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Free
Speech Coalition, Inc. April 10, 2001 CC:M&SP:RU
(REG-246256-96) Re: Comments of the Free Speech Coalition, Inc., Regarding the Temporary Regulations Relating to Excise Taxes On Excess Benefit Transactions Under Section 4958 of the Internal Revenue Code [REG-246256-96] Dear
Sir: PRELIMINARY OBSERVATIONS The
nonprofit organizations which have joined FSC have a very strong
interest in the excess benefit transaction regulations promulgated
by the Internal Revenue Service implementing the section 4958 excise
taxes. As a result, FSC filed comments in response to the proposed
regulations regarding such transactions in November 1998, and now
files these comments regarding the temporary regulations which were
promulgated in January 2001. The IRS temporary regulations have
incorporated some changes from the proposed regulations in response
to concerns raised by FSC and other commenters. GENERAL ISSUES FSC
remains concerned that the IRS perceives itself as enjoying broad
discretion to impose excise taxes on excess benefit transactions
(sometimes called “intermediate sanctions”) in conjunction
with revocation of tax-exempt status. No standards are proffered
that would define the propriety of such enforcement actions: “The
IRS will publish guidance concerning the factors that it will consider
in exercising its discretion as it gains more experience administering
the section 4958 regime.” 66 Fed.Reg. 2155. FSC submits that
this approach is unwise, as the IRS already suffers from a widespread
public perception that its audits of taxexempt organizations in
recent years may have been unduly influenced by improper considerations.
It may be in the IRS’ best interest (particularly before seeking
to impose such a dramatic and severe penalty against a tax-exempt
organization) to present a bright line standard which limits the
IRS’ discretion. The IRS’ explanation of the temporary regulations states that taxpayers will receive a notice of proposed deficiency 30 days before a notice of deficiency is mailed. 66 Fed.Reg. 2144. The explanation further states that the “200-percent tax under section 4958(b) is not to be assessed (and if assessed, is to be abated) if the excess benefit is corrected within 90 days after the mailing of the notice of deficiency for that tax.” This clarification is appreciated, but assumes the IRS’ right to impose an eight-fold increase in penalty on those organizations having the temerity to challenge the administrative position of the IRS. There should be no penalty imposed on taxpayers for disagreeing with the IRS. At minimum, FSC recommends that the final regulations identify precisely what notice will be provided to disqualified persons following the IRS’ identification of a potential excess benefit transaction. The regulations should provide expressly that the 200-percent excise tax will not be imposed during any period in which the 25-percent excise tax may be, or is being, contested by a taxpayer. ADDITIONAL COMMENTS ON SPECIFIC ITEMS WITHIN THE TEMPORARY REGULATIONS Among
the remaining concerns which the temporary regulations raise for
FSC members is the apparent requirement that a nonprofit organization
hire experts to certify the fairness of certain outside and personnel
contracts, to avoid placing its tax-exempt status at risk. The burdens
which the temporary regulations place on the governing bodies (or
their committees) of nonprofits to demonstrate the reasonable nature
of their contracts with managers (and other disqualified persons)
are excessive. For example, the temporary 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 clear
guidance as to what would constitute a similarly situated organization.
There are no criteria defining 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?). As to “the availability
of similar services in the geographic area of the applicable tax-exempt
organization,” it is not clear whether this standard would
apply only to vendors, or would speak to issues such as whether
other nonprofits in the area have specialized employees (e.g., media
relations directors).
CONCLUSION Overall, the proposed standards governing both the IRS' imposition of section 4958 excise taxes and the revocation of tax-exempt status continue to grant excessive discretion to the Service, raising constitutional issues as to their vagueness and overbreadth. The provisions of section 4958 of the Internal Revenue Code do not authorize the IRS to define the terms “disqualified person” and “excess benefit transaction” so broadly. Since the statute does not authorize the imposition of these burdens, and no justification for these burdens is provided, FSC believes that these requirements should be stricken from the temporary regulations before they are finalized, and urges the Treasury to do so.
Respectfully submitted, |
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