Tuesday, April 9, 2024

Restoring Faith in the Determination Letter

Why are Senators targeting 501(c)(3) NIL collectives?


Yesterday, I blogged about the Service's denial of tax exempt status to an NIL collective.  I cited a news article in which Phil Hackney explained that the Service's grant of tax exemption to previous NIL organizations is hardly an endorsement or stamp of approval. Phil, formerly of IRS Chief Counsel's Office, noted that NILs that obtained favorable determination letters were very likely just beneficiaries of an overworked and underfunded TEGE division.  Coincidentally, in yesterday's Tax Notes (subscription required), Jeffrey Pennell and Alex Shang offer Proposals to Restore Faith in Exempt Organizations.  The proposal responds to the problem to which Phil alluded, though not that problem alone.  Here are introductory paragraphs:

This article is about the administrative process by which an organization’s exempt status is recognized and the oversight or review of those organizations after exempt status is approved. It contains a proposal that recognizes the difficulty with which the IRS performs these pre- and post-approval processes, and it acknowledges a nearly indisputable truth: that neither function is being performed effectively or efficiently.

This proposal has implications for federal, state, and local taxation. It consists of three separate but related elements: (1) that the pre- and post-approval processes be delegated to a separate agency, not the IRS; (2) that all EOs be required to report on their activity annually; and (3) that the exempt status of all currently exempt organizations be reconfirmed once. All three elements are meant to restore faith in the integrity of exempt status and to better ensure that exemptions are current and appropriate.

The proposal to move the determination process to a separate agency provides a possible solution to what Congress has always refused to do.  Provide adequate funding.  The authors propose that the agency be funded by user fees. TEGE would retain its other functions and remain subject to what the authors call "Congressional [funding] whims."  If determinations is all that would be done in the new determination's agency, the idea of user fees might be sustainable though the agency would need start-up and then a reserve fund for when times are slow.  The authors hope that reliance on user fees will avoid the delay in processing occasioned by underfunding.  

The idea of moving determinations out of the IRS is interesting for another reason.  It is based on the desire to create the "optic" that the determination process will be insulated from the politics that precipitated the infamous Tea Party scandal. They think it's the perceptions of "weaponization" that causes Congress to withhold needed funding.  I suppose its possible that a government agency can be so insulated that people think it mostly immune from politics.  The first example with nonpartisan hue I can think of is the Federal Reserve Board.  But there must be a few more.  Maybe the U.S. Patent and Trademark Office.  The authors seem to admit that although moving the determination process to a different agency might put TEGE "out of its misery," it probably won't entirely dissuade people from thinking that Presidents use the determination process for political advantage. 

Perhaps the optics could be strengthened by providing for an executive board the members of which are appointed by Ways and Means or Senate Finance, with exactly equal representation from both political parties. A pox on both their houses, I'd say. The board wouldn't make determinations, just provide bipartisan oversight. I have no idea whether the Constitutionalist would think that violates separation of powers, but splitting the members equally down the middle would probably not result in any sort of gridlock.  Surely, the vast majority of applications are -- yawn! -- devoid of politics or political opportunity.  Anyway, the article is a thoughtful conversation starter on an important topic.  

darryll k. jones


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