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

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The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issues(11)(12)II.Consistency and Fair Treatment are Critical.Education, Implemented Thoughtfully, Is More Appropriate Than PressuringChange.STATEMENT OF THE PROBLEM AND THE PROJECT OBJECTIVESA. ProblemRecently, the IRS has become increasingly involved in seeking to promote “goodgovernance” practices across the tax-exempt sector based on its belief that a wellgovernedorganization is more likely to be compliant and that good governance alsoallows for self-identification and resolution of problems. We acknowledge the IRS’slongstanding stake and legitimate interest in governance issues as they relate directly tocompliance with the laws under its jurisdiction. However, the efficacy of specificgovernance practices is unproven; and the IRS merely asking about specificgovernance practices is a powerful force that can drive behavior. Charities can feelpressured to adopt the specified practices even where it is inadvisable in their situationbecause they believe the IRS or others will consider them poorly governed if they fail todo so. This then can effectively usurp the judgment of their governing boards indetermining what governance practices make sense in their individual contexts, placeundue burdens on organizations, divert their attention to proxies for governance insteadof actual governance, and adversely impact the unique, diverse, vibrant, and flexiblecharitable sector in this country. Accordingly, we believe that caution is critical whenseeking to promote specific governance practices.B. ObjectiveThe objective of this report is to provide a framework that will assist the IRS as it seeksto balance the desirability of promoting good governance against the potentialdeleterious consequences to the sector.III. PROCESSACT members obtained information and perspectives about governance issues andpractices through interviews with IRS and Treasury staff, charities’ experts in stateattorneys general offices, academics, and practitioners in the field (including exemptorganization and other attorneys, accountants that work with nonprofit organizations,those involved with the promotion of voluntary standards in the nonprofit sector, andother experts and stakeholders). The interviews explored the history of the IRS’sinvolvement in governance issues with respect to exempt organizations, any empiricalevidence regarding the efficacy of specific governance practices, and the interviewees’perspectives on what is meant by good governance and the appropriate role of the IRSin this area.ACT members also benefited from the perspectives of many more professionals andpractitioners through their participation in two mini-conferences convened at thesuggestion of the ACT:ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 6
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issues• Internal Revenue Service Role in Corporate Governance of Nonprofits, convenedby the National Center on Philanthropy and the Law at New York University LawSchool, in New York City, on October 4, 2007.• Improving Governance in Nonprofits: Do We Know How? Do For-Profits ProvideLessons?, co-convened by the Urban Institute Center on Nonprofits andPhilanthropy and the Harvard University Hauser Center for NonprofitOrganizations, in Washington, D.C., on January 16, 2008.The ACT also reviewed general and specialized publications (including articles, books,and special reports relating to governance in the for-profit and nonprofit sectors);materials, publications, forms, rulings, and advice issued by the IRS and Department ofTreasury; publications and speeches by senior IRS officials; congressional testimonyand reports; case law; and other materials. Appendix 1 provides a list of the personsinterviewed for this report, greater detail about the October 2007 and January 2008mini-conferences, and a detailed bibliography of certain written materials consulted inthe preparation of this report.IV. INTRODUCTIONIn recent years, the subject of “good governance” and its potential to preventwrongdoing, ensure compliance with the law, and enhance the overall effectiveness ofan organization has been a topic of enormous interest. This current period ofheightened attention began with the corporate scandals in the for-profit world, includingEnron Global Crossing, WorldCom, Adelphia, and Tyco International, and the attendantpassage of Sarbanes-Oxley. 1 But nonprofit organizations have not been immune fromthe focus on “best practices.”Nonprofit governance is a topic of interest in the media and to the public. In recentyears, the growth of media outlets (including 24-hour cable television news and theproliferation of Internet news sites and blogs 2 ), combined with the greater availability ofinformation on the financial transactions of nonprofit organizations, 3 has addedincreased scrutiny from the media to the oversight that governmental agencies arecharged with exercising. 4 The Boston Globe, the New York Times, and theWashington Post are among the major newspapers that have covered questionabletransactions involving nonprofit organizations such as the American Red Cross, the1American Competitiveness and Corporate Accountability Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (hereinafter Sarbanes-Oxley or SOX).2There also are an increasing number of blogs dedicated to the nonprofit sector. See, e.g., http://www.wheremostneeded.org,http://nonprofiteer.typepad.com, http://charitygovernance.blogs.com, http://donttellthedonor.blogspot.com.3IRC section 6104(d). See, e.g., www.guidestar.org, where Forms 990 and 990-PF are publicly available for viewing anddownloading.4See, e.g., Marion R. Fremont-Smith & Andras Kosaras, Wrongdoing by Officers and Directors of Charities: A Survey of PressReports 1995-2002, 42 Exempt Org. Tax Rev. 25 (2003)ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 7
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