Taxpayer Advocate Service Continues Fret Over Form 1023‐EZ

• Published date: 01 October 2016
• Date: 01 October 2016
• DOI: http://doi.org/10.1002/npc.30252

Bruce R. Hopkins’ NONPROFIT COUNSEL

7

October 2016

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

Commissioner (summarized in the May 2012 issue)).

This foundation had transferred all of its assets to three

private foundations, which were held by the court to

not be subject to liability as transferees of a transferee.

The IRS appealed this case and a related one

(Diebold Foundation, Inc. v. Commissioner). These courts

of appeals remanded the decisions, having concluded

that the initial transfer was a fraudulent conveyance.

This time around, the Tax Court found that the transfers

to the foundations were fraudulent under state law and

that the foundations are liable for taxes, interest, and

penalties as transferees of a transferee (IRC § 6901). ◆

IRS PUBLISHES HIGHLIGHTS

OF ITS STUDY OF CHARITIES

1985–2010

The IRS, on July 27, published highlights of data

gleaned from its study of tax-exempt charitable organi-

zations over the period 1985–2010. Not surprisingly, the

agency concluded that these entities “represent the vast

majority of [exempt] organizations, and account for the

bulk of the financial activity for the tax-exempt sector.”

The sector, the IRS observed, has grown “steadily and

significantly over the years.” One indicator of this phe-

nomenon is that total expenses reported by nonprofit

organizations showed a cumulative real growth of 127

percent during these 25 years, compared to a cumula-

tive growth over that period in gross domestic product,

which was 66 percent.

Other findings:

• For tax year 2010, over 269,000 exempt charities

filed Forms 990, reporting nearly $3 trillion in assets

and $1.6 billion in revenue.

• Due to an increase in the threshold for filing, the

number of Forms 990 and 990-EZ filed by charities

dropped for the first time since the IRS has been col-

lecting the data.

• Larger exempt organizations, especially hospitals and

universities, “dominated” the financial activity of

the charitable sector. (Commerciality doctrine alert:)

These organizations received the majority of their

revenue from program services.

• Smaller organizations relied on contributions and

grants as their primary source of revenue. [2.1] ◆

IRS PUBLISHES PRIVATE

FOUNDATION DATA

The IRS, on the same date, published its new data on

private foundations, mostly for tax year 2012. Here are

the highlights:

• Grants made during that year totaled $48.6 billion.

• Total revenue of foundations was $95.3 billion.

• Assets totaled $698.6 billion in value.

• A total of 93,542 returns were filed.

• The largest private foundations (at least $100 mil-

lion in assets) represented less than 1 percent of all

returns filed for the year, yet they were responsible

for 45 percent of the year’s grants, 50 percent of

total revenue, and 60 percent of total assets.

• The median payout rate for the year was 5.2 percent.

• The excise tax on failure to distribute income (IRC §

4942) was $7.1 million in 2015. [2.1] ◆

TAXPAYER ADVOCATE

SERVICE CONTINUES FRET

OVER FORM 1023-EZ

The Taxpayer Advocate Service, in its Mid-Year Report

to Congress on Fiscal Year 2017 Objectives, states that

the TAS continues to find the Form 1023-EZ “insuf-

ficient,” charging that, by means of it, the IRS is “erro-

neously conferring IRC § 501(c)(3) status on ineligible

entities.” Indeed, TAS believes that this situation is so

dire that use of this application is contributing to the

federal tax gap. (Who knew these small organizations

had so much potentially taxable income?)

This fret of the TAS is partially based on its conclu-

sions in last year’s report (summarized in the September

2015 issue). Thereafter, TAS provided the IRS with a list

of 149 organizations that received favorable determina-

tion letters, having filed the EZ, that have (according to

the TAS) deficient articles of incorporation. (Remember

the days when the IRS’s backlogged inventory of appli-

cations for recognition of exemption topped 70,000?)

The IRS apparently has not followed up on these entities,

at least not to the satisfaction of the TAS. The agency

is of the view that to do so would taint the statistical

sample used by it in its postdetermination compliance

program.

The TAS reported that, during fiscal year 2017, it will

continue to:

• Advocate that the IRS “address the needs” of these

149 organizations, requiring them to demonstrate

that they have properly amended their articles.

• Evaluate, on the basis of the results of the IRS’s

postdetermination “audits” of Form 1023-EZ filers,

the extent to which these reviews “show significant

levels of noncompliance and whether the noncom-

pliance could have been averted through simple

revisions” of the application.

• Evaluate the extent to which the IRS’s “broader

compliance framework yields information about the

behavior, needs, and preferences of exempt organi-

zations” (whatever that means). [26.1(h)(i)] ◆