October 5, 1998
Office of Management and Budget
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]
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.
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opposed to the ideas and language of the proposed regulations, and respectfully requests that these regulations be withdrawn.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.
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.
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.
How accurate is the estimated burden
associated with the proposed collections of information?
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.
William J. Olson
cc: Internal Revenue Service