FSC’s Comments on "Intermediate Sanctions”

October 5, 1998
HAND DELIVER
Office of Management and Budget
Office of Information and Regulatory Affairs
Attn: Desk Officer for the Department of Treasury
Old Executive Office Building
Washington, D.C. 20503
Re: Comments of the Free Speech Coalition, Inc., Regarding the Proposed Regulations Relating to the Excise Taxes On Excess Benefit Transactions Under Section 4958 of the Internal Revenue Code [REG-246256-96]

Dear Sir:
The Free Speech Coalition, Inc. would like to take this opportunity to comment on the proposed regulations relating to the excise taxes on excess benefit transactions under Section 4958 of the Internal Revenue Code.

INTRODUCTION
The Free Speech Coalition, Inc. ("FSC") is an alliance of liberal, conservative and non-ideological issue-activists who are particularly concerned with the preservation of the rights of nonprofit advocacy organizations. This diverse group, which came together in 1993, ranges ideologically from the American Conservative Union and English First to the Center to Stop Handgun Violence and the Feminist Majority. We have felt compelled to band together to defend the interests of Americans who want to participate fully in the formation of public policy in this country without undue governmental interference and restriction.
The nonprofit organizations which are members of FSC obviously have a strong interest in the "collections of information" which would be required by the proposed regulations, implementing the Section 4958 excise taxes, promulgated by the Internal Revenue Service. Among the concerns which these regulations raise for FSC members are (i) the apparent necessity to purchase independent compensation surveys in order to certify the reasonableness of certain outside and personnel contracts, or else place their tax-exempt status at risk, and (ii) the tremendous burden which these regulations will place on the governing bodies of nonprofits and (iii) the increased personal risk upon the members of those governing bodies.
For the reasons set out herein, FSC is strongly opposed to the ideas and language of the proposed regulations, and respectfully requests that these regulations be withdrawn. However, if the Office of Management and Budget ("OMB") believes that revisions can be made which would eliminate the objections advanced in these Comments, we would ask for an opportunity for FSC and others to review such revisions and to provide further comments.

THE REQUEST FOR COMMENTS UNDER THE PAPERWORK REDUCTION ACT
The OMB has requested comments on the issue of "collections of information" under the proposed IRS regulations. Specifically, comments were requested concerning:
• Whether the proposed collections of information are necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;
• The accuracy of the estimated burden associated with the proposed collections of information;
• How the quality, utility, and clarity of the information to be collected may be enhanced;
• How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and
• Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of service to provide information.

EXAMINATION OF THE PROPOSED REGULATIONS
The burdens placed on the governing bodies (or their committees) of nonprofits to demonstrate the reasonable nature of their contracts with managers (and other disqualified persons) by these regulations are excessive. For example, the proposed regulations discuss the acquisition of data regarding "compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions." Yet there is no guidance as to what would be a similarly-situated organization, whether or not data solely from other nonprofits would be adequate, no criteria for what is functionally comparable (is it sufficient to ask what the organization pays its executive director, or is it necessary to obtain a list of the duties performed by that organization's executive director?), and no allowance for differences in the qualifications of persons filling the positions (one may have a bachelor's degree, while another may have a doctorate; one may be nationally-recognized, while another is recently out of school). As to "the availability of similar services in the geographic area of the applicable tax-exempt organization," it is not clear whether this standard applies only to vendors, or speaks to issues such as whether other nonprofits in the area have specialized employees (e.g., media relations directors).
For groups not coming under the $1 million level, independent compensation surveys compiled by independent firms are the only example provided of what presumably constitutes adequate data when broken down by size and other criteria. The proposed regulations may serve to make the purchase of such surveys essential. Purchasing these surveys annually from book publishers is very expensive, but would be virtually required by these regulations imposing an additional administrative cost on nonprofits which will only serve to reduce funds available for programmatic activities.
Further, the proposed regulations impose the requirement on nonprofits that their governing bodies (or committees) conduct comparability studies for any fundraising contract that does not result in revenue-sharing transactions (fundraising contracts which result in revenue-sharing transactions would evidently become per se excess benefit transactions). Such governing bodies apparently would be required to obtain "compensation levels paid by similarly situated organizations, both taxable and tax-exempt, for functionally comparable positions" &emdash; in other words, copies of the fundraising contracts of other, similarly situated for-profits and nonprofits &emdash; and determine "the availability of similar services in the geographic area of the applicable tax-exempt organization" (e.g., survey all fundraisers in the geographic area), or "independent compensation surveys compiled by independent firms" (more workfare for consultant firms).
Alternatively, those governing bodies would need to obtain "actual written offers from similar institutions competing for the services of the disqualified person" &emdash; in the case of prospective fundraising vendors, this would require obtaining copies of the fundraising contracts.

FSC'S APPLICATION OF THE OMB CRITERIA TO THE PROPOSED REGULATIONS
Are the proposed collections of information necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility?
No. Any conceivable benefit to the Internal Revenue Service, such as increased ease of auditing, would be de minimis.
How accurate is the estimated burden associated with the proposed collections of information?
The IRS Notice states that "[t]he estimated annual burden per recordkeeper varies from 3 hours to 308 hours, depending on individual circumstances, with an estimated weighted average of 6 hours, 3 minutes." Assuming, for example, that the minimum requirement set forth in the proposed regulations is imposed on a nonprofit which has only one salaried disqualified person &emdash; the executive director &emdash; and has an annual income under $1 million, the burden on that organization would still be far more substantial than estimated by the IRS. For that nonprofit to determine the appropriate salary of its executive director, under the proposed regulations, the nonprofit's board would be required to determine what:
• is a comparable organization;
• is the same or a similar community:
• are similar services;
• find five comparable organizations in similar communities whose executive directors perform similar services who are willing to provide data on the salary and benefits provided to their executive director;
• analyze the data;
• develop an analysis of the data;
• reach agreement on what the data mean;
• reach agreement on what the executive director should be paid;
• document on "written or electronic records of the governing body or committee" minutes reflecting all of the following items:
• the terms of the transaction that was approved;
• the date the transaction was approved;
• the members of the governing body or committee who were present during debate on the transaction or arrangement that was approved and those who voted on it;
• the comparability data obtained and relied upon by the committee;
• how the data was obtained;
• any actions taken with respect to consideration of the transaction by anyone who is otherwise a member of the governing body or committee but who had a conflict of interest with respect to the transaction or arrangement; and
• the basis for any determination that reasonable compensation for a specific arrangement is higher or lower than the range of comparable data obtained.
Inexplicably, failure to do all of these things before the next board meeting voids all good faith efforts to comply with the regulations. Compliance with all these requirements does not even constitute a safe harbor, but only a rebutable presumption.
In addition, the timely preparation of reasonable, accurate and complete records &emdash; alone &emdash; for acceptance at the next meeting may take more than 3 hours.
Next, assuming that the "average nonprofit" has multiple "disqualified persons" whose compensation must be considered by the board on a regular &emdash; if not annual &emdash; basis, the estimate that the "average nonprofit" will spend only 6 hours to comply with the requirements which would be imposed by the proposed regulations is totally inadequate.
How may the burden of complying with the proposed collections of information be minimized?
The IRS' own, unreasonably low estimate of recordkeeping burden imposed by the proposed regulations is more than 910,000 hours annually. There is no reason to believe that the benefit to the IRS by imposing these burdens on nonprofits would even approach one-tenth of this amount. We suggest that an organization whose annual receipts are less than $1 million should be totally exempt from the "collection of information" requirements.

CONCLUSION
The provisions of Section 4958 of the Internal Revenue Code do not authorize the IRS impose the burdensome "collection of information" requirements on nonprofits. Since the statute does not authorize the imposition of these burdens, and no justification for these burdens is provided, FSC believes and urges that these requirements should be stricken from the proposed regulations before they are implemented.
Respectfully submitted,
Mark B. Weinberg
Legal Co-Counsel
William J. Olson
Legal Co-Counsel
cc: Internal Revenue Service
Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, D.C. 20224