GAO Issues Report on Exemptions for Tax Regs and Other Guidance

• Date: 01 November 2016
• Published date: 01 November 2016
• DOI: http://doi.org/10.1002/npc.30258

Bruce R. Hopkins’ NONPROFIT COUNSEL

5

November 2016

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

provider; (2) the governing body of the qualified user

does not include the chief executive officer of the service

provider or the chairperson (or equivalent) of the service

provider’s governing body; and (3) the chief executive

officer of the service provider is not the chief executive

officer of the qualified user’s related parties.

The question thus is whether this new approach to

the concept of private business use has a broader appli-

cation. For example, might the rules concerning manage-

ment contracts in the context of joint ventures involving

tax-exempt organizations, when evaluating the presence

of private benefit, be somewhat loosened? A good argu-

ment can be made that they should. [20.12(c)] ◆

GAO ISSUES REPORT ON

EXEMPTIONS FOR TAX REGS

AND OTHER GUIDANCE

A US Government Accountability Office report

released on September 6 contains a whopping under-

statement: “Treasury and IRS produce large numbers

of regulations and [other] guidance documents for the

public every year.” This report notes that the IRS only

considers guidance published in the Internal Revenue

Bulletin to be authoritative. One of the conclusions

reached by the GAO is that the IRS “does not always

clearly identify the extent to which certain documents

published outside the IRB can be considered authorita-

tive for use by the public.”

Despite having “detailed procedures” for identifying,

prioritizing, and issuing new guidance, the IRS “lacks

documented procedures for deciding what type of

guidance to issue.” Another GAO conclusion: “Policies

and procedures that identify factors to consider when

deciding among different guidance types could help IRS

ensure that the selected form of guidance reflects what

is known about the binding nature of various types of

guidance.”

The GAO’s review of IRS guidance issued from 2013

to 2015 found that “very few” tax regulations were (1)

determined to be “significant regulatory actions” as that

phrase is defined in an executive order (E.O. 12866), (2)

determined to have significant economic impacts on

small businesses under the Regulatory Flexibility Act,

or (3) considered major rules under the Congressional

Review Act. These findings were said to reflect Trea-

sury’s and the IRS’s position that “any impacts associ-

ated with tax regulations or other guidance result from

the underlying statute rather than the regulations or

guidance implementing it.”

Also, some tax regulations and other guidance

are exempt from the executive order’s requirements

by reason of a long-standing agreement between the

Treasury Department and the Office of Management

and Budget. The GAO stated that this agreement has

not been reevaluated since 1993 to “ensure that it still

reflects current requirements for reviewing regulations

and guidance as well as the current environment for tax

regulations and guidance (including an increased use of

the tax code to accomplish economic and social objec-

tives through the use of tax expenditures).”

This Treasury/OMB memorandum of agreement was

made public on September 26. Dated April 29, 1983,

this agreement states that the “review procedures of

the Executive order are waived with respect to all regu-

lations except legislative regulations that are ‘major’ as

defined in the Executive order.” It provides that Treasury

is responsible for alerting the OMB to “any major regula-

tion for which Executive order review has been waived”

and “any non-major regulation that reasonably could be

expected to have a significant economic impact.”

Note: This GAO report is titled “Regulatory Guidance

Processes” and subtitled “Treasury and OMB Need to

Reevaluate Long-standing Exemptions of Tax Regula-

tions and Guidance” (GAO-16-720 (September 2016)).

Commentary: The exempt organizations function in

the IRS could benefit mightily from development of

“procedures for deciding what type of guidance to

issue.” Identification of “factors to consider when decid-

ing among different guidance types” is long overdue,

because the IRS is out of whack in matching type of

guidance with the importance and priority of the item

under consideration.

For example, the IRS’s guidance as to mission-

related investing by private foundations (summarized

in the November 2015 issue) emerged in the form of a

lowly notice, when a revenue ruling would have been

more appropriate. (Admittedly, many won’t care what

the guidance form is as long as the substance of the

guidance is to their liking.) At least in this instance, the

guidance was nonetheless authoritative (although not

necessarily eligible for much, if any, judicial deference).

A more egregious set of circumstances exists with

respect to nonprofit governance. Here is one of the

nonprofit sector’s most pressing law issues, with the IRS

inserting itself into that area beginning in 2007 and issu-

ing guidance on the topic on a regular basis ever since. Yet

none of that guidance, in the form of dozens of private

letter rulings and an occasional speech, is authoritative.

(This is aside from the fact that the IRS lacks the jurisdic-

tion and authority to regulate nonprofit governance, and

is misapplying the private benefit doctrine in justifying its

interventions.) The IRS should be articulating its position

as to regulation of nonprofit governance in a document

that is published in the Internal Revenue Bulletin.

The surmise from here is that the IRS will ignore the

GAO recommendations and thus that this report will not

lead to type-of-guidance reforms, absent direction from

a court. It is good, nonetheless, to have this important

issue raised. ◆