On July 25, 2012, the Oversight Subcommittee of the House Committee on Ways and Means, led by Congressman Charles W. Boustany Jr., MD (R-LA), heard testimony from the IRS and experts in the tax exempt community on the growing complexity of non-profit organizational structures, tax issues concerning unrelated business income and the redesigned Form 990. The hearing was the second in a series examining compliance and transparency issues facing non-profit organizations.
Discussing the growing complexity of the organizational structures of public charities, Thomas Hyatt, a partner at SNR Denton US LLP, testified to the necessity of having complex organizational structures to allow non-profits to operate effectively in the current regulatory and economic environment. Among other things, Hyatt noted how such structures facilitate better governance, limit liability, and allow organizations to operate in highly regulated fields while maintaining compliance with tax laws and regulations that limit the activities of certain forms of nonprofits. Hyatt also noted that transparency and compliance concerns warrant ongoing review, but the current regulatory scheme and third party oversight seems to provide adequate checks and balances on the sector.
Donald B. Tobin, Associate Dean and Professor of Law at Ohio State University, spoke to the restrictions imposed on different forms of nonprofits with regard to engaging in political activities, such as lobbying and campaign advocacy, as well as the complex organizational structures and affiliated entities employed to navigate these restrictions. Tobin discussed the different rights and limitations facing public charities under Section 501(c)(3), which face heighted restrictions on engaging in political activities, social welfare organizations under Section 501(c)(4), which have greater flexibility, but less beneficial tax treatment, and political organizations under Section 527, which are formed for the purposes of influencing elections. He also discussed the importance of protecting the purpose, and resulting favorable tax treatment, of public charities by retaining political activities restrictions, while continuing to provide other outlets for constitutionally protected speech.
Also speaking to the structural complexity of tax-exempt organizations, John D. Colombo, Professor of Law at the University of Illinois, discussed tax issues related to the economic activities of nonprofits that generate income subject to the Unrelated Business Income Tax (“UBIT”). Commercial activity of nonprofits is subject to UBIT if it is not “substantially related” to the organization’s exempt purpose. Colombo discussed the growing trend of nonprofits to engage in commercial activities and the lack of legal clarity governing economic activities of nonprofits, making it more costly for organizations to comply with the UBIT rules and maintain exempt status. Colombo also suggested potential reforms for the IRS to consider, such as adopting a consistent approach for defining “charitable activities”, clarifying rules that govern situations where commercial funds are used to further charitable purposes and limiting the private benefit doctrine so as to exclude transactions that enhance an organization’s ability to carry out its charitable purpose.
Discussing the redesigned Form 990, Eve Borenstein, a partner of Borenstein and McVeigh Law Office LLC, summarized the differences between the new and old Form 990, the success of the redesign and areas that need further improvement. The need to redesign the Form 990 stemmed from increased complexities in the form beginning in the 1990s. The resulting form resembles more of an “annual information return” instead of a traditional tax return. It requires disclosure of both financial and non-financial information in twelve areas related to operations and administration. Organizations are required to report on essentially all aspects of their enterprise. Borenstein stated there has been a steep learning curve for filling out the redesigned Form 990, particularly for professional preparers due to a lack of understanding of the unique purpose of form, which is to allow the IRS to better regulate compliance in the tax-exempt organizations community. Borenstein also stated that there are five areas where the form could be improved: additional IRS education related to filling out the form, simplification of Schedule L (Transactions with Interested Persons), allowing more small organizations to file the simplified Form 990-EZ instead of Form 990, eliminating or streamlining Schedule F (Statement of Activities Outside the US), eliminating the Statement of Functional Expenses and simplifying the Schedule R (Related Organizations and Unrelated Partnerships) reporting of related organizations.
Hon. Steven T. Miller, Deputy Commissioner for Services and Enforcement at the IRS, gave an overview of the current laws and regulations related to IRS section 501(c)(3), including the process of qualifying for and maintaining status as a tax exempt organization and categories of exempt organizations. Miller also reviewed the IRS’s approach and responsibility in ensuring compliance with regulations. This approach, Miller testified, strives to honor Congressional intent, maintain public confidence in the charitable sector and allow for input from stakeholders.