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 Issuesjurisdiction. Charitable governance issues arise from section 501(c)(3)’s operationaltest and inurement proscription; 24 section 4958’s imposition of excise taxes on excessbenefit transactions between public charities 25 and those in a position to exercisesubstantial influence over them (particularly the procedures set forth in the regulationsto section 4958 regarding how to obtain the rebuttable presumption ofreasonableness); 26 the limits on transactions involving private foundations and theirinsiders, including directors, trustees, their family members, and other related parties; 27and the statutorily mandated public disclosure of the Forms 1023 and 990. 28Governance is an issue in each of the IRS’s five points of contact with the tax-exemptsector: in creating standards for exemption; on determination of exemption; onexamination or in other compliance initiatives; in 990 reporting; and in education andoutreach.The IRS’s view that “a well-governed charity is more likely to obey the tax laws,safeguard charitable assets, and serve charitable interests than one with poor or laxgovernance” 29 seems self-evident. At the same time, efforts to promote goodgovernance are fraught with complexity. There are over 1.2 million organizationsdescribed in section 501(c)(3) today. 30 Effective governance practices among theseorganizations will vary depending on numerous factors, including size, sophistication,location, available resources, and activities. 31 Moreover, while we may all agree thatgovernance matters, it is not at all clear that requiring specific governance practicesresults in greater compliance with the tax laws. In fact, superior board governance mayhave much more to do with the values, active engagement, and accountability of thosein charge than with the adoption of procedures and policies. Yet, the IRS merely askingabout specific governance practices is a powerful force that can drive behavior.Charities can feel pressured to adopt the specified practices even where it isinadvisable in their situation because they believe the IRS or others will consider thempoorly governed if they fail to do so. This can effectively usurp the judgment of thegoverning board in determining what governance practices make sense in its specificcontext, place undue burdens on organizations, divert their attention to proxies forgovernance instead of actual governance, and adversely impact the unique, diverse,24All references to “section” are to the IRC unless otherwise indicated. Inurement also is proscribed by IRC sections 501(c)(4),501(c)(5), 501(c)(6), 501(c)(7), 501(c)(9), and 501(c)(10), inter alia.25IRC section 4958 also regulates excess benefit transactions involving IRC section 501(c)(4) organizations.26Treas. Reg. § 53.4958-6.27See IRC sections 4946 (defining disqualified persons to private foundations), 4941 (self-dealing), and 4945 (taxableexpenditures).28See discussion infra at notes 104-06 and accompanying text.29Preface to Governance and Related Topics – 501(c)(3) Organizations, supra note 22.30See Remarks of Steven T. Miller, Commissioner, TE/GE, IRS, Georgetown Tax Conference (April 24, 2008),http://www.irs.gov/pub/irs-tege/represent_manage_speech_042408.pdf.31See Panel Principles, supra note 13, at 5: “[G]iven the wide, necessary diversity of organizations, missions, and forms of activitythat make up the nonprofit community, it would be unwise, and in many cases impossible, to create a set of universal standards tobe applied uniformly to every member. Instead, the Panel commends the following set of principles to every charitable organizationas guideposts for adopting specific practices that best fit its particular size and charitable purpose”ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 11