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 IssuesSection 4958 100 imposes an intermediate sanction, short of revocation, where adisqualified person enters into a transaction or receives compensation from anorganization described in sections 501(c)(3) or (c)(4) that results in the insider receivingmore than fair market value. In order to encourage the governing board of anorganization to more vigilantly oversee such transactions, Congress mandated arebuttable presumption of reasonableness, set forth in Treasury Regulation section53.4958-6, pursuant to which an organization may create a rebuttable presumption thata transaction is not an excess benefit transaction if it follows the following three-stepprocedure: 101• The transaction is “approved in advance by an authorized body of theapplicable tax exempt organization. . .composed entirely of individuals whodo not have a conflict of interest.”• The “authorized body obtained and relied upon appropriate data as tocomparability prior to making its determination.”• The “authorized body adequately documented the basis for its determinationconcurrently with making that determination.”Under Treasury Regulation section 53.4958-6(b), if a transaction satisfies this threestepprocess, the IRS may rebut the presumption that arises to find an excess benefittransaction only if it produces “contrary evidence to rebut the probative value of thecomparability data relied upon by the authorized body.” 102 The rebuttable presumptionis a unique provision because Congress specifically found that organizations are morelikely to make better decisions about the fairness of insider compensation and thefairness of certain transactions between the organization and insiders if they follow thethree specified governance procedures.Congress also has determined that Forms 1023 and 990 should be publicly available.In stark contrast to the strict confidentiality rules governing other tax returninformation, 103 certain tax return information of charities has been available for publicinspection since 1950. 104 The purpose of requiring tax-exempt organizations to fileinformation returns and to make those information returns publicly available is topromote tax compliance through transparency and accountability, and to enable the100141 Cong. Rec. E1765 (Sept. 12, 1995). An excess benefit transaction is a non-fair market value transaction in which adisqualified person pays less than fair market value to the exempt organization or charges the exempt organization more than fairmarket value; or an unreasonable compensation transaction in which a disqualified person receives compensation in excess of fairmarket value. In addition, once regulations are issued, a proscribed revenue sharing transaction also will constitute an excessbenefit transaction.101Treas. Reg. § 53.4958-6(a).102Treas. Reg. § 53.4958-6(b). H.R. Rep. No. 104-506, at 57 (1996) (“If these three criteria are satisfied, penalty excise taxes couldbe imposed . . . only if the IRS develops sufficient contrary evidence to rebut the probative value of the evidence put forth by theparties to the transaction (e.g., the IRS could establish that the compensation data relied upon by the parties was not for functionallycomparable positions or that the disqualified person, in fact, did not substantially perform the responsibilities of such position.)”).103The unauthorized disclosure of tax return information by IRS is a felony under Section 6103. These same sanctions apply toother governmental authorities and contractors who are authorized to receive tax return information from the IRS.104See Appendix 4 for a history of public disclosure. See also discussion, supra, notes 93-97 and 104-06 and accompanying text.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 30