AICPA Panel Comments on Proposed Revisions to Form 1023

December 2, 2002

 

 

1. Make the exemption application process educational for applicant organizations by (a) explaining, in plain language, standards for qualifying for exemption; (b) describing how the IRS processes applications; and (c) making the Form more accessible and easier to complete with instructions for each part.

2. Make the determination process more efficient for the IRS review staff by (a) requesting better quality information to facilitate qualifying the applicants; and (b) highlighting appropriate information to effectively and efficiently identify which applications need further review.

 

A. The new line-by-line instructions will greatly facilitate applicants' understanding of the Form 1023. We strongly suggest that the Form be cross-referenced to each line's specific instructions. This will increase both an applicant's ability to properly complete the Form and the likelihood that the Instructions will be utilized.

B. The Form could flow in a more logical order. We suggest ordering the parts as follows: (1) organizational tests; (2) financial data; (3) activity discussion, including involvement of related parties; (4) public charity status, and (5) special issue questions and attachments. This order would better promote internal consistency and support the interactive nature of these areas. Specialized schedules should continue to be attached -- at the end and only as applicable.

 

A. As redesigned, the Form will not reduce an applicant's completion time. Describing an organization in an understandable manner with the detail requested is time-consuming and not dissimilar to preparing a business plan suitable for soliciting capital investment.

B. We do, however, have the following concerns about the volume and depth of the financial information requested:

D. Miscellaneous

Part XI, Item 6. Organizations are asked to extend the statute of limitations on certain tax issues and for certain years, without specifying the actual dates involved. This may be confusing to applicants and we suggest that dates be added.

 

A. Part VI. The redesigned Form distills the "organizational requirement" down to the two regulatory provisions (Regulation Sections 1.501(c)(3)-1(b)(1) and (4)). The questions in Part VI ask for language meeting the organizational purpose limitation and dissolution/dedication of assets set forth in the regulations. However, it is our experience that two additional paragraphs are required by the IRS Determinations Group: one stating a prohibition on "any other activities not permitted to be carried on by a corporation exempt under 501(501(c)(3)", the other prohibiting "private inurement". The Instructions need to clarify if these provisions will in fact, be required. We also recommend conforming the statements on the required organizational document language in the Form, its Instructions and Publication 557.

B. Part VI. We suggest adding information to the Instructions and questions on the Form on language appropriately limiting lobbying and prohibiting political activity in the organizing documents, if these limitations will be required.

C. Part III, Item 3. The question should be revised to ask "Do you now, or do you plan to, compensate officers, directors or trustees?"

D. Part VIII. As mentioned earlier, we believe that Part VIII's list of "yes/no" questions should appear within the Form, after the Narrative of Activities (Part IX in the draft). In addition, we suggest that these questions each be cross- referenced to appropriate background information (e.g., applicable rulings or cases) in order to allow an applicant to apply these to the organization's specific operations.

E. Part VII, Item 5, asks, "Are you submitting this application more than 27 months after the date you were legally formed?" Technically, the rule provides "27 months from the end of the month" in which the organization was formed (Regulation Sections 1.508-1(a)(2) and 301.9100- 2(a)(2)(iv)).

F. Miscellaneous

 

A. Although we believe that the revised Form will elicit more complete and relevant information, we note that the overlay of a "Yes/No" question format, along with Instructions that point out areas of qualification-sensitive information may have an unintended effect of suppressing full disclosure. The format and Instructions point applicants in the direction of "correct" answers with respect to their intended activities. Furthermore, if the voluminous level of detail required with respect to the financial disclosures is maintained, this format and such detail will encourage organizations to apply for tax-exempt status as early after formation as possible. This would occur because it arguably would be to an organization's advantage to apply before employees are hired and advisors retained, if for no other reason than to limit the cumbersome, detailed disclosures.

B. We acknowledge transactions that carry a risk of inurement or private benefit will be addressed in greater detail through questions in Part III. However, we expect that the revised Form will point applicants to adopt a "less is more" approach in answering the Form's questions. Thus, the apparent goal of increased disclosure may not be accomplished.

C. While we agree the redesigned Form is an improvement over the existing Form 1023, we are concerned that there will continue to be a lack of appropriate scrutiny of an applicant's actual (rather than projected) programmatic and administrative operations.

See Section VI for proposed alternative process.

 

A. The redesigned Form and Instructions are heavily skewed toward public charities (which we understand are the vast majority of all applicants). Rather than add extra weight to the application package to address private foundations, we suggest that a separate "Form 1023-PF for Private Foundations" be developed. A separate Form 1023-PF would allow certain schedules on the redesigned Form to be eliminated. The Form 1023-PF would focus on those items necessary to grant tax-exempt status to private foundations. The use of two forms would allow the Instructions in each to focus on areas of concern for the specific type of organization. For example, information on excess benefit transactions in a public charity context could be provided without risk of confusion with the rules on self- dealing transactions that exist for private foundations; similarly, "disqualified persons" under Section 4958 versus Section 4946 would be distinctly defined and covered on each form. Two forms might also alleviate the situation we now see, where an organization desires to be a private foundation, is granted public charity status at the Service's suggestion, but at the end of the advance-ruling period is determined indeed to be a private foundation.

B. Part I, Item 6. The Instructions should state that the organization's fiscal year should match the fiscal year identified in the organization's bylaws.

C. Part VIII. We applaud the addition of more specific questions reflecting current areas of concern and sensitivity regarding operations. We strongly recommend that the IRS review and update this Part on a periodic basis particularly to conform to information learned through the market-segment studies and other Examination initiatives.

D. Part VIII, Item 1. We believe that a stronger statement should be made regarding the prohibition of political activity.

E. Part VIII, Item 4. We suggest that the Instruction to this Item specifically ask for agreement(s) with third parties conducting bingo or other gaming operations for the applicant. We also note that the requirement to provide the amount of time spent on gaming operations is burdensome (see next comment). It is of dubious utility when the gaming occurs as a fundraising activity.

F. Part VIII, Item 5. The item requests "the time you spend on these activities as compared to your total activities". This requirement is burdensome. We are concerned that applicants in a start-up phase will not be able to accurately project this information. Any answers given may be meaningless.

G. Part VIII, Item 8a. Adding a schedule with the standard follow-up questions regarding tax-exempt bonds would eliminate the need to send a letter and should expedite application processing.

H. Part VIII, Item 16. This question and its instructions are vague, and would likely result in a loss of clear, useful information. Any organization using Internet-based e-mail could conclude it must answer "yes." The instructions should acknowledge that existing rules governing electronic activity apply to evaluate the nature of activity conducted on the Internet.

I. Schedule B, Section II. In our experience, schools often apply for tax-exempt status prior to beginning their operations. Typically this is so they can raise funds to support the school's infrastructure needs, etc. In a start-up phase, is can be extremely difficult to predict the future demographics of yet-to-be-enrolled and yet-to-be-hired employees.

 

1. Based upon a shorter Form 1023 focused on Section 501(c)(3)'s organizational requirements, grant a provisional determination effective for a time-limited period (the UAR); we suggest the same five-year period now used for Sections 509(a)(1), 170(b)(1)(A)(vi) or 509(a)(2) advance rulings. We hope this could be done using a reduced number of personnel within the existing IRS Determinations Group.

2. A definitive ruling for those organizations defined in Section 170(b)(1)(A)(i)-(v) could be provided by requiring such organizations to complete the redesigned Form 1023.

3. Organizations granted UAR's would be required to annually submit supplemental information patterned upon the questions contained in Parts II, IV and VIII of the redesigned Form. Ideally, this requirement would be met through an attachment to Form 990. The benefit is that the questions would be answered based upon the applicant's actual activities. This submission (and Form 990) would be required regardless of the level of an organization's gross receipts during the UAR and would be subject to public disclosure.

Sincerely,

 

 

Jody Blazek

 

Chair

 

AICPA Tax Exempt Organization

 

Taxation Technical Resource Panel