Opinion: Ultra Vires
| Publication year | 2017 |
| Pages | 49 |
| Citation | Vol. 86 No. 10 Pg. 49 |
November 2017
The IRS's Illegal Regulation of Nonprofit Governance
Bruce Hopkins
NOTE: Opinions and positions expressed herein are those of the author(s) and not necessarily those of the Kansas Bar Association, the Journal, or its Board of Editors. The material within this publication is presented as information for attorneys to use and consider, in conjunction with other research they deem necessary, in the exercise of their independent judgment. The Board of Editors does not independently research the content of submitted articles approved for publication.
The Internal Revenue Service is unfairly—and unlawfully—regulating the governance affairs of the nation's public charities and other categories of taxexempt organizations. It is engaging in this activity by means of its private letter ruling policies, as well as its structuring of the annual information return that most of the larger exempt organizations must file.
The IRS, however, lacks the jurisdiction, and the basic authority, to do what it is doing in this context. This is certainly not the first time a federal agency has been caught wandering outside the realm of its legal authority. Indeed, this is not the first time in recent years that the IRS has been tagged for regulating beyond the bounds of its jurisdiction.[1] In this case, however, there is no tax regulation involved, nor is there anything of lesser authority, such as an IRS ruling, or even announcement or notice.
Concept of Nonprofit Governance
Governance of nonprofit organizations encompasses many topics, including duties and responsibilities of directors and the personal liability of directors and officers. At its core, however, governance focuses on who is doing the governing and how the governors ended up in their positions.
Traditionally, governance has been a matter of state law. Nearly every state (but not Kansas) has a nonprofit corporation statute, for example. These and comparable laws, such as those pertaining to management of trusts, dictate matters such as the minimum number of directors, how the directors are elected or appointed, and their terms. They do not address topics such as directors being representative of a community, board diversity, or board members' competence.
This state of affairs has radically changed in recent years. The IRS has plunged into the realm of nonprofit governance, trying to dictate the composition of nonprofit boards and impose requirements as to the adoption of policies.
How This Began
Often, agency overreach is triggered by an event, such as a well-publicized scandal. It can be the result of a personal predilection of an agency head. It can be the consequence of an agency with too little work to do, looking for tasks to justify its existence. None of these factors, however, apply in this case.
It is not clear why the IRS decided to enter the realm of nonprofit governance or why it decided to move when it did. There was no scandal. The Department of the Treasury was not under a court order to begin regulating nonprofit governance. The U.S. Congress did not ask the IRS to act. No known major force dragged the federal government into this field of regulation.
Whatever the reason, the public aspect of this can be pinpointed; it occurred on April 26, 2007. On that day, the then-Commissioner of the Tax-Exempt/Government Entities Division of the IRS announced to a stunned audience at a nonprofit law conference that the IRS was contemplating entry into the field of nonprofit governance. The Commissioner conceded at the outset of his remarks that, for the IRS to propound and enforce good governance principles, the agency would have to go "beyond its traditional spheres of activity."
The Commissioner revealed that he was pondering the question of "whether it would benefit the public and the taxexempt sector [for the IRS] to require organizations to adopt and follow recognized principles of nonprofit governance." In fact, there are no "recognized principles of good governance" for nonprofit organizations. There are ample sets of principles to choose from; they are, however, often inconsistent.
But in subsequent speeches the Commissioner made it clear that the IRS was undertaking that task. Later that year, for example, he stated that, "[w]hile a few continue to argue that governance is outside our jurisdiction, most now support an active IRS that is engaged in this area." No evidence was provided then or since in support of that observation.
He expressed his view that the IRS "contributes to a compliant, healthy charitable sector by expecting the tax-exempt community to adhere to commonly accepted standards of good governance." He continued: "We are comfortable that we are well within our authority to act in these areas." And: "To more clearly put our weight behind good governance may represent a small step beyond our traditional sphere of influence, but we believe the subject is well within our core responsibilities."
With those inconsistent statements, he launched the IRS's effort to regulate nonprofit governance, violating much law in the...
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