A tax on "excess benefits": a proposed penalty to end "abuses" by nonprofit organizations.

If you need any more evidence that associations are experiencing the backlash of a "crisis of credibility," then here it is: On March 16 Assistant Treasury Secretary for Tax Policy Leslie B. Samuels unveiled the Clinton administration's plan to help the Internal Revenue Service (IRS) combat "abuses" within the exempt-organization community. The plan would impose a tax on "excess benefits" received by insiders (including officers, directors, trustees, and those otherwise in a position to exercise substantial influence over the organization). The plan would also increase the penalties for failing to meet Form 990 disclosure requirements.

If the Treasury's recommendation is adopted by Congress, March 16, 1994, will be the effective date.

Testifying at a House Ways and Means Oversight Subcommittee hearing, both Samuels and Subcommittee Chairman J.J. Pickle (D-TX), along with ranking Republican Amo Houghton (R-NY), expressed the general view that the IRS currently does not have the tools necessary to properly enforce the tax laws governing exempt organizations. Under current law, if an entity acts improperly, the IRS must essentially choose between two extremes--revoking its exempt status or doing nothing. The administration's proposal, developed in consultation with the subcommittee and members of the exempt community (e.g., Independent Sector, Washington, D.C.), is designed to provide the IRS intermediate sanctions (i.e., sanctions that are less extreme and more likely to be used) against organizations that violate the law.

Excessive benefits

The new excise tax "is targeted at the types of abuses that have generated concern and would provide a substantial deterrent to these abuses," Samuels testified. Specifically, the excise tax would apply to any excess benefit provided to an insider by a 501(c)(3) or 501(c)(4) organization. An excess benefit is defined as the excess of the value of any benefit provided by the organization over the consideration received by the organization in return for the benefit.

Under the proposed scheme, the insider would be subject to an initial tax of 25 percent on the amount of the excessive benefit, and, after a specified period of time, if the insider does not repay the amount, he or she would be subject to a second tax of 200 percent of the benefit. The tax would apply to two types of transactions: 1) the payment of unreasonable compensation by an organization, or a non-fair-market-value transfer in which an insider pays inadequate consideration for property transferred, leased, licensed, or loaned by the organization, or 2) excessive consideration paid by the organization for property transferred, leased, licensed, or loaned by the insider.

In addition to the two-tiered tax structure just described, if a manager (officer, director, etc.) of an organization knowingly approves a transaction that results in an excess benefit, the manager would be subject to a 10 percent tax on the excess benefit, up to a maximum of $10,000. The manager could not be reimbursed by the organization for the amount of the tax.

Form 990 reforms

To improve Form 990 filing compliance, the administration's proposal would increase the penalty for failure to file a timely, complete, and accurate form from the current $10 a day to $100 a day for organizations with gross receipts of more than $1 million for the year. For organizations with gross receipts of $1 million or less, the penalty would be increased to $20 per day, with the maximum for any one return limited to the lesser of $10,000 or 5 percent of the gross receipts for the year.

To improve public access to relevant information, the administration's proposal requires exempt organizations to provide copies of their Forms 990 and related materials to any person who requests these documents and pays a reasonable fee to cover copying and mailing costs. (Currently, organizations are only required to make their Forms 990 available for public inspection--at the organization.) Finally, the proposal would require additional information to be provided on the Form 990, including

* payment of excise taxes on activities inconsistent with the standards for exemption (e.g., excess benefits, excessive lobbying);

* significant changes in the management of the organization;

* changes in its governing board; and

* a change in the certified public accounting firm retained by the organization to examine its books and records.

After the subcommittee and the general public comment on the proposal, the subcommittee will issue a report containing its findings and recommendations for reform (expected to closely track the administration's proposal). At that time, the Treasury Department will convert its proposal into legislative language to submit to Congress. Samuels said that process "shouldn't take more than a couple of weeks" once it begins, and Pickle has expressed a desire to put the legislation on a fast track. Chances for passage of legislation this year are considered excellent.

Jeffrey S. Tenenbaum is ASAE's government affairs issues analyst.