Attorney Wants Houghton Confidentiality Bill to Apply to EOs

"Tax exempt organizations deserve and should be included in the protections the bill would provide," Sullivan says. While it is important for EOs to disclose details about their use of funds and compliance with the law, he adds, forcing them to disclose information contained in closing agreements "would not add meaningfully to what already is publicly available."

[1] As you know, Representative Amo Houghton's recently introduced bill, H.R. 5044, would clarify existing tax law and expressly protect the confidentiality of certain negotiated agreements between the IRS and other parties. I read with interest your letter of August 8 to Chairman Archer supporting the bill. In response to this proposal, there recently has been some discussion in the tax press over whether IRS closing agreements with tax-exempt organizations should be protected by the bill, particularly in light of proposals made by the Joint Committee on Tax ("JCT") last January to dramatically expand disclosure required of tax-exempts. I would like to take this opportunity to express support for the bill as it is written, and share my concerns about any proposal to except tax- exempt organizations from its scope.

[2] I am a former Internal Revenue Service exempt organizations official, and now represent a number of tax-exempt organizations in private practice. One of my clients, the Coalition for Nonprofit Health Care, is composed of health care organizations dedicated to preserving the nation's primarily nonprofit health care delivery system and having a mission of providing needed health care and community benefit. On behalf of the Coalition and other clients, I have been working on public disclosure and taxpayer confidentiality issues for some time. In March, the Coalition submitted written comments to the Committee on Ways and Means regarding the JCT disclosure proposals. I have enclosed copies of these comments and related correspondence for your review, and would draw your attention to their specific coverage of the JCT proposal to require disclosure of IRS closing agreements with exempt organizations.

[3] As drafted, H.R. 5044 clarifies current law, and thus covers all IRS closing agreements, including those entered into with tax-exempt organizations. Tax-exempt organizations deserve and should be included in the protections the bill would provide. Exempt organizations run the same risks as other taxpayers of misuse and misinterpretation of private information developed in IRS examinations or voluntarily disclosed to the IRS in pursuit of a negotiated settlement. In addition, while it is important for exempt organizations to share with the public details about their use of funds and level of compliance with the law, information contained in closing agreements, if disclosed, would not add meaningfully what already is publicly available. I hope you will conclude from the enclosed materials that there is no valid reason to single out and exclude exempt organizations from the scope of H.R. 5044.

[4] If you have any questions or need further information, please do not hesitate to contact me at (202) 408-7157.

Sincerely,

THE COALITION FOR NONPROFIT HEALTH CARE

[6] 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.

[7] 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:

o the nation's largest HM0 and nonprofit health care system;

Disclosure of all written determinations

[8] 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

[9] 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 disclosable 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

[10] 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

[11] 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.

[12] 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

[13] 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

[14] The Coalition supports the JCT Study recommendation that the IRS be required to notify the public that tax-exempt organizations' Forms 990 are publicly available.

Requiring disclosure of both a tax-exempt organization's legal name and names under which it does business

[15] 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.

[16] 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

[17] 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

[18] 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

[19] 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.

[20] 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.

[21] 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)

[22] 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.

[23] 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.

[24] 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.

[25] 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.

[26] 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.

[27] 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.

[28] 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

[29] 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.

[30] 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.

[31] 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 AFTER a final determination by the IRS help ensure consistency of determinations and public understanding of the standards applied.

[32] 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.

[33] 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

[34] 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.

[35] 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 [sic] for the public's interest in an organization's exempt activities do not apply to taxable activities.

[36] 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 Form 990 regarding the transfer of funds among organizations exempt under Section 501(c)(3), Section 501(c)(4), and Section 527

[37] 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.

[38] 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

[39] 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.

[40] 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.

[41] 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.

[42] 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.

                                   Respectfully submitted,

[43] I have long been an admirer and supporter of your work with Tax Analysts, including, in most cases, your efforts to compel disclosure under the Freedom of Information Act of Internal Revenue Service (IRS) documents that may shed light on agency interpretation of law or policy. In the long run, both taxpayers and the government almost always benefit from administration of our nation's laws in the sunshine.

[44] It is in this spirit that I am writing to urge you to dismiss Tax Analysts' suit for disclosure of certain IRS closing agreements (Tax Analysts v. Internal Revenue Service, D.D.C. No. 94 CV 2220). As a tax-exempt organizations practitioner and former IRS official who has negotiated several closing agreements from both sides of the table, ¹ I am very concerned that your suit, if successful, will effectively end a vital dispute resolution mechanism for both the Service and tax-exempt organizations. Given the regulatory nature of the IRS' role in the exempt organizations area, the widespread occurrence of inadvertent technical violations voluntarily disclosed or discovered by the Service on examination each year and the narrow scope of the new Section 4958 Intermediate Sanctions provisions, taxpayer-specific closing agreements negotiated under Section 7121 remain a crucial mechanism for improving compliance and avoiding revocation of exemption. I fear that the Service will be less willing to compromise and taxpayers will be less willing to acknowledge error if closing agreements are made public.

[45] I understand Tax Analysts' and the general public's interest in having access to internal agency documents that may illuminate IRS legal interpretation or policy. I also find it completely understandable, given the size and visibility of the Church of Scientology and the notoriety of its legal disputes with the IRS, that Tax Analysts and members of the exempt organizations community were curious about the Church's closing agreement with the IRS. It is equally understandable that this curiosity may have led Tax Analysts to sue for disclosure of a variety of closing agreements entered into by the IRS. Nevertheless, now that the Scientology closing agreement has, for better or worse, been made public, I urge you to reevaluate what, if any, benefit will accrue to Tax Analysts, taxpayers generally, and the exempt organization community specifically from continuation of the disclosure suit. In seven years at the IRS and an equal number in private practice, I have never seen a closing agreement with an exempt organization that would shed any meaningful light on agency interpretation of law or policy, other than the Hermann Hospital closing agreement, which the parties agreed to make public for precisely that reason. Closing agreements are essentially private contracts of compromise. If, as would be the inevitable result of success in your lawsuit, the availability of closing agreements is curtailed, tax-exempt organizations would lose a meaningful mechanism for avoiding revocation of exemption or other harsh penalties while agreeing to improve compliance. The IRS would lose an effective compliance tool, and the taxpaying public would gain very little.

[46] I very much hope that, for all the above reasons, you will conclude that the public interest would best be served by voluntary dismissal of Tax Analysts' suit.

Sincerely yours,