more revenue,
prevent waste/abuse/fraud, and protect citizens' rights.
I still don't know what happened at RAND in 1993. Maybe the
FTB caught them, and RAND just told their employees that there
was some change in government regulations or something and the
employees never knew that they had been misclassified. Or if it
was the IRS that caught RAND, I don't know whether or not
revised W-2s were issued. Most of these people still were being
called ``consultants/ independent contractors.'' I would like
to know this information. I also asked if IRS notifies PWBA
when it finds misclassifications as there might be ERISA
violations, or if it even shares internally with EP/EO. That
isn't happening, and I doubt IRS and PWBA have enough staff to
follow-up anyhow. While I don't see much logic for having EP/EO
together (except in this rare example where an EO is violating
terms of its EP), I do hope that the elimination of EP/EO will
not lead to lower appropriations for each of these functions.
PWBA would not be auditing RAND for 33 months if my basic
premise (that I was an employee and as such should have had
benefits under RAND's plans) was in error. It doesn't take 33
months to determine that. Even then RAND continued to fight me
about the employee/independent contractor issue with great
effort and expense. As far as I can discern, their efforts made
no common sense except in the context of the employers' usual
response to claims or litigation against them by employees,
i.e., deny/deny/deny, stall/stall/stall, pay lawyers/lawyers/
more lawyers. Employers use this strategy in tax-exempt
organizations as well as for-profit businesses.
Between November 1996 and September 1997, RAND also had to
deal with a small claim of approximately $3300 as penalty for
paying my last paycheck late, a simple matter handled by the
California State Labor Commissioner, hereafter referred to as
LC. I know that my cost to represent myself in this matter
(mostly involving 8 trips to various LC offices since I had to
file papers, get information, etc. for mileage and parking fees
plus some copying of documents) was $189. I estimated based on
legal fees of $350 an hour for RAND's legal counsel plus
travel, etc. that they spent approximately $15,000.
Unfortunately if that figure is correct, the US taxpayers
picked up 85% of RAND's costs as part of their federal grant
and contract overhead. Legal fees and related costs to defend
against lawsuits or claims by current or former employees are
allowable in overhead calculations. Since 85% of RAND's income
is from federal grants and contracts, then the federal fisc
paid for 85% of these totally unnecessary and wasted costs. I
don't think we would have had to bother with this silly side
issue if I had access to IRS audits and closing agreements or
to those of the FTB.
Initially, I was represented by a former boss and friend of
many years who is a health lawyer, does mostly administrative
health law, knows little ERISA, and is not a litigator. During
the summer of 1996, while I was still working at RAND and being
harassed, threatened with termination of my employment, etc.,
he warned RAND several times in writing of Section 510
including warnings to my immediate supervisor, RAND's Director
of Personnel, and RAND's legal counsel, Cooley Godward, a very
large and prestigious firm headquartered in San Francisco but
without an office in the Los Angeles area. The documentation is
in the PWBA files. But these warnings did not prevent my
termination from employment in September 1996.
The first three-judge decision of the 9th Circuit Court of
Appeals on Vizcaino v. Microsoft came down in early October
1996, and my attorney sent it to Cooley Godward. However, by
November 1996, we were getting nowhere; so I went to PWBA. My
attorney also suggested that I file a claim for late payment of
last pay with the California LC to get RAND's attention. The
first step in these claims is a conference, mostly to get rid
of frivolous claims. If the employee doesn't appear for the
conference, the claim is dropped. Appearance by the employer or
his representative is optional. Most employers don't appear as
it is a waste of time and money. At the conference on December
12, 1996, I appeared but did not bring legal counsel and was
opposed by RAND's legal counsel, an associate from Cooley
Godward flown down from San Francisco to litigate against me.
They sent a Boalt Hall educated litigator for this 15-30 minute
conference at which RAND did not even need to be represented.
The only issue argued was whether or not I was an employee, and
I had W-2, W-4, pay stubs showing RAND paid its share of FICA,
and documentation of approval of my claim for California
unemployment compensation that RAND never challenged. I
prevailed, and the case would be scheduled for a hearing.
The hearing was scheduled for August 7, 1997. But a lot
happened in those intervening months. In mid-March 1997, PWBA
told me that they were investigating my claim further. I told
them to go ahead and that I would be contacting the Inspector
General of DOL because I feared that RAND would try to use its
influence to stop the audit. I knew that a former Secretary of
DOL was on RAND's Board of Trustees as well as many other
politically influential and powerful people on not just their
Board of Trustees but also the Board of Overseers of RAND's
Institute for Civil Justice and other subunits' advisory groups
as well. I also was aware that RAND had a ten-year $10 million
contract from the PWBA (from September 1988 to March 1997) to
establish a Center for the Study of Employee Health Benefits.
The center's work was done by RAND analysts in collaboration
with analysts from The Urban Institute and Harvard University.
A month later in April 1997, my PWBA case was turned over
to an auditor/investigator in preparation for an audit of
RAND's ERISA compliance. I agreed to cooperate fully even
though after months of no negotiations or contact between my
attorney and RAND's lawyers, they suddenly were making an offer
to settle with me for about $7335, a good reference, and
withdrawal of my LC late pay claim--and of course, my silence.
In fact, if I had any qualms about going forward and
cooperating with PWBA, that settlement offer quickly erased
them. I don't need to buy references. Even adding in the $3300
for the late wage claim would hardly amount to a settlement for
a totally frivolous claim. Obviously RAND was still claiming
that I was not an employee and didn't want the LC to declare
that I was one. Furthermore, I considered that offer to be in
exchange for my First Amendment rights that definitely are not
and never will be for sale. That also is why Section 510 is
important.
The PWBA audit began sometime in June 1997. From that point
on to this very day, it was under seal. No one including me can
know anything until the investigation is completed. Since RAND
has only 1000 workers total, it is clear to me that RAND
probably is using its legal counsel to make PWBA subpoena every
document and is stalling so that all statutes of limitation
will be gone. In July 1997, the 9th Circuit Court of Appeals
issued its en banc decision for the plaintiffs in Vizcaino v.
Microsoft. (Since then, Microsoft appealed to the U.S. Supreme
Court that refused to hear the case and let the 9th Circuit's
decision stand.) I also knew that RAND had added Paul,
Hastings, Janofsky & Walker to its legal team. An attorney from
the Los Angeles office of that firm had written the amici
curiae in the Vizcaino case on behalf of the American
Electronics Association, California Chamber of Commerce,
California Employment Law Council, and The Employers Group. I
also was aware that the U.S. Supreme Court in May 1997 in a
unanimous decision written by Sandra Day O'Connor in Inter
Modal Rail Employees Association v. Acheson, Topeka & Santa Fe
Railway Co. had ruled that Section 510 of ERISA applied to
welfare (i.e., health benefits) as well as vested pension
benefits.
So I mistakenly thought that this time RAND just wouldn't
show up for the August 7, 1997 LC hearing. I didn't think I
could waste any attorney's time for $3300 to represent me. I
planned to argue the case, if I had to, from paper, i.e., all
the documentation of my being an employee, the date on the copy
of my last paycheck, and the postmark on the envelope in which
it was mailed to me. I really wasn't thinking about it much as
my father passed away on July 12, 1997, and I was in Ohio for
three weeks arriving back in California just a few days before
the hearing. This time RAND not only had the same attorney from
Cooley Godward flown down from San Francisco, but he had come
down the day before to prepare his witnesses, the
administrative person who had dealt with me during my last days
at RAND and the CFO of RAND, the only officer of RAND whom I
have ever met. Actually I was interested in meeting him because
he was the study director of the RAND Health Insurance
Experiment, the study that put RAND on the map in health
research in the late 1970s and early 1980s.
I'm not a lawyer, and anything more about my background is
not important. We had a hearing officer recording the
proceedings on a boom box. Obviously it is never a good idea to
represent one's self, though it is frequently done in these
informal LC hearings, and surely not against a top litigator
who objected quite a lot. The hearing took about 90 minutes.
The RAND witnesses were well prepared with appropriate ``I do
not recalls.'' Of course, RAND argued that I was not an
employee, but the CFO did state under oath that RAND complies
with all laws. Well, I was determined to get something on the
record, but I didn't know what to do when RAND's legal counsel
objected to my questions (e.g., if RAND had ever been audited
by the IRS or FTB regarding misclassification of employees and
how much RAND was paying its legal counsel.) It took what I now
recall as 4-5 times to get my most important question in the
appropriate form, ``Do you have any idea why so-and-so in
personnel told me that RAND was caught by the tax people for
misclassifying employees and that I was an employee?'' Of
course, he replied, ``I have no idea.''
The LC's decision was in two parts: The hearing officer
mooted the question of whether or not I was an employee but
ruled that I had not shown intent to pay me late. An appeal
would mean going to Municipal Court and paying all RAND's legal
fees if I lost. That wasn't worth the risk for $3300. I did
want to get a copy of the tape of the hearing and requested it
immediately, but it took a long time to get and then about 15-
20 minutes was missing. I don't know for sure how long and
can't resist saying that it may have been 18 minutes. It took a
long time, many months, help from my State Assemblyman to get
someone at LC to listen to the original master tape, to confirm
that a portion of the hearing tape was missing, and to
apologize to me. The missing portion happened to include the
entire testimony of the RAND CFO!
All this is a pretty silly example of how far employers
will go to cover up what might be in an IRS audit or closing
agreement. The taxpayers of the United States paid 85% of
RAND's costs. The taxpayers of California paid the costs of the
hearing and all my calls and complaints about the lost tape. On
the one hand, this is silly, and on the other is a sad way for
a large and prestigious tax-exempt organization to conduct its
business.
The classification of workers as employees creates tax
costs for the employer as well as costly obligations regarding
federal and state legal protections and rights for workers.
I've looked at Thomas for the last several years, and there
have been many bills about this issue. It's not very hard to
tell if the bills favor employers or employees by which Member
of Congress introduces and who co-sponsors them. Some are
puzzling and amusing such as H.R.19, the Caddie Relief Act of
1999 introduced by Mr. Burton.
I do want to see two kinds of legislation passed eventually
as a result of my experiences, and the first ones are three
related bills, H.R. 769, 770, and 771 which Mr. Lantos
introduced in the 105th Congress with Mr. Campbell and Mr.
Shays as the only co-sponsors. All three bills relate to
federal procurement and misclassification of employees by
federal contractors. The sponsors appeared to be motivated by
some constituent employers who wanted to give all their workers
benefits and were at a competitive disadvantage to win federal
contracts if they did so. These ideas should be revisited as we
should not contract away good federal jobs with benefits to
those private contractors who won't give some or all of their
workers health insurance, vacation, paid holidays, or sick
leave or call them employees so that they can take advantage of
the Family and Medical Leave Act. At a time when so many
workers are uninsured or underinsured for health care, this
makes sense as good public policy.
RAND may well have violated the nondiscrimination part of
ERISA for pension law by misclassifying mostly workers at the
lower ends of its pay scale. I was making about $55,000 and was
one of the higher paid members of my class. According to the
Pittsburgh Post Gazette on September 28, 1999, regarding the
opening of an office of RAND in Pittsburgh, ``half of its
(RAND's) workers are researchers who make an average of
$85,000.'' Nondiscrimination in pensions has nothing to do with
civil rights laws but with assuring that the highest paid
people don't get more than their fair share of pension funds,
ability to put away so much tax-sheltered v. lower paid
employees. Ways and Means undoubtedly is familiar with this as
it's the main part of ERISA that is very complex and much like
tax code law.
Of course, health benefits in ERISA have no
nondiscrimination requirements. An employer can write his
health plan to include or exclude whomever he wishes so long as
he doesn't discriminate by civil rights protected categories
and then consistently and fairly administers whatever standards
he set. I wonder if, perhaps there shouldn't be a non-
discrimination clause for benefits for federal contractors, for
example, if they aren't going to provide health benefits for
10% of the workers on a federal contract or grant, perhaps it
should always be the highest paid people who can best afford to
buy their own coverage. I'm not so sure that this isn't a good
idea for all ERISA health benefits. For example, RAND (at the
time I was there) paid 100% of the premium for the worker,
better than the federal employees plan you all have. But that
meant they paid about $300 for the highest paid workers who
could afford the higher deductibles for the fee-for-service
plan and only $150 for each worker who took an HMO. It wasn't a
set amount or percent for each worker. The management of RAND
definitely designed its health benefits to give more to the
higher paid workers including themselves. And then there were
some of us who worked right beside them doing the same kinds of
jobs who didn't get any health benefits and whom I allege were
illegally denied them.
Maybe if we made the employers who already do give health
benefits to their workers and aren't going to stop doing so,
meet some nondiscrimination standard, then we wouldn't have to
have CHIP or continue Medicaid for workfare people at the
bottom of the pay scale--and we could save some tax dollars.
That seems fairer to me. And maybe any tax-exempt organization
that gets federal grants and/or contracts should be required to
give all its workers basic benefits. For example, university
presidents are overhead, have good salaries, and always get
benefits. So why shouldn't their janitor and laundry workers
who also are overhead also have benefits? These have been
issues at numerous universities including USC, and just in the
past week at Johns Hopkins.
2. Full Disclosure of 990s
I hold the officers of RAND responsible and accountable for
their actions. Since my alleged Section 510 violation happened
just after the Taxpayers Bill of Rights legislation was passed
in 1996, I waited for the regs to come out so that I could go
over to RAND to get their 990 to learn how big their salaries
are. By the start of 1999, I realized that I didn't care to
know. I learned from the JCT Study that the regs came out in
June 1999. I still don't care. But I think the public has a
right to know. I don't think it will stop anyone from serving
as an executive in a tax-exempt organization. The public knows
your salaries and those of other high government officials. The
salaries of major executives of for-profit corporations are
published all the time. I volunteer in the development office
of a tax-exempt organization that subscribes to a weekly
publication, Chronicle of Philanthropy Once a year it publishes
the 100 or so highest salaries in tax-exempt organizations.
It's not surprising that presidents of large universities,
conductors of major symphony orchestras, and the CEO of the
American Red Cross make high salaries.
We are shocked or concerned only when they are paid so much
and don't do their jobs appropriately or act in some illegal
way. When they do, they harm the organization and all its
employees and its mission. For example, about ten years ago
there was such a scandal in Los Angeles involving the head of
United Way. For a number of years thereafter donations to
United Way were diminished. That hurt a lot of needy people who
are served by United Way agencies.
Only a month after I came to RAND, I was surprised by an
article in Los Angeles magazine that described how RAND had
lobbied for zoning changes in Santa Monica. These changes had
to be approved by the voters and would prevent zoning changes
RAND wanted in order to develop its land commercially.
Obviously some employee at RAND was upset about this as that
person leaked an internal memo in which the CEO of RAND talked
about the need ``to ensure that our property rights are
upheld.'' Indeed, as a tax-exempt organization, RAND did not
pay property taxes on that land. RAND spent $200,000 to win
that vote (The zoning changes had been put on the local Santa
Monica ballot as an initiative.), and the opposition spent only
$8000. Last fall I read an article in the American Journal of
Public Health that detailed the very complex rules regarding
lobbying by tax-exempt organizations. I know a little now about
self-defense lobbying. RAND also got its employees to call
voters on their own time after work. The lobbying expenses had
to be reported on RAND's 990, and I'm sure that the opposition
in Santa Monica was watching. So I know RAND and their
attorneys were very careful to obey very complex lobbying laws.
I only wish that they were as careful in complying with their
ERISA plans.
As a footnote to that, RAND didn't commercially develop the
land they got from Santa Monica for $250,000 in about 1950. It
was a bargain even then as they were able to borrow $1 million
on it. But four years after Los Angeles magazine reported these
15 acres of prime land to be worth $41 million, RAND sold 11.3
acres back to the City of Santa Monica for $53 million in
October 1999 and retained 3.7 acres to build a new
headquarters.
I believe that RAND now is complying with ERISA. RAND
probably has rewritten its ERISA plans and either is or is not
giving more people benefits. Whatever it is doing, it is
complying with the law. However, when I alleged that RAND was
violating ERISA, the officers of RAND were the fiduciaries of
its ERISA plans. The situation is similar to that in DOL's suit
against Time Warner in which DOL asked that the fiduciaries be
held responsible and be removed from those positions in the
ERISA plans.
In June 1997, RAND hired a highly qualified new head of
Human Resources. It probably was time to clean up their
personnel department that had been neglected for several years
if not longer. The PWBA audit was beginning and still is
ongoing. Only seven months earlier in November 1996 a sex
discrimination case had been filed against them in U.S.
District Court in DC. I am a declarant in that case which is
under seal. I haven't spoken with my attorneys at Sprenger and
Lang who represent the plaintiffs, but I am pretty sure I can
say that and no more about it. I can say what is public
knowledge, i.e., the case is still active with several motions
being considered by the judge.
3. Public Disclosure of Grants and Contracts
While I agree with Mr. Anderson in principle, I think how
much extra data would be required on the 990s for a place like
RAND. Adequate alternatives should be explored. It is important
also to know about federal contracts awarded to tax-exempt
organizations.
The RAND situation also relates to this item. I prepared
the following material over a year ago for Sprenger and Lang to
share with attorneys who were considering representing me in
ERISA litigation. It shows the motive for RAND's not giving
some employees benefits.
Benefits and Overhead Rates on Government Contracts and Grants
Benefits are an allowable expense on all federal government
grants and contracts. The benefits rate is figured as a percent
of salary or pay. RAND had a very generous benefits package for
employees with a rate of 49% in 1995. Most universities also
have generous packages but have rates around 25-33%. Overhead
rates for government grants and contracts are negotiated
annually between each organization and the government. They
include rent, utilities, basic telephone, management, upkeep,
and all supportive services (personnel, library, accounting,
janitorial services, etc.). There are many pages of federal
regulations governing how these rates are negotiated. Most
university overhead rates are around 50%. In 1995 RAND's was
79%. I think these figures are correct, and RAND lowered them
some in 1996 to 47% for benefits and 72% for overhead. These
are approximate but very close figures. I can't really explain
the high overhead given RAND owns its land and has a building
which surely has been paid off for many years. RAND also has an
$84 million endowment.
Calculation of Grant and Contract Budgets
In most research, the biggest single budget category always
is salaries. (The major exception is nuclear or other high tech
research that requires lots of expensive equipment.) Other
categories beside salaries might be some computers or office
equipment, travel money to go to professional meetings or
research sites, maybe some extra postage or phone lines for
surveys or incentives to pay respondents to surveys, etc. For
salaries, first you apply the benefits rate and then you take
the overhead rate to get the cost billed to the government. So
let's look at the calculations in 1995 two ways:
Take $100 worth of salary. A ``consultant'' got 14% more in
lieu of benefits or $114. Then with overhead, take 179% of that
or $204 (rounded to nearest dollar). An employee got $100 plus
49% benefits or $149. Then take 179% of $149 that is $267. The
``consultant'' is illegally denied benefits, and RAND charges
the government $64 less for $100 worth of work. That adds up.
Let's do the same now for my salary for one year with all
figures rounded to even thousands. As a consultant, I got
$55,000 and with 79% overhead, that is $98,000. As an employee,
I'd get $49,000 base pay that with benefits would be increased
by 49% to $73,000 on which you then figure the 79% overhead for
a total of $131,000. That's a difference of $33,000 a year for
my salary only! And I am just one person in the class!
Most grants have ceilings of how much will be paid; so one
needs to stay under them. On contracts where there is
competitive bidding, misclassifying employees as consultants
gives one a competitive advantage. Of course, RAND's rates are
so high that really all it did, was decrease its competitive
disadvantage. Both grantees and contractors are supposed to
obey all federal labor laws including ERISA. Of course, RAND
now probably is just using all the ERISA loopholes to do the
same thing but be in compliance with ERISA.
There are a lot of people in my ERISA class who were
misclassified for only 3-6 months so that they didn't notice or
didn't care and actually were grateful and happy to become
employees. Deny someone benefits for a year, and he/she
notices. Deny four people benefits for three months each, and
they don't care--but it's still one year of ERISA violations.
If the grocer wants to cheat and he's smart, he puts his thumb
on the scale of a lot of people rather than resting his elbow
on the scale for one person.
Some of the best ERISA attorneys in California reviewed my
ERISA case to consider representing me in litigation. If their
names were known, everyone is ERISA circles would say, ``If so-
and-so says she has a case, she does.'' But there are no
punitive damages or pain and suffering in ERISA--so legal
counsel for employees must consider the financial risk of
representing clients on contingency versus the potential
damages involved. We don't know the size of the class, and we
doubt there are many people with large vested pension
interests. I am pretty sure that the class is at least 100 in
size. Proportionately to the Time Warner class size estimated
in DOL's suit, the RAND class is bigger as RAND has only about
1000 workers. So no one wanted to take that risk. Some didn't
want to deal with a Section 510, but Sprenger and Lang's
attorneys were ready to litigate that part. They don't do ERISA
and don't practice in California where the case would have to
be filed. But they do wrongful terminations all the time and
believed my Section 510 case was strong.
As a result of all the victories by the attorneys for the
Microsoft plaintiffs in the 9th Circuit, there has been a
plethora of ERISA class actions here. But all the cases are
filed against large employers such as ARCO and PacBell. RAND
with 1000 workers is not a particularly small employer at all,
but with only the worth of illegally denied benefits to be
recovered, it is not large enough to obtain legal counsel on
contingency. It is unlikely that anyone who works for a smaller
employer with an ERISA case that is mostly health benefits
denials is going to get legal counsel. There aren't that many
ERISA attorneys for plaintiffs anyhow unless one is a member of
a union.
I also looked into possible qui tam litigation as RAND was
under billing the government and gaining a competitive
advantage by not giving its employees benefits. The multiplier
factor is astounding. I came to the NCI 36-month grant on which
I worked in its 16th month. The study director before me for
the first 15 months had benefits. Shortly after I started, I
learned the study already was over six months behind schedule.
I was not able to recover that time in the year I was there and
was without benefits. I was sure that the project was not going
to meet its goals, mostly because of enormous problems with a
sample gathered months before I began work on the project. I
also was sure that the principal investigator would take a one-
year no-cost extension, and that happened. The $33,000 saved by
not giving me benefits went toward paying the salaries of the
principal investigator and other staff in the added no-cost
year. I consulted the Government Accountability Project and a
qui tam attorney. Qui tam usually deals with over billing the
government, and no one knew how one might apply it to the RAND
situation. Of course, it is just as egregious and against
public benefit. And in some ways, it is worse as RAND cheated
its own employees.
The statutes of limitation for my class and me are gone or
rapidly going, and I believe RAND and its attorneys want to
stall the audit until they all are gone. However, I haven't
worried about that for the past six months since I looked into
cost accounting principles and federal procurement laws and
regulations for government grants and contracts for salaries
and wages. All grantees and contractors must obey all federal
laws, particularly labor and civil rights ones. They also must
treat people working on federal funds consistently with those
who are not. RAND receives approximately 85% of its annual
budget (about $125 million) from the federal fisc or about $106
million a year. Whatever the size of my class, one then can
project that 85% of their time was charged to federal funds. So
85% of the ERISA violations also are violations of federal
procurement law. The Secretary of Labor is responsible for
labor standards on all federal grants and contracts and has the
power to withhold federal funds for such violations. Therefore,
I think this ERISA case also is a case about federal
procurement law. I checked this out with quick and unofficial
opinions from the people at the Office of Federal Procurement
Policy at OMB, and they saw no problem with this reasoning.
Obviously it needs to be examined further which I am sure DOL
is doing. The audit will go on for some time more yet.
I have feared that all statutes of limitation would be
gone; RAND would be in compliance with ERISA; and some closing
agreement would be made with PWBA behind closed doors. So
perhaps nondisclosure for tax-exempt organizations should
involve PWBA audits and any other federal investigations of the
organization. I don't fear RAND's getting away with settling
this matter behind closed doors any more. The audit may not be
settled until we have a new President, but it doesn't matter
who is President or Secretary of Labor. They will be honorable
people and will take seriously their oaths to uphold the laws
of the United States. I hope that they will require, as part of
any settlement, to make restitution to every member of my class
and to me.
The saddest thing to me is how RAND deceived its own
employees. The Microsoft plaintiffs worked next to others for
years watched them get benefits and become wealthy on stock
options that they did not receive. I know how they felt. For a
year I watched other people after a few months of work become
employees and get health benefits. I was reminded every month
when I wrote my check for COBRA premiums. Then when COBRA ran
out and I had to take lesser conversion coverage with no
prescription drug benefit, I still had that monthly premium
check as a reminder. But the thing that bothered me the most is
that the people who became employees were pleased as it was an
acknowledgment of their good work and performance. They were
good enough to be employees at RAND. They were not likely to
complain to the government or anyone else. They didn't know
that during those first months they worked at RAND they already
were employees and entitled to benefits. They are a part of my
class. They deserve to know and to be compensated for that loss
even if it is only for a few hundred dollars each.
While researching federal procurement law, I learned
something else of interest that I mentioned earlier: As part of
overhead, RAND could include legal and related costs for
defending any litigation brought by an employee or former
employee. Since 85% of its income comes from the federal
government, that would be an 85% matching by the tax payers of
any legal defense funds RAND spends from its other income that
also derives from its tax-exempt status. I am very glad that I
didn't get legal counsel on contingency for ERISA litigation. I
would not want to see them have to litigate for me on
contingency with their funds against federally subsidized legal
counsel. However, in audits/investigations by the government,
RAND can be reimbursed for legal and related costs only if the
government allows it as part of a settlement. RAND has plenty
of other funds to fight the government and can go on doing that
for a long time if it wants to do so.
Last but surely not least, in November 1999, I learned the
most astounding thing of all when I looked at PWBA's
appropriation for FY99 that was $90 million. RAND gets about
$106 million annually from the federal government. PWBA's FY00
appropriation is $101.8 million. However, I must say to both
parties in Congress that the PWBA appropriation levels are
disgraceful. They are almost ludicrous compared to the extra
few billions you give NIH each year. When this problem with
RAND began four years ago, PWBA was responsible for ERISA and
COBRA for everyone in the country in 15 offices around the
country. Since then, Congress has added HIPAA, NMHPA, MHPA, and
WHCRA to PWBA's responsibilities that include administration,
education of employers and employees, and enforcement. Most
people who have health insurance in this country get it under
ERISA--125 million or more. That isn't even $1 per person. I
don't even know what figure to suggest it should be, but the
Appropriations Committee surely should look at this.
4. Linked Data
While this item would seem to have nothing to do with RAND,
it does because Dr. Lillard's name looked familiar. Indeed
while I did not know him, Dr. Lillard was at RAND at the same
time I was. That coincidence provides me with an opportunity to
express to him and the many other fine researchers at RAND my
deep regret that they will be harmed in any way by this whole
affair. I always believed that this matter should have been
handled and solved internally. The PWBA has documented evidence
of my efforts and those of my legal counsel to get RAND to talk
with us as well as written evidence of warnings about Section
510. If the officers of RAND violated Section 510 of ERISA
against me as I allege, then they did so with impunity.
Closing Thoughts
I do wish to bring to the attention of Congress one additional
ERISA issue. I don't think anyone really has many good ideas about what
to do about ERISA. We'll know by June what the U.S. Supreme Court
thinks in the Herdrich case it heard a few weeks ago. My best guess is
that they won't want much to do with this messy law and gladly will
throw it back to you in Congress. Maybe ERISA should only be about
pensions. I surely am not that wise, but I will be asking my
Congressman to introduce one very limited piece of ERISA legislation
next year to revise Section 510 and to make some technical changes in
the law. A couple months ago a leading ERISA advocate told me about a
man, I believe in the 7th Circuit area, who just lost his Section 510
case on appeal. I hope that his Representative in Congress will join in
co-sponsoring this bill, and I hope that his representative is of the
opposite party from mine, as I would like to have a bipartisan bill.
While it is probably hoping too much, I would love to see it stand
alone rather than be tacked on to some big bill because I would like
every member of Congress to consider it and vote for it.
A statement about Section 510 must be included in every pamphlet
describing ERISA benefits for every worker who is covered by an ERISA
plan. As presently constituted, it surely is not worth all that paper
on which it is written. This is one part of ERISA that requires some
penalties/fines/punitive damages/whatever. Perhaps the statutes of
limitations also should be increased for Section 510. ERISA cases are
heard in federal court by judges, but Section 510 is one part that
should have jury trials. Federal judges are and should be appointed for
life. No one should be harassed or fear loss of work, references, or
employment merely for speaking out about violations of the ERISA law or
asking for clarification of his/her ERISA rights. However, I think
wrongful terminations might be handled more appropriately by juries of
peers whose jobs aren't guaranteed for life than by judges with
lifetime appointments.
The technical modification would amend many sections of ERISA by
changing ``welfare'' to ``health'' wherever it appears. Those ERISA
welfare benefits are health benefits. And they are how most working
people in this country get their health insurance. ``Welfare benefits''
is a confusing term. I don't know the legislative history, but I am
very curious about how Congress came up with this term originally.
I have tried to weave a great many disparate strands together and
surely have left many loose ends and threads. I regret that I could not
create a more seamless tapestry or write more clearly. I hope my
comments have been of assistance. Thank you for your time, attention,
and consideration.
Sincerely yours,
Linda Fishman
Reed & Brown, LLP
Pasadena, CA
March 13, 2000
A.L. Singleton, Chief of Staff, Committee on Ways and Means
Re: Comments on Joint Committee on Taxation Staff Report--Dated January
28, 2000
This Memorandum is intended to comment on the proposals contained
in the Study of Disclosure Provisions Relating to Tax-Exempt
Organizations (``the Report'') prepared by the staff of the Joint
Committee on Taxation, dated January 28, 2000 and, in particular, the
section addressing lobbying expenditures by tax-exempt organizations,
commencing on page 106 of the Report.
This Memorandum concerns the Report's three recommendations stated
at pages 118 and 119. Each of the recommendations is designed to
increase charities' reporting obligations and to expand the information
that charities must provide in their annual IRS filings. Specifically,
staff suggests modifying Schedule A to IRS Form 990 (``Schedule A'') to
require ``both electing and non-electing [under Code Sec. 501(h)]
public charities to provide a detailed description of the legislation
addressed in their lobbying efforts and the manner in which
organizations engaged in lobbying activities.'' Secondly, staff
suggests that Schedule A be changed to require charities to disclose
amounts attributable to self-defense lobbying (direct lobbying
concerning an issue affecting the organization's existence or powers).
Third, staff suggests Schedule A be further modified to require
charities to disclose all non-partisan study, analysis and research
that contains ``a limited call to action.'' The Report defines the term
``limited call to action'' to mean those actions listed in Regulation
Sec. 56.4911-2(b)(2)(iii)(D). The Report would require disclosure of
all non-partisan studies that identify ``one or more legislators who
will vote on the legislation as ``opposing the communication's view...;
being undecided ...; being the recipient's representative in the
legislature; or being a member of the legislative committee or
subcommittee that will consider the legislation.'' Id. Under existing
law, communications of self-defense and non-partisan study do not
constitute lobbying.
We respectfully object to the proposed changes to the Internal
Revenue Code (the ``Code'') suggested in the Report for the following
reasons:
1. The recommendations effectively expand the definition of
lobbying. Detailed Regulations already define grass roots and direct
lobbying and require amounts spent on such lobbying to be reported.
Staff recommendations add new categories of disclosure (self-defense
and non-partisan study) that are now expressly not reportable lobbying.
2. The recommendation to regulate ``limited calls to action'' is
onerous and unjustified. The well-accepted understanding of the Code
and Regulations among exempt organizations has been that a
communication from an exempt organization to its constituents or others
which expresses a view on legislation, but does not include a call to
action, is not a lobbying communication and is not reportable by the
exempt organization. The Report moves substantially beyond that
position, in that it proposes to impose reporting requirements even for
those communications which it describes as including a ``limited call
to action'' which it defines as being a communication which identifies
one or more legislators who will vote on the legislation as (i)
opposing the organization's views with respect to the legislation, (ii)
being undecided with respect to the legislation, (iii) being the
recipient's representative in the legislature, or (iv) being a member
of the legislative committee or subcommittee that will consider the
legislation. The staff argues that such activities constitute a form of
advocacy of which the public should be aware. The Staff admits that
such activities do not constitute lobbying [page 119 of Vol. II of the
Report], but conclude that the mere fact that the activities do not
constitute lobbying does not eliminate the public interest in access to
information concerning such expenditures. The Report fails, however, to
explain what the basis for that interest may be, other than mere
curiosity or the unstated interest of the government in further
regulating the lives of its citizens. If Congress believes that
communications which do not contain a call to action should be
regulated, Congress should explain the reason for such regulation. It
appears to us that, at its root, this proposal really grows from the
conviction on the part of some that tax-exempt status is really a gift
from the government and represents a tax subsidy. We believe that
reasoning has been rejected by Congress and should not be reintroduced
through the means of the Report.
3. The recommendations needlessly increase complexity of already
intricate regulations. Lobbying regulations are already cumbersome and
difficult to understand. The Staff recommendation would create yet
another division within the maze of regulations--lobbying that is not
reportable lobbying, but still must be disclosed on the organization's
Form 990.
4. The recommendations will add new record keeping requirements and
increase expense to exempt organizations. The Report proposes changes
to the existing law which will further complicate an already
complicated portion of the law, forcing tax-exempt organizations to
spend ever more of their resources analyzing their communications,
calculating the percentages of those communications which constitute,
or may hereafter constitute, lobbying communications, or ``limited
calls to action'' and compiling reports to the IRS.
5. The recommendations are contrary to the clear direction of the
Congress, especially Senate Finance Chairman Roth, toward tax
simplification. These recommendations will add reports and expense
whereas the Senate Finance Committee has championed the reduction of
reports and the simplification of record keeping. Changes to existing
regulations should not be considered unless they simplify and decrease
burden and expense.
6. The recommendations risk misleading the public about the
lobbying activities of exempt organizations. By requiring disclosure
and reporting of activities that are expressly not lobbying, the
recommendations may mislead the public by portraying lobbying
activities in too large a scale. The recommendations are apt to confuse
more than inform.
7. The recommendations will further chill the voice of non-profits
in the public square. The Internal Revenue Code, Treasury Regulations
and IRS activity in the area of lobbying and political activity already
exert an ``in terrorem'' effect that causes non-profits to withhold
communicating their views for fear that the IRS will impose sanctions.
Non-profit speech is thereby artificially curtailed by IRS activity.
The issue that should be addressed is how to bring clarity to IRS
actions and regulations in this area. Increasing the burden and threats
to non-profits that express views on legislation only exacerbates the
existing problem.
In 1999, both houses of Congress voted, as part of the 1999 Tax
Bill, to eliminate the statutory difference between grass roots and
direct lobbying. Both houses recognize that the distinction is
artificial, does not advance any legitimate governmental goal, and that
removing the distinction will help simplify the Code. The Report's
recommendations are diametrically opposed to simplification and, if
enacted, will further complicate the Code. We respectfully urge that
the recommendations of the Report contained on pages 118 and 119 be
rejected.
Respectfully submitted,
Stephen W. Reed,
General Counsel,
Focus on the Family and Family Research Council
Statement of Free Speech Coalition, Inc., McLean, Virginia
INTRODUCTION
The Free Speech Coalition, Inc. is pleased to submit these
comments along with other organizations and companies with
respect to the Joint Committee on Taxation's Study of
Disclosure Provisions Relating to Tax-Exempt Organizations.
This study comprises the second volume of a three-volume Study
of Present-Law Taxpayer Confidentiality and Disclosure
Provisions which was published on January 28, 2000, pursuant to
Section 3802 of the IRS Restructuring and Reform Act of 1998.
The Free Speech Coalition, Inc. (``FSC''), founded in 1993,
is a nonpartisan group of ideologically diverse nonprofit
organizations and the for-profit organizations which help them
raise funds and implement programs. Our purpose is to protect
First Amendment rights through the reduction or elimination of
excessive regulatory burdens which have been placed on the
exercise of those rights.
FSC is joined in these comments by several concerned tax-
exempt organizations and for-profit companies, including:
Accuracy in Media; American Center for Law and Justice;
American Conservative Union; American Preventive Medical
Association; American Target Advertising, Inc.; APMA Legal &
Educational Foundation; Bruce W. Eberle & Associates; Citizens
Against Government Waste; Citizens United; Coalition to Stop
Gun Violence; English First; Freedom Alliance; Gun Owners of
America; High Frontier; The Leadership Institute; National
Center for Cardiac Information; National Rifle Association;
National Right to Life Committee; Policy Analysis Center;
Public Advocate; 60 Plus Association; Squire & Heartfield
Direct, Inc.; Tri-State Envelope Corporation; United Seniors
Association, Inc.; United States Border Control; and U. S.
Taxpayers Alliance.
SUMMARY
FSC and its co-commenters fully support efforts to ensure
accountability within the nonprofit community, and reasonable
oversight of that community by the Internal Revenue Service.
While the road to the Joint Committee's study may have been
paved with good intentions, several of the study's
recommendations are badly flawed. Indeed, it is difficult to
conclude that certain of the important matters dealt with in
the study were truly ``studied.''
Specifically, we are concerned that, in trying to ensure
the provision of more complete information regarding tax-exempt
organizations to the general public, enactment of the study's
findings would instead inhibit the orderly resolution of
audits, guarantee the diversion of charitable assets from tax-
exempt purposes to legal defense purposes, and facilitate
greater opportunity for IRS abuse of its oversight authority
through the publication--and transmission to state
authorities--of interim (read unbalanced and incomplete)
findings and analyses in the determination and audit process.
To its credit, the study acknowledges the existence of a
tension between tax-exempt organizations' right to privacy,
arising in part out of their concern about misuse of private
information, and the study's purported principal objective--the
public's right to know.
Curiously, there is no indication that the general public
has even the slightest interest in the additional information
proposed to be compelled to be released at substantial expense
under the study's recommendations. Even the provision in the
statute (Section 3802) which called for the staff study was in
neither the House nor Senate bill, arising spontaneously in the
conference committee's version--probably at the urging of
regulators seeking greater power over the independent sector of
the economy. Yet the study finds that ``information regarding
tax-exempt organizations ... should be disclosed unless there
are compelling reasons for nondisclosure that clearly outweigh
the public interest in disclosure.'' (Vol. II, pp. 6, 80-81.)
FSC and its co-commenters urge the Committee to consider
alternatives to proposing new legislation. If, however, it
deems new federal legislation appropriate, such legislation
should focus more on scrutinizing the enforcement activities of
the IRS, thereby reducing the Service's vulnerability to
charges of abuse in its exercise of authority over the
nonprofit community.
COMMENTS
1. Requiring the disclosure of more documents relating to
audits and closing agreements will reduce the chance of
anything being resolved short of litigation.
Audits of tax-exempt organizations are perceived within the
nonprofit community as designed to ensure compliance with
applicable law, and to obtain effective corrective action where
necessary. Closing agreements have been the principal vehicle
that the IRS has used over the past decade to resolve cases and
obtain compliance by tax-exempt organizations.
Currently, tax-exempt organizations have strong incentives
to resolve an audit as quickly and painlessly as possible.
While such incentives do not preclude occasional gamesmanship,
or strategic withholding of information, they certainly promote
prompt and complete responses to appropriate requests. Further,
if a closing agreement would not be made public, counsel for
the tax-exempt organization may be far more likely to accept an
admission of liability on an issue that is questionable (or
capable of being litigated effectively).
By contrast, the prospect that documents will be publicly
released, as the study recommends, would lead to posturing by
both sides, substantially diminishing the likelihood of
settlement. Negotiations would be conducted as if everything
will be reported in the newspaper. The exempt organization's
counsel will seek to assess how each document could be ``spun''
for greatest journalistic (or, as regards information provided
by the IRS to state attorneys general, greatest political)
impact.
The study observed, speciously we would submit, that:
There are a variety of reasons why both the IRS and a tax-
exempt organization may wish to settle a matter that are
independent of whether the activity will be disclosed. These
include the costs of litigation, as well as the likelihood of
ultimate success on the merits. Further, if a tax-exempt
organization chooses not to settle a matter, the only option
will be litigation, which also will result in public
disclosure. With respect to the effect of disclosure on
voluntary compliance, the Joint Committee staff notes that it
would be inconsistent with an organization's exempt purposes
and fiduciary responsibilities to continue to engage in
activity that violates the law. Thus, tax-exempt organizations
should continue to have an interest in voluntary compliance and
correction of inappropriate activity regardless of whether such
activity is disclosed publicly. [Vol. II, p. 86.]
However, the Joint Committee staff's analysis lacks mature
consideration of several points. To begin with, speaking
bluntly, the IRS' assertion of a finding does not make it true.
Further, the IRS has been known to experiment with aggressive,
untested legal theories upon unsuspecting tax-exempt
organizations, based on iterations of their famous ``facts and
circumstances'' test, which at least one federal appeals court
has called ``no standard at all.'' United Cancer Council, Inc.
v. Commissioner of Internal Revenue, 165 F.3d 1173 (7th Cir.,
1999).
As noted above, under current law, with a private
agreement, the balancing of costs between paying the penalties
of the settlement and those incurred by litigating the issues,
with consideration of the likelihood of ultimate success, may
lead an organization to prefer settlement over defense of its
rights in court--even where such a defense would likely prove
successful. On the other hand, if the nonprofit's donors are
likely to hear of the organization's essentially false
admission, the cost becomes far higher. The study simply does
not deal with that truth.
Further, while public disclosure may occur pursuant to
litigation, such disclosure--e.g., the IRS alleges that the
nonprofit has engaged in X practice, but the nonprofit denies
the allegation and is fighting the IRS in court--lacks the
impact of a public admission of impropriety. Thus, it would
normally be in the tax-exempt organization's best interests to
defend its innocence, when the only recourse would be public
disclosure of admitted tax violations.
Likewise, the Joint Committee staff's assertion that a
nonprofit should cease any activity that the IRS does not
favor, on the IRS' word alone, presumes a deference that the
IRS has not earned.
Clearly, one likely consequence of the enactment of the
study's findings would be that most disputes will wind up in
court--thereby increasing the cost of handling audits for both
exempt organizations and the IRS. Given the current environment
of limited resources dedicated to exempt organization
oversight, the study's proposals (issued with the intent of
facilitating greater oversight of tax-exempt organizations) may
logically result in fewer audits and less oversight.
While the Joint Committee staff proffered its proposals
with the justification that ``public oversight of tax-exempt
organizations generally is viewed as increasing compliance with
Federal and State laws'' (id., p. 65), it is far from self-
evident that these proposals would result in improved public
oversight of tax-exempt organizations. As the study itself
acknowledged:
Some argue that increased disclosure will not result in an
increase in the quality and quantity of information received.
It has been suggested that tax-exempt organizations may attempt
to manipulate publicly available information so that the public
perceives the information in a more favorable way, and that
persons who misuse tax-exempt organization funds will actively
conceal information. Some argue that organizations may be
reluctant to bring violations of the law to the attention of
the IRS or work with the IRS to correct a problem if they know
that the violation will be made public. [Id. at 66.]
Having acknowledged the risk that tax-exempt organizations
would become less forthcoming if the Joint Committee's
recommendations are enacted, the staff express confidence that
yet other burdens on the tax-exempt community--further reducing
``flexibility regarding characterization of expenses,'' and
modifying penalties for violations of the law--would somehow
ensure the success of their scheme. Again, the cycle of greater
legal fees, fewer charitable services, and reduced oversight of
the tax-exempt community can be expected to result.
2. Increasing the complexity of IRS Form 990 reporting will
increase the administrative cost, as well as accounting cost,
of preparing and filing these annual forms, with no real
benefit to anyone.
As the Joint Committee staff acknowledges, ``[m]ore
information is not necessarily better; rather, information
needs to be tailored to those who will use it.... Any proposals
relating to disclosure should be examined to determine whether
they will in fact serve the purposes for which disclosure is
made.'' Id., p. 67.
The Joint Committee staff recognizes this as a significant
concern with the Form 990. They cite comments which stated that
``the current Form 990, while containing valuable information,
may also be confusing, particularly to members of the general
public.'' Id. Nevertheless, the staff recommend that the Form
990 be modified to include ``information regarding how well an
organization accomplishes its exempt purposes that may not be
relevant to whether the organization is complying with the
Federal tax laws.'' Id., p. 90.
Evidently, the staff's view that ``information regarding
tax-exempt organizations ... should be disclosed unless there
are compelling reasons for nondisclosure that clearly outweigh
the public interest in disclosure'' is not even limited to
materials with at least an arguable relationship to legal
compliance. Tax-exempt organizations would be obliged to
present a compelling reason to limit disclosure of any
information that could conceivably be asked, so long as such
information is allegedly ``relevant to the public in order to
oversee the tax-exempt sector'' id., p. 90--at least, such is
the goal of the Joint Committee staff.
Not that such demands are cost free. The Joint Committee
staff observes that there are direct costs of disclosure which
should be taken into account--costs which may be quite
burdensome to smaller organizations. Id., p. 67. They further
suggest analysis of whether the cost of the disclosure is
appropriate relative to the public benefit of the disclosure.
Id.
Thereafter, the study ignores such observations and
suggestion. In the staff's detailed recommendations regarding
changes to Form 990, the significant cost of increased
disclosure was not even discussed, and relief from such burdens
is dismissed out of hand. Id., pp. 92-93. Only the interests of
state regulators and of those entities which serve as self-
appointed guardians of the nonprofit community were deemed
worthy of consideration.
3. The public disclosure of pending applications for exempt
status (and supporting documents) can be expected to lead to
the further politicization of the IRS
The Joint Committee staff expressed concern that ``an
organization may be in operation and the public may believe the
organization is tax exempt and, in the case of purported
section 501(c)(3) organizations, incorrectly assume that
donations to the organization are tax deductible.'' Id., p. 87.
Thus, the Staff concluded public disclosure of pending
applications should be necessary.
That is an extremely weak argument for increased
disclosure. It might be more persuasive if the IRS did not
already provide a publication (and Internet access) allowing
prospective donors to determine the tax-exempt status of a
prospective donation recipient, but there is clearly no need
for ``reform'' in this area. At least the study does not point
to any need.
Further, the Joint Committee staff appear oblivious to the
resultant danger that this practice would lead to the further
politicization of the IRS. Imagine a press report regarding a
pending application for tax-exempt status by an organization
addressing abortion, or global warming, or international trade.
At once, competing interest groups begin to lobby Members of
Congress and Administration officials to intervene, either in
support of, or opposition to, the application. Or consider the
well-connected tax-exempt organization that wishes to avoid
competition in representing a given viewpoint. Perhaps an
influential public figure demonstrates his unhappiness with an
existing organization by seeking to quash the application of a
new group affiliated with the existing organization.
What benefits would result from this publicity which would
in any way justify such risks and costs?
4. The provision of preliminary findings to state officials
during the IRS audit process facilitates further harassment of
tax-exempt organizations.
The Joint Committee staff has recommended that the IRS be
permitted, prior to a final determination to deny or revoke
tax-exempt status, to disclose to State Attorneys General and
other nontax State officials or agencies audit and examination
information concerning tax-exempt organizations. In addition,
the Joint Committee staff has recommended that the IRS be
permitted, either upon request or on its own initiative, to
share audit and examination information concerning tax-exempt
organizations with nontax State officials and agencies with
jurisdiction over the activities of such organizations when the
IRS determines that such disclosure may facilitate the
resolution of cases. Id., at 104.
Purportedly, these recommendations would: (1) enhance the
combined efforts of the Federal and State governments to
protect the public by promoting the continued flow of
information from State officials to the IRS; (2) improve the
ability of State officials to monitor compliance with nontax
State laws affecting tax-exempt organizations and to enforce
and pursue correction of violations of such laws; and (3)
facilitate the participation of both the IRS and State
officials in the resolution of cases involving significant
charitable and fiduciary violations by making more complete
information available in earlier phases of such cases to both
State officials and the IRS. Id., at 104-05.
Admittedly, this practice would make the punishment of tax-
exempt organizations far more efficient. It would certainly
``facilitate the resolution of cases'' by encouraging state
bureaucrats to ``pile on'' tax-exempt organizations while they
are already investing scarce resources in responding to the IRS
audit.
But what of the accused? Does the tax-exempt organization
become guilty until proven innocent--before two jurisdictions
concurrently? What if the organization lacks resources to
defend both at once?
CONCLUSION
FSC strongly opposes the Joint Committee Staff's
recommendations because the additional burdens which would be
imposed upon tax-exempt organizations (and upon the IRS) would
be infinitely greater than any possible public benefit arising
from their implementation.
The Joint Committee Staff, while recognizing a tax-exempt
organization's right to privacy, appears oblivious to the
effect of compelled disclosure on these organizations' First
Amendment rights. The U.S. Supreme Court has long recognized
``that significant encroachments on First Amendment rights of
the sort that compelled disclosure imposes cannot be justified
by a mere showing of some legitimate governmental interest.
Since NAACP v. Alabama we have required that the subordinating
interests of the State must survive exacting scrutiny. We also
have insisted that there be a `relevant correlation' or
`substantial relation' between the governmental interest and
the information required to be disclosed.'' Buckley v. Valeo,
424 U.S. 1, 64 (1976), addressing the constitutionality of the
Federal Election Campaign Act of 1971. Thus, the Joint
Committee Staff's recommendation that exempt organizations be
forced to disclose information on the Form 990--information
that expressly has no relation to enforcement of the laws--
would appear to explicitly violate the First Amendment
protections accorded exempt organizations.
We welcome the opportunity to work with the Committee on
this matter so that it may better understand the adverse
effects of new burdens being placed upon the nonprofit sector.
Free Speech Coalition, Inc.
Accuracy in Media
American Center for Law and Justice
American Conservative Union
American Preventive Medical Association
American Target Advertising, Inc.
APMA Legal & Educational Foundation
Bruce W. Eberle & Associates, Inc.
Citizens Against Government Waste
Citizens United
Coalition to Stop Gun Violence
English First
Freedom Alliance
Gun Owners of America
High Frontier
The Leadership Institute
National Center for Cardiac Information
National Rifle Association
National Right to Life Committee
Policy Analysis Center
Public Advocate
60 Plus Association
Squire & Heartfield Direct, Inc.
Tri-State Envelope Corporation
United Seniors Association, Inc.
United States Border Control
U. S. Taxpayers Alliance
Statement of Independent Sector
I. Introduction
Independent Sector (``IS'') is a coalition of more than 700
national organizations and companies representing the vast
diversity of the nonprofit sector and the field of
philanthropy. Its members include many of the nation's most
prominent nonprofit organizations, leading foundations, and
Fortune 500 corporations with strong commitments to community
involvement. This network represents millions of volunteers,
donors, and people served in communities around the world. IS
members work globally and locally in human services, education,
religion, the arts, research, youth development, health care,
advocacy, democracy, and many other areas. No other
organization represents such a broad range of charitable
organizations and activities.
America's ``independent sector'' is a diverse collection of
more than one million charitable, educational, religious,
health, and social welfare organizations. It is these groups
that create, nurture, and sustain the values that frame
American life and strengthen democracy. In 1980, a group of
visionary leaders, chaired by the Honorable John W. Gardner,
became convinced that if the independent sector was to continue
to serve society well, it had to be mobilized for greater
cooperation and influence. Thus a new organization, named to
celebrate the independent sector's unique role apart from
government and business, was formed to preserve and enhance and
protect a healthy, vibrant independent sector.
Independent Sector and the many charities it represents
have a keen interest in ensuring that charities provide public
disclosure of key information to help ensure that they operate
strictly in the public interest and not for private benefit.
Charities depend on public trust to raise money and carry out
their missions, and transparency is essential to maintaining
that trust. For this reason, IS supports twelve of the nineteen
recommendations for additional disclosure made in the Joint
Committee on Taxation Study on Disclosure by Tax-Exempt
Organizations (hereafter, ``the JCT Report'').
In particular, IS strongly urges Congress to adopt the JCT
recommendation that electronic filing for exempt organizations
be greatly accelerated and that the Form 990 be redesigned to
be far more understandable for members of the public. A
substantial amount of information about charities is already
available, but it is not as easy to find and to use as it
should be. Of all the proposals made, IS believes this proposal
has by far the greatest potential to improve public oversight
of charities and to ensure that they are serving public and not
private purposes.
IS does, however, take issue with the JCT Report concerning
the appropriate analytic framework for evaluating proposals for
additional disclosure. IS believes that charities' disclosure
obligation derives from their role in serving public interests,
not from their tax treatment. Many taxable taxpayers receive
exemptions for part of their income or tax benefits of
comparable value. The JCT Report correctly recognizes that
these tax benefits do not justify mandatory disclosure of
return information by taxable entities and individuals; the
result should be no different for charities and other exempt
entities.
Charities must operate with a high degree of transparency
to ensure the public trust essential to the performance of
their social role. However, charities are fundamentally private
entities and as such are entitled to a substantial zone of
privacy with respect to their internal decision-making process.
Moreover, in certain key contexts confidentiality is also
essential to fair and efficient tax administration. Finally,
the burden of additional disclosure with respect to public
policy related activities will create an undue chilling effect
on charities' participation in the development of public
policy, an effect that is not in the public interest.
Accordingly, weighing the costs and benefits of additional
disclosure, IS strongly opposes seven of the JCT
recommendations, including the three recommendations for
increased reporting on charities' participation in the public
policy process.
II. Framework for Analysis
Independent Sector has long advocated public disclosure by
charities of substantial information related to programs and
finances as a key mechanism for ensuring that charities meet
their obligation to operate strictly in the public interest.
Consistent with this long-standing commitment, IS supports many
of the recommendations offered in the JCT Report.
Public trust is charities' most important asset.
Maintaining public trust requires a high degree of transparency
in charities' operations. As a collective voice for charities
across the country, Independent Sector has consistently
supported initiatives to guarantee the public broad access to
information about the financial and programmatic operations of
charities. For example, IS strongly supported the recent
legislation requiring charities to mail copies of their Forms
990 and 990-PF on request. Likewise, IS has consistently
supported increased funding for IRS review of Forms 990 and
990-PF to ensure that all charities are fully and accurately
meeting current disclosure requirements. Finally, IS also
strongly supports electronic filing and related initiatives to
give the public immediate on-line access to all Forms 990 and
990-PF.
Consistent with this long-standing commitment, IS welcomes
the opportunity to present its views to the Ways and Means
Committee on additional federal tax disclosure by charities. IS
supports the majority of the specific recommendations contained
in the Joint Committee on Taxation's recent report.
2. IS believes that charities' public disclosure obligations
derive from charities' fundamental nature as voluntary
associations formed by private citizens to advance the public
good--not from charities' receipt of favorable tax treatment.
The JCT Report suggests that charities' public disclosure
obligations derive principally from charities' favorable tax
treatment--i.e., tax exemption and the right to receive
deductible contributions--which the Report regards as the
equivalent of a government subsidy. Independent Sector
disagrees with this premise in two important respects.
First, IS believes that charities' public disclosure
obligations derive from charities' fundamental nature as
voluntary associations formed by private citizens to advance
the public good--not from charities' receipt of favorable tax
treatment. By definition, going back to their origins in the
English common law, charities are organized and operated for
the benefit of the community. To qualify as a charity, an
organization must dedicate all of its income and assets, in
perpetuity, to serving the disadvantaged or otherwise providing
goods and services for the benefit of the public at large.
Charities were recognized as separate entities with legal
rights and responsibilities long before there was a federal
income tax code. The need for disclosure stems from charities'
unique social role. A charity must be transparent enough to
make donors, volunteers, and partners confident that the
charity will, in fact, advance public rather than private
interests. This need for disclosure as a means of ensuring
public trust is conceptually independent of the receipt of
favorable tax treatment.
Second, IS takes issue with the JCT Report's
characterization of tax exemption and the charitable deduction
as government subsidies and the Report's view that the receipt
of those subsidies creates a strong presumption in favor of
increased disclosure. The Report treats tax exemption and the
charitable deduction as tax benefits because they enable
charities and their donors to avoid paying tax they would
otherwise have to pay. There have been years of serious
academic debate over whether the charitable exemption and
deduction are appropriately viewed as special benefits or as
structural necessities of a properly calculated income tax.\1\
A sound tax policy case can be made that neither the charitable
tax exemption nor the charitable contribution deduction are
properly characterized as government subsidies.
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\1\ In the principal article with respect to the charitable
exemption, Boris Bittker and George R. Rahdert, argues that the
exemption for nonprofit organizations is consistent with the
fundamental principles of an income tax and is not a special exception
or subsidy. See Boris I. Bittker and George Rahdert, ``The Exemption of
Nonprofit Organizations from Federal Income Taxation,'' 85 Yale Law
Journal 299 (1976). The arguments for treating the charitable
contribution deduction as a subsidy are somewhat stronger. It is
treated as a tax expenditure. However, there has also been scholarly
debate over whether this treatment is appropriate or whether the
deduction is an essential element in measuring the normal income tax
base. As Professor William D. Andrews argued more than twenty-five
years ago in the Harvard Law Review, amounts contributed to charity are
no longer available for either present or future personal consumption
and, therefore, should not be included in defining taxable income.
William Andrews, ``Personal Deductions in an Ideal Income Tax,'' 86
Harvard Law Review 309 (1972). See also, Adam Yarmolinsky, ``The
Charitable Deduction: Subsidy or Limitation?'' 29 Nonprofit and
Voluntary Sector Quarterly 173 (2000) (arguing that the charitable
deduction is best viewed as a Congressional limitation on federal
taxing power instead of as a subsidy). The only benefit that can come
back to the taxpayer is a psychic sense of satisfaction. Any more
tangible quid pro quo of value will reduce the taxpayer's charitable
contribution deduction. See, United States v. American Bar Endowment,
477 U.S. 105 (1986). Furthermore, two-thirds of American taxpayers are
nonitemizers who still give substantial amounts to charity. Their
contributions do not carry any tax-based subsidies with them because
they cannot claim an itemized deduction.
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Furthermore, the logical extension of the JCT Report's
treatment of the charitable exemption and deduction as tax
benefits \2\ would be to treat every deduction, credit or
exemption as a tax benefit. If the public is viewed as having
an interest in all tax benefits accorded under Federal law, as
the Report suggests,\3\ then disclosure should be required of
all taxpayers who receive tax benefits in any form. Following
this view, every taxable corporation with a business expense
deduction or net operating loss carryover, or every individual
receiving a child care credit, should likewise be required to
disclose their tax returns. Plainly, the Joint Committee Staff
is not prepared to adopt this general approach. Indeed, the
first volume of the JCT Report explicitly recognizes that
confidentiality of tax return information is essential to
fostering voluntary compliance with the system.\4\ Clearly
then, the receipt of tax benefits--whether in the form of the
charitable exemption and deduction or the many benefits
received by taxable entities and individuals--does not create a
general presumption in favor of disclosure.
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\2\ Staff of Joint Committee on Taxation, 106 th Cong., 2d. Sess.,
Study on Present Law Taxpayer Confidentiality and Disclosure Provisions
As Regional By Section 3807 of the Internal Revenue Service
Restructuring and Reform Act of 1998 Vol. II, 47 (Comm. Print 2000)
(hereinafter ``JCT Staff Report'').
\3\ JCT Staff Report, Vol. II, 80.
\4\ ``This confidentiality is based on persons' right to privacy,
as well as the view that voluntary compliance will be increased if
taxpayers know that the information they provide to the government will
not become public.'' JCT Staff Report, Vol. I, 5.
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Finally, it is significant to note that even government
entities funded entirely with public subsidies enjoy a
significant zone of privacy.\5\ Clearly, Congress has
recognized that even in the case of publicly funded
governmental entities, where the case for public accountability
is strongest, unlimited disclosure can be counter-productive.
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\5\ The Freedom of Information Act was established to insure
accountability of federal government actions through disclosure of
records. Nonetheless, it provides eight categories of exemptions that
allow the government to avoid disclosure of records. For example, the
Freedom of Information Act includes specific exceptions that allow
government employees to have extensive, candid, and confidential
discussions while they are formulating policies. See 5 U.S.C.
Sec. 552(b)(5) (1988). Moreover, the Federal Advisory Committee Act and
other sunshine laws provide for exemptions from public scrutiny under
certain circumstances. If government agencies are entitled to some
privacy, charities, as private entities, a fortiori are entitled to a
zone of privacy and a far greater one than government agencies enjoy.
3. While IS supports a high degree of transparency for
charities, IS believes that it is extremely important to avoid
reporting requirements that could have an undue chilling effect
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on charities' participation in the public policy process.
Because of their unique role in mobilizing citizens and
communities to address issues of common concern, charities make
an important and valuable contribution to the development of
public policy. Charities are on the front lines of the struggle
against the most significant social problems, including hunger,
poverty, discrimination, and disease, and are also the vanguard
of many significant social innovations. The hands-on experience
charities derive from their day-to-day work for the public good
can help legislators make more informed and enlightened
decisions on the full range of issues that come before them.
Key members of Congress explicitly and repeatedly recognized
the important contribution charities make to the legislative
process in the course of developing the landmark 1976
legislation clarifying and liberalizing the lobbying rules for
public charities.\6\ The clear premise of this legislation--a
premise IS believes should continue to guide Congress--is that
the public interest is served by encouraging more rather than
less participation by charities in the public policy process.
---------------------------------------------------------------------------
\6\ Illustrative of the tenor of the Congressional debate that led
to the enactment of section 501(h) and section 4911--the Internal
Revenue Code provisions that define the lobbying rules for public
charities--are the following statements by key supporters of the
legislation:
Senator Dole (R-KS): ``Charities can be and should be
important sources of information on legislative issues.'' 121 Cong.
Rec. 42032 (1975).
Representative Conable (R-NY): ``The role of charities in
a pluralistic society--something we are all dedicated to--is
constructive and the charities should not be muzzled.'' 119 Cong. Rec.
42632 (1973)
Senator Nelson (D-WI): ``[Charities] represent the public
in many important areas such as health, education, and the environment.
These groups have much information to contribute and a wide range of
helpful experience that could greatly assist the consideration and
enactment of this country's laws.'' 119 Cong. Rec. 5749 (1973).
Senator Muskie (D-ME): ``It makes no sense to decide that
these organizations operate in the public interest and grant them tax-
exempt status and then silence them when they attempt to speak to those
who must decide public policy.'' 117 Cong. Rec. 8517 (1971).
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As a practical matter, one of the chief barriers to such
participation by charities in the public policy process is the
complex set of federal and state rules governing lobbying by
charities. Charities are subject not only to the federal tax
law rules on lobbying but also to the federal Lobbying
Disclosure Act, the separate lobbying restrictions related to
the receipt of federal grant funds, and to various state lobby
disclosure statutes. The regulations interpreting the federal
tax limitations on lobbying alone total more than 40 pages in
the Code of Federal Regulations. The complexity of these rules
has a substantial, and highly undesirable, chilling effect on
participation in the democratic policymaking process, both for
smaller organizations with limited staff and access to legal
counsel and for larger organizations that must establish and
maintain complex record-keeping systems. IS opposes additional
reporting requirements that could further deter charities from
participating in the public policy process. Such a chilling
effect would be particularly troubling because charities are
often the only parties able to speak on behalf of the least
fortunate in our country.
Congress must assess any new disclosure requirements
against a complex legal landscape. Not only are the rights to
free speech and association implicated; freedom of religion
must also be given proper deference. The charitable community
includes many churches and other religious organizations, and
the JCT Report implicitly recognizes the importance of freedom
of religion. Even though the JCT Report's arguments about tax
subsidies and the public interest would apply equally to these
religious entities, the JCT Report recommends no changes in the
current rules exempting churches and their integrated
auxiliaries from the basic reporting requirements. IS believes
that similar and explicit consideration must be given to the
effect of additional disclosure on other constitutional
considerations, including, most importantly, the chilling
effect on free speech.
Thus, absent a finding of an absolutely compelling public
interest in additional disclosure, IS believes Congress should
avoid imposing additional reporting burdens in this important
and constitutionally sensitive area. IS did not find any
discussion in the JCT Report of any abuses that the staff
believed needed to be addressed with respect to charities'
participation in the policy formation process. Given the
growing disaffection of many Americans from our public policy
process, Congress should be doing everything possible to
encourage, rather than discourage, active participation from
all quarters of American society, including most especially the
charities, in the public policy arena.
4. The scope of charities' overall reporting obligations should
be determined through a careful cost-benefit analysis that
weighs the public interests advanced by disclosure of
particular information against those public interests
undermined by additional disclosure.
IS agrees with the JCT Report that proposals for additional
mandatory disclosure should be evaluated under a careful cost-
benefit analysis that weighs the public interests advanced by
disclosure against the public interests that may be undermined
by the proposed additional disclosure. In the constitutionally
sensitive area of charities' participation in the public policy
process, IS believes that the chilling effect on free and open
speech, association and participation can be outweighed only if
additional disclosure is the only way to safeguard an important
public interest. In other areas, the costs and benefits may be
more evenly matched, but each must still be given its due
weight.
IS believes that the principal interests advanced by
disclosure are as follows:
Increasing the public's ability to oversee tax-
exempt organizations for the purpose of verifying that the
organizations are serving the public and not private interests,
and are remaining faithful to the goals of their contributors
and other supporters;
Increasing compliance with Federal tax (and other
applicable) laws;
Promoting the fair application and administration
of the Federal tax laws; and
Encouraging charitable giving, volunteerism, and
collective activity.
This list of purposes to be served by exempt organization
disclosure is substantially similar to the list of policies the
JCT Report articulated,\7\ although there are some very notable
clarifications. IS disagrees with JCT's view that disclosure
necessarily ``improves the efficiency'' of the exempt sector.
In fact it questions why the government is concerned with
efficiency rather than accountability in the nonprofit sector.
IS also does not believe that additional public disclosure
necessarily increases public accountability. There is a nearly
infinite amount of information that charities could be required
to provide to the public. Substantially increased disclosure
necessarily entails substantially increased costs. These are
costs measured in the time and resources needed to learn about
new legal requirements, change record-keeping systems, gather
and store additional information, and deal with harassment from
adversaries who use the required disclosure as an opportunity
to distract the charity from its real work.\8\ Time and
resources spent on government paperwork are time and resources
not spent on providing food, clothing, shelter, medical care,
child care and other vital services to the charity's
beneficiaries. Congress should impose such administrative costs
only when it is clear that they will produce a commensurate
increase in meaningful public accountability.
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\7\ See JCT Staff Report, Vol. II, 80.
\8\ Congress recognized the possibility of harassment arising in
connection with mandatory disclosure when it revised section 6104 in
1996. Section 6104(e)(3) specifically relieves exempt organizations of
the burden of producing copies of their core tax documents when they
receive a request that is part of a ``harassment campaign.''
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IS believes that the principal interests that may be
adversely affected by increased mandatory disclosure are as
follows:
Avoiding imposition of excessive reporting costs
that drain resources from activities that further a charity's
mission;
Avoiding a chilling effect on constitutionally
protected rights to freedom of speech and freedom of
association;
Protecting the privacy interests of donors,
members and other taxpayers whose personal information is in a
charity's possession;
Ensuring competitive equality for unrelated
business activities;
Promoting increased voluntary compliance and
efficient tax administration; and
Protecting appropriate privacy interests of exempt
organizations in seeking determinations and rulings on proposed
organizations and transactions.
Again, the JCT Report has identified many of these same
factors as bearing on the cost-benefit analysis for proposed
new mandatory disclosures. However, IS believes that in
weighing the costs and benefits of a number of the disclosure
proposals--especially those that relate to a charities'
communications with the IRS, unrelated business activities, and
lobbying activities--the JCT Report significantly
underestimates the negative effects of increased disclosure.
5. IS believes that in working to ensure appropriate
transparency of charitable organizations, policy-makers should
recognize the very substantial amount of information that
charities already disclose and should give high priority to
making this information more readily available, in user-
friendly form, to the public.
The existing disclosure requirements that apply to
charities under the Federal tax law generate a substantial
volume of publicly available information. With the finalization
of the regulations under section 6104 last year, incentives are
in place for more and more of that information to be readily
available and easily searchable over the Internet.
Unfortunately, much of the most valuable information for the
public is hidden among the more than 400 separate pieces of
data (not including attachments and schedules) that are found
on the six page Form 990. To illustrate, from the Form 990, any
member of the public can already see the following information:
Detailed Description of Activities Furthering the
Charitable Mission Including Discussion of any Significant
Changes in Activities Since the Application for Exemption or
last Form 990 was filed
Total Revenues
Total Expenses
Names and addresses of all officers, directors,
trustees and key employees
Compensation of officers and directors, trustees
and key employees
Compensation of the five most highly paid
employees other than officers, directors or trustees
Average hours per week these individuals devote to
their positions
Other payroll, including fringe benefits
Professional Fundraising Fees
Legal Fees
Accounting Fees
Travel
Conferences, Conventions and Meetings Expenses
Assets
Liabilities
Fees and Contracts Received from Government
Agencies
Investment Income
Membership Fees received
Whether the organization had unrelated business
income tax liability
Names of taxable subsidiaries and percentage
ownership
Whether the organization engaged in lobbying
If so, lobbying expenditures made by the
organization
Transfers to and Transactions with Exempt
Organizations that are not charities, including section 527
political organizations
Without an understandable user's guide--and no such guide
exists--the public derives little benefit from much of the
information already reported by charities. Thus, there is a
deep need for tools to help the public understand the
information that is already disclosed. We believe that
oversight of the charitable sector by both the government and
the public could be dramatically improved by revising the Form
990 so that it highlights critical information and facilitates
the reader's understanding of the significance of the
information being presented. A top priority for the IRS in this
regard should be providing, either directly or through non-
governmental intermediaries, on-line access to all Forms 990.
III. Comments on Specific Recommendations
A. Overview
The JCT Report makes nineteen separate recommendations with
respect to disclosure by exempt organizations. Independent
Sector's position on these proposals is summarized below.
Recommendations IS Supports
IS supports the following eight JCT recommendations:
Accelerated electronic filing and redesign of Form
990
Disclosure of third party communications re
written determinations
Confidentiality of taxpayer identification numbers
Disclosure of annual returns by section 527
organizations
Disclosure of names under which exempt entities
conduct their operations
IRS notification of public availability of Form
990
Mandatory disclosure and IRS reporting of exempt
entities' web page
Increased preparer penalties for preparers of
exempt entities' returns
Recommendations IS Supports But That Require Further Study or
Refinement
IS supports the goals of the following four JCT
recommendations, but IS believes these recommendations need
further study or refinement:
Greater flexibility for IRS information sharing
with state charity regulators
Increased reporting re transfers among section
501(c)(3), section 501(c)(4), and section 527 organizations
Permitting private foundations to report only
summaries of their investment transactions and assets
Annual notice requirement for small exempt
entities
B. Recommendations That IS Opposes
IS strongly opposes the following seven JCT
recommendations:
Non-redacted disclosure of written determinations
and related file documents
Non-redacted disclosure of closing agreements and
audit results
Non-redacted disclosure of exemption applications
at the time of filing
Non-redacted disclosure of Forms 990-T and 1120
Narrative description of lobbying by charities
reporting under section 501(h)
Reporting of self-defense lobbying expenses
Reporting of expenses for nonpartisan analysis
containing limited calls to action
B. Recommendations that IS Supports
1. The Joint Committee Staff recommends that the Form 990
and related forms: (1) should be accepted by the IRS for
electronic filing for returns filed after 2002; and (2) should
be revised to ensure that the forms provide relevant and
comprehensible information to the public as well as the IRS.
IS emphatically endorses these recommendations. The
capacity to distribute this information economically and
swiftly depends increasingly on having it available in
digitized form. Furthermore, as IS stated in comments submitted
to Treasury last fall, the Form 990 is already rich with
information. However, most readers find it difficult to locate
the most important information or to assess the significance of
the information provided. IS stands ready to work with the IRS
in developing a more useful form that will increase meaningful
access to information.\9\
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\9\ The IRS regularly encourages outside parties familiar with the
Form 990 to suggest improvements. Two organizations are beginning a
substantial project to do exactly that. They are Philanthropic Research
Inc. (the nonprofit that operates the Guidestar web site) and the
National Center for Charitable Statistics located at the Urban
Institute.
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2. The Joint Committee Staff recommends that rules similar
to the disclosure rules that apply to third-party
communications under section 6110 should be applied to third-
party communications relating to written determinations and
exemption applications subject to disclosure under section
6104.
Section 6110 generally requires that communications to the
IRS by third parties relating to a specific taxpayer or
taxpayers must be disclosed to the public. The purpose of this
requirement is to put the public on notice when third parties
attempt to influence the IRS to take action to benefit, or to
harm, a particular taxpayer. IS agrees that the same rules
should also apply--for the same reasons--to third party
communications related to tax-exempt organizations.
3. The Joint Committee Staff recommends that the taxpayer
identification number of tax-exempt organizations should not be
subject to disclosure.
IS appreciates the JCT Report's concern about the possible
misappropriation of taxpayer identification numbers. To the
extent that the record developed by the JCT Staff indicates
that such misappropriation constitutes a significant threat to
tax-exempt organizations or the tax system, IS would support
this recommendation. IS notes, however, that exempt
organizations have been routinely disclosing this information
for many years on the first page of the Form 990. IS is not
aware of any problems that have arisen from this disclosure.
4. The Joint Committee Staff recommends that the scope of
section 6104 should be expanded to require the disclosure of
the annual return filed (Form 1120-POL) by political
organizations described in section 527. The Joint Committee
staff also recommends that section 527 organizations should be
required to file an annual return even if such organizations do
not have taxable income and that the annual return be revised
to include more information concerning the activities of such
organization.
IS believes that the involvement of section 527
organizations in partisan, election-related activities creates
a legitimate public interest in disclosure of the financial
information contained on the Form 1120-POL. Accordingly, IS
supports this recommendation. IS notes that the Form 1120-POL
requires disclosure of investment income and expenses and
certain other financial income, but does not require disclosure
of donors or political contributions received.
5. The Joint Committee Staff recommends that tax-exempt
organizations should be required to provide both their legal
name and the name under which they do business on the Form 990.
IS supports this change and believes that it will help
reduce public confusion about the identity of some charitable
organizations. IS believes the public would find it useful to
be able to find the names under which charities do business not
only on a charity's return but also in the IRS list of exempt
organizations.
6. The Joint Committee Staff recommends that the IRS notify
taxpayers in instructions and publications that Form 990 is
publicly available.
IS agrees that more public education will lead the public
to take greater advantage of the access they already have to
information about exempt organizations.
7. The Joint Committee Staff recommends that the World Wide
Web site, if any, of a tax-exempt organization should be
included on Form 990 and that the IRS should be required to
publish such addresses.
IS agrees that having this information readily available
will increase the general public familiarity with specific tax-
exempt organizations.
8. The Joint Committee Staff recommends that the present-
law tax penalty imposed on tax return preparers should be
expanded to apply to willful or reckless misrepresentation or
disregard of rules and regulations with respect to Form 990.
IS believes it is appropriate for return preparers to be
held to a comparable standard of accountability when preparing
returns for tax-exempt organizations as currently applies to
the preparation of returns for taxable organizations. However,
to ensure that charities will still be able to obtain the
services of return preparers at a fair price, and the volunteer
services of return preparers who help many smaller charities,
IS asks that it be clear that preparers of exempt organization
returns will be subject to penalties only where the IRS can
demonstrate that they acted willfully, recklessly and without
reasonable cause in preparing the return. The differences
between the Form 990, which is an information return that does
not state an amount of taxable income or amount of tax due, and
the basic tax returns other taxpayers file could make it
problematic to apply the same preparer penalties with respect
to exempt organization returns as apply to returns filed by
taxable taxpayers.
C. Recommendations that IS Supports in Principle But that Need
Further Study or Refinement
1. The Joint Committee Staff recommends that the IRS should
be permitted to disclose to Attorneys General and other non-tax
State officials or agencies audit and examination information
concerning tax-exempt organizations with respect to whom the
State officials have jurisdiction and have made a specific
referral of such organization to the IRS prior to a final
determination with respect to the denial or revocation of tax
exemption. In addition, the Joint Committee staff recommends
that the IRS should be permitted to share audit and examination
information concerning tax-exempt organizations with non-tax
State officials and agencies with jurisdiction over the
activities of such organizations if (1) the State officials
regularly share information with the IRS, and (2) the IRS
determines that such disclosure may facilitate the resolution
of the case.
Independent Sector believes that increased collaboration
between the IRS and state charity regulators merits full and
careful exploration. Fostering such collaboration could result
in valuable improvements in overall accountability for
charities. However, relaxing the current confidentiality rules
also raises complex policy issues related to taxpayer privacy
and equity between tax-exempt and taxable entities.
In order to develop a statutory framework that strikes the
appropriate balance between enhanced enforcement capabilities
and protection of charities against harassment or unjustified
burdens, IS believes Congress needs input from a task force
comprised of current and former federal and state charity
regulators and representatives of charities who have been
through federal and state enforcement actions. A dialogue among
these parties is essential to producing statutory language that
is effective and fair. IS would gladly convene such a task
force to provide Congress with this essential input as rapidly
as Congress's timetable demands.
2. The Joint Committee Staff recommends that the Form 990
report more information concerning the transfer of funds among
various organizations so that the public and the IRS can better
assess whether contributions to tax-exempt organizations are
being used to fund political activities.
Part VII of Form 990, Schedule A already requires charities
to provide detailed reporting with respect to such transactions
with non-charitable exempt entities. The JCT Report does not
make clear what additional reporting the Joint Committee Staff
is recommending or why the current reporting requirements are
inadequate. However, to the extent the Joint Committee Staff
can share any record they have developed that supports the
conclusion that current reporting requirements are inadequate
to prevent potential abuses, IS would support appropriate
additional reporting requirements.
3. The Joint Committee Staff recommends that private
foundations reporting capital gains and losses on Form 990-PF
should be permitted to disclose a summary of those capital
transactions. A full listing of the transactions would be
required to be filed with the IRS and to be provided to the
public upon request.
IS agrees that disclosure of such voluminous information
does not necessarily benefit the public, and may in fact reduce
the level of meaningful disclosure by obscuring other important
information. However, the real burden comes in having to file
the detailed information with the IRS in the first place,
especially because the IRS has indicated that it does not use
the information except in the rarest of cases. The same problem
arises with respect to Part II of Form 990-PF on which
foundations are required to submit a detailed listing of all
foundation assets.
For large foundations with extensive and highly diversified
investment portfolios, the required schedules of investment
transactions giving rise to capital gains and losses can be
thousands of pages long. The Form 990-PF similarly requires
foundations to attach a detailed schedule of all foundation
assets, which, likewise, can be extremely lengthy.
When the media or members of the public at large ask to
examine these parts of the Form 990-PF--and few ever do--they
are stymied by the sheer volume of information. IS believes
they are interested in the information that a summary would
provide. Thus, neither the IRS nor the public derives any
significant benefit from these highly burdensome reporting
requirements. Moreover, requiring the submission of these
voluminous records is a major impediment to electronic filing
of the Form 990-PF.
As the detailed information contained on these assets or
capital transactions schedules could conceivably be relevant in
the case of an audit, IS recommends that private foundations be
required to keep the information on file as long as the
relevant statute of limitations remains open. However, IS
further recommends that foundations be permitted to submit
summary statements of their assets and capital transactions
instead of the detailed schedules currently required. This
change would not jeopardize any enforcement interests, would
actually improve the public's ability to understand the
information that is disclosed, and would substantially reduce
the reporting burdens on private foundations.
4. The Joint Committee Staff recommends that tax-exempt
entities (other than churches) that are below the filing
threshold of the Form 990-EZ should be required to file
annually a brief notification of their status with the IRS.
While IS agrees that there might be some public benefit in
enabling the IRS to maintain complete and current information
about smaller organizations, IS believes the costs of enforcing
such a rule, particularly for the IRS, far outweighs the
benefits. Small organizations tend to be staffed by volunteers
who may well not be familiar with the rules for annual filing.
Frequent changes in volunteer leadership results in frequent
changes of address and a pervasive lack of awareness of IRS
reporting requirements. Imposing penalties on these tiny
charities for failure to file would be impractical where
changes of address made it impossible for the IRS to contact
the organizations. More broadly, absent any pattern of abuse,
it is difficult to see what compliance gains would justify the
substantial costs to the IRS of trying to find these small
entities in order to enforce an annual reporting requirement.
Considering all of these factors, IS urges Congress to maintain
the current rules while encouraging the IRS to develop simple
flexible methods--perhaps using a national toll-free telephone
number or a web site--small organizations could use voluntarily
to inform the IRS of their whereabouts.
C. Recommendations that Independent Sector Opposes
1. The Joint Committee Staff recommends that all written
determinations and background file documents involving tax-
exempt organizations should be publicly disclosed. In general,
the Joint Committee Staff recommends that such disclosure be
without redactions
IS strongly opposes this recommendation.
If taxable taxpayers so request, the IRS must redact their
names, addresses and other identifying details from private
letter rulings and technical advice memoranda and related
background file documents before they are released
publicly.\10\ The JCT Report provides no convincing rationale
why a different rule should apply to charities and other tax-
exempt entities. Accordingly, IS believes that exempt entities
should have the benefit of the same redaction rules that apply
to taxable entities.
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\10\ See IRC Sec. 6110(c)(1).
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Charities are private entities formed by private
individuals. As such, they have the same competitive interests
in privacy that taxable organizations do. For example, a
charity considering a joint venture with a taxable entity may
feel the need to obtain an IRS ruling that the joint venture
will not adversely affect its exempt status. Requesting such a
ruling allows the charity to identify in advance potential
areas of disagreement with the Service, and frequently enables
the charity to modify the proposed transaction to address any
Service concerns. Thus, the private letter ruling process is an
important means of encouraging voluntary compliance.
However, in considering such ruling requests, the IRS
frequently requires exempt entities to make extensive
disclosures related to both current and future operations at a
level of detail far beyond that required by the Form 990. If
faced with the prospect of non-redacted disclosure of this
detailed, and sometimes quite sensitive, operational
information, many charities would simply decline to seek
advance rulings. Charities face competitive pressures in their
sphere comparable to what for-profit entities face in the
business world. Charities compete for funding and strategic
advantages among their peers. The cost of being forced to
disclose not only the proposed transaction that is the subject
of the ruling request but any other operational information the
IRS may seek may far outweigh the benefit of gaining IRS
assurance that the IRS sees the transaction as being in
compliance with the law.
Even more than the specific charity, it is the IRS and the
public that loses if charities are deterred from seeking
rulings. IRS enforcement can be more efficient and more
effective when government officials can see transactions before
they happen and shape them, where appropriate, to comply with
the law. With the advantages of foresight, the IRS can even
help ensure that particular records are kept to make subsequent
audits swifter and easier. It would be far more costly for the
IRS to have to review most of these transactions after they
have happened. Moreover, because the rulings process is
prospective and the audit process is retrospective, the rulings
process can alert the IRS to problem areas when they are
getting started and enable them to put out public guidance to
avert abuses. The public benefits from this proactive work and
will lose this benefit if charities are deterred from seeking
advance rulings.
Equally serious problems would arise if Congress mandates
non-redacted disclosure of technical advice memoranda and
related background file documents. In the case of a disputed
audit issue, the exempt organization and the agent will have to
wrestle with a set of costs and benefits wholly unrelated to
getting technical resolution of the issues. The negotiating
balance between both sides will be skewed because raising the
possibility of technical advice necessarily would entail
raising full disclosure. Charities who believe an agent has
simply made errors of law in his or her analysis will be put in
the untenable position of choosing between getting the benefits
of a correct legal interpretation to which they are legally
entitled and protecting the confidentiality of their internal
decision making processes and strategic plans. For these
reasons, requiring disclosure will not support efficient tax
administration and will discourage exempt organizations and
agents from seeking the best technical input available from the
experts in the National Office.
Finally, there is no public interest being served. The fact
that technical advice is being requested provides no basis for
suspecting the organization of wrongdoing or requiring
disclosure. The whole point of the process is to encourage
agents to recognize honestly where the law is not clear and
request assistance from experts in the National Office who are
not directly responsible for the audit.
Disclosure of identifying information in these written
determinations is not necessary to promote fair application and
administration of the Federal tax law. The public can clearly
see how the IRS is applying the law from a redacted document as
has been demonstrated by years of experience with written
determinations issued to taxable taxpayer under the rules of
section 6110(c) which provides for redaction of identifying
information. What is far more urgently needed to improve fair
application and administration is a substantial increase in the
amount of guidance published by the IRS on specific legal
questions affecting exempt organizations. Written
determinations issued to a single exempt organization operating
under a specific set of facts can never offer as much help in
understanding how the law applies to exempt organizations as
published guidance can.
In sum, the costs of this proposal would be significant and
would include impairment of charities' capacity to operate
effectively; reduced opportunities to encourage voluntary
compliance through the private letter ruling process; and
damage to the public credibility of charities subject to audits
that include technical advice, even if the charity ultimately
prevails. The costs can be eliminated and the benefits of this
proposal can be achieved by simply requiring release of written
determinations subject to the same redaction rights enjoyed by
taxable taxpayers, including the rights to appeal decisions
about the drafting of the technical advice memorandum and the
redactions to be made.
2. The Joint Committee Staff recommends that the IRS
disclose the results of audits of tax-exempt organizations. In
addition, the Joint Committee staff recommends that all closing
agreements with tax-exempt organizations should be disclosed.
In general, the Joint Committee staff recommends that such
disclosures should be made without redaction. Closing
agreements should be disclosed ``regardless of whether the
agreement arose as a result of an audit.''
IS strongly opposes this recommendation.
IS disputes JCT's view that release of closing agreements
serves the public interest. The IRS has had the discretion to
require disclosure of closing agreements as a condition of
settlement, but has actually cooperated with public release as
a term of settlement in only two of the thousands of agreements
it has signed with exempt organizations. Closing agreements are
simply negotiated resolutions compromising disputed issues, and
contain no detailed statement of facts or of the Service's
legal position. Therefore, they have virtually no educational
value in clarifying the Service's interpretation of the
law.\11\ The two closing agreements that were cited by the JCT
staff as having been publicly released--in the Hermann Hospital
and Bishop's Estate cases--had highly unusual fact patterns
that the IRS believed would be instructive to the public.
Obviously the IRS has not had a similar view with respect to
most of the other closing agreements it has entered. It follows
that mandating disclosure of all closing agreements would
provide the public with little information of use or interest
in ensuring that charities serve public interests while
imposing substantial costs on the affected charities.
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\11\ The JCT Staff concurs in this view. The Report states, ``In
general, the Joint Committee staff does not believe that closing
agreements are an effective means to provide guidance to taxpayers
regarding the law. Such agreements are negotiated, and they may not
represent the IRS view of the law. Further, because such agreements may
be fact specific and may not contain all relevant information, they may
be misleading if relied upon by others.'' JCT Staff Report, Vol. II,
85, n.186.
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The Report's recommendation of mandatory disclosure of
closing agreements would force certain cases to litigation even
though the IRS would prefer to settle rather than commit scarce
litigation resources to those cases. Charities may refuse to
settle and accept disclosure because of the potential for the
public to perceive the settlement as an admission by the
charity of failure to comply with the law. Press coverage is
unlikely to capture the fact that the settlement does not
formally contain any such admission but will instead likely
focus on the fact that the IRS has pursued an enforcement
action. Litigation, though far more costly to the charity, the
IRS and the overall system of tax compliance, preserves for the
charity the ability to make arguments in its own defense.
The JCT Report does not provide any reason why its proposed
rule should be limited to exempt entities. To the extent the
public has an interest in knowing the terms on which the
Service has settled a disputed tax issue, it would seem that
that interest would be at least as great in the case of a
publicly traded company in which members of the public have
made substantial financial investments. However, the JCT Report
does not make a similar recommendation with respect to taxable
entities because of the obvious adverse effect on voluntary
compliance. There is no reason why exempt entities should be
subject to a different rule.
The JCT Report's recommendation would also have a highly
adverse effect on voluntary compliance programs involving
exempt entities. Under current law, an exempt organization that
discovers that it is in violation of a tax law requirement can
generally enter into a confidential settlement agreement with
the Service typically involving a financial penalty,
correction, and prophylactic steps to ensure future compliance.
Mandatory public disclosure of such agreements would create a
strong disincentive to come forward and take advantage of this
highly desirable mechanism for promoting voluntary
compliance.\12\ The cost of disclosure would be too high,
particularly when evaluated against the likelihood of
examination.
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\12\ In this regard, IS urges Congress to see these closing
agreements the same way it saw Advance Pricing Agreements last year
when it passed legislation clarifying that APAs are confidential and
may not be released as written determinations. In that case, Congress
recognized that disclosure of APAs would threaten the continuation of
the program because the program's success depended upon taxpayers'
willingness to disclose substantial amounts of sensitive proprietary
information. H. Rept. 106-344, 106 th Cong. 1 st Sess, 21.
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IS would be interested in exploring the periodic release of
audit results strictly on an aggregate basis. IS believes there
could be considerable value in making this information
available to the exempt sector provided that it can be done in
a way that protects confidentiality. A similar approach was
required in connection with last year's APA legislation.\13\ In
this way, practitioners who participate in an exempt
organization audit infrequently can get some useful information
on the types of issues that the IRS may be willing to settle in
a closing agreement and how common or rare it is to raise the
issues his or her client is facing.
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\13\ Congress directed Treasury to publish an annual report
regarding APAs, which is to provide extensive information on the
program, including a model APA, the number of pending APAs executed and
the number requested, and the transactions covered and the functions
performed and risks assumed by the related organizations, trades or
businesses involved Pub. L. 106-170 Sec. 201(b)(2) (December 17, 1999).
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3. The Joint Committee Staff recommends that applications
for tax-exempt status (and supporting documents) should be
disclosed when the application is made. In addition, the Joint
Committee staff recommends that any action taken on the
application be disclosed.
IS strongly opposes this recommendation.
Disclosure is supposed to facilitate the public's ability
to ensure that charities serve exclusively public purposes.
Though various members of the public may have their individual
reasons for being interested in particular applications, the
public as a whole lacks a legitimate stake in the operations of
an organization that has not yet been recognized as exempt.
These same concerns apply with respect to applications that are
rejected. There is no limit to public curiosity, but there must
be a limit on satisfying it if we are to maintain consistency
in disclosure standards, fair and efficient tax administration
and protection for the legitimate privacy interests of non-
exempt parties.
Furthermore, individuals contemplating the establishment of
a charity have a legitimate interest in maintaining the
confidentiality of their plans until they have a chance to
obtain a determination of tax-exempt status from the Service.
If their application were disclosed when filed, other
individuals and institutions--like existing charities that
would not have to disclose their plans prospectively--would
have an unfair advantage in competing for funding, staff and
other resources. Thus, mandatory public disclosure of pending
applications might well prevent the successful launch of a new
organization and thereby deny the public the benefits the new
organization would have produced and the individuals founding
the charity the opportunity to work collectively with the peers
they have selected to accomplish their charitable mission.
Of equal importance, public disclosure of the applications
could result in abuse of the application process. Third parties
who dislike the applicant or the applicant's views will have
the opportunity to try to influence the review process by
sending information to the IRS. The IRS will have no capacity
to evaluate the veracity of information that third parties will
likely submit in connection with applications they support or
oppose. Furthermore, IRS employees will be subject to pressure
from public opinion when evaluating applications from very
unpopular organizations. The process of being considered for
exemption should be a strict application of the law to the
facts as represented by the organization, and every
organization deserves equal treatment. A confidential process,
as exists currently, is the best way to ensure even-handed
treatment of all applicants for exempt status.
4. The Joint Committee Staff recommends that the scope of
section 6104 should be expanded to require the disclosure of
all Forms 990-T and any forms (including forms 1120 and 1065)
filed by affiliated organizations of tax-exempt organizations.
IS strongly opposes this recommendation.
Disclosure of a charity's Form 990-T (its unrelated
business income tax return) runs counter to the policy behind
UBIT, which is to create a level playing field between taxable
and tax-exempt organizations, not one tilted toward the taxable
entities. When a tax-exempt organization is paying tax on its
unrelated trade or business activities, it should be entitled
to the same confidentiality that a taxable business enjoys. As
the JCT Staff acknowledged in the first volume of their study,
confidentiality in this context promotes voluntary compliance.
It would be thoroughly unfair to a tax-exempt organization to
force it to show its competitors its business tax return when
it does not have the corresponding right to see its
competitors' returns.
The JCT Report states that disclosure of this information
will ``facilitate comprehensive oversight'' by the public of
exempt organizations. Disclosure is not provided for
disclosure's sake, and oversight is not for oversight's sake.
Disclosure has costs associated with it, and before those costs
are imposed, they must be justified. Disclosure must serve a
purpose, and where charities are concerned, that purpose is to
ensure the charities operate strictly for public purposes and
not private purposes. Where a charity is paying tax in
connection with its business activities, it has acknowledged
that the activities generating the taxable income do not serve
charitable purposes. The public's concern with respect to these
activities, therefore, is in seeing that the revenues generated
are ploughed back in to charitable activities. Knowing the
technical details of how a business reports its income does not
move the public any closer to knowing whether the charity is
serving public rather than private ends.
Finally, the proposal is clearly overreaching. No
definition is provided of what constitutes an affiliated
organization. It would be unfair and unjustified to require a
taxable entity to disclose its tax return simply because it had
been generous enough to form a corporate foundation or had some
overlapping board members with a charity.
5. The Joint Committee staff recommends that public
charities (both electing and non-electing charities) should be
required to provide a general description of their lobbying
activities on Schedule A to Form 990.
IS strongly opposes this recommendation.
Public charities play an invaluable role in the legislative
process. They are the principal vehicle through which
individual citizens can come together to work for public policy
changes that they believe will advance the greater good.
Whether the issue is how to reduce drunk driving, promote
literacy, strengthen families, or revitalize blighted
communities, public charities are on the front lines of the
effort in communities across America. Their unique experience
has led several legislators to urge that private charities, and
faith-based organizations in particular, serve as models for
various public policy initiatives. The expertise charities
derive from this front-line experience can be of tremendous
value to legislators at the federal, state, and local levels--
but only if charities are free to participate in the
legislative process.
In 1976, Congress enacted section 501(h) of the Internal
Revenue Code precisely to encourage such participation. Prior
law had prohibited charities from ``substantial'' lobbying, but
had provided no clear definition of either ``substantial'' or
``lobbying.'' The resulting uncertainty had a profound chilling
effect on charities' participation in the legislative process
that remains to this day. In an effort to dispel this chilling
effect, section 501(h) provided an alternative to the vague
substantial test with specific lobbying expenditure limits and
also established a much clearer, albeit fairly complicated,
definition of lobbying.
While section 501(h) was an important step toward
reassuring charities that it is legal and proper for them to
lobby, the overall set of federal and state laws and
regulations governing lobbying by charities remains a
substantial deterrent to charities' participation in the
legislative process. The section 501(h) rules, while reasonably
clear, are also quite complex. The relevant regulations fill
more than 40 pages of the Code of Federal Regulations.
Charities electing to be subject to section 501(h) must
establish complicated record-keeping systems to track their
direct and grassroots lobbying expenses, and must continually
invest significant staff time and resources in maintaining
these systems. Charities that receive federal grant funds must
comply with a different, and comparably complex, set of
lobbying restrictions contained in OMB Circular A-122. Further,
charities are also subject to the Federal Lobbying Disclosure
Act and to various state lobbying reporting statutes.
Unfortunately, many charities read into these complex and
stringent requirements a signal that participation in the
legislative process is a suspect activity that they undertake
at their peril. That impression runs directly counter to
Congress's own deliberate efforts, through the enactment of
section 501(h), to send the opposite message, that lobbying is
an appropriate rather than a suspect activity. Similarly, the
IRS even states in the Internal Revenue Manual that making the
section 501(h) election tends to be a sign of compliance with
laws; the IRS has observed that the election gives charities a
clear set of standards to apply to their lobbying and feel
comfortable that they can lobby and be in compliance with the
law.\14\ Nevertheless, many charities are deterred from
participating in the policymaking process by the sheer cost and
complexity of complying with these complicated, overlapping
regulatory regimes. The cost of this chilling effect is
profound, and it is borne ultimately by the public who loses
the benefit of charities' participation in the public policy
process.
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\14\ See I.R.M. Sub-Section 7925; Letter from Marcus Owens,
Director, Exempt Organizations Division, IRS to Bob Smucker, Charity
Lobbying in the Public Interest dated February 11, 1999.
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The JCT Report's recommendations for imposing yet more
reporting requirements on charities' participation in the
legislative process must be evaluated against this backdrop.
The substantial complexity of the existing rules already has a
profound chilling effect. The JCT recommendations would only
exacerbate this serious problem.
The JCT Report's first recommendation is that public
charities that have elected to be subject to the section 501(h)
lobbying rules should be required to provide a detailed
description of their lobbying activities and the manner in
which they conducted those activities, all in addition to
reporting the amount of their lobbying expenditures as required
by current law. Three key facts bear note in relation to this
proposal:
This is a solution in search of a problem. The JCT
Report does not provide any hard evidence or arguments that
this additional reporting would serve any important public
purpose. Instead, the Report merely asserts that ``staff
believes that the public has a significant interest in
understanding and monitoring the lobbying activities of a
public charity ...'' The Report makes no effort to explain why
the public has a different or greater interest in monitoring
lobbying by charities as opposed to monitoring the much more
substantial lobbying of the business community.
Congress has already addressed the need for
greater access to information on lobbying expenditures by
enacting the Lobby Disclosure Act. Under this Act, charities
that exceed the registration and reporting thresholds must file
semi-annual reports to Congress identifying the legislation on
which they have lobbied. Most states have similar lobbying
registration and reporting statutes that require charities to
report on state-level lobbying. Given that both Congress and
most state legislatures have already established comprehensive
lobby reporting regimes for both taxable and exempt entities,
it is difficult to see the rationale for embedding additional
lobby reporting requirements in federal tax law. In fact the
IRS has made other changes to the form to address enforcement
concerns, but has never seen the need for such a narrative.
Finally, the proposed additional reporting is
absolutely unnecessary to enable the IRS to assess electing
charities' compliance with the section 501(h) lobbying
expenditure limits. Charities are already required to report
their lobbying expenditures, and must also maintain in their
files, subject to IRS audit, detailed records substantiating
their reported lobbying expenditures. The IRS has always had
the authority to require a narrative description of lobbying
activities by organizations subject to section 501(h) but has
never seen the need to do so. In fact, the IRS has made other
changes to the form to address enforcement concerns, but has
never seen the need for such a narrative.
As these facts make clear, there is simply no compelling
rationale to support the proposed requirement for a narrative
description of lobbying activities, and certainly no rationale
that can justify the additional chilling effect on
participation in the development of public policy that such a
requirement would certainly entail.
6. The Joint Committee staff recommends that public
charities should be required to disclose expenditures for self-
defense lobbying.
IS strongly opposes this recommendation.
Congress has long recognized that charities, like all other
individuals and entities, have a fundamental right to respond
when their existence, powers, duties, or tax treatment are the
subject of a legislative debate. Charities are entitled to
correct the record when inaccurate statements are made about
them and to provide their own views in contrast to the views of
their legislative adversaries. Accordingly, the federal tax law
definitions of lobbying applicable to both public charities and
private foundations contain express provisions excluding self-
defense activities from the definition of restricted
activities.
Presumably, a charity's members, donors, and beneficiaries
fully expect the charity to defend itself when its tax
exemption or ability to raise deductible contributions is under
attack. The JCT Report cites no evidence that these stakeholder
groups have any desire to require the charities they support to
report the amount of their self-defense expenditures. Nor is
there evidence that the public at large perceives itself as
having a vital interest in having information on charities'
self-defense activities.
A charity's opponents might, of course, be interested in
having such information, but their private interest in gaining
a strategic advantage in the debate by burdening the charities
hardly constitutes a legitimate public interest justifying the
imposition of an additional reporting burden. After all, the
opponents have not provided--and have no intention of
providing--any of the resources the charity is using to fund
its self-defense efforts. The charity clearly owes them no duty
of disclosure with respect to these expenditures.
Nor does the IRS need information on the amount of a
charity's self-defense expenditures, since spending on self-
defense is not relevant for purposes of enforcing the
requirements of section 501(c)(3).
And finally, it is difficult to see why legislators need
information on the amount of a charity's self-defense
expenditures. The self-defense exception only applies to direct
lobbying--that is, to direct communications with legislators by
an organization and/or its members. If a charity engages in a
substantial self-defense campaign, legislators, of all people,
will not need to see the organization's Form 990 to gauge the
scope and intensity of the effort.
In short, requiring charities to track and report the cost
of their self-defense activities would not advance any
significant public purpose. It would, however, impose quite
substantial administrative costs and burdens on charities.
Charities would be required to train their staffs on what does
and does not fall within the scope of the self-defense rule.
Charities would also have to establish time reporting and cost
allocation systems to track self-defense costs. Given this
substantial administrative burden on the one hand, and the lack
of any significant public benefit from the reporting of these
self-defense costs on the other, this proposal clearly fails
the cost-benefit test. Accordingly, IS strongly opposes this
recommendation.
7. The Joint Committee staff recommends that public
charities should be required to disclose expenditures for
nonpartisan study, analysis, and research if such study,
analysis, or research includes a limited ``call to action.''
IS strongly opposes this recommendation.
The JCT Report's recommendation would require charities to
track and report the expenses of preparing and distributing so-
called ``nonpartisan study, analysis, and research.'' if that
nonpartisan analysis contains an ``limited `call to action'.''
Under the relevant tax rules, a communication that refers to
and reflects a point of view of a legislative proposal
qualifies as nonpartisan analysis if it contains a full and
fair exposition of the issues it addresses and provides
sufficient information to allow the recipient to form an
independent view on the issues discussed.\15\ Under the JCT
recommendation, such nonpartisan analysis contains a ``limited
`call to action' '' if it specifically identifies one or more
legislators as (1) opposing the organization's view with
respect to the legislation; (2) being undecided with respect to
the legislation; (3) being the recipient's representative in
Congress; or (4) being a member of the legislative committee or
subcommittee that will consider the legislation.\16\
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\15\ Treas. Reg. Sec. 53.4945-2(d)(1).
\16\ See concept of a ``limited'' or ``indirect'' call to action is
defined in the existing regulations implementing the public charity
lobbying rules under section 4911. See, Treas. Reg. Sec. 53-4911-
2(b)(2)(iii) and (iv).
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This recommendation would impose a substantial and
unproductive record-keeping burden on the many charities that
produce valuable policies analyses of legislative issues. The
fact that an otherwise purely educational report lists the
names of legislators on a committee with jurisdiction over one
or more legislative proposals or provides readers with help in
identifying their representatives is an entirely arbitrary way
of sorting what merits reporting. For example, when a health
organization produces literature to educate the public about
the importance of finding a cure for cancer or insuring that
children get vaccinations, it should not have to accept a
special record-keeping and reporting burden simply because it
gives the public a list of all the legislation that has been
introduced to help accomplish its health goals and mentions the
members of Congress who have jurisdiction over the legislation.
This kind of nonpartisan research and analysis confers a clear
public benefit by making both the public and legislators better
informed about issues of general public concern. Imposing
disclosure burdens will only hurt the public and Congress by
making it harder for charities to provide them with fair and
detailed discussions of issues raised in specific legislation.
Educational institutions and other charities provide
instruction and training on every conceivable topic, including
topics relating to public policy. Indeed, for educational
institutions in particular, this is the reason they exist. To
force colleges, universities, schools, and other charities to
scrub every article, study or other piece of scholarship that
relates to a public policy matter and contains a ``limited call
to action'' would be overwhelmingly burdensome and a huge waste
of resources. To determine the amount of the institution's
expenditures on that particular article--when funding for
faculty work is often provided from multiple sources--would be
complex to the point of impossibility. For example, under this
proposal, a college would have to report on a professor who
writes an article on the history of agriculture, drops a
footnote citing a newly introduced bill that would change
federal law on genetically engineered crops, mentions the name
of the legislator who introduced it and the fact that he chairs
the committee that will have jurisdiction over the bill, and
simply states that he supports the bill because he supports any
effort to address the subject. More to the point, the college
would have to report on every professor who publishes any
article or study that mentions any bill, a view on the bill and
otherwise benign information about legislators who are working
on the bill. Even worse, the college would then need to
determine the expenditures it had made to contribute to the
production of these articles. The faculty members who write
these pieces, along with their scholarly colleagues at many
other charities devoted to public education, were not
attempting to influence the legislative process, yet the JCT's
overly broad recommendation would cover all of this activity.
The effort that would be required to comply would overwhelm
educational institutions and drain vast resources that could
otherwise be used productively.
It is difficult to see what possible public interest would
be served by this disclosure requirement. The fact that one
policy paper discussing a legislative proposal identifies the
members of the relevant legislative committees while another
does not hardly seems like a rational basis for requiring
reporting of expenses related to the first report but not the
second. The reference to the legislative committees is
completely irrelevant to IRS enforcement efforts since both
reports clearly qualify, and would continue to qualify, as non-
lobbying communications. Moreover, it seems equally clear that
the public is neither asking for, nor would derive any benefit
from, this expenditure data. And once again, the JCT staff has
not presented any information to suggest that this disclosure
requirement would address any known existing abuses.
Accordingly, IS firmly believes that this recommendation
clearly fails the requisite cost-benefit analysis.
Statement of International Health, Racquet & Sportsclub Association,
Boston, Massachusetts
Mr. Chairman and Members of the Committee:
The International Health, Racquet & Sportsclub Association
(IHRSA) submits this statement in response to the Committee's
notice seeking comment on the Joint Committee on Taxation staff
recommendations (the recommendations) to increase disclosure of
information relating to tax-exempt organizations.
IHRSA represents over 3000 proprietary health clubs and
fitness facilities. The provision of health and fitness
services is one of those areas of our economy in which there is
significant growth and intense competition, both among
proprietary firms, and increasingly with large and amply funded
entities which enjoy tax exempt status. Whether those tax free
competitors are appropriately carrying out their charitable
responsibilities, or using their charitable status as an
umbrella to shield them from taxes while pursuing an
essentially commercial market, is a major concern of our
members.
IHRSA firmly endorses the proposed recommendations to
increase the level of disclosure of tax exempt organization
reporting. Increased public discussion and awareness of the
nature of exempt organization activities is a necessary
condition of the increasing scope of services that are
sheltered from taxation. The credibility and fundamental
fairness of our tax system is at risk, unless we take steps to
recognize and promote the public discussion of such issues, not
just in the context of general theories, but in relation to the
specific activities of organizations in local communities.
Allowing more sunshine to illuminate tax exempt activities is a
very small burden, given the significant advantages which
exempt firms have over proprietary firms.
General Principles Relating to Disclosure
The recommendations state clearly and accurately the
important reason to discuss disclosure of exempt organization
information. In our system, we have recognized the role of non-
government organizations in carrying out activities which may
otherwise be governmental in nature, and we encourage that role
through tax exemption. These organizations are not ``owned'' by
particular parties; their central purpose is public in nature.
The public supports them, directly through deductible
contributions and indirectly by giving them a pass from the tax
system which burdens all businesses and individuals. This
special status must be earned by performance of the appropriate
exempt functions.
Whether and how these entities carry out their charitable
purposes is a legitimate matter of public information. IHRSA
therefore absolutely endorses the recommendation that an
essential framework for discussion is that ``disclosure of
information regarding tax-exempt organizations is appropriate
unless there are compelling reasons for nondisclosure that
clearly outweigh the public interest in disclosure.''
Disclosure of Written Determinations
The recommendations suggest public disclosure of a number
of types of IRS decisions involving exempt organizations,
including audit results, applications, and third party
communications. IHRSA endorses those recommendations. Whether
in the context of general public oversight of exempt
organizations, or more specifically, to improve public
understanding of the IRS decision process regarding such
organizations, it is time to remove the veils which keep the
public and other entities shielded from the exact outlines of
questions involving exempt organizations.
IHRSA particularly urges adoption of the recommendation for
disclosure of the exempt organization application. We urge the
Committee to look at this from a practical perspective. Most
exempt organizations applications are granted, and once
granted, it is very rare for the Service to remove the
exemption. In contrast to the very scant information on
charitable mission now required in the annual 990 form, it is
in the application form that the organization must describe, in
some detail, the planned scope of its activities, and how they
will fulfill the charitable purpose. The possibility for public
review of the application would be an important factor in
ensuring that potential exempt organizations clearly fulfill
their exempt purposes.
Some have criticized this recommendation as likely to
burden the IRS by unleashing a torrent of correspondence to the
IRS by critics of applicants, where there might be a difference
of philosophy or apparent political perspective. Even if that
unlikely result occurs in isolated cases, the underlying tax
law principles which the IRS must apply will not be changed by
any disclosure. The Service will presumably reach its decision
on granting exemption based on the facts and circumstances of
the application, and not on the weighing of the mail.
From IHRSA's perspective, our members are not interested in
judging the political philosophy of an organization. We are,
however, interested in seeing that entities which claim
charitable purpose and activity do, in fact, make good on those
claims. The current system, in which only the annual summary
990 information is disclosed, does not allow a serious analysis
of whether an organization has clearly stated how it intends to
carry out its charitable purposes, and if it is in fact doing
so after the application is granted.
Disclosure of 990-T forms and annual returns of affiliated
organizations
IHRSA strongly agrees with the recommendations that
disclosure of annual 990 forms be extended to 990-T and
affiliated organization 1120 returns. The current system,
requiring disclosure by an exempt organization of only part of
its operations, is not adequate to allow the public any
comprehensive view of the complete scope of activities of
exempt organizations. At its most basic, the 990-T Form may be
regarded as a detail, a report on the presumably slight level
of unrelated business income of organizations pursuing
charitable purposes. But it is clear that this benign view is
probably no longer accurate. ``Probably'' is the only possible
word to use, because the public does not have any knowledge of
the scope of an exempt organization's unrelated activities
under the present system. Major levels of growth in unrelated
income have been suggested by some recent IRS analysis. And it
is clear, for example, that the public does not know how
particular tax exempt organizations pay their executives and
allocate their costs between charitable and unrelated
activities. There is no reason not to regularly make such
information available.
By the same token, we believe that the concerns of some
critics of the recommendations about proprietary data are
overstated. The 990-T's report a scope of economic activity,
not customer information. The 990-T's will still contain
largely summary information, whose disclosure is less likely to
represent any competitive value and more likely to reveal
essentially how such unrelated activities compare to the
pursuit of the underlying charitable purpose. Trade secret
concerns can be accommodated with 990-T disclosure.
The recommendation's alternate of folding the 990-T into
the 990 is a very useful suggestion, as is the recognition that
the issue of disclosure should not be affected by the nature of
the legal organization relating the affiliate to the sponsoring
tax exempt organization.
Summary
IHRSA strongly supports the recommendations of the Joint
Committee regarding disclosure. As many observers have noted,
the sharp divisions between proprietary and tax exempt
activities have become much less sharp, especially within the
past decade. At the same time, the economic scope of activities
of the tax exempt sector has mushroomed. The nature of those
activities is often difficult or impossible for the public to
discern, notwithstanding the fact that they are carried out
from a platform which originally was established for specific
charitable purposes. IHRSA is neither condemning nor endorsing
these developments in the abstract. However, the public has the
right to know about them in some meaningful way. Only if that
occurs can we be assured that tax exempt organizations are in
fact aggressively pursuing their charitable mission and not
utilizing the exemption as a shield to deter taxation of
essentially commercial non-charitable economic activity.
We urge the Committee and the Congress to enact the
appropriate changes in the Internal Revenue Code which will
effect the Joint Committee recommendations. We would be happy
to supply the Committee with any further relevant information.
April 26, 2000
Hon. Rep. Bill Archer, Chairman
Hon. Sen. William V. Roth, Jr., Vice Chairman
Attn: Lindy L. Paull, Chief of Staff
Joint Committee on Taxation
Dear Joint Committee on Taxation:
The Joint Committee on Taxation is doing long-neglected and long-
needed work to require disclosure of lobbying and political activities
by non-profit organizations.
There is a broad misconception that all non-profits are charities,
doing charity work, or that non-profits somehow are non-political. But
charities are only a sub-group of non-profits. America's most active
and vocal lobbying and political pressure groups have organized as non-
profits, hoping to gain a charitable image by mixing among true
charities. Many of these political groups also depend heavily on
``grants'' of taxpayers' money to finance their group.
For many years, a huge effort has been underway to persuade non-
profits to use their special tax status not to perform works of public
service, but to launch political agendas and to focus on political
advocacy. Both lawmakers and the general public are the targets of
these major propaganda efforts. Free speech must be protected, of
course, but that does not require giving huge tax advantages to some
while denying it to others. (For example, 1993 legislation greatly
limited political speech by profit-making groups, by restricting their
tax deductions for lobbying, while not placing equal restrictions on
lobbying by non-profits.)
When Congress in 1995 examined political advocacy and lobbying by
non-profit organizations, we discovered that 57% of lobbying by non-
profits comes from just 3% of 501 (c) 3 grantees. We also discovered
that lobbying activities conducted by other non-profit organizations
who receive government grants is not being disclosed under current law.
Clearly, taxpayers have a right to know how their funds are being used.
The Joint Tax Committee is performing a valuable service by
examining the issue, and recommending greater disclosure. The public
needs to know about the activities of special interest organizations
who receive tax exemptions. More information certainly should be
reported on the Form 990, which is the key public record filed by these
groups, but which does not now require sufficient disclosure.
The Joint Committee's staff recommendations clearly show they
understand the problems with lobbying by tax-exempt organizations,
which has become a backdoor subsidy for political activists, giving
them a louder voice than tax-paying groups.
Public charities should welcome the opportunity to distinguish
themselves from advocacy groups. Disclosure of lobbying efforts is a
key way to identify the difference. This should include lobbying and
advocacy thinly-disguised as studies, analysis, and research, when they
are actually used to attract media attention and support for a group's
political agenda. Too often, the media fail to report the political
motives which underlie supposedly impartial studies.
In addition to the Committee staff's recommendations, I hope the
Form 990 will also be revised to require disclosure of grants from
taxpayers' money, separate and distinct from disclosure of privately-
funded grants, and distinguishing between federal, state and local
grants from public funds.
The acceptance of the Joint Committee staff's recommendations will
help the tax-exempt non-profit community to police themselves better.
The IRS will receive appropriate information. Contributors will know
that their contributions are being used as outlined in an
organization's charter, and not to finance political advocacy instead.
Sincerely,
Ernest J. Istook, Jr.
Member of Congress
EJI/wad
Statement of William J. Lehrfeld, Bethesda, MD
I.
Except for provisions relating to increased disclosure of
lobbying information, the recommendations of the Joint
Committee staff to disclose substantially all interaction
between exempt organizations and the Internal Revenue Service
is deserving of Congressional support. As the staff analysis
makes clear, the degree of benefits available to the exempt
organization sector generally, and the 501(c)(3) sector
particularly, justifies these modest intrusions on what
otherwise might be considered areas of corporate privacy. A
501(c)(3) exempt organization has no private constituency, per
se, in that it purports to serve and operate in the public
interest in the historic sense of charity.\1\ But there are
thousands of 501(c)(3) organizations that have users, even as
vendees, and these users, as with any consumer orientation,
bring to the relationship a desire for continuity of service or
function, undeterred by anyone's oversight other than their
own. Establishing oversight for the operation of a school,
church, hospital or other charity is a subjective task in that
most enjoy their privileges and immunities not by reason of the
success achieved for their limited population, but by the fact
that as a whole, such institutions provide broad public
services--and stability--that is appropriate and necessary to
our open, co-dependent society. But a gas station and a dry
cleaner are appropriate and necessary for society as well, so
there must be some justification for the direct and indirect
largesse offered by the Congress to these organizations through
a variety of deduction incentives, exclusions, exemptions, or
credits. In return, at the very least, in this marketplace, an
alert public expects these organizations to perform their roles
with an overriding sense of responsibility to the public. Some
private profit or benefit must be involved since good help is
hard to come by, especially in certain TV markets where college
athletics prime many a pump.
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\1\ Bob Jones University v. United States, 461 U.S. 574 (1983).
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Congress is fully justified in demanding a full and fair
accountability of the totality of subsidies. Accountability for
charitable organizations especially is historic and, in fact,
it was the lapses and failures of many charities that led to
the Statute of Charitable Uses in 1601 creating a ``reform'' of
the charitable sector in England. There has been no equivalent
``reform'' much less analysis and understanding of the public
sector here in the United States and, but for the Internal
Revenue Service, there is no single private or public entity
that assumes responsibility for assuring that 501(c)(3)
organizations turn square corners. And surely no one, nowadays,
believes the Internal Revenue Service has manpower, the money
or the stomach to vigorously address and remedy the fault lines
running through the nonprofit sector. That leaves the public--
meaning the media--to press the sector for inside information
about its affairs.
II.
In 1965, the United States lost a decision involving taxes
imposed on International Business Machines.\2\ The case
involved the discriminatory effect a private letter ruling had
on competitors selling a comparable product. The text of the
decision is unimportant and it is noted here solely because of
the notions spread in the petition for certiorari filed by the
United States; the petition claimed that if the IBM case were
allowed to go unreviewed by the Supreme Court, the entire
private letter rulings process of IRS would collapse. It also
alleged that, unless the Supreme Court reversed the IBM case,
the government would be forced to shut down the private letter
ruling process because it would be unable to administer a
program subject to the wild vagaries of court review. As it
turns out, the hyperbole of the United States was so far wrong
it now seems almost quaint. The private ruling process not only
prospered but became a valuable, sometimes irreplaceable tool
for all forms of tax planning, so much so that Congress took
the initiative, in 1976, to make sure that all America had
access to the facts, law, arguments, rationale and conclusions
found in substantially all private letter rulings.\3\
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\2\ International Business Machines Corp. v. United States, 343
F.2d 914 (Ct. Cl. 1965).
\3\ See, IRC 6110, enacted to create boundaries against the law
being created in Fruehauf Corp. v. Internal Revenue Service, 522 F.2d
284 (6th Cir. 1975), vacated by 429 U.S. 1085 (1977) as a result of the
Tax Reform Act of 1976.
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Private letter rulings are a gateway when planning ``iffy''
transactions, because counsel is edgy, the employer is
uncertain, and the law could be read as easily against as for
the transaction. Private rulings issued by the National Office
(in the form of technical advice) upon review of issues raised
during audits, also disclose the application of law and
regulations on completed transactions raised during an
examination. It would be extremely helpful for the public to
know and benefit from not only the offensive or defensive
thinking of the exact exempt organization seeking IRS
assistance and comfort when eliciting a ruling on a proposed
transaction, but also in the context of the who and the why of
it. More can be gleaned from who a petitioner is than what is
revealed today by background file documents in closed,
confidential files. It is also an important accountability
consideration that technical advice memoranda, especially
relating a to proposed revocation, be made public so that
organizations which have failed to conform their corporate
behavior to the norms expected by law and regulations, have the
arguments and rationale analyzed by the press and the public
for a more important judgment, blessing or sanction. Congress
correctly noted that there should be limited exceptions to
disclosure, especially where national security or trade
considerations are involved.\4\ Even these rules today seem
anachronistic. There is no justification for refusing to
disclose, as completely as possible, the entire work file of
any private ruling or any technical advice memorandum. The
party seeking assistance or relief wants the continuation of
its subsidies. The public needs to know--is it still prudent,
or efficient, or relevant that these subsidies remain
supportable. If IRS needs a complete picture for a ruling or
technical advice task, so it is that the public does as well.
More information, accessible on a more timely basis and from
IRS sources, allows a better-informed judgment about the
entity, its corporate behavior and the extent it is meeting the
public's expectation of its mission.
---------------------------------------------------------------------------
\4\ IRC 6110(c)(2) and (4).
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It is also important that IRS disclose their own postures
in audit cases since the text of private rulings traditionally
are quite modest in their description or explanation of the
facts, description or explanation of the law and regulations,
and description or explanation of the rationale which justifies
the conclusion. The Joint Committee staff did not recommend a
statute which requires the IRS to write intelligible private
letter rulings; that would be an exercise in mischief. But the
idea has merit.
The Committee staff did not demand IRS reveal its work
product--conference reports, interoffice memos, opinions of IRS
personnel, which eventuated in the ruling or technical advice.
This disclosure is also necessary so the public can judge
whether IRS is driven by justifications serving no policy or
revenue purpose, or may be acting vindictively or is even
politically motivated. Whatever the audit or ruling file
contains should be disclosed even if ordinarily privileged. Let
the system decide and give IRS some insight from outsiders.
Look back at the original purpose of the Freedom of Information
Act and make that the measure for IRS disclosure.
It comes as no surprise to anyone that the staff of the
Joint Committee has, on a number of occasions, been called upon
to evaluate whether or not there was invidious selection and/or
political discrimination in the audit and ruling process
involving conflicts or controversies between taxpayers and the
IRS. Despite the Chairman's desire to have a report by
September 15, 1997 concerning the potential political influence
on the IRS by the Administration or Members of Congress, he has
not seen fit to explain publicly to the press, or to anyone,
why the report has not been made public, as of the date of
these comments. This is important because many times the
Congress itself is the party responsible for intruding upon an
exempt organization audit or ruling process either strongly
opposing or strongly supporting the exempt organization. Under
the proposals, these congressional letters would have to be
associated with the case file and not filed someplace else.\5\
Complete disclosure of private ruling letter ruling requests,
the names and identifying details in private letter ruling
requests, or audits, might early on decrease the number of
rulings requested by exempt organizations with respect to
proposed transactions. That is not necessarily a bad thing
since many rulings are merely for taxpayer comfort, and not due
to any lack of counsel's confidence that the transaction is out
of bounds. What is important is that full disclosure will give
some shape and meaning to the administration of the law and by
knowing who is involved, what the IRS thought, what third
parties were interested, and how a favorable or unfavorable
ruling will implicate related transactions. Such full
disclosure will not only allow the public to gain more insight
and value from a ruling, but also discern whether the proposed
transaction, after the ruling, is accurately reflected in the
events that come to pass. IRS does no follow-up on its rulings,
but if the press is looking, a measure of accountability can be
achieved that is now ignored or lost.
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\5\ In Lehrfeld v. Richardson, 132 F.3d 1463 (D.C. Cir. 1998),
there was testimony by Internal Revenue Representatives that
congressional records involved in a particular exemption application
would not be kept in the same file as the exemption application itself.
This needs to change by redefining the application file. See, IRC
6104(d)(5).
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III. Closing Agreements
Closing agreements are an important aid in resolving
controversies involving all taxpayers but especially exempt
organizations. The problem with closing agreements is that the
Service is just now beginning to appreciate the value which
closing agreements have on regulating prospective behavior by
previously errant organizations rather than merely quickly
resolving a tax dispute involving certain dollars, for certain
years, for certain issues. During my six years of service in
the IRS National Office, I remember seeing one, perhaps two,
closing agreements that passed through the Branch on the way up
to the Commissioner. Prior to the mid-nineteen nineties, I had
little personal experience with closing agreements, perhaps
less than a dozen in 30 years. In the last five years, however,
I have seen closing agreements come up in the ordinary course
of negotiating settlements because the government can not only
fix a ``tax'' for the resolution of the years in issue, but can
also formulate a plan for corporate behavior over the horizon
that requires the entity's conformance to the rules set out in
the closing agreement. In the last several years only one of my
closing agreements (out of five) would have faltered if IRS
insisted on any disclosure of any sort about the agreement.
Because the organization strongly disagreed with the IRS
position but felt that it could get in and out of its situation
without significant expense, signing the closing agreement
seemed a quick and practical solution. But that case was
unusual, involving an educator and an overheated revenue agent,
and the relationship was so venomous that the Inspection
Service was always nearby. For other clients, signing a closing
agreement has been a useful tool to settle private foundation
tax liabilities, unrelated business tax liabilities, and exempt
status issues. These settlements work because of the imposition
of conditions subsequent in the closing agreement unrelated to
the actual behavior of the organization leading to the
assertion of tax liability in the first place. These conditions
guide the entity and act as a way of reducing revisits by
agents, since management and counsel can cooperate to protect
the entity from donors, directors, or others (like politicians)
from going off-task.
If there is a particular problem today with respect to the
closing agreement program, it is that it is selectively applied
when it comes to the disclosure of the agreement itself or the
existence of the agreement. It appears, from both personal
experience and industry gossip, that the Internal Revenue
Service has, as a rule, sought to impose some form of
disclosure on closing agreements relating to church
organizations and not to impose a comparable requisite on non-
church organizations. Press releases were required of Jimmy
Swaggart, Jerry Falwell, Church of Scientology, and several
others entities and there seems to be no notice or demand that
the Internal Revenue Service, in the implementation of a
closing agreement process, expects publicity in other cases or
circumstances. It is as if churches have been singled out by
the Internal Revenue Service for additional repentence in the
form of an acknowledgement of their alleged political activity
or other untoward behavior.
This forced disclosure problem is exacerbated by the fact
that, based upon depositions taken in the Tax Analysts case,\6\
Internal Revenue Service is not certain where its closing
agreements are filed, retains no generalized index, and its
senior management is uncertain whether or not there is any
consistency in the textual explications of closing agreements,
other than the format provided by the revenue procedure. See
Rev. Proc. 68-16, 1968-1 C.B. 770. The chaotic approach to
closing agreement administration, evidenced by these
depositions,\7\ indicates there is no ``master plan'' nor any
guidelines that are easily accessible to IRS senior management
in dealing with CEP cases, or just plain ``large'' cases, or
sensitive cases, or cases in which a publicity demand is being
pressed by IRS for reasons that it will never share with the
affected entity or be known to the public.
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\6\ Tax Analysts v. Internal Revenue Service, 53 F. Supp. 2d 451
(D.D.C. 1999).
\7\ Depositions are available for disclosure to Joint Committee
staff upon request.
---------------------------------------------------------------------------
The notion that disclosure of the text of a closing
agreement contents will impede their utility is nonsense. A
closing agreement is often the first, best route to be taken by
an exempt organization with compliance problems, because it
immediately resolves the liability issue for prior years, it
creates over the horizon boundaries which are readily
referenced by the agreement, and is executed perhaps by the
same persons who had complicity with the orginal dysfunction.
Such agreements reduce the likelihood of a protracted and very
expensive investigation, appeal and litigation; it allows a
controversy to be resolved and not to stay within public
earshot. Both parties can use the power and effect of time and
distance brought by an agreement to their own advantage. While
disclosure of an agreement may sometimes be irksome or even
painful, the process has so many benefits weighed in its favor
that its utility would almost never be undermined by its
disclosure.
Disclosure also means that the organization facing that
prospect would have, it would appear, a strong bargaining tool
to moderate inappropriate langugage which the government might
seek to impose in the ordinary nondisclosure case. Disclosure
of the closing agrteement also allows the organization to make
a clearer choice on whether it wishes to directly confront the
government's argument on noncompliance. Certainly if an issue
addressed by Internal Revenue Service is not a continuing
issue, and has little or no future significance, a closing
agreement can be utilized to promptly dispose of the asserted
liability and create a series of negotiated promises concerning
future behavior. On the other hand, if there is a continuing
issue with larger liability over the horizon, publicity of the
closing agreement may be the one factor that causes the
organization to face up to the desirability (apart from the
cost) of confronting the Internal Revenue Service through a
notice of deficiency or refund suit on the integrity of the IRS
argument.
IV. Additional Disclosure Suggestions
There are some matters which the staff did not deal with
and the purpose of this part of the submission is to suggest
that additional disclosure could prove useful.
1. Disclosure of Certain Contributors. Under present law
private foundations must list on Form 990PF the names of their
grantees. This information seems to be useful in allowing
commercial publishers and others to create reference books on
the missions of various foundations. It is suggested that the
names of private foundations which are donors to 501(c)(3)
organizations, or others, be disclosed on Form 990. The
information is already in the public domain and its disclosure
on the return of the donee organization would facilitate public
awareness of the types of support received by certain
organizations.
2. Disclosure of Corporate Contributors. There are
expectations of privacy under many circumstances, especially
where governmental units might use membership lists or donor
lists as a way of harassing an organization. There is also some
concern on the part of donors that if their names are
disclosed, many potential donees will seek them out for
contributions and create a form of friction between the
charitable sector and donors which could possibly reduce
contributions. However, with respect to contributions to non-
501(c)(3) organizations, these organizations should be required
to disclose donors which are related, affiliated or controlled
organizations (i.e., where the 501(c)(4) is a mere piggy back)
or where they receive contributions from corporations so that
the public becomes aware if the organization is carrying out a
business purpose of the donor, rather than an exempt purpose of
the donee. To the extent that a corporate donor could
reasonably expect to claim a business expense deduction for its
contribution to support a 501(c)(4), (c)(5), (c)(6)
organization, it is not unreasonable to expect that disclosure
of this information may assist in determining whether or not
the organization is in compliance with the expectations of its
exempt status. In other words, if an organization is seen as
being a mere conduit for a group of business corporations which
use the conduit as a way in which it can disguise corporate
involvement in a particular program, project or cause, then it
is in the public interest to know exactly why a particular
social welfare organization or trade association is immediately
involved and whether or not the integrity of the organization
can be impugned because of the financial controls that may be
exercised over the organization's policies through the medium
of financial support.
3. In the 1992 tax bill, Congress chose to alert charities
of their financial stake in a charitable remainder trust. The
need for this proposed legislation was indirectly grounded in a
decision of the Wyoming Supreme Court which held that a charity
could not rescind a sale of property from a charitable
remainder trust that apparently was sold to a person related to
a fiduciary at below its fair market value. Charities thereupon
went to Congress and successfully argued that if a remainderman
had early notification of its financial stake in a charitable
remainder trust it could assume a role of oversight and
accountability with respect to its financial interest, given
the fact that there is almost no Internal Revenue Service
oversight of charitable remainder trusts. The common law of
charitable remainder trusts allows the charity oversight and
accountability.\8\ To the extent that the charity learns of its
interests immediately, it is able to be responsible so that its
financial stake in the trust is protected from erosion, arising
out of fiduciary nonfeasance or misfeasance. Given the slovenly
way in which IRS approaches charitable remainder trusts,\9\ it
is strongly recommended that the committee enact the proposal
that was provided for in 1992 as a way of sending additional
signals\10\ to the ``planning'' community that the
opportunities for manipulation and mal-administration will no
longer be tolerated.
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\8\ Shriners Hospital for Children v. Smith, 385 S.E.2d 617 (Va.
1989).
\9\ IRS has no notion of how much is in the corpus of charitable
remainder trusts; IRS has never sought to impose any kind of a civil
penalty for failure to file a timely or complete return; and IRS has an
indifferent attitude with respect to the examination of these trusts as
part of its responsibility of assuring the integrity of the exemption
and deduction provisions which create the incentives for establishing
such trusts.
\10\ Recent regulation amendments make it clear regulations are
addressing abuse issues.
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4. Part of better accountability can be achieved for
charitable remainder trust by Congress overturning Reg. Section
1.170A-13(c)(7)(v)(B) and (C) and Reg. Section 1.170A-
13(f)(13). These two regulations allow the trustee of a
charitable remainder trust to substantiate the contribution of
a donor to the trust, rather than having the charity, as called
for by law, do the substantiation. It seems that if the charity
itself is the enterprise which is required to substantiate the
contribution made by a donor by knowing what property was
gifted and the terms in the text of the trust, it would be able
to provide a mechanism to assure that the substantiation rules
operate as effectively as Congress first designed them to do,
especially in light of the fact that many charitable remainder
trustees are the donors themselves, as well as the income
beneficiaries. When a donor is both an income beneficiary and a
trustee of a charitable remainder trust, there is great
temptation to utilize the trust to exploit the trust to points
not contemplated by the statute or the regulations because of
the significant tax advantages that can accrue to a manipulated
trust when trusteed by the person who gains the initial stake
in the trust. Altering these two regulations by statute would
be an abrupt notice to these donors and fiduciaries that they
must turn square corners with respect their philanthropic
intentions.
National Association of State Charity Officials
Harrisburg, PA
March 14, 2000
A. L. Singleton, Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D. C. 20515
Dear Mr. Singleton:
The National Association of State Charity Officials (NASCO) is the
national organization of the various state officials responsible for
administering and enforcing over three dozen state charitable
solicitation statutes. On behalf of the NASCO board, I submit the
following comments concerning the Joint Committee on Taxation staff
report dated January 28, 2000.
The NASCO board commends the Joint Committee staff's thorough
research and well-documented report. We strongly support, with one
exception, the Joint Committee staff's recommendations because they
will significantly enhance the ability of NASCO members to fulfill our
statutory mandates to protect the public from charitable solicitation
fraud and improve both the quantity and quality of the information
available to the public concerning tax-exempt organizations.
The Joint Committee staff's most important recommendation is the
one recommending that the IRS be permitted to disclose to State
Attorneys General and other nontax state authorities audit and
examination information from both completed and ongoing IRS audits and
investigations of tax-exempt organizations.
In at least 38 states, NASCO members, like the IRS, are charged
with overseeing the activities of tax-exempt organizations.
Notwithstanding this fact, the IRS has not been permitted to share
information with state authorities who, in many cases, were conducting
simultaneous investigations or audits of the same tax-exempt
organizations the IRS was investigating or auditing.
This current prohibition on the IRS sharing information with state
authorities having similar oversight responsibilities is especially
frustrating in those cases where state authorities have specifically
referred a matter to the IRS and the IRS is prohibited from even
confirming that it is conducting, or will conduct, an investigation or
audit.
For these reasons and others, implementation of this recommendation
alone would significantly improve the ability of NASCO members to
perform our oversight responsibilities more effectively. If
implemented, unnecessary duplication of effort would be eliminated,
unscrupulous organizations would be prosecuted more expeditiously by
both the IRS and state authorities, and the public would be protected
more effectively and efficiently.
The NASCO board's only concern about this particular recommendation
is that it appears to limit the IRS's ability to share information
concerning its audits and investigations to those states which have
made specific referrals to the IRS or have a history of making such
referrals. We believe the IRS should be permitted to share information
concerning tax-exempt organizations even with states which have not
made specific referrals or have a history of making such referrals. In
other words, if the IRS completes a major audit or investigation of a
tax-exempt organization located in Pennsylvania, it should be required
to notify the appropriate Pennsylvania authorities even if they did not
make a specific referral to the IRS concerning the organization in
question and have never made any referrals to the IRS. Otherwise, the
Pennsylvania authorities' ability to protect their residents will be
significantly diminished.
The NASCO board is also strongly in favor of the Joint Committee
staff's recommendation to increase the penalties imposed upon tax
return preparers who knowingly or recklessly make material
misrepresentations, falsifications, or omissions on 990s.
Given the significant number of material falsifications and
omissions several states have documented on 990s, it is imperative that
tax return preparers who knowingly or recklessly prepare and submit
false or misleading 990s be appropriately disciplined and/or
prosecuted.
The 990 is the primary public document the IRS and state
authorities have used, and will continue to use, to conduct our
oversight responsibilities. It is also the primary document the general
public relies upon to help them make better, more informed charitable
giving decisions. As a result, it needs to be accurate, complete, and
free from material misrepresentations, falsifications, and omissions.
This is especially true now that thousands of 990s are widely
available on the Internet through the Guidestar web site. This recent
technological innovation has the potential to revolutionize
accountability in the tax-exempt community. However, if many of the
990s submitted by organizations contain material misrepresentations and
falsifications, the value of having them widely available on the
Internet will be significantly diminished. Those responsible for
preparing these important tax documents must be held accountable for
any knowing or reckless falsifications or misrepresentations.
The NASCO board is also very much in favor of the Joint Committee
staff's recommendation to have the IRS accept electronic filings of
990s after 2002.
The only Joint Committee staff recommendation the NASCO board does
not agree with is the one to no longer make the taxpayer identification
numbers of tax-exempt organizations disclosable. The reasons for our
disagreement with this recommendation are several. First, many state
authorities routinely use this information for tracking, retrieval, and
investigative purposes. Second, it would be cumbersome and costly to
have this currently public information deleted from 990s before they
are posted to the new Guidestar web site or routinely disseminated by
state authorities to the general public. Third, we are not aware of any
instances where this number which has been available to the public for
years has been used by third parties to the detriment of any tax-exempt
organization. Indeed, the Joint Committee staff report did not cite any
specific instances of actual misuse. It simply stated that the staff
believed ``the potential for misuse may be increased.'' And, lastly, to
now make organizations' taxpayer identification numbers nondisclosable
would only benefit new organizations since the taxpayer identification
numbers of thousands of existing tax-exempt organizations have been
routinely disclosed and available to those who could potentially misuse
them for years.
In closing, the NASCO board appreciates the opportunity to submit
these written comments to your Committee and again commends the Joint
Committee on Taxation staff for its exemplary work on this important
topic. Do not hesitate to contact me if you have any questions
concerning our comments.
Sincerely,
Karl E. Emerson
President
Statement of National Club Association (NCA)
The following comments are submitted for the record by the
National Club Association (NCA).
Introduction
NCA is the trade association representing the legal,
legislative and business interests of private social,
recreational and athletic clubs. Member organizations include
country, golf, city, yacht, tennis, and athletic clubs. The
scope of these clubs ranges from small clubs with limited
membership and facilities to larger, full-scale operations with
dining and extensive recreational facilities. Some clubs
operate on a seasonal basis while many are open year-round.
The majority of the clubs NCA represents are tax exempt
under section 501(c)(7). These clubs are organized for social
activities, recreation and other nonprofit purposes. This
exemption reflects the recognition by the government that these
clubs are not-for-profit mutual endeavors by their members.
These comments are submitted in response to a study
released by the Joint Committee on Taxation on January 28,
2000, entitled a Study of Present Law Taxpayer Confidentiality
and Disclosure Provisions as Required by Section 3802 of the
Internal Revenue Service Restructuring and Reform Act of 1998.
We are specifically responding to the recommendations made in
Volume II relating to disclosure provisions for tax-exempt
organizations.
Overview of Comments
NCA has been interested in the issue of the public
disclosure of Form 990 and related documents by tax-exempt
groups as well as what we consider to be redundant and often
unnecessary requirements for information on the Form 990. As a
result, we are concerned with many of the sweeping and far-
reaching recommendations for changes to existing public
disclosure requirements for tax-exempt organizations as
contained in the Joint Committee's January 28 report.
We agree with the Joint Committee that the issue of public
disclosures requires a balancing of an organization's right to
privacy and concerns about misuses of information and the
legitimate public interest in information regarding charitable
organizations. However, we believe the Joint Committee's
recommendations will cause the pendulum to swing too far in one
direction, thereby upsetting this delicate balance.
Many of the recommendations are overreaching and
unprecedented in that they would apply to no other tax
reporting groups. We believe that other recommendations, such
as disclosing an application of an entity that has been denied
tax-exempt status, fail to have any relevance to the goal of
proper public disclosure. Finally, we believe that the
recommendation to disclose unredacted tax audits and closing
agreements would have, in some instances, a chilling effect on
voluntary taxpayer compliance. NCA's specific comments on these
points are outlined below:
Recommendations are Overreaching
The JCT study recommendations for further public disclosure
of tax-exempt organizations across the board are a substantial
overreaction to public concerns regarding charitable
organizations.
These recommendations are not warranted when applied to
certain types of tax-exempt organizations, particularly those
that are not classified as 501(c)(3) charitable organizations.
The public interest concerning 501(c)(3) organizations is far
different that than for 501(c)(7) social clubs or for trade
associations organized under 501(c)(6). As a result, in many
instances disclosure by tax-exempt groups other than 501(c)(3)
organizations would promote more of a voyeur interest rather
than the protection of the public.
For example, we fail to see what public purpose is served
by disclosing the application of an entity that is denied tax-
exempt status. Furthermore, procedural or administrative
hurdles (that may be overcome later by an applicant) may have
prompted the denial. The disclosure of an application that is
denied by the IRS could be misconstrued by the public and put
the entity in an unfair or prejudicial position when applying
for exempt status at a later date.
Written Determinations and Background Documents
The JCT study recommends that all written determinations
and background file documents involving tax-exempt groups be
disclosed. We believe this recommendation has serious
implications and could create a chilling effect for groups
seeking private letter rulings (PLRs) from the IRS to clarify
certain issues.
The publication of unredacted PLRs would discourage
organizations from seeking advice before proceeding with
certain actions. PLRs, although only applicable to the entity
seeking the advice, have served as a key compliance tool for
the tax-exempt community concerning the IRS's position on
certain issues. Public disclosure of the name of an
organization that is merely seeking advice on a proposed action
would not serve the public good and might impede it.
Privacy Concerns Regarding Salary Disclosures
The JCT study recommends that exceptions to any public
disclosure requirements be made on a case-by-case basis. This
would be both time-consuming and expensive and places an unfair
burden on the tax-exempt organization. NCA believes that
further consideration should be given to a broader basis for
limiting disclosures on certain issues.
For example, NCA believes that the public airing of
salaries and benefits of certain key personnel on the Form 990
serves no vital public interest with respect to 501(c)(7)
social clubs. Such disclosures raise a number of issues
relative to the privacy concerns of individual citizens
(serving in a nonpublic capacity). In communities where several
tax-exempt social clubs exist, the disclosure of salaries
serves little purpose other than to raise awareness of a purely
confidential personnel matter. In addition, it may also serve
to drive up wage costs for those clubs that may not be
competitive. NCA recommends that such disclosures only be
required for excessive salaries that far exceed the industry
norm.
Disclosure of Audits and Closing Agreements
The recommendation that audits and closing agreements be
disclosed unredacted is particularly troublesome and could have
a negative effect on various components of the audit process.
Closing agreements, for example, are confidential documents
and represent, in effect, a negotiated agreement between the
taxpayer and the IRS on issues raised in the audit. The ability
to negotiate and settle tax issues that are in dispute could be
impeded and ultimately affect the negotiating process if public
disclosures are to be made. As a result, a greater number of
cases may end up in the court system, thereby adding time and
cost burdens for both the taxpayer and the government.
Tax audits usually involve extensive supporting documents,
questionnaires and often Field Service Advice (FSA) inquiries
made by IRS agents requesting IRS clarification on key issues.
The public disclosure of these documents, especially unredacted
FSA inquiries, may work at cross purposes and chill voluntary
disclosure and early resolution of outstanding tax issues.
Furthermore, during an audit many inquiries and the
accompanying answers or explanations provided by the taxpayer
are oral, leaving the written record incomplete and potentially
creating confusion for the general public.
Furthermore, tax issues for tax-exempt groups are unique
and complex, and often have legislative histories that may be
unknown to the general public. As a result, the public
disclosure of such tax documents could be misconstrued and used
for the wrong purposes.
Disclosure of Form 990-T
The JCT study recommends that in addition to Form 990, tax-
exempt groups should also publicly disclose their Form 990-T,
which is essentially a corporate income tax return. We believe
that such a disclosure is another onerous regulatory burden.
Such a requirement is unprecedented and it is unfair to require
it of tax-exempt groups and not others which pay corporate
income taxes.
New York State Office of the Attorney General
March 14, 2000
Mr. A.L. Singleton
Chief of Staff
Committee on Ways and Means
House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515-6345
RE: Study of Disclosure Provisions as Required by Section 3802 of the
Internal Revenue Restructuring and Reform Act of 1999
Dear Mr. Singleton:
We are writing to comment on the January 28, 2000 report of the
Joint Committee on Taxation, Study of Present Law Taxpayer
Confidentiality and Disclosure Provisions as Required by Section 3802
of the Internal Revenue Restructuring and Reform Act of 1999 (``The
Report'').
I. Introduction
We strongly support the Report's recommendation of
increased disclosure to state charity regulators, including
Attorneys General, of information relating to tax-exempt
organizations gathered under the Internal Revenue Code. The
Joint Committee's goal to enhance efforts to protect the public
by promoting the flow of information between the IRS and the
states will improve the ability of the states to enforce state
laws and will facilitate the cooperation of the states and the
Internal Revenue Service in cases involving breaches of
fiduciary duties by charitable organizations and their managers
and disqualified persons.
The Charities Bureau of the New York State Department of
Law is charged with the responsibility to oversee charitable
entities that conduct activities in New York and/or solicit
contributions from New York State residents. We audit and
investigate such entities. When we discover violations of the
Internal Revenue Code, we forward information to the Internal
Revenue Service for its action.
As the Report points out, state charity regulators
currently are not advised as to whether the IRS has taken
action based on our referrals. This is extremely frustrating
and can result in duplications of effort or no effort on our
part where the issues are multi-state or primarily federal. As
with the IRS, our resources are limited (nineteen lawyers and
seven accountants), and we have to prioritize. Nevertheless, we
believe our law enforcement efforts are significant and enclose
a draft of our 1999 annual report to indicate the scope and
results of our efforts.
In an effort to remedy this situation, we met in Washington
with the new exempt organization leadership of the IRS last
Spring. We have referred to them issues of exclusive or primary
concern to the IRS and some that we believe warrant joint
efforts. We have been unable to obtain a meaningful response
from the IRS.
We do not think the legal restrictions on disclosure are
the only obstacle. If we have one general criticism of the
Report, it is that it appears to assume that greater states/IRS
cooperation will follow from increased disclosure. This may be
true, but in our experience the mindset of the IRS is
antithetical to cooperation. This we know has also been the
experience of some United States Attorneys offices. If their
and our experience is typical, the IRS's mindset, particularly
at the national level, also has to be changed, dramatically and
decisively.
In at least one recent case, we have been able, at the
district level, to cooperate with the IRS to a point that we
feel we are on the brink of achieving a significant result in
the case of a foundation whose actions implicate violations of
both state and federal law. A for-profit disqualified person
bought shares of its stock held by the Foundation. The
Foundation needed to sell such shares to avoid the assessment
by the IRS of substantial excise taxes for excess business
holdings. The IRS seemingly had ignored the self-dealing
issues.
The Charities Bureau became aware that the Foundation had
received offers from parties other than the company to purchase
the Foundation's company stock for significantly more than what
was paid by the company. The Bureau is working with the IRS to
assess penalties on the Foundation managers and the company for
self-dealing rather than to impose an excess business holdings
excise tax on the Foundation itself. Under state law, Bureau is
seeking restitution from the company to the charity.
If this experience could be replicated nationwide, we
believe both the states and the United States will have taken a
significant law enforcement step forward.
II. Specific Recommendations
The Report recommends that the IRS be authorized to provide state
regulators with information concerning its actions with regard to
referrals. To be effective, such disclosure must be prompt. Otherwise
the states will not know how to proceed and may encounter state statute
of limitations issues.
The language of the Report (page 104) should be strengthened. The
IRS should not be ``permitted'' to disclose, but should be authorized
and directed to disclose. Nor should the IRS have the exclusive power
to determine whether or not ``disclosure may facilitate resolution of
cases.'' If this escape clause is retained, experience tells us that
disclosure by the IRS to the states will be rare.
Disclosure by the IRS to the states of documents relating to the
imposition of intermediate sanctions, private foundation excise taxes,
revocation of exempt status and other proceedings would assist greatly
in enforcement of state laws that regulate the disposition of
charitable assets and solicitation of contributions from the public.
Although, from time to time, we receive notification of the revocation
of exempt status, there does not appear to be any systematic procedure
by which we are advised of such determinations even though such
disclosure is now required by Section 6104(c) of the Code. As we
observed in our letter of September 30, 1999, printed at pp 296-297 of
volume III of the Report, the now permitted IRS disclosure to state
officials discussed at pages 36-37 of the Report should be required to
be prompt and consistent.
Information concerning the failure to grant or the denial of exempt
status is very helpful to the states. For example, entities may, in the
course of soliciting charitable contributions from New Yorkers, claim
that they are tax exempt when they have not been granted tax-exempt
status or such status has been revoked.
Likewise, information concerning pending IRS proceedings to impose
taxes and/or penalties on charitable entities might be relevant to our
oversight of trustees' management of charitable assets. Early
intervention on state law issues might prevent future misuse of
charitable funds.
In this connection, we wish to make two points of substance. Both
the intermediate sanctions and private foundation excise tax Code
provisions generally provide for taxation of both the exempt
organization and its managers. From the point of state regulators
anxious to maximize charitable assets and mindful of the fact the
exempt organizations act by their managers, the federal taxation of the
exempt organizations is not consistent with state policy. The excise
tax burden should generally fall on the managers, not on the charity.
Correction is triggered in either case.
Particularly counterproductive are the provisions of the
regulations that provide a blanket exception to self-dealing for
indemnification of foundation managers for excise taxes paid under
chapter 42. This makes no public policy sense whatsoever. It violates
Congress's intent to make foundation managers financially responsible.
In the situations where an excise tax is also imposed on the charity,
the indemnification exemption could lead to the absurd result of the
charity paying twice and its managers not at all.
The Report recommends that charitable entities be required to
disclose forms 1120 and 990T which report their for-profit income. More
and more tax-exempt entities are developing relationships with for-
profit entities, including the establishment of for-profit
subsidiaries. Some tax-exempt organizations try to conceal some of
their activity behind for-profit companies. In order to have a full
understanding of the financial activities of tax-exempt organizations,
knowledge of related for-profit activities is essential. We support the
proposal to make such information available to the public.
Currently, charitable organizations that do not normally have
income of less than $25,000 are exempt from filing any report with the
IRS and most states. The Report recommends that such organizations be
required to file with the IRS an annual notification of their status.
In New York, we find that small organizations that were, at one time,
exempt from filing often fail to file when their income rises above
$25,000. Other organizations that were exempt from filing cease
activity but, since no annual filing was required, fail to notify us of
that fact. Requiring an annual notification of status would go a long
way to solving these problems if such notice will also promptly shared
with the states by the IRS.
This Bureau receives numerous 990's of all types that contain
material omissions, errors in preparation and misrepresentations. We
support the Report's proposal to increase penalties imposed on
preparers. We anticipate that increased penalties will reduce the
number of incomplete and incorrect filings and, consequently improve
accountability and decrease the amount of time state offices spend in
seeking amended reports.
More important, exempt organization reports and returns that are
materially incomplete should be rejected by the IRS, and penalties
against foundation managers for late filing should be levied unless the
exempt organization promptly refiles. The states should get notice of
such rejections.
The Report's support of electronic filing is welcomed. We are
trying to develop our technology to implement electronic filing. We are
pleased that the report encourages making technology issues a high
priority for the IRS.
We do not support the Report's recommendation to exempt the
taxpayer identification number from disclosure to the states. That
number is used by many of the states to identify their registrants and
to cross-reference numerous other databases maintained throughout the
country. We are not aware of any instances in which the taxpayer
identification number has been misused by the states, and the Report
does not give any reason why the TIN should not be disclosed. We are
certain that its exemption from disclosure to the states will deprive
the states of a valuable tool.
Nor is it clear to us why the Report recommends limiting disclosure
of the TIN at all. Most state and private databases use the TIN as the
identification/registration number of tax-exempt organizations and the
TIN is routinely disclosed to the public. Many databases of information
concerning tax-exempt organizations are available on the Internet. We
are unaware of any instances of abuse resulting from disclosure.
Exempting the TIN from disclosure would deprive the states and the
public of an important method of following the activities of tax-exempt
organizations.
The Report recommends permitting disclosure to a state by the IRS
when there has been a specific referral by the state and/or the state
regulator regularly makes referrals to the IRS. While a relaxation of
the restrictions on disclosure will likely encourage the states to
refer matters to the IRS, making such disclosure a quid pro quo may
result in inefficient use of resources when the states and the IRS
separately investigate and litigate the same or similar issues and may
result in lost opportunities to conduct cooperative enforcement
efforts. Therefore, we recommend that the IRS be also directed to refer
to the states matters that raise primarily state law issues and/or
affect a state's charitable assets.
Foreign exempt organizations that apply for federal income tax
exemption under the Code probably do not qualify to do business or
register in states where they should. The Report does not appear to us
to address the issue of how a foreign exempt organization should notify
the IRS, when it applies for exemption, what state or states should be
notified of its application. This may not be a significant issue for
many states, but it is for New York and presumably also for California
and Florida.
There is a similar issue, also apparently not addressed in the
Report, with respect to domestic exempt organizations engaging in
activities in states other than the state of incorporation or situs
that under applicable state law should require them to qualify to do
business or register in states other than the state of incorporation or
situs. The 1023s and 990s should require such organizations to indicate
the other states in which they have activities, and the IRS should
notify all such states, not just the state of incorporation or situs.
Nondisclosure of information that might harm the national defense
is discussed briefly at pp 35-36 of the Report but otherwise apparently
not considered. We are aware of at least one situation that might
involve such disclosure where nevertheless we believe it could be to
the advantage of the IRS to be cooperating with New York and another
state. The tax committees should consider arrangements, similar to the
cross-swearing arrangements frequently made between United States and
state prosecutors, under which carefully screened state charity
officials could be security cleared to participate in these matters.
New York strongly favors disclosure of all of the items mentioned
on pages 64-65 of the Report, especially fund raising practices and how
much of the donation will be used to support charitable purposes and
how much will be retained by professional fund raisers. This Bureau
regularly publishes ``Pennies for Charity, Where the Money Goes.'' A
copy of the December 1999 issue is enclosed. It shows that on the
average only 29 percent of money raised by telemarketers goes to the
charity, which, of course, will in turn spend some of that amount on
its own administrative expenses.
New York strongly favors IRS disclosure of audit results and
closing agreements to the concerned states. Report, pages 84-86.
We also favor specific IRS disclosure of enforcement actions to the
concerned states, but this is not specifically mentioned in the Report.
The Report apparently does not discuss vested charitable remainder
trusts. They normally do not apply for exemption or register with the
states until the noncharitable beneficiaries' interest has terminated.
In our experience, the charitable remainder has too often been
dissipated by then, even though the settlor took a charitable deduction
on the creation of the trust. To alert state charity enforcement
officials to the existence of vested charitable remainder trusts, the
IRS should notify them of form 1023 or 5527 or of final forms 1041 or
1041A that reflect no charitable disposition. Forms 1023 or 5527, 1041
and 1041A should require the trusts to disclose the states where they
have activities.
If we can provide any further information or be of any further
assistance in the implementation of the Report and on further
recommendations, please contact us.
Sincerely,
William Josephson
Assistant Attorney General-in-Charge
Charities Bureau
Karin K. Goldman
Assistant Attorney General
Registration Section Chief
Charities Bureau
Encl.
CC: The Honorable Eliot Spitzer, Attorney General of the State of New
York
Michele Hirshman, First Deputy Attorney General
Dietrich Snell, Deputy Attorney General
[An attachment is being retained in the Committee files.]
Northwest Federation of Community Organizations
Seattle, WA 98144
March 15, 2000
A.L Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth
Washington D.C. 20515
The Northwest Federation of Community Organizations (NWFCO)
respectfully submits the enclosed comments in opposition to the recent
proposals related to ``Lobbying Expenditures'' contained in the Study
of Disclosure Provisions Relating to Tax-Exempt Organizations prepared
by the staff of the Joint Committee on Taxation.
The Northwest Federation of Community Organizations was founded in
1993 to facilitate the needs of grassroots organizations and their
community leaders across Montana, Idaho, Washington, and Oregon.
Together the five organizations that are affiliated with NWFCO--Idaho
Community Action Network; Montana People's Action; Washington Citizen
Action; Oregon Action; and the Coalition of Montanans Concerned with
Disabilities--represent approximately 100,000 members. These members
include retirees, farmers, farm workers, professionals, blue-collar
workers, and welfare recipients. They are African-Americans, Native
Americans, Latinos, and whites.
The Northwest Federation of Community Organizations and our
affiliates share a commitment to advocacy by nonprofits. We appreciate
the Joint Committee staff's effort in exploring the many issues related
to disclosure and formulating recommendations regarding lobbying and
other areas. Although our organization supports various other
recommendations in the staff's report, the three lobbying proposals
seem to us to be an overly broad solution to a problem that does not
exist.
We oppose the lobbying proposals because we believe they would:
chill the vital contribution that nonprofits make to the
public policyprocess;
impose unnecessary bureaucratic reporting obligations on
nonprofits,reducing the resources available to address core charitable
needs; and
provide little information not already publicly available
that would beuseful to charitable regulators or the public.
The attached comments are excerpted from comments prepared by
Independent Sector addressing the complete list of proposals contained
in the staff's report. The Northwest Federation of Community
Organizations has focused on the advocacy-related proposals in these
comments because they directly implicate our mission. These more
focused comments demonstrate the consensus of the nonprofit sector in
opposition to these proposals in particular.
The Northwest Federation of Community Organizations stands ready to
assist the Committee in any way we can as you consider these flawed
proposals. If the Committee decides to proceed with legislation
implementing these proposals, we request that hearings be held to allow
the nonprofit sector and the public we serve to respond to the
legislation. In the meantime, we would be delighted to provide you with
further information regarding our concerns and, in particular, the
impact these proposals would have on our organizations.
Sincerely,
LeeAnn Hall
Executive Director
The nonprofit sector has an essential role to play in the
policy process. By their very nature, charities have direct
experience in meeting society's needs and proven knowledge of
effective ways to meet those needs. In addition to this unique
expertise, nonprofits also have the credibility that is
inherent in their independent status to encourage responsible
civic engagement and advance the causes of the disadvantaged
and under-represented members of our society.
Although the value of nonprofits' participation in the
policy process is clear, the threat that these proposals seek
to address is not. There is no evidence of systemic problems
with current disclosure practices or malicious failure to
comply with lobby laws. Nonetheless, the Joint Committee staff
has made proposals that would consume charitable resources that
could otherwise be used to serve the public. These proposals
are a burdensome solution in search of a problem.
We urge the Committee in the strongest possible terms to
reject the staff's recommendations. All three of these
proposals would chill the valuable participation of nonprofits
in the policy process because the increased scrutiny would
suggest Congressional skepticism about the value of that
participation. All three of these proposals would drastically
increase the burdens on nonprofits that engage in these
educational and advocacy activities, consuming resources for
needless bureaucracy when might be better spent in meeting the
needs these charitable organizations werecreated to address.
There is no compelling need for these new requirements that
justifies the negative impact on core, first amendment speech.
Furthermore, each of the individual proposals has
additional flaws. The proposal to require 501(c)(3)s that make
the 501(h) election to provide a detailed description of its
legislative concerns and activities provides little additional
information beyond what is already publicly available in state
and federal lobbying disclosure statements. The proposal to
require reporting of self-defense lobbying challenges the right
of 501(c)(3)s to respond to legislative threats to their rights
or existence. The proposal to require reporting of certain
nonpartisan studies, analyses, and research would regulate
speech that improves, rather than taints, the quality of policy
deliberations.
Oklahoma Family Policy Council
Bethany, OK 73008-3458
March 10, 2000
Mr. A.L. Singleton
Chief-of-Staff
Joint Committee on Ways and Means
U.S. House of Representatives
1102 Longworth HOB
Washington, DC 20515
Dear Mr. Singleton:
As volunteer board members and officers of a charitable
organization, we are writing to vigorously register our strong
disapproval of certain concepts presently contained in Volume II of the
Committee's report entitled ``Study of Present-Law Taxpayer
Confidentiality and Disclosure Provisions as Required by Section 3802
of the Internal Revenue Service Restructuring and Reform Act of 1998.''
From our reading of your report, we understand the Joint Committee
to be recommending substantive and material changes in the ways in
which the Internal Revenue Service would relate with--and provide
oversight of--exempt organizations under the Internal Revenue Code of
the United States.
Specifically, it is our understanding that the Committee is
considering the following:
1) a material change to Schedule A to IRS Form 990 to require
``both electing and non-electing (under Code Sec. 501(h)) public
charities to provide a detailed description of the legislation
addressed in their lobbying efforts and the manner in which
organizations engaged in lobbying activities.''
2) a modification of Schedule A to IRS Form 990 to require
disclosure of amounts attributable to direct lobbying by an
organization concerning an issue affecting the organization's existence
or powers; and to also require disclosure of amounts spent on
membership communications that encourage members to engage in direct
lobbying that would meet the definition of self-defense lobbying if
conducted by the organization.
3) a change to Schedule A to IRS Form 990 to require disclosure of
non-partisan study, analysis and research that contains ``a limited
call to action.'' By the term ``limited call to action,'' Committee
staff is referring to the actions listed in Regulation Sec. 56.4911-
2(b)(2)(iii)(D). Essentially, this staff recommendation would require
disclosure of all non-partisan study that identifies ``one or more
legislators who will vote on the legislation as ``opposing the
communication's view ...; being undecided ...; being the recipient's
representative in the legislature; or being a member of the legislative
committee or subcommittee that will consider the legislation.'' Id. The
quoted material is the so-called ``limited call to action.'' Under the
Regulations, such non-partisan study with a limited call to action does
not constitute grass roots lobbying.
Mr. Singleton, if our understanding of what the Committee is
proposing is correct, then we must register our strongest disapproval
for the following reasons:
1. The proposals implicitly change the definition of lobbying,
something that is not really needed since very detailed regulations
already define grass roots and direct lobbying in U.S. law and
reasonably require amounts spent on such lobbying to be reported.
2. The recommendations needlessly increase complexity of already
intricate regulations. Lobbying regulations are already cumbersome and
difficult to understand. The Staff proposal would create yet another
division within the maze of regulations--lobbying that is not
reportable lobbying, but still must be disclosed on the organization's
Form 990. Does this make sense? We think not.
3. The recommendations will add burdensome new record keeping
requirements and substantially increase expenses to exempt
organizations. As you know, exempt organizations do not now need to
keep track of self-defense and non-partisan analysis activities. If the
recommendations are adopted, then organizations such as the Oklahoma
Family Policy Council will need to track these activities in sufficient
detail to comply with whatever reporting requirements may be imposed,
incurring significant financial hardship. As volunteer board members,
who have each given sacrificially to fund important work such as that
conducted by an exempt organization such as ours, we really must object
to new onerous and unnecessarily burdensome regulations coming at us
from our own government.
4. The recommendations are contrary to the clear direction of the
Congress, to move the IRS and the Code toward tax simplification. We
well remember the televised hearings into IRS abuses, and questioning
by our own Sen. Don Nickles, the assistant majority leader. The Senator
favors IRS simplification, as does the Committee's chair, Mr. Roth.
These proposed recommendations will add many new reports and expense
whereas the Senate Finance Committee has championed the reduction of
reports and the simplification of record keeping for the American
people.
5. The recommendations risk misleading the public about the
lobbying activities of exempt organizations. This is a very serious
infringement on our First Amendment rights, and the First Amendment
rights of all charitable organizations. By requiring disclosure and
reporting of activities that are expressly not lobbying, as defined and
interpreted by the IRS and the courts, the proposed recommendations may
grievously mislead the public by portraying lobbying activities in too
large a scale. The recommendations are apt to confuse more than inform,
which would be shameful. If the general public--as a result of this
proposal--comes to wrongly see nonprofit organizations as simply
lobbying organizations, and withdraws support, than much good
charitable and educational work will no longer be accomplished.
6. Regulations imposed on non-profits are already too complex and
the recommendations just add to the complexity and burden of operating
a nonprofit. Changes to existing regulations should not be considered
unless they simplify and decrease burden and expense.
7. The recommendations will further chill the voice of non-profits
in the public square, and our society will be much worse for it. As you
know from the hearings that have previously been held, the Internal
Revenue Code, Treasury Regulations and IRS activity in the area of
lobbying and political activity already have an ``in terrorem'' effect
that causes non-profits to withhold communicating their views for fear
that the IRS will impose sanctions. Increasing the burden and threats
to non-profits who legally express their views on legislation is only
enhancing the existing problem.
Too often in these days in which we live, government--our U.S.
government--comes at the people, rather than springing forth from them.
This appears to be the situation here. There has been no public
groundswell to further complicate our tax laws. Rather the opposite is
true, as you well know.
Absent any real need to impose additional burdensome regulations on
public charities, which are operating legally under U.S. laws, we beg
you to choose another path.
The Joint Committee staff, for whatever reason, appears to have
``run amuck'' in their thinking related to the concepts and
recommendations contained in Volume II of the study. Possibly it is
because they do not have to live under the rules they propose to the
Committee members. We do. As volunteer board members and officers, who
often struggle mightily to pursue this work, we know that the proposal,
herein described, will have serious negative consequences for the
nonprofit sector. Therefore, the proposed recommendations should be
rejected as a policy option for the Joint Committee at the earliest
opportunity.
Thank you for considering what we hope are thoughtful, worthy, and
helpful comments to you, the Joint Committee staff, and the full
membership of the Committee on Ways and Means.
Sincerely,
Lloyd G. McAlister
Chairman
Alan Mauldin
Treasurer
Michael L. Jestes
Executive Director
William Donovan
Board Member
David C. Dunn
Research and Project
Director
Stephen Prentice
Board Member
Jeanne R. Young, CPA
K.E.E.P. Program
Administrator
Velonia Jestes
OFPC Receptionist
Philanthropic Research, Inc.
Williamsburg, VA 23185
March 14, 2000
The Honorable Bill Archer, Chairman
Joint Committee on Taxation
1015 Longworth House Office Building
Washington, DC 20515-6675
Dear Chairman Archer:
Philanthropic Research, Inc. (PRI) is a 501(c)(3) public charity
whose mission is to promote philanthropy by helping donors,
institutional funders, and charities become more informed, effective,
and efficient. PRI publishes the GuideStar Web site (``http:/
/www.guidestar.org), which includes the most comprehensive database of
charity information available to the general public.
In addition to our Internet presence, we work closely with the
National Center for Charitable Statistics at Urban Institute (NCCS),
the National Association of State Charities Officials, and the IRS to
improve the quality of Form 990 reporting. We are currently undertaking
a sector-wide project to explore ways to improve the Form 990. An
outline of this program is attached.
Comments on the Joint Committees Recommendations
Non-disclosure of Taxpayer Identification Number
PRI generally supports the recommendations made by the
Joint Committee regarding disclosure by tax-exempt
organizations. However, we believe that the Joint Committee's
recommendation regarding non-disclosure of taxpayer
identification numbers (TIN) of tax-exempt organizations would
actually work against the Joint Committee's finding that the
public should know more, rather than less, about the operations
of tax-exempt organizations. Increasingly, the public learns
about tax-exempt organizations through public sources such as
the GuideStar Web site, which receives an average of 1.8
million hits each week. The information that resides in the
GuideStar database is compiled from many sources, including the
IRS Business Master File, the IRS Returns Transaction File,
actual Forms 990 filed by organizations, and information
provided by the organizations directly to PRI. The only
foolproof way to link the information from these various
sources into a coherent whole is through the use of the TIN.
As a simple example of the problem created by the absence
of TINs, consider that there are six distinct organizations
listed in the IRS Business Master File with the name ``POP
WARNER LITTLE SCHOLARS INC'' in Tucson, AZ. In this situation,
matching data from different sources in the correct way
requires human intervention. The human intervention becomes
much more intensive and expensive (perhaps even impossible)
when it comes to the 4,328 affiliates of Ducks Unlimited, most
of which use the corporate address in Memphis, TN, regardless
of their actual location.
Redaction of the TIN from official IRS documents before
they are provided to the public will also create a burden at
the IRS that can only decrease their responsiveness to
legitimate queries from the public. While a relatively small
percentage of tax-exempt documents currently available to the
public through the IRS must be redacted, the non-disclosure of
the TIN would mean that essentially all of these documents
would have to be redacted. And, in many cases, such as most
software-prepared Forms 990, the TIN is printed on each page,
which would require greatly increased redaction efforts.
Given the absence of documented, widespread misuse of the
TIN by third parties, we believe the Joint Committee should
reconsider this recommendation.
Acceleration of Electronic Filing of Form 990
We strongly endorse your recommendation to accept
electronic filing of Form 990 after 2002. In addition to the
inefficiencies created in the Federal and State systems by the
absence of electronic filing, there are many expensive efforts
in both the for-profit and nonprofit arenas to provide this
information in the absence of a stronger Federal presence. PRI
and NCCS will spend more than $2 million in 2000 on data entry
and image processing of Forms 990.
Notification Requirement for Entities not Currently Required to
File
We believe that this will be of great value to both the IRS
and the general public. The IRS itself estimates that more than
20% of the tax-exempt organizations on its master file are no
longer in existence. Further, even if an organization that is
not required to file is still in existence, as time passes and
addresses change, it is difficult if not impossible for the IRS
to locate these organizations if the need arises.
Thank you for the opportunity to comment on these recommendations.
We believe that, on the whole, they are positive steps toward more
openness in the tax-exempt sector that will benefit the public and tax-
exempt organizations alike.
Sincerely,
Arthur W. Schmidt, Jr.
President
AWS:cem
Att.
Improving the Quality of Reporting on Forms 990
Scanned images of all IRS Forms 990 filed by public
charities, an essential and widely used source of information
on the nonprofit sector, are now easily and instantly
accessible on the Internet. The Urban Institute's National
Center for Charitable Statistics (NCCS) and Philanthropic
Research, Inc. (PRI) with its GuideStar Web site have
worked together on this project to create the most accessible
data on the sector ever available.
The Form 990, which has been long subject to public
scrutiny, is the primary source of information about the
nonprofit sector. The June 1999 implementation of new Federal
disclosure regulations, as well as the posting of the forms on
the Web through the joint NCCS/PRI project, has made these
documents more easily available than they have ever been and
highlighted the quality problems that nonprofit sector
representatives have been addressing for many years.
NCCS and PRI, with the support and advice of nonprofit
sector representatives from a broad range of interested
organizations, are launching an effort to review the Form 990
itself--its format, instructions, and the information
requested--to help ensure that the nonprofits provide the
highest quality information possible on the form.
There are a number of approaches to helping improve the
quality of reporting. First and foremost, nonprofits must pay
more attention to the forms, filling them out completely and
accurately. Improvements in the software used to prepare the
forms could help eliminate arithmetic and omission errors and
prompt the need to attach supplemental statements with all the
necessary information. A more standardized approach to
accounting practices in the sector to better align reporting
with the Form 990 as well as the various government and
professional requirements would also help reduce the burden of
reporting.
But a review of the form itself and the instructions is
also essential to this effort. The joint NCCS/PRI project will
include the following steps:
Drafting a working paper outlining the various
issues related to the form (clarification of the form and the
corresponding instructions, format changes, and items that
should be added or changed, etc.) in March.
Circulating the paper for comments to: Sector
representatives, including Independent Sector and other
national organizations, such as National Council of Nonprofit
Associations (NCNA), National Association of Attorneys-General,
National Association of State Charity Officials, United Way of
America, National Health Council, National Association of State
Arts Agencies, Alliance of Information and Referral Services,
Foundation Center; Government representatives, including the
Internal Revenue Service, Office of Management and Budget,
General Accounting Office, Department of Health and Human
Services, as well as the National Association of Attorneys-
General/National Association of State Charity Officials, (NAAG/
NASCO); and Preparers of Forms 990, including State CPA
societies, led by Greater Washington Society of CPAs and
California CPAs.
Posting the draft for comment on various listservs
and Websites, including cyber-accountability, NCCS
(nccs.urban.org), PRI (``http://www.guidestar.org) and Quality
990 (``http://www.qual990.org), a web site hosted by NCCS that
serves as a communication tool and resource for nonprofit
organizations, the accounting profession, and government
charity regulators.
After the comments from nonprofit sector
practitioners and researchers have been incorporated, the
recommendations for changes in the Form 990 will be presented
at the annual NAAG/NASCO-IRS meeting in May 2000, hosted by
NCCS at the Urban Institute.
Continuing to meet with IRS, NAAG/NASCO, and
sector representatives to work to implement the recommended
changes in Form 990.
As the sector's size and role continue to grow, policy
makers, practitioners, researchers, and the public must have
better information about nonprofits. While the focus of this
effort is the Form 990, including the Form 990-EZ, there are
new disclosure regulations that will give the Forms 990-PF
filed by private foundations the same wide visibility. As we
learn more about these forms, NCCS and PRI believe that a
similar process of review must be initiated to help ensure that
the newly accessible data are of the highest quality possible.
Such efforts are essential to improving reporting on all
versions of Form 990 and the quality of information available
on the nonprofit sector.
Statement of Piercy, Bowler, Taylor & Kern (CPAs), Mr. Gil Hyatt, and
others, Las Vegas, Nevada
This statement is being made on behalf of Piercy, Bowler,
Taylor & Kern (CPAs), Mr. Gil Hyatt, and others in response to
House Ways and Means Committee Press Release FC-18 on the study
and recommendations released on January 28, 2000 by the Joint
Committee on Taxation (``JCT''), JCS-1-00, concerning
disclosure of Federal tax returns and return information (``the
JCT Disclosure Study''). The JCT Disclosure Study was required
by Congress as part of the Internal Revenue Service
Restructuring and Reform Act of 1998 (P.L. 105-206).
First, we applaud Congress and the JCT for addressing the
serious matter of breaches of taxpayer confidentiality and
unauthorized disclosure of tax return information. Next, while
we support many of the statements and recommendations contained
in the JCT Disclosure Study, we believe the study falls far
short in addressing the area of breaches of taxpayer
confidentiality and unauthorized disclosure of tax return
information by state tax agencies. The JCT relies on a GAO
survey of safeguard deficiencies reported by State taxing
authorities and states that ``[A]lmost all of the surveyed
State taxing authorities reported some discrepancy of one type
or another.'' See, JCT Disclosure Study, Vol. I (p. 168).
Despite this troubling self-admission by the States, the study
does not recommend adequate remedies to address this serious
problem.
We submitted numerous facts and documents to the JCT as
part of their study that overwhelming evidences this problem in
the case of the California Franchise Tax Board. These
submissions are contained in Volume III of the JCT Disclosure
Study. See, JCT Disclosure Study, Volume III (p. 221-268).
These comments include specific examples of misuse of
confidential tax return information by the California Franchise
Tax Board (``FTB''), as well as administrative and legislative
recommendations.
This problem has been highlighted by Congressman Brad
Sherman who recently wrote two letters to the California
Franchise Tax Board about their inappropriate use of training
materials and of enforcement tactics used to create a culture
where violations of taxpayer rights and privacy go unchecked. A
copy of Congressman Sherman's letters is attached hereto as
``Attachment 1.'' Also attached hereto is an outline of
recommendations (``Attachment 2'') and a memorandum further
highlighting recommendations and comments made herein
(``Attachment 3'').
As a guiding principle, we believe that any state or local
tax agency, like the FTB, that does not have proper safeguards
in place or that recklessly disregards safeguards designed to
protect taxpayer information should be prohibited from
receiving Federal tax returns and return information from the
IRS. To implement this sound tax policy, we believe the House
Ways and Means Committee should:
1) Hold hearings on the JCT Disclosure Study;
2) Further investigate abuses by State tax agencies,
particularly the California Franchise Tax Board (``FTB''); and
3) Pass legislation to do the following:
a. Grant authority and provide direction to the IRS to
immediately cease sharing Federal tax returns and return
information with any state or local tax agency, such as the
FTB, that does not have proper safeguards in place or that
recklessly disregards safeguards designed to protect taxpayer
information, until identified abuses have been rectified and
the agencies have taken appropriate measures to prevent future
abuses;
b. Require that all state or local tax agencies that receive
Federal tax returns and return information, including the FTB,
should adopt and fully comply with the same reforms and
taxpayer rights protections imposed on the Internal Revenue
Service by the Internal Revenue Service Restructuring and
Reform Act of 1998 as a prerequisite for obtaining Federal tax
returns and return information from the IRS; and
c. Direct the IRS Taxpayer Advocate to establish a function
within his/her office to specifically address taxpayer
complaints regarding breaches of confidentiality relating to
Federal tax returns and return information by state and local
tax agencies as well as provide authority to the Taxpayer
Advocate to request that the IRS cease sharing Federal tax
returns and return information with any state or local tax
agency, such as the FTB, that does not have proper safeguards
in place or that recklessly disregards safeguards designed to
protect taxpayer information.
Thank you for the opportunity to submit this written
statement for the record and comments.
Congressman Brad Sherman
24th District, California
February 7, 2000
Jerry Goldberg
Executive Director
Franchise Tax Board
P.O. Box 942840
Sacramento, CA 94240-0040
Dear Mr. Goldberg:
Its been a while since we have had a chance to talk and exchange
letters here in Washington. From time to time I run across people who
do not love the Franchise Tax Board as much as you do. Sometimes the
FTB has a ``result oriented'' image as opposed to simply trying to get
the fairest possible resolution of a tax matter. While I know you
strive to avoid any basis for this image, the image itself is certainly
not helpful to California's continuing efforts to recruit business.
I have enclosed what I am told is the front cover of a FTB training
manual. Its dated August 31, 1993. 1 am told that this same cover or
approach may still be in use.
I think you will agree that the picture on the cover is simply not
an appropriate way to set the tone for FTB staff.
Very truly yours,
Brad Sherman
cc: Kathleen Connell, B. Timothy Gage, Dean Andal, Marcy Joe Mandal,
Aleesa Islas, Jim Speed, Johan Klehs, Claude Parrish, John Chiang
Congressman Brad Sherman
24th District, California
February 7, 2000
Jerry Goldberg
Executive Director
Franchise Tax Board
Sacramento, CA 94240
Kathleen Connell
State Controller
Sacramento, CA 95814
Kathleen Connell
ATTN: Marcy Joe Mandel
Culver City, CA 90230
B. Timothy Gage
Director
Department of Finance
State Capitol
Sacramento, CA 95814
Jim Speed
Executive Director
State Board of Equalization
Sacramento, CA 95814
Johan Klehs
State Board of Equalization
Sacramento, CA 94541
Dean Andal
State Board of Equalization
Stockton, CA 95219
Claude Parrish
State Board of Equalization
Sacramento, CA 90502
John Chiang
State Board of Equalization
Van Nuys, CA 91406
Office of Governor Davis
c/o Aleesa Islas
Constituent Affairs Representative
State Capitol
Sacramento, CA 95814
Dear Friends:
As you know, information provided by the Internal Revenue Service
is critically important to the Franchise Tax Board and the Board of
Equalization.
On January 28, 2000, the staff of the Joint Committee on Taxation
released a report entitled Study of Present--Law Taxpayer
Confidentiality and Disclosure Provisions as Required by Section 3802
of the Internal Revenue Service Restructuring and Reform Act of 1998.
Complete copies of this 3-volume study are available by simply
contacting my office.
I want to refer you to pages 168 through 173 of volume I (a copy of
which is enclosed). This discusses efforts by state governments to
safeguard the confidentiality provided to them by the IRS.
As you know, I continue my dedication to effective tax
administration that requires the exchange of information between the
IRS and relevant state tax authorities. The more that can be done to
ensure that federal information is kept strictly confidential, the
easier it will be to convince Congress to continue to allow and
facilitate these exchange of information agreements.
If you want to delve into this issue further, I refer you to the
letter dated January 12, 2000, which appears on page 221 of volume III
of the study (a copy of which is enclosed). It addresses the issue of
states keeping the information they receive from federal tax
authorities confidential. It particularly focuses on the Franchise Tax
Board.
In setting policy, it is important to remember how dependent state
authorities are on federal tax information, and the reluctance most
members of Congress have in taking heat to collect revenue that
Congress doesn't get to spend. I am sure you are familiar with the
failure of Congress to overturn the Quill case, and the successful
attempt by the electronic commerce industry to shape the debate on the
taxation of the Internet to often include taxation of tangible personal
properties sold through the Internet.
Accordingly, it is very important that California do everything
possible to maintain proper confidentiality of information obtained
through the IRS, and avoid pressure in Washington to reduce the flow of
this information, Not only does the continuing battle with direct mail
and Internet sales indicate a reason for care in this area, but also
you should remember that, here in Washington, Nevada has as many
senators as California. Moreover, tax fighters tend to have more
friends than tax collectors.
I look forward to doing whatever is possible to have a working
efficient exchange of information. I also trust that you will do
everything possible to avoid instances that would make that effort
difficult.
Very truly yours,
Brad Sherman
ATTACHMENT 2
RECOMMENDATIONS
Any state or local tax agency that does not have proper
safeguards in place or that recklessly disregards safeguards
designed to protect tax payer information should be prohibited
from receiving Federal tax returns and return information from
the IRS.
To implement this sound tax policy, we believe the House
Ways and Means Committee should:
1) Hold hearings on the JCT Disclosure Study;
2) Further investigate abuses by State tax agencies,
particularly the California Franchise Tax Board (``FTB''); and
3) Pass legislation to do the following:
a. Grant authority and provide direction to the IRS to
immediately cease sharing Federal tax returns and return
information with any state or local tax agency, such as the
FTB, that does not have proper safeguards in place or that
recklessly disregards safeguards designed to protect taxpayer
information, until identified abuses have been rectified and
the agencies have taken appropriate measures to prevent future
abuses;
b. Require that all state or local tax agencies that
receive Federal tax returns and return information, including
the FTB, should adopt and fully comply with the same reforms
and taxpayer rights protections imposed on the Internal Revenue
Service by the Internal Revenue Service Restructuring and
Reform Act of 1998 as a prerequisite for obtaining Federal tax
returns and return information from the IRS; and
c. Direct the IRS Taxpayer Advocate to establish a function
within his/her office to specifically address taxpayer
complaints regarding breaches of confidentiality relating to
Federal tax returns and return information by state and local
tax agencies as well as provide authority to the Taxpayer
Advocate to request that the IRS cease sharing Federal tax
returns and return information with any state or local tax
agency, such as the FTB, that does not have proper safeguards
in place or that recklessly disregards safeguards designed to
protect taxpayer information.
ATTACHMENT 3
MEMORANDUM
I. INTRODUCTION
The Joint Committee on Taxation (``JCT'') was required to
prepare a study on taxpayer confidentiality by the Internal
Revenue Service Reform and Restructuring Act of 1998 (``the
Act'') (P.L. 105-206). As part of their study, the JCT
requested public comments on various issues of taxpayer privacy
and the use of tax return information, including the impact on
taxpayer privacy of sharing tax information for the purposes of
enforcing State and local laws. On January 28, 2000, the JCT
released the results of their study in a three-volume set of
comments and recommendations (``the JCT Disclosure Study'').
On February 3, 2000, the House Ways and Means Committee
requested public comments on the JCT Disclosure Study in Press
Release FC-18. Set forth herein is a memorandum supplementing
comments made in response to Press Release FC-18.
II. BACKGROUND
Congress has taken great steps to prevent abuses against
taxpayers, in particular, violations of confidentiality with
regards to Federal tax returns and return information. Federal
tax returns and return information are shared with state tax
agencies so long as those agencies abide by certain rules that
protect confidential taxpayer information.
State and local tax agencies must maintain safeguards that
protect taxpayer privacy and confidentiality with respect to
tax returns and tax return information. Agencies that do not
maintain adequate safeguards or recklessly disregard such
safeguards should be prohibited from receiving Federal tax
return information.
Congress has a strong interest in the policies and
procedures of the state tax agencies that receive Federal tax
returns and return information. Internal Revenue Code Sec.
6103 makes it clear that state employees with access to Federal
tax return information shall keep such information confidential
and may not disclose it to anyone except for those properly
authorized to view such information. Because Federal tax
information is what is being shared, Congress must insure that
tax information shared with State and local agencies is
protected to the same degree called for by Federal law and that
such agencies must be held to the same standard to which the
IRS is held regarding Federal tax information, including full
compliance with recent IRS reforms and ``taxpayer rights''
legislation.
Congress should also insure that recent IRS reforms are not
undermined by abusive state tax agencies misusing Federal tax
information. Furthermore, Congress should also insure that the
IRS is not a partner with abusive state tax agencies using
Federal tax information improperly to coerce, threaten or abuse
taxpayer's rights, including during state examinations or
audits.
III. VIOLATIONS OF CONFIDENTIALITY BY STATE AGENCIES
A. Overview
Unfortunately, some state tax agencies do not have proper
confidentiality safeguards for taxpayer information and many
states that do recklessly disregard such safeguards in their
zeal to collect as much tax revenue as possible, many in
violation of taxpayer privacy and confidentiality of Federal
tax returns and return information.
While Congress addressed the issues of taxpayer privacy and
abuse at the federal level in the Act, there may be just as
many oppressive actions currently occurring throughout the
country at the State level. Included in Volume III of the JCT
Disclosure Study is an article from Forbes Magazine entitled
``Tax torture, local style'' (July 6, 1998). See, JCT
Disclosure Study, Vol. III, page 231. This article highlights
the fact that ``[T]here are at least half as many revenue
agents working for the states as the federal government'' and
``[C]ollectively, they are just as oppressive as the feds.''
Moreover, many of these abuses and violations derive from
information states receive from federal agencies under their
information sharing arrangements.
The Forbes article lists a number of state tax department
problems including: (1) privacy violations by California,
Connecticut, and Kentucky; (2) criminal or dubious activities
by Connecticut, Indiana, Kentucky, New Mexico, North Carolina,
Oklahoma, and Wisconsin; and (3) mass erroneous tax-due bills
by Arizona, California, Indiana, Michigan, and Ohio.
In another article included in the JCT Disclosure Study,
the Los Angeles Times reported that the state taxing authority,
the California Franchise Tax Board, ``is second in size and
scope only to the Internal Revenue Service--and by all accounts
the state agency is the more efficient, more aggressive and
more relentless of the two'' and that ``there is little to stop
the agency from becoming more aggressive.'' See, JCT Disclosure
Study, Vol. III, page 233 ``State Agency Rivals IRS in
Toughness,'' Los Angeles Times (August 2, 1999, page 1).
The state tax agencies are also applying inconsistent rules
resulting in inequitable treatment and unfair burdens on
nonresident taxpayers. Another article included in the JCT
Disclosure Study is entitled ``State Taxation of Professional
Athletes: Congress Must Step In'' (Paul Barger, Tax Notes,
October 11, 1999, p. 243). See, JCT Disclosure Study, Vol. III,
page 235. It details the type of inconsistent and disparate
treatment that some nonresident taxpayers face from state
taxing agencies.
Overall, serious violations of taxpayer confidentiality and
taxpayer rights in the examination and audit process are
presently occurring at an alarming rate at the State and local
levels. In many cases these abuses involve the misuse of
confidential Federal tax returns and return information.
B. Examples of Taxpayer Abuse and Misuse of Confidential Information at
the State Level in California
Recent cases evidence a total disregard of taxpayer
protections and safeguards of confidential tax return and
return information by the California Franchise Tax Board
(``FTB''), the state's income tax collection agency,
particularly with respect to residency audits.
In a case involving Mr. Gil Hyatt, the FTB practiced
indiscriminate breaches of taxpayers' confidentiality and
improperly used the threat of disclosing taxpayer confidential
information to exact additional taxes. The FTB blatantly
disregarded the requirements for proper treatment of
confidential information and then used the disclosure of
confidential information to coerce settlement of an
unreasonable tax assessment from a taxpayer. Among the FTB's
more reprehensible actions was the public disclosure to
newspapers and other public entities of Mr. Hyatt's name,
social security number, and non-public address through quasi-
subpoenas during the state examination and audit process.
The accounting firm of Piercy, Bowler, Taylor & Kern has
represented a number of other clients in similar
circumstances--all involving a total disregard of taxpayer
protections and safeguards of confidential tax return and
return information by the FTB. Other cases of abusive tactics
and misuse of taxpayer information by the FTB are described in
memorandums attached hereto. These memos by Mr. Gil Hyatt
include descriptions of his case, the case of Mr. George Archer
(a professional golfer), and the case of Mr. Joseph and Emily
Gilbert. See, JCT Disclosure Study pages 245 through 267
entitled ``Attachment C;'' ``Attachment D;'' and ``Attachment
E.''
C. Facts in the Case of Mr. Gil Hyatt
Mr. Gil Hyatt is a Nevada resident who is well known
throughout the world for his innovations in computer
technology. He is justly protective of the location of his
office and research lab in view of the industrial espionage
that is rampant in the industry marketplace in which he works
and in view of established dangers from stalkers and other
predators. He has taken great care to keep the address of his
home, office, and research lab secret to protect against
industrial espionage and stalking, including purchasing the
property through a trust and taking other precautions so that
his name was not connected with the property.
Mr. Hyatt moved from California to Nevada in September 1991
and still resides in Nevada to this present day with no
intention of changing his Nevada residency. Even though Mr.
Hyatt has physically moved away from California and intends to
stay in Nevada indefinitely, the FTB refused to acknowledge the
move for tax purposes, began an extensive tax examination and
assessed him with what is tantamount to an ``exit tax'' of
millions of dollars. Because of his particular need for
confidentiality and privacy, the FTB with blatant disregard for
both Federal and state laws, proceeded on a calculated program
to intimidate and harass him by public disclosure of his
confidential information (including shared Federal tax
information) and by making threats of further public disclosure
if he did not settle with the FTB over the amount of taxes
owed.
Because of the tortious conduct by the FTB, Mr. Hyatt filed
a complaint in Nevada state court claiming violations of his
right to privacy, fraud, and abuse of process. This case is set
for trial in Nevada in November 2000. In spite of the claims in
this case and the pending state court action, the FTB continues
its tortious conduct, including continuing to disclose Mr.
Hyatt's confidential information.
In general, the facts in Mr. Hyatt's case involve an
assessment by the FTB of millions of dollars in false penalties
and intentional errors in income calculations, done in a manner
consistent with the FTB's established practice of significantly
increasing assessments in preparation for settlement
negotiations. When Mr. Hyatt argued against the assessment, the
FTB threatened that his confidential personal information would
become public if he didn't settle his case. In other similar
examples, taxpayers have been known to settle at the protest
stage to keep their private information from becoming public.
During the course of this ``residency'' examination, Mr.
Hyatt was cajoled into giving his private address to the FTB
only after the FTB provided assurances that it would keep it
strictly confidential and that California law made it a crime
for the FTB to disclose this information. As the examination
proceeded, without notice to Mr. Hyatt and with total disregard
for his privacy, safety, and confidentiality, the FTB, within
weeks of receiving the information, began indiscriminately
broadcasting the private address to the very entities from whom
Mr. Hyatt sought to keep the private address confidential. The
FTB sent out formal Demands for Information (quasi-subpoenas)
to newspapers and to other public entities that keep large
databases of information on citizens. A copy of this quasi-
subpoena (``Demand to Furnish Information'') is included in the
JCT Disclosure Study. See, JCT Disclosure Study, page 243.
These quasi-subpoenas disclosed Mr. Hyatt's name, social
security number, and his non-public residence address to the
very entities from which he sought to be protected. This
without even noticing, servicing, or informing Mr. Hyatt or his
attorney that such quasi-subpoenas were being sent out, thereby
depriving him of his legal right to take legal action to quash
these fraudulent quasi-subpoenas. When challenged about this
disclosure of confidential information, the FTB argued that the
private address need not be kept confidential because it was
public--in spite of the fact that Mr. Hyatt was never publicly
linked to this address.
The FTB did not just disclose this confidential information
accidentally or discretely. In fact, the FTB was very direct in
using the Demands for Information form to indiscriminately
disclose Mr. Hyatt's confidential information and cast him in a
bad light, while at the same time getting the recipient's
attention due to its formal, criminal-investigation type
format. See, JCT Disclosure Study, page 243. While the FTB
asserts that these quasi-subpoenas are intended only to demand
information from uncooperative third parties, the FTB has
adopted another use for them--as tools for embarrassing and
intimidating taxpayers during the examination and audit process
and disclosing the taxpayer's confidential information by
indiscriminately sending them out in mass mailings.
Another abuse in the Hyatt case occurred when the FTB
located a check made out to a Dr. Shapiro. Instead of asking
Mr. Hyatt for information on this Dr. Shapiro, the FTB located
six Dr. Shapiros in the telephone book and sent out quasi-
subpoenas containing confidential information to all of them,
thereby informing a group of professionals that Mr. Hyatt was
under investigation, focusing more attention on him, and
causing him even greater exposure and embarrassment. The FTB
also sent quasi-subpoenas containing confidential information
to several newspapers on a ``fishing expedition'' calculated to
cause Mr. Hyatt even more exposure and embarrassment. These
examples are strong indications that the FTB uses confidential
taxpayer information to intimidate taxpayers in order to exact
improper tax assessments and recklessly disregards safeguards
with respect to tax information.
D. Other Generic Violations of Confidentiality By the FTB and the State
of California
A state tax agency that receives federal tax information
should maintain a secure area for such information. The FTB,
however, allows its auditors to carry such information in
unsecured briefcases to locations outside of the FTB (e.g., an
auditor's residence). Furthermore, all federal tax information
should be provided only on a need-to-know basis and should not
be commingled with other information or indiscriminately
disseminated even within the recipient agency. At the FTB, in
contrast, Federal and state tax information is commingled into
a single audit file, which is then indiscriminately
disseminated throughout the agency without proper protection
for the federal tax information within. The FTB does not
properly safeguard confidential federal taxpayer information,
but instead often keeps such information in the offices, car
trunks, and homes of FTB agents and even regularly misplaces or
loses such information.
In Mr. Hyatt's case, the FTB, without any indication of
satisfying the special requirements of Federal law,
intermingled Federal income tax returns with extensive state
audit information in audit files, shipped those files to an
unsecured agent's home in Arizona, and maintained the audit
files (including the Federal tax return information) in this
unsecured and illegal environment. The Federal tax returns and
return information remains intermingled to this day with no
indication that the FTB will ever provide safeguards for the
Federal tax returns and return information.
In addition, recent Federal tax reforms seeking to prevent
individual's within agencies from inspecting a taxpayer's
federal tax information without authorization (``illegal
browsing'') have not been enforced at the state level in
California. For instance, the FTB in some cases appears to
practice a ``fishing'' tactic of browsing taxpayers'
confidential tax information in order to determine which
taxpayers would make good candidates for a state ``residency''
tax audit. These techniques fly in the face of recent
Congressional legislation restricting such illegal browsing.
Because the FTB does not distinguish between Federal
confidential information and state confidential information,
the FTB is no more likely to be careful with Federal tax
information than it is with state tax information. For example,
as evidenced above, the FTB indiscriminately discloses social
security numbers and home addresses, regardless of the Federal
or state tax return source, with the cavalier position that
social security numbers and home addresses constitute public
information and hence do not have to be protected. These
activities are clear violations of Federal and state laws that
specifically protect such information.
In other areas, the State of California receives Federal
tax return information for tracking down ``dead beat'' dads.
The state uses this confidential information to obtain child
support payments from out-of-state parents, but then misuses
the fact that child support payments are made by nonresident
parents as ``evidence'' to tax these nonresidents as residents.
This issue is addressed more fully in a memo included in the
JCT Disclosure Study. See, JCT Disclosure Study, page 265
``Attachment E.''
The receipt of Federal tax returns and return information
from tax-sharing agreements with the IRS, whether used by the
FTB in its ``residency'' and tax audits or by the state of
California in other areas, should be subject to strict privacy
safeguards. Unfortunately, there are cases under current law
that show, regardless of the protections that the IRS provides
for Federal tax returns and return information, these
protections can be and are circumvented by the FTB and the
state of California in a manner that recklessly disregards
taxpayer protection safeguards.
E. Summary
As evidenced in the Gil Hyatt case and other cases, the FTB
is one of many state taxing agencies which relies upon IRS
information for its taxing activities, but which recklessly
disregards any safeguards protecting confidential tax returns
and return information. Moreover, since the tax laws of
California have not been conformed to the Internal Revenue
Service Restructuring and Reform Act of 1998 (``the Act''), the
reforms and taxpayer rights protections in the Act do not apply
to any such inappropriate actions by the FTB or the state of
California.
Thus, while the IRS is required to operate under the
taxpayer protections granted by the Act, State and local
agencies, like the FTB, can and do end-run around the
Congressionally mandated taxpayer protections and can reek
havoc on unsuspecting taxpayers. Even worse, any safeguards
that do exist are in some cases recklessly disregarded by the
FTB, in effect blatantly violating State law with impunity.
Again as evidenced in the Gil Hyatt case and other cases,
nowhere is this truer than with the FTB's ``residency''
auditing department--the department responsible for going after
former California residents now residing in other states.
Examples of improper and/or illegal activities by the FTB
include the same type of activities that were under scrutiny by
the Congress at the Federal level in 1998 when it passed the
Act. These include not only blatant disregard of the
requirements for proper treatment of confidential tax
information, but also actually using the disclosure of such
confidential information as a threat to exact unreasonable tax
assessments from taxpayers. There are also indications that the
FTB in its training materials, encourages its agents to
inappropriately assess penalties so that they can intimidate
taxpayers and then later negotiate away the penalty to exact
the unfair tax assessment originally desired. Many of these
same issues were under scrutiny by Congress when it passed IRS
reforms as past of the Act.
Any State or local agency guilty of such improper acts, bad
faith or breaches of taxpayer confidentiality should not be
allowed to receive Federal tax returns and return information.
Agencies, like the FTB, that are incapable of providing the
safeguards necessary to protect shared tax returns and return
information or that recklessly disregard such safeguards should
be prevented from receiving Federal tax return and return
information. Moreover, any evidence that a state tax agency is
using Federal tax information in conjunction with any kind of
improper and/or illegal state tax examination or audit
activities should be grounds for immediate suspension of any
sharing by the IRS with that state tax agency.
IV. CONCLUSION
Congress should do whatever it can to protect the rights of
U.S. citizens against overzealous State and local tax agencies
that misuse confidential Federal tax return and return
information.
Any state or local tax agency, like the FTB, that does not
have proper safeguards in place or that recklessly disregards
safeguards designed to protect taxpayer information should be
prohibited from receiving Federal tax returns and return
information from the IRS.
To implement this sound tax policy, the House Ways and
Means Committee should make the administrative and legislative
recommendations set forth in the attached document.
Traditional Values Coalition
Washington, DC 20003
March 13, 2000
Mr. A.L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515
RE: Opposition letter to the proposals made by the Congressional Joint
Committee on Taxation concerning additional reporting
requirements for 501 (c) (3) organizations.
Dear Mr. Singleton:
On behalf of Traditional Values Coalition's 43,000 member churches,
I am submitting these comments.
The Internal Revenue Service Restructuring and Reform Act of 1998
was intended to consider methods to restructure the IRS to make it more
responsive to the needs of Americans and less intrusive in their lives.
Conversely, this report seems to be doing the opposite.
There will be much more intrusion, record keeping and expense for
non-profits once the recommendations are implemented from the Joint
Committee on Taxation staff report entitled ``Study of Present Law
Taxpayer Confidentiality and Disclosure Provisions as Required by
Section 3802 of the Internal Revenue Service Restructuring and Reform
Act of 1998, Volume II,'' which concerns disclosure provisions relating
to tax-exempt organizations. Unfortunately, as so often occurs, it
appears that while Congress gave with one hand, it decided to take with
the other.
The purpose for this increased intrusion seems to be the ludicrous
notion that the public is anxious to know what non-partisan, non-
lobbying the non-profits are engaged in.
It would appear the result of this report would be to tighten the
noose around the neck of churches in an attempt to cut off any
involvement in the culture outside of the church wall under the threat
of losing their tax-exempt status. Non-profit speech is already
artificially curtailed by IRS activity and churches currently are
afraid to speak on issues that impact them because they live in terror
of the IRS.
In addition, I am concerned that these changes would needlessly
effect the definition of lobbying and would make for very complex
reporting of local church facility needs such as obtaining a
conditional use permit or building permit from a city or county board.
Furthermore, every time a church spoke with a public official about any
issue it would have to be disclosed, requiring unneeded record keeping
and paperwork.
Forcing reporting requirements on non-profits even for those
communications including a ``limited call to action'' is unnecessary.
These recommendations are completely contrary to the previous
direction of the Congress toward tax simplification. These proposals
would create burdensome new record keeping requirements for non-
profits.
Finally, I would like to have a count and also be able to see
copies of the letters the committee has received previous to their
January 28, 2000 release of the Committee on Taxation proposal that
evidence an outcry of the public showing their great interest in
further regulation of non-profits. Would you please be so kind as to
accommodate this request? I will look forward to an immediate reply.
Sincerely,
Rev. Louis P. Sheldon
Chairman
Urban Institute
Washington, DC 20037
March 14, 2000
The Honorable Bill Archer, Chairman
Joint Committee on Taxation
1015 Longworth House Office Building
Washington, DC 20515-6675
Dear Chairman Archer:
The mission of the National Center for Charitable Statistics (NCCS)
at the Urban Institute is to serve as a data repository for statistics
and other quantitative information to help describe and define the
nonprofit sector. NCCS serves as a bridge between practitioners and
scholars, and a vital source of information for public policy decision
makers. It has long been at the forefront of efforts to make IRS Forms
990 data readily accessible to the general public, regulators,
practitioners, and researchers. IRS data are available for
noncommercial research purposes from our web site and on CD-ROMs. We
work closely with state charity officials and state attorneys-general
to provide them with electronic data from the Forms 990. A description
of our project to help improve the quality of reporting on Forms 990 is
enclosed for your reference.
NCCS also has a contract with the IRS to obtain scanned images of
all Form 990 returns filed by 501(c)(3) organizations. We are currently
working with Philanthropic Research, Inc. (with its Guidestar web site)
to make these images available to the public on the Internet.
NCCS strongly supports all of the recommendations contained in the
Joint Committee's report, with one exception: making the taxpayer
identification number (TIN) of the exempt organization confidential.
The Need for the Taxpayer Identification Number
Unless some other system of unique identifiers is
developed, making the TIN confidential would make the tasks of
using and disseminating IRS data a nightmare. The TIN is the
key for ensuring that data sets have a complete complement of
organizations for a year. It is also necessary for matching
organization data from the major public data sources such as
the IRS's Business Master File, its Return Transaction File,
and the Statistics of Income Division's Exempt Organization
Sample.
Tasks which are now relatively simple, such as making three
years of Forms 990 available for a single organization (as
required) would become much more difficult. Without the TIN, we
would be left to match records using the names and addresses of
the organizations. This is not a viable option because:
Many organizations have similar names. For
example, is the Hartzwell Foundation the same as the Hartzwell
Family Foundation? Looking only at the names, one might think
that the Form 990 preparer used a longer formal name one year
and the shorter the next year. However, the two different TINs
make it clear they are, in fact, different organizations.
Organizations, especially the smaller ones that
make up the majority of the exempt organization universe, move
offices and addresses on a fairly regular basis. Thus, the
address is not a reliable way to match organization returns.
In short, the proposal to make the TINs confidential will
make a relatively mechanical process for linking hundreds of
thousands of records an expensive and tedious process requiring
extensive verification. The process of developing samples and
compiling accurate data sets would be greatly impeded.
The use of exempt organization data by policy-makers and
donors is increasing dramatically, much as the use of data on
publicly-traded companies has grown in the past twenty years.
The combination of increased societal wealth, the use of the
Internet, the new exempt organization disclosure requirements,
and the access to scanned images of Forms 990 on the web sets
the stage for the development of many new efforts by
consultants, financial service companies, the nonprofit sector
and others to help donors make wise and efficient giving
decisions. Easily accessible data also eases the burden on the
state attorneys-general who are trying to monitor charities and
ensure that charities are meeting their legal requirements.
Electronic Filing
On a final note, NCCS is especially pleased to see that the
committee is recommending the acceleration of the IRS's schedule for
implementing electronic filing. We believe the public benefit of
electronic filing will be immense since electronic filing will greatly
reduce the cost of making data available.
We appreciate the opportunity to comment on these recommendations.
Sincerely,
Eugene Steuerle,
Senior Fellow
The Urban Institute
Former Deputy Assistant
Secretary of the
Treasury
Elizabeth T. Boris,
Director
Center on Nonprofits and
Philanthropy
The Urban Institute
Linda M. Lampkin,
Manager
National Center for
Charitable Statistics
The Urban Institute
Improving the Quality of Reporting on Forms 990
Scanned images of all IRS Forms 990 filed by public
charities, an essential and widely used source of information
on the nonprofit sector, are now easily and instantly
accessible on the Internet. The Urban Institute's National
Center for Charitable Statistics (NCCS) and Philanthropic
Research, Inc. (PRI) with its GuideStar web site have worked
together on this project to create the most accessible data on
the sector ever available.
The Form 990 is the primary source of information about the
nonprofit sector. Although long subject to public scrutiny, the
June 1999 implementation of new federal disclosure regulations,
as well as the posting of the forms on the web through the
joint NCCS/PRI project, has made these documents more easily
available than they have ever been. And, also, highlighted the
quality problems that nonprofit sector representatives have
been addressing for many years.
NCCS and PRI, with the support and advice of nonprofit
sector representatives from a broad range of interested
organizations, are launching an effort to review the Form 990
itself--its format, instructions, and the information
requested--to help ensure that the nonprofits provide the
highest quality information possible on the form.
There are a number of approaches to helping improve the
quality of reporting. First and foremost, nonprofits must pay
more attention to the forms, filling them out completely and
accurately. Improvements in the software used to prepare the
forms could help eliminate arithmetic and omission errors and
prompt the need to attach supplemental statements with all the
necessary information. A more standardized approach to
accounting practices in the sector to better align reporting
with the Form 990 as well as the various government and
professional requirements would also help to reduce the burden
of reporting.
But a review of the form itself, and the instructions, is
also essential to this effort. The joint NCCS/PRI project will
include the following steps:
Drafting a working paper outlining the various
issues related to the form (clarification of the form and the
corresponding instructions, format changes, and items that
should be added or changed, etc.) in March.
Circulating the paper for comments to: Sector
representatives, including Independent Sector and other
national organizations, such as National Council of Nonprofit
Associations (NCNA), National Association of Attorneys-General,
National Association of State Charity Officials, United Way of
America, National Health Council, National Association of State
Arts Agencies, Alliance of Information and Referral Services,
Foundation Center; Government representatives, including the
Internal Revenue Service, Office of Management and Budget,
General Accounting Office, Department of Health and Human
Services, as well as the National Association of Attorneys-
General/National Association of State Charity Officials, (NAAG/
NASCO); and Preparers of Forms 990, including State CPA
societies, led by Greater Washington Society of CPAs and
California CPAs.
Posting the draft for comment on various listservs
and websites, including cyber-accountability, NCCS
(nccs.urban.org), PRI (``http://www.guidestar.org) and Quality
990 (``http://www.qual990.org), a web site hosted by NCCS that
serves as a communication tool and resource for nonprofit
organizations, the accounting profession, and government
charity regulators.
After the comments from nonprofit sector
practitioners and researchers have been incorporated,
presenting the recommendations for changes in the Form 990 at
the annual NAAG/NASCO-IRS meeting in May 2000, hosted by NCCS
at the Urban Institute.
Continuing to meet with IRS, NAAG/NASCO, and
sector representatives to work to implement the recommended
changes in Form 990.
As the sector's size and role continue to grow, policy
makers, practitioners, researchers, and the public must have
better information about nonprofits. While the focus of this
effort is the Form 990, including the Form 990-EZ, there are
new disclosure regulations that will give the Forms 990-PF
filed by private foundations the same wide visibility. As we
learn more about these forms, NCCS and PRI believe that a
similar process of review must be initiated to help ensure that
the newly accessible data are of the highest quality possible.
Such efforts are essential to improving reporting on all
versions of Form 990 and the quality of information available
on the nonprofit sector.
Ventura Missionary Church
Ventura, CA 93003
March 20, 2000
A.L. Singleton, Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth
Washington, D.C. 20515
Dear Members of the Joint Committee,
It has come to my attention that additional requirements may be
imposed on churches that would require them to report to the IRS every
time they urge their members to call or write their elected officials
(local, state or federal) on any bill under consideration.
If this report is true, it would be one of the most flagrant
violations of the First Amendment that I can think of in recent
history. I am personally seeing a growing intrusion by government into
the life of churches across the nation. To me it is alarming and it
needs to be opposed courageously.
Please head this off now before it goes any further.
Sincerely,
Leonard W. DeWitt
Senior Pastor
LWD/lld
Statement of Edward N. Goodman, Vice President, Public Policy, VHA Inc.
VHA Inc. (formerly Voluntary Hospitals of America)
appreciates the opportunity extended by Chairman Bill Archer to
offer comments on the legislative recommendations contained in
the Joint Committee on Taxation (``JCT'') Disclosure Study
released on January 28, 2000.
VHA is a nationwide network of community-owned health care
systems and their physicians. VHA has more than 1,900 members--
including some of the nation's leading health care
institutions:
Baylor and Memorial Hermann Health Systems in
Texas
Bakersfield Memorial Hospital and Cedars-Sinai
Health System in California
INTEGRIS Health in Oklahoma
BJC Health System in Missouri and Illinois
Baptist Memorial Health Care System in Tennessee
Allina Health System in Minnesota
As ``community-owned'' health care organizations, VHA
members affirm that their assets belong to the community, and
that no individual shareholder or corporation makes any profit.
VHA was founded in 1977 to help preserve the not-for-profit
philosophy of providing health care. At that time, large, for-
profit health care systems were threatening the success of
community-owned hospitals. These large investor-owned systems
could demand purchasing discounts unattainable by individual
not-for-profit organizations. To help preserve not-for-profit
health care, VHA offers its members contracts on regional and
national products and services in areas such as clinical
effectiveness, information technology, learning networks and
education, market-share development, performance improvement
and supply-chain management.
Accordingly, VHA's comments on the JCT staff's disclosure
study are focused on those provisions recommending
significantly increased disclosure of exempt organization tax
information.
In general, VHA supports increased public access to exempt
organizations' financial and operational data through broader
disclosure of tax filings and IRS determinations. VHA also
strongly supports greater legal clarity through the release of
material applying the law of exempt organizations to particular
facts. However, VHA cannot support the creation of an unlevel
playing field in which tax-exempt nonprofit organizations are
subject to significantly greater disclosure and record-keeping
burdens than those imposed on taxable for-profit entities.
VHA believes that the goals of public access and legal
clarity are generally well served by the JCT staff
recommendations concerning exempt organization trade names,
Internet addresses, notifications in IRS publications of Form
990 availability, and the proposed termination reports.
Moreover, the staff recommendation to release all exempt
organization rulings (including those which deal only with
exempt status issues) would result in significant increases in
legal clarity and understanding of IRS positions.
Many of the other JCT proposals, however, raise very
serious concerns for nonprofit health care organizations. Set
forth below is a list of such provisions, along with a brief
description of VHA's concerns. We look forward to discussing
our concerns in greater detail with the staff and Members of
the Ways and Means Committee when your schedule permits.
Disclosure of Pending Applications for Exemption
Under current law, approved applications for exemption are
subject to disclosure and public access. The JCT staff would
extend the disclosure rule to pending applications for
exemption.
VHA Concern:
VHA believes that broader disclosure is necessary to
facilitate public access only in those situations where a
nonprofit organization represents to the public that it has
filed a Form 1023 application in order to solicit charitable
contributions or secure some other benefit. However, where a
newly formed organization makes no public representation about
its exempt status or eligibility for charitable contributions,
disclosure of a pending application is potentially misleading
to the public and disruptive to the efforts of both the IRS and
the organization to complete the application process
expeditiously and cost-effectively.
Disclosure of IRS Rulings Without Redaction
The JCT staff recommends that all written determinations
(including private letter rulings and background file
documents) involving tax-exempt organizations be publicly
disclosed. In general, the staff recommends that such
disclosure be made without redactions.
VHA Concern:
VHA agrees with the JCT's recommendation to correct the
anomaly in the disclosure law that prevents private letter
rulings issued to exempt organizations from being released to
the public unless they address tax issues beyond continued
qualification for exempt status. VHA believes that all private
letter rulings issued to both nonprofit and for-profit
organizations should be released. Such a change levels the
playing field.
However, VHA disagrees that rulings issued to exempt
organizations should be publicly disclosed without redaction.
Such a change would distort the level playing field achieved by
the first aspect of this JCT proposal. Moreover, it will be
administratively burdensome to apply the exemptions from
disclosure in Section 6110(c) (e.g., disclosure exemptions for
trade secrets, commercial, and financial information), and such
exemptions will be meaningless to the exempt organization if
its name is released in connection with the ruling.
Disclosure of Audit Results and Closing Agreements
The JCT staff recommends that the IRS disclose the results
of audits of tax-exempt organizations. In addition, the staff
recommends that all closing agreements with tax-exempt
organizations should be disclosed. Again, the staff recommends
that such disclosure should be made without redaction.
VHA Concern:
Mandatory disclosure of unredacted closing agreements and
audit results will have a negative effect on potential
settlements. When faced with the choice of litigating or
settling an IRS audit issue, the current rule protecting the
confidentiality of IRS settlements provides a strong incentive
not to litigate. Moreover, the IRS always has the option to
negotiate for disclosure as part of a settlement. Closing
agreements are also used outside the audit context to deal with
self-identified tax compliance problems. The proposed
disclosure without redaction will clearly have a chilling
effect on organizations' willingness to voluntarily step
forward to correct tax problems in this context. Taxable
corporations and individuals have comprehensive protection from
disclosure in both the audit and non-audit contexts.
Mandatory disclosure may also have a chilling effect on the
IRS' willingness to enter into settlements. If all closing
agreements are disclosed, the IRS will have to worry about
whether a particular settlement will be interpreted as a
general policy or enforcement position.
Disclosure of Tax Returns for UBIT, Taxable Subsidiaries, and Joint
Ventures
The JCT staff recommends that the scope of 6104 should be
expanded to require the disclosure of all Forms 990-T and any
Forms (including Forms 1120 and 1065) filed by affiliated
organizations of tax-exempt organizations.
VHA Concern:
Mandatory disclosure of Form 990-T (UBIT tax returns filed
by exempt organizations), Form 1120 (corporate tax returns
filed by taxable affiliates), and Form 1065 (partnership tax
returns filed by joint ventures) would create an unjustifiably
unlevel playing field for the non-profit owners of such
entities. In general, taxable corporations' returns are
protected from disclosure. In the case of joint ventures and
less than 100%-owned affiliates, there is also a concern that
the privacy of the exempt organization's taxable partners could
be jeopardized. Such individuals and entities are not subject
to disclosure of comparable tax return information when they do
business with for-profit parties.
Disclosure of More Detailed Information Regarding Transfer of Funds
Among Affiliates
The JCT staff recommends that Form 990 require reporting of
more information concerning the transfer of funds among various
affiliated tax-exempt organizations. In particular, the JCT
staff would require tax-exempt organizations to identify
clearly conduit arrangements in which funds are being
transferred among Section 501(c)(3), 501(c)(4), and 527
organizations (e.g., PACs).
VHA Concern:
Tax-exempt hospitals systems frequently transfer funds
between exempt affiliates, but rarely use the 501(c)(3)-(c)(4)-
PAC conduit arrangement that the JCT staff is concerned about.
This disclosure requirement is acceptable only if narrowly
tailored to its purpose. If it is not so tailored, it will
impose onerous reporting burdens on large multi-entity health
systems that go far beyond the abuses it is intended to
address.
Disclosure of More Detailed Information Regarding Lobbying
The JCT staff recommends that public charities (a category that
includes most tax-exempt hospitals and health care organizations) be
required to supply additional, more detailed information regarding
lobbying on Schedule A of the Form 990 filed each year. Such
information would include:
a detailed description of specific lobbying activities and
issues (e.g., legislation supported or opposed) at the Federal, State
and Local levels
expenditures for self-defense lobbying (a category that
includes any efforts to protect an organization's tax or nonprofit
status).
expenditures for non-partisan study, analysis and research
if such study, analysis, or research includes a limited ``call to
action.''
Under IRS regulations and rulings, self-defense lobbying and
nonpartisan study, research and analysis (even when the latter includes
a limited ``call to action'') are excluded from the definition of
lobbying.
VHA Concern:
Increased reporting of lobbying activities and issues will impose
substantial additional recordkeeping and reporting burdens on nonprofit
health care systems, particularly those multi-hospital systems with
facilities in different states and local jurisdictions. To require
reporting of activities that IRS regulations actually exclude from the
definition of lobbying makes the proposal even more objectionable from
a policy viewpoint. Reporting should be limited to categories of
activities that have a particular legal significance.
Disclosure of Trade Names
The JCT staff recommends that a tax-exempt organization be
required to list on the Form 990 all trade names, as well as
the organization's legal name.
VHA Concern:
Large health systems with multiple ancillary providers may
use a number of trade names to represent their numerous
facilities and services. VHA recommends that organizations be
required to provide all names under which the organization
conducts substantial activities or solicits contributions. Such
disclosure should be sufficient to address the concern of the
JCT staff without requiring burdensome reporting of extraneous
detail.
Virginia Department of Agriculture and Consumer Services
Richmond, VA 23218
March 13, 2000
Mr. A. L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, D.C. 20515
Dear Mr. Singleton:
On behalf of the Virginia Department of Agriculture and Consumer
Services, I respectfully submit for your consideration the following
written comments regarding the Joint Committee on Taxation Disclosure
Study regarding provisions related to tax-exempt organizations.
We concur with all but one of the recommendations relative to the
Disclosure of Internal Revenue Service (IRS) Materials. Specifically,
we disagree with the recommendation that the taxpayer identification
number (TIN) of tax-exempt organizations should not be subject to
disclosure.
While the TIN of a tax-exempt organization is routinely disclosed
under present law, the study suggests that the potential for misuse may
increase given the additional disclosures recommended. However, the
study does not cite specific examples of misuse. We believe that the
TIN is a critical piece of information for investigative and record
management purposes that should continue to be subject to disclosure.
For example, our staff uses the TIN for processing refunds of
overpayment of registration fees, identifying organizations with sound-
alike names, requesting information from the IRS, and identifying the
parent organization from an affiliate.
Thank you for the opportunity to comment on the recommendations of
the Joint Committee.
Sincerely,
J. Carlton Courter, III
Commissioner
cc: The Honorable Barry E. DuVal
Donald W. Butts, DVM
The Whiting Law Firm, P.A.
Portland, ME 04101
March 13, 2000
A. L. Singleton, Chief of Staff
Committee on Ways and Means
U.S., House of Representatives
1102 Longworth
Washington, DC 20515
Re: Proposed Changes to Section 501(c)(3) Rules
Dear Mr. Singleton:
I represent about two dozen section 501(c)(3) groups here in the
State of Maine. Many of them are involved in educating their members
and the public as to the likely effects of proposed legislation, and
concerning where political candidates stand on various issues.
I understand that the Joint Committee on Taxation is considering
proposals to make section 501(c)(3) organizations report on their
annual 990 forms expenditures related to such educational activities.
From what I have been told, these educational activities still will not
be considered ``lobbying,'' and will not jeopardize a group's section
501(c)(3) tax exempt status. Rather, the government is just curious as
to how much is being spent on such activities, and believes the public
should know how much a group is spending and for which issues.
My clients and I are greatly concerned about those proposals for
three reasons.
First, such reporting requirements will chill the ``free speech''
rights of my clients and other section 501(c)(3) groups. See: McIntyre
v. Ohio Elections Commission, 514 U.S. 334 (1995); FEC v. Massachusetts
Citizens for Life, Inc., 479 U.S. 238 (1986); First National Bank of
Boston v. Bellotti, 435 U.S. 765 (1978); and Buckley v. Valeo, 424
U.S. 1 (1976).
This is especially true if section 501(c)(3) organizations are
required to report which bills and/or political issues they spent money
on. See: McIntyre v. Ohio Elections Commission, supra. As our U.S.
District Court Judge here in Maine recently held in Yes For Life
Political Action Committee v. Peter B. Webster, 74 F. Supp. 2d 37 (D.
Me. 1999), at 42:
``I recognize that many people find anonymous statements on
controversial issues to be repugnant... But what the
Constitution protects and what good judgment or good policy
permits are often two entirely different things. The Supreme
Court has ruled that under the First Amendment anonymous
political messages deserve protection because in some important
instances the face of an unpopular speaker will otherwise
interfere with the legitimacy of the political message he/she
is sending. Ultimately, it is up to the voters to assess the
message and what weight to give it.''
Second, we do not understand why section 501(c)(3) groups should
have to report such expenditures if they are not considered
``lobbying,'' and will not jeopardize a group's tax exempt status. Idle
curiosity hardly seems sufficient justification for requiring
organizations to report confidential and politically sensitive
financial information... opening the door for those who oppose the
group's views on those political issues to misuse that information to
the detriment of the organization [which, again, is likely to chill the
``free speech'' of the organization].
And third, to my knowledge no section 501(c)(3) organization
currently keeps a separate account of these expenses... which means
that all such groups will have to revamp their recordkeeping and
accounting systems to track and report these expenses separately. No
doubt this will be an expensive and time consuming process; and keeping
track of such expenses and reporting them separately will be a totally
unnecessary accounting headache. In this age when the public is crying
out to make the IRS and tax reporting more ``user friendly'' this
proposal would be a big step in the wrong direction.
I am enclosing six copies of this letter, along with a computer
disk of this letter. I understand that this what is required to comment
on proposals before the Joint Committee.
Thank you for your consideration of our concerns.
Very truly yours,
Stephen C. Whiting
SCW/sr
Enclosures
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