Monday, July 13, 2015
Last week the Senate Finance Committee released reports on tax reform from its various bipartisan working groups. The Business Tax Working Group Report, A-68 to A-75, had three “options” relevant to exempt organizations, none of which break new ground. One would require all tax-exempt organizations to file returns in the 990 series electronically. Another would permit any 501(c) organization to obtain a declaratory judgment regarding determinations by the IRS of its tax exempt status. A third would replace the two-tiered tax on the net investment income of private foundations with a single tax, at a rate of 1 percent.
On the merits, electronic filing generally is a good idea, as it should lead to more accurate, accessible, and complete filing of information returns. Hopefully, any legislation will be coordinated with the IRS to make sure the agency has the wherewithal and the funding to accommodate efiling.
Extension of declaratory judgment procedures is an old idea (dating at least to the 1990s), though the need for it is not clear. Proposed as part of “good government bills” in the 2000s, it has previously passed the Senate but never been enacted. Presumably, its recent reappearance on both sides of Congress is related to the Tea Party scandal and the delay 501(c)(4) groups have had in getting determinations from the IRS. The thinking must be that if noncharitable exempts are able to seek a declaratory judgment on an exempt status determination, the IRS would have an incentive to issue a determination within 270 days to avoid going to court. Further, groups would be able to appeal adverse determinations. On balance, however, it is difficult to know whether this would be useful. One negative effect could be that the IRS might yield on close (or even not so close) cases to avoid the costs of defending a court challenge, further diluting the noncharitable exempt category. On the other hand, by throwing some noncharitable exempt status questions to the courts, over time additional law could develop on the scope of tax-exempt status.
The option to replace the two rates of excise tax on tax-exempt private foundations with a single rate is supported by just about everyone (including the House, the Administration, and private foundations). The only issue seems to be the rate – whether it should be say 1% as prosed by the House and the working group, or a revenue neutral rate, as proposed by the Administration. There are policy reasons to support a rate reduction, namely that under the current two-tiered structure, foundations can face a tax increase if payout goes up. But that said, fiddling with the tax rate and structure is to tinker with a tax that has never served its purpose, which was to fund IRS exempt organization oversight. If the tax is to be retained at all, the purpose should be reconsidered. Is the tax on private foundation investment income intended as a penalty for not paying out? Is it now just punitive – reflecting decades old distrust of private foundations? Or is it meant to be a tax on income accumulations? What is notable in this regard is the absence in the working group of any notion of extending the tax to private operating foundations or endowments of educational institutions, as proposed last year as part of the Tax Reform Act of 2014 on the House side.
Relatedly, the three options from the Finance Committee working group stand in stark contrast to the myriad of proposals in the Tax Reform Act of 2014. Absent are reforms to intermediate sanctions, supporting organizations, rules on executive compensation, payouts on donor-advised funds, changes to the unrelated business income tax rules, or increases to penalties for noncompliance – all of which featured prominently in the House offering. It could be that the Senate staff was just not interested in the House approach. More likely, however, was that for purposes of a bipartisan staff report, the only consensus items would be the non-controversial, fairly easy ones. Whether there is interest on the Senate side in taking on some of the broader reforms contemplated by the House remains to be seen.