Full Text: Letter from Nonprofit Committee to Archer and Roth on Restructuring Commission

August 26, 1997

Representative Bill Archer, Chairman

Dear Representative Archer and Senator Roth:

[1] The Committee on Nonprofit Organizations of the Association of the Bar of the City of New York has reviewed the report of the National Commission on Restructuring the Internal Revenue Service ("National Commission"), the speech of former Assistant Commissioner for EP/EO, James J. McGovern, before the National Commission on January 8, 1997, and the report and letter of the Taxation Section of the District of Columbia Bar Association to you dated May 6, 1997, which all include recommendations to create an independent funding mechanism for the Internal Revenue Service's Employee Plans and Exempt-Organizations operations ("EP/EO"). For the reasons discussed in this letter, we agree with the recommendations for an independent funding mechanism for EP/EO.

[2] The cited documents, together with public discussions by representatives of the Internal Revenue Service (for example, at the Georgetown Law Center's Conference on Tax-Exempt Organizations held on April 17-18, 1997), reflect the general recognition by the Internal Revenue Service, the Bar and the tax-exempt sector that budgetary restrictions imposed on the Internal Revenue Service are significantly eroding EP/EO's ability to carry out the functions it was specifically created to perform. According to the report of the National Commission, the office of EP/EO was created to administer a non-tax-collection function in the Service, to provide guidance and oversight and encourage voluntary compliance and self-correction, in addition to the usual Internal Revenue Service functions of collection, enforcement and sanction. EP/EO guidance was historically characterized by an active national headquarters which creates programs and produces rulings and other publications upon which the tax-exempt sector and its legal advisors relied for the conduct of the sector's activities.

[3] In order to fund EP/EO's activities, Congress enacted Internal Revenue Code section 7802(b)(2) to provide for an annual independent appropriation for EP/EO equal to the receipts from the private foundation excise tax on investment income. That funding mechanism was never put into effect, however, and EP/EO now receives its funding as part of the general appropriation for the Internal Revenue Service. As a result, as the Internal Revenue Service's funding has been reduced in recent years, EP/EO has been correspondingly affected. Mr. McGovern noted in his speech to the National Commission that EP/EO headquarters personnel has been reduced by one third over the past four years, significantly diminishing EP/EO's ability to provide its unique services.

[4] The budgetary cuts have unfortunately coincided with the following trends in the tax-exempt sector which argue for increased resources to carry out EP/EO's mission:

1. Congress has determined that increased Internal Revenue Service oversight over some aspects of the operations of tax-exempt organizations is desirable, as evidenced by the intermediate sanctions (Code section 4958) and disclosure requirements (Code section 6104) enacted as part of the Taxpayer Bill of Rights 2. The legislation, with its accompanying legislative history, is viewed as creating a model and incentive for proper organizational behavior for exempt organizations, as well as for sanctioning improper behavior. To accomplish those goals, adequate staffing is required to make enforcement a reasonable expectation.

2. Changes in statutory and case law affecting the tax-exempt sector are frequent. /1/ Guidance, in the form of revenue rulings and other materials, is desirable to assist the sector in understanding and complying with the Service's position on changes in the law. As Mr. McGovern pointed out in his speech to the National Commission, however, Revenue Rulings from EP/EO have precipitously declined since 1983, and none has been issued in the past five years.

3. The operations and finances of tax-exempt organizations are rapidly changing. Arrangements with non-exempt endeavors and enterprises, including joint ventures and sales of assets, have greatly increased over the past few years. Hospital joint ventures and sales of assets are the most publicized of these arrangements, which are undertaken by many other types of exempt organizations, as well. Guidance and oversight are needed in those areas to assist the organizations to properly provide for their necessary financing, while ensuring that public and not private interests are served by those organizations.

4. As Mr. McGovern described in his speech, the sector has expanded significantly in the recent past, both as to the resources it manages and controls and as to the number of organizations which have qualified for exempt status.

[5] All of those developments argue for an EP/EO operation that directs its resources to policy, guidance, oversight, and compliance, as well as to enforcement and collection functions. We believe the tax-exempt sector would be best served by insuring that those EP/EO functions are not further curtailed or eliminated by budgetary reductions; indeed, they should be increased to meet the needs of this expanding sector. As practitioners, we support the proposals for independent funding because we have concluded that it will insure the restoration of the technical functions of EP/EO and provide us with the necessary guidance to best represent our clients. We believe the sector itself supports independent funding because the oversight provided by the Internal Revenue Service will improve compliance and enhance the organization's credibility in the public eye, thereby facilitating fundraising. In addition, by fostering the guidance and voluntary compliance functions of EP/EO, the working relationship between the sector and the Service will be maintained. Finally, we believe that the public will be served by the proposal as well, because of EP/EO's resulting ability to maintain its oversight functions and improve compliance for organizations that are supported directly and indirectly by public monies.

[6] We therefore concur with the National Commission recommendations to Congress to provide for an independent source of funding for EP/EO by reactivating section 7802(b)(2) of the Internal Revenue Code and authorizing an annual appropriation for EP/EO. The suggested sources for funding the appropriation, as discussed in the letter of May 6, 1997, from the Taxation Section of the District of Columbia Bar, are appropriations equal to amounts paid to the Service by tax-exempt organizations through (a) private foundation investment income tax (section 4940 of the Code), (b) user fees for EP/EO services, (c) excise taxes on excess benefit transactions (section 4958 of the Code, and (d) penalties under section 6652(c) and section 6685 of the Code for failure to follow public disclosure rules. There may be further sources within EP/EO's jurisdiction, such as other private foundation excise taxes (sections 4941-4945 of the Code), to raise the funding to the level necessary to support EP/EO if it is determined that these primary sources are not sufficient. We believe that those sources of funds, generated from the sector itself, are appropriate and in accordance with Congressional intent in enacting Code section 7802(b)(2).

[7] We recommend, therefore, that Congress act to provide for independent funding for EP/EO, that it determine the required level of funding and the sources adequate to meet that level, and that it make its determinations a part of the legislative history and any statutory change.

[8] This Committee would be happy to be of assistance to you or provide you with any further information about these comments.

                                   Very truly yours,

                                   THE COMMITTEE ON NONPROFIT

CC: Senator Daniel Patrick Moynihan

                Committee on Nonprofit Organizations

Douglas F. Bauer                   Martha Gray Billman

     *Principal authors

FOOTNOTE

/1/ Examples within the past year include the intermediate sanctions legislation, new Treasury Regulations applicable to tax- exempt organizations as a result of the repeal of the General Utilities doctrine, and the Sierra Club case.

END OF FOOTNOTE