Advisory Committee on Tax Exempt and Government Entities (ACT ...

The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance IssuesInternet has facilitated this interstate and international expansion, not only in thesolicitation of funds, but also in the operation of programs. The fact that an organizationthat is active in a state with developed expectations about nonprofit governancepractices need only adhere to the potentially more relaxed rules of its state ofincorporation—even if it has no physical presence in the latter jurisdiction—becomesincreasingly hard to accept from interstate nonprofit operators. 54It is perhaps unsurprising then that in our discussions with state charities regulators wefound them generally receptive to the expanding role of the IRS in matters of nonprofitgovernance, at least with respect to additional Form 990 governance disclosures, anexpanded educational role for the IRS, and, most importantly, the IRS sharing data withthe states. 55 States requiring reporting by charities often accept the federal Form 990for their purposes, 56 and the new form’s expanded inquiries into governance providesadditional tools for state charities regulators to identify organizations that are lackingsome of the governance indicators that are believed associated with the protection ofcharitable assets. 57 In the absence of adequate enforcement resources at the statelevel, the IRS can play an important educational role that promotes self-correction. Insum, our interviews indicate that the recent expansion of federal interest in nonprofitgovernance is viewed by the states as a complement and supplement to state efforts,rather than as a threat to their authority. 58However, state regulators’ receptivity to an expanded federal role in matters of nonprofitgovernance is not without qualification. Concerns include the federalization ofgovernance issues and impinging on the enforcement discretion of the states. Onestate regulator from a state active in charity regulation speaking to the “duplicative” state54For example, Delaware, a popular state of incorporation for organizations even with no programmatic presence in that state,permits corporations to be formed with only a single director. Delaware General Corporation Law § 141(b). But see AmericanCenter for Education, Inc. v. Cavnar, 80 Cal. App. 3d 476, 478 (Cal. 1978)(“[W]e believe that actions taken in California concerningthe administration of that charity should not escape the scrutiny of California law, merely because the founders chose to incorporateelsewhere.”).55We also note that the IRS plays a collaborative role with the states in connection with sharing certain information about charities.Prior to Congress adopting the Pension Protection Act of 2006, P.L. 109-280, federal tax law imposed strict limits on the informationthe IRS could disclose to state law enforcement officials about concerns involving section 501(c)(3) organizations. Under new IRCsection 6103(p)(4), the state official charged with regulating charities may request in writing (on Form 8821), and the IRS must thendisclose, a notice of proposed revocation of exempt status, or proposed refusal to recognize exemption; a notice of proposedeficiency of tax under section 507 or the private foundation provisions in chapter 42; the names, addresses and taxpayeridentification numbers of organizations that have applied for exemption; and return information pertinent to any of the above. Similardisclosures are now permitted for any 501(c) organization but only for the purpose of, and to the extent necessary in, theadministration of state laws regarding charitable assets. See IRC sections 6103, 6104, 7213, 7213A and 7413.56According to the National Association of State Charities Officials, state regulators have been accepting the Form 990 as a statefiling instrument, at least in part, since 1981. See National Association of State Charity Officials Comments on proposed Changesto Form 990, September 14, 2007, http://www.nasconet.org/NASCO_Comments_IRS_Form_990.pdf.57One representative from a state attorney general’s office, interviewed along with others from the National Association of StateCharities Officials, described the new governance questions as “great” because not all states have the capacity to monitor nonprofitsand, if the IRS does not ask governance questions of these organizations, no one will.” (Telephone interview with state charitiesregulators, National Association of State Charity Officials, November 5, 2007).58James Tierney, the former Attorney General of Maine, dismissed the prospect of confusion caused by differences in state andfederal approaches to nonprofit governance as something that the various states must confront every day, observing “We’re notFrance.” . (Telephone interview with James Tierney, David E. Ormstedt, Tam Ormiston, and Cindy Lott, National State AttorneysGeneral Project, Columbia University Law School, October 29, 2007).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 20