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 Issuespublic to contribute to oversight of the nonprofit sector. 105 Under current law, section6104 provides for public inspection and dissemination of information from tax-exemptorganizations, including Form 1023 (Application for Tax-Exempt Status), Form 990(Annual Information Return), and, in the case of section 501(c)(3) organizations, Form990-T (Annual Business Income Tax Return). At the outset, the public availability ofinformation from tax-exempt organizations was limited and cumbersome, and theinformation provided in returns filed by charities was relatively incomplete. Appendix 4is a summary of the history of the rules governing disclosure requirements applicable totax-exempt organizations and shows the enormous evolution over the last half centuryin terms of the information available for public disclosure, the expanded rationales fordisclosure, and the ease with which returns can be accessed. The Internet, of course,has played a dramatic role in making the information immediately accessible.The increased availability of certain tax return information by charities has enhanced theability of third-party stakeholders (e.g., donors and potential donors, beneficiaries andpotential beneficiaries, state attorneys general, the public, watchdog groups, Congress,and the media) to play a more active oversight role. This, in turn, has facilitated IRSenforcement, at least to the extent that wrongdoing has been brought to the attention ofthe IRS. Nevertheless, as discussed above, transparency has its limitations.IRS. While Congress has not required the adoption of specific governance practices asa condition for exemption under section 501(c)(3), there are a limited number ofsituations where the IRS has mandated specific governance practices as a condition forexemption in precedential (sometimes non-precedential) rulings and other documents.Most of these arise in the health care arena, 106 although the IRS requires a conflict ofinterest policy in certain low-income housing joint ventures. 107 We appreciate that in thequickly-changing field of health care it can, in some instances, be difficult to distinguisha health care organization that qualifies for exemption from one that is merely the forprofitpractice of medicine or a health-related business. In various contexts, as the IRShas labored to draw that line, it has created a per se requirement for exemption thatrequires the organization be governed by an independent body. The IRS’s position,however, has not always been sustained by the courts 108 and we are concerned aboutper se requirements.C. Governance Issues Involving DeterminationsThe determination process may be viewed as involving two stages: the completion andsubmission of the Form 1023; and the administrative process where, based in105See generally 2000 JCT Study, supra note 97.106See Appendix 3 for a discussion of the IRS’s application of governance issues in the health care context.107In the case of an organization that proposes to further its purposes by participating, as a general partner, in a section 42 lowincome housing tax credit limited partnership, the IRS requires that the organization adopt a conflict of interest policy like the sampleset forth in Appendix A to the Form 1023 instructions or another form to protect the organization’s interest. See Memorandum forManager, EO Determinations, from Director, EO Rulings and Agreements (July 30, 2007), at 2, http://www.irs.gov/pub/irstege/lihtcp_choimemo_073007.pdf.108See supra note 107.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 31