Position Papers

Position Paper on Endorsements

Submitted by: Ingrid Mattson, Rabbi David Saperstein, Sayyid M. Sayeed, Rabbi Julie Schonfeld, Siva Subramanian, Steven Woolf

This position paper seeks to affirm strongly the ban on political endorsements by churches (and other non-profits), and by clergy in their professional capacities.  Anything that would allow political endorsements emanating from the pulpit and/or in regular communications of a church, poses grave risks to America’s religious communities.  The current statutory ban on intervention in any political campaign on behalf of any candidate for public office is supported by a broad array of national denominations and has served to protect houses of worship in America from government regulation and from divisive partisan politics dividing the church communities. 

Relates to Issue 1

Posted by David Saperstein, Panel of Religious Sector Representatives on 8/2/2013 2:44:03 PM ET

Prohibition on Political Campaign for Faith Based Nonprofits to be Retained

On behalf of the Islamic Society of North America, the largest and the oldest organization of mosques, communities and faith based professional organizations in the US, and in alliance with The Jewish Federations of North America, we want to reaffirm that the current prohibition on political campaign intervention by charitable nonprofit (501(c)(3) organizations be retained as currently structured and as interpreted in the Internal Revenue Service. We believe that the current prohibition, which has been in existence for over 50 years, is in the best interests of both charitable organizations and their donors. It serves to create an important barrier between charitable contributions by donors and unwarranted political campaign activity by organizations who claim such deductible contributions.

Relates to Issue 1

Posted by Sayyid Syeed, Panel of Religious Sector Representatives on 7/16/2013 4:54:45 PM ET

Current prohibition of political campaign intervention

It is the unequivocal opinion of The Jewish Federations of North America that the current prohibition on political campaign intervention by charitable nonprofits (501(c)(3) organizations be retained as currently structured n the Internal Revenue Code and as interpreted in the Internal Revenue Service. We believe that the current prohibition, which has been existence for over 50 years, is in the best interest of both charitable organizations and their donor, as it serves to create an important barrier between charitable contributions by donors and unwarranted political campaign activity by organizations who claim such deductible contributions.

Relates to Issue 1

Posted by Steven Woolf Sr., Panel of Religious Sector Representatives on 7/11/2013 12:56:48 PM ET

Alliance Defending Freedom Position Paper

Should the current prohibition of political campaign intervention by 501(c)(3) organizations be relaxed or modified in some way to permit limited speech in support of or opposition to political candidates?

Answer:          The Johnson Amendment should be repealed to alleviate the constitutional violations it imposes on churches and non-profits.

Should the prohibition be replaced with a limitation similar to the existing lobbying restrictions?

Answer:          The Johnson Amendment should be repealed in its entirety.  It should not be converted to a limitation similar to the lobbying restriction.

If so, should churches be permitted to make an election to measure covered activities in dollars spent like other organizations may do pursuant to Section 501(h)?

            Answer:          No

Should the prohibition be retained but the terms “participate in” or “intervene in” be defined in terms of expenditures and electioneering communications per federal election law?

            Answer:          No

Relates to Issue 1

Posted by Erik Stanley, Panel of Legal Experts on 4/17/2013 11:38:24 AM ET

Preserving the Nonprofit-Public Social Compact

Question Presented: Should the current prohibition of political campaign intervention by 501(c)(3) organizations be relaxed or modified in some way to permit limited speech in support of or opposition to political candidates?

Response: On behalf of the National Council of Nonprofit, I write to express the strongly held view that no changes are warranted in the existing prohibition on political campaign intervention by charitable nonprofits (501(c)(3) organizations). The existing ban on political activity is in the best interest of individual nonprofits, the nonprofit community as a whole, and the people and communities we serve.

Discussion

The nonprofit sector is vital for democracy to be successful; the rights of the people to gather through nonprofits to speak freely about public policies must be preserved. From before the time our nation was formed through today, individuals have assembled in groups to advocate for the advancement of the issues and concerns of their times. As safe havens for people to gather to amplify their collective voices, nonprofits have a duty to stand up and speak out for the public good and promote a more just and equitable society. Nonprofits often provide a voice for those individuals and groups who are unable to speak for themselves. Likewise, nonprofits share the responsibility to promote greater engagement of the citizenry, open elections, and open government.

The National Council of Nonprofits works to create a culture in support of nonprofit advocacy and to maintain the advocacy rights of nonprofit organizations by promoting, supporting, and protecting nonprofit advocacy rights. Since the Council of Nonprofits began publishing a Public Policy Agenda, its Board of Directors has annually endorsed the position that the “integrity of charitable nonprofits” must be ensured “by supporting the tax-law ban on electioneering and partisan political activities.”

We have studied the question extensively and recognize that an organization does not have to wade into the political morass and take sides on candidates – positive or negative – in order to affect policies that have an impact on mission. Rather, the cult of the personality that focuses on the candidates and their political affiliations rather than their ideas, creates the very cynicism that the charitable nonprofit community is able to avoid. In our hyper-politicized society, the nonprofit community is, and should remain, the safe, neutral place where citizens can give, volunteer, and experience the services and missions free from ulterior motives.

An affirmative answer to the question presented to the Commission runs the very real risk that the public will come to see the charitable community as one more sharply divided group in our society, and identify individual organizations at Republican charities or Democratic charities. This development would undoubtedly diminish the ability of charitable nonprofits to serve as problem solvers in their communities, to innovate and experiment, and to provide the safe place that politics maintain. There already are too many instances in which politician try to punish charitable nonprofits as being too Republican- or Democratic-oriented; to open the floodgates to labeling and demagoguery will hurt the neutral communities and individuals that independent charitable nonprofits serve.

As we see it, the ban on political activities of nonprofits is vital to the promotion and expansion of nonprofit advocacy rights. It also is fundamental to the social compact between governments and charitable nonprofits. Charities, both faith-based and community-based, must earn their tax exemption every day. They do this by dedicating themselves to the public good, and by giving up profits, privacy (in the case of non-faith-based organizations), and politics in pursuit of their missions. Governments at the local, state, and federal levels are currently seeking to challenge or alter this social compact by extracting new revenues from tax-exempt organizations through various taxes, fees, and “voluntary” payments in lieu of taxes. The fact that charitable nonprofits do not engage in partisan electioneering is a key defense of the sector and a critical factor in public support of tax-exempt organizations in response to governmental challenges. The desire of some in the charitable nonprofit community to engage in partisan politicking will unmistakably come at the very significant cost of new and excessive diversion of revenues from nonprofit missions to government coffers.

For the foregoing reasons, we emphatically answer “no” to the question of whether the ban on partisan campaign intervention should be lifted or altered. Because our position is that no changes in the ban on political activities are warranted, we will not comment on alternatives that have been offered in the policy question presented by the Commission.

Relates to Issue 1

Posted by David L. Thompson, Panel of Nonprofit Sector Representatives on 3/29/2013 2:53:44 PM ET

BoardSource Position Paper - Prohibition of Policital Campaign Intervention

BoardSource fully supports the Commission on Accountability and Policy for Religious Organizations’ (“Commission”) effort to identify strategies to help nonprofit boards increase accountability as the governing body of their organizations. For 25 years, BoardSource has been active in educating nonprofit boards and helping to strengthen board leadership and governance throughout the nonprofit sector.  In this paper, we address Commission Issue #17 related to the prohibition of political campaign intervention by section 501(c)(3) organizations.

This paper presents the views of BoardSource regarding the prohibition on political campaign intervention and analyzes the impact of the prohibition on the nonprofit sector.  We do not address the constitutionality of the provision, but will focus solely on the impact of the prohibition on the sector and the impact that eliminating or modifying the prohibition would have on the nonprofit sector.

BoardSource recommends that the Commission keep the prohibition in place because the prohibition is vital to maintaining the public trust and to ensuring that section 501(c)(3) organizations are providing a public benefit, thus entitling them to receive tax benefits.  This reciprocity must be maintained, so the Commission should keep the prohibition against political campaign intervention for all section 501(c)(3) organizations.  In addition, because there is a fundamental distinction between lobbying and electioneering, the prohibition should not be altered to match the current restriction placed on lobbying.  Lastly, in order to ease the burden of enforcement and the uncertainty as to what constitutes a violation, there should be further definition of what establishes “participation” or “intervention,” but they should not be defined in terms of expenditures and electioneering communications.

Relates to Issue 1

Posted by Anne Wallestad, Panel of Nonprofit Sector Representatives on 3/29/2013 11:41:42 AM ET

CLERGY CAMPAIGN SPEECH: WHEN STATE MEETS CHURCH

CLERGY CAMPAIGN SPEECH: WHEN STATE MEETS CHURCH

by Charles O. Morgan, Jr., attorney, Panel of Legal Experts

March 13, 2013

            This position paper proposes that Congress allow churches the right to limited lobbying, as if a 501(h) type election were made, without requiring churches to file Form 5768.  

            The paper further proposes that clergy should be allowed to speak freely on political issues during regular church services, similar to the proposal in the Houses of Worship Free Speech Restoration Act of 2005, that failed to pass the House.

            The paper also considers the effect of allowing churches to make a 501(h)-type election to allow support for or opposition to political candidates.  To require churches to file Form 5768 in order to speak out on political matters would not be feasible or practical.    Difficulties would lie in the IRS identifying churches, forcing churches to register, quantifying offending speech, and enforcing unauthorized politicking, and further, it is submitted that this pursuit of church violators would not be economically feasible.

Relates to Issue 1

Posted by Charles O. Morgan Jr., Panel of Legal Experts on 3/13/2013 3:27:32 PM ET

Unmuzzling the Constitution in Determining Whether Religious Institutions Should File a 990

By claiming the religious exemption from 6033(a)(1) filing requirements is a privilege not a right, the authors of the 2011 Senator Grassley staff memo(hereinafter, “Committee Memo”) take a leap over a widening chasm between the Constitutional protections for religion and the Congressional taxing power of religious institutions.  The Committee memo states: “…Requiring churches to file an annual information return does not offend either the Free Exercise Clause or the Establishment Clause.”[1]  First, this position paper asserts that imposing a 990 filing requirement is a severe and unconstitutional imposition on the autonomy of churches.  Second, this paper argues the conclusion of the Committee Memo is incorrect and does not carefully follow Supreme Court precedent on the issue of tax and religious institutions.  Finally, this paper concludes the government interest to be served by imposing a filing requirement on religious institutions- namely; preventing fraudulent abuse of the religious exemption- can be sufficiently met through better use of the tools already available to the Internal Revenue Service.

Relates to Issue 4

Posted by Dennis Kasper, Panel of Legal Experts on 4/21/2012 12:32:48 AM ET

Church Requirement to File Form 990 Would Unconstitutionally Intrude Upon Religion.

Newton’s third law of motion states that forces always occur in opposite pairs, i.e. for every action there is an equal and opposite reaction.  The action of imposing on churches annual disclosures through the Form 990 will inherently result in the opposite reaction, a loss of religious liberties and surrendering a measure of control over our religion.  The motives of those championing additional regulation of churches may be pure, but liberty must yield for the government to gain ground.  Moreover, submission of churches to any annual Form 990 filing requirement unavoidably involves First Amendment violations of the Free Exercise Clause and the Establishment Clause, as it would unduly burden churches and promote excessive entanglement with church affairs.  The imposition of Form 990 reporting requirements upon churches, in any manner, should be soundly rejected.

Relates to Issue 4

Posted by Thomas Winters, Panel of Legal Experts on 4/11/2012 3:20:56 PM ET

Comments on Issue 15 - rebuttable presumption

The position paper posted by Panel of Legal Experts Member, Todd Chasteen, accurately defends the rebuttable presumption protection. In particular, the paper appropriately debunks the SEC Staff Report opinion that merely establishing “good faith” by the charity is sufficient to shift the burden to the IRS. To the contrary, Section 4958 provides for an 18 step process which requires expertise in tax, law, or both. Such an analysis exceeds the internal resources of all but the biggest charities. As a result, Section 4958 creates substantial burdens of time and expense as charities are forced to retain specialized outside advice. If all charities, regardless of size, were required to meet the proposed “minimum standard of due diligence,” this would result in a disproportionate burden on small charities and it is difficult to see how the IRS could adequately respond to the enormous amount of reporting data it would generate.

That said, I do not agree with the alternative recommendation #1. The paper responds favorably (as a secondary position) to the SEC Staff Report proposal of applying an entity-level tax on a charity with an excess benefit transaction as a means of incentivizing compliance. For the reasons referenced by Panel Members Dessingue, Gary and Miller and summarized in Issue 14 above, penalizing the corporate entity for the unauthorized acts of self-interested managers and insiders is not actually a deterrent.

Conversely, Panel Member Chasteen’s recommendation #2 regarding altering the Form 990 to make executive compensation more easily accessible and encouraging greater accessibility of the Form 990 to donors generally is an extremely cost-effective means of allowing the market to influence and even regulate charity conduct. Donors demonstrate their support for the corporate conduct of a charity through their donations. Providing them greater access to the information of all charities will advance this self-regulating process.

Recommendation #3, to limit comparability data to include only the compensation data of non-profits, is a recommendation that I cannot support. The proposal would effectively create a two-tier system which fails to take into account the complexity of charities with world-wide operations and annual budgets in the hundreds of millions of dollars. Requiring that such charities compare salary data only to other charities will likely have the unintended consequence of disadvantaging large charities in the search for top talent.

Such an approach will also feed the misperception that charities run themselves less professionally and with less skill than for-profit ventures. In fact the reverse is true. Faced with no ability to make more products, or bill time for more services, a charity is totally dependent upon the year-to-year charitable donations. This requires charities to do more with less; to work harder, think better and run more efficiently than their for-profit peers. Doing so requires charities have the ability to competitively pay their employees – particularly their leadership. As a result, comparability should not be tied to a not-for-profit status, but rather to whether the comparable salaries are reflective of the same type of skillset.

The example given in the SEC Staff Report whereby a church used compensation figures of Oprah Winfrey, Britney Spears, Madonna and David Letterman as functionally comparable positions to that of a senior pastor to justify a $2 million salary is a red-herring. The church which proposed such a comparison should be embarrassed at equating a church leadership position with four of the most highly paid entertainment personalities in the country. Such conduct should result in a quick review for the tax service and an even quicker conclusion that the minimum standard of due diligence has been woefully undershot. This example, while embarrassing to all charities, is better-used as an example of how secular authorities sometimes take the most absurd example imaginable from the wayward few and use it to craft policy that will negatively affect the overwhelming majority of ethical and legally compliant charities.

Relates to Issue 15

Posted by Edward W. Anderson, Panel of Religious Sector Representatives on 4/2/2012 2:42:06 PM ET

Issue 12 comments

This proposal misunderstands the purpose of governing documents and the existing protections against excess benefit transactions. Governing documents exist to provide broad guidelines for corporate governance. The guidelines must be flexible enough to span all the different purposes for which corporations exist. Conversely the guidelines do not exist for the purpose of addressing granular tax issues like excess benefit transactions, but rather the larger principle that all corporations are required to conduct their affairs lawfully and within the limits that the law allows in their individual areas. Excess benefit transactions are already expressly addressed in the tax code, as are the consequences of engaging in such a transaction. Oversight of charity purposes should continue to be handled by the Attorney General in each state. Enforcement of the tax code and assessing penalties should continue to be handled by the IRS.

Relates to Issue 12

Posted by Edward W. Anderson, Panel of Religious Sector Representatives on 4/2/2012 2:41:19 PM ET

Comments on Issue 10

As discussed in response to Issue 9, the country’s interests are served by encouraging charitable contributions through retaining the deductibility of charitable donations. Practically speaking, the government lacks the resources to advance its own policies globally and it lacks the expertise to deliver aid as efficiently as the NGOs. It is therefore dependent upon NGO’s to advance those policies for it and to deliver aid with efficiencies that the government lacks, despite governmental economies of scale. The historic deductibility of charitable contributions is thoroughly ingrained in the experience of the taxpayer. To propose taking away the tax deductibility of charitable contributions is likely to result in a substantial reduction of the annual revenues of all NGOs, which is contrary to the interests of NGO, but also contrary to the interests of the nation’s foreign policy agenda and of course contrary to the interests of the recipients.

Relates to Issue 10

Posted by Edward W. Anderson, Panel of Religious Sector Representatives on 4/2/2012 2:40:53 PM ET

Comments on Issue 9

I believe IRS should be limited in disclosing information of foreign activities. While it is not often publically acknowledged by the government, the interests of the country are clearly served by the work of NGO’s in limited-access countries. Whether the organization is providing mere humanitarian aid, or humanitarian aid accompanied by a religious message, both are clear examples to the politically oppressed peoples of the world that the United States is a country of enormous generosity and compassion for the poor. Allowing the IRS to disclose an organization’s 990, including foreign activities, such that individuals are put in harm’s way, will eventually result in the abandonment of NGO projects in countries and amongst people-groups that need it most.

Additionally, there are practical difficulties with a policy that requires disclosure of foreign activities on a Form 990. Due to the generosity of the American people, NGOs have grown enormously in the recent decades. A number of charities, like our own, operate hundreds or thousands of projects annually in countries around the world. For example, it seems unlikely that the IRS really wants our ministry disclose all 5,600 projects, the details of each bank account, the names of each recipient and the amounts they have received. What would the IRS do with such information and how would it advance its mission? The lack of a clear answer to these questions suggests that the IRS would not benefit from such a policy and that it would negatively impact foreign policy, as well as needlessly endangering lives.

Relates to Issue 9

Posted by Edward W. Anderson, Panel of Religious Sector Representatives on 4/2/2012 2:40:25 PM ET

Comment on issue 7 - love offerings

Generally, yes. I believe the tax treatment of a love offering should be dependent upon the intent of the donor and the relationship of the individual recipient to the organization who processes the gift. As an employee or agent of the organization, it should not be possible to receive a “love offering” without it being treated as compensation to the recipient. It would be nearly impossible to separate the recipient’s services between work-related activities and personal services that would justify a tax-exempt “love offering.” If the donor intends to make a personal gift to the individual within the limits allowed by the tax code, that transaction need not and should not involve the exempt organization. In situations where a gift is made to an exempt organization but is restricted for use by a particular individual, if the organization issues a donation receipt, then the gift should be taxable to the recipient and treated as income.

Relates to Issue 7

Posted by Edward W. Anderson, Panel of Religious Sector Representatives on 4/2/2012 2:39:40 PM ET

It Would Be Beneficial to Grant Churches the Same Favorable UBI Tax Treatment Enjoyed by Schools

Unrelated Business Income Tax

Under Internal Revenue Code (IRC) section 512, revenue from regularly carried on business activity which does not further the exempt purposes of an organization is subject to the Unrelated Business Income Tax (UBIT), a tax on the revenue at the normal rates for corporate income. Under IRC section 514, rental income and gains from sales of property, which would not normally subject to UBIT as passive income, are taxable if the gain is from “debt -financed property,” which is any property which has been acquired through financing.

Qualifying Organizations Exception

There is an exception to the UBIT on income from debt-financed property. According to IRC section 514(c)(9), acquisition indebtedness does not include debt financing for the purchase or improvement of real property by educational organizations described under IRC 170(b)(1)(A)(ii). It should be noted that the exception does not apply if:

1. The purchase price for the acquisition or improvement was not a fixed amount;

2. The amount of the indebtedness, or any amount payable with respect to the indebtedness, or the time for making any payment of that amount depends on revenues, income, or profits derived from the property;
3. The property is not, at any time after the acquisition, leased by the qualified organization to the seller or to a related person; or

4. The seller or a person related to the seller is providing the financing in connection with the acquisition of the property.

If none of these circumstances exist, then under section 514(c)(9), the properties would not be considered to have any acquisition indebtedness and therefore gain would not be considered income from debt financed property. In addition, IRC section 512(b)(5) states that "there shall be excluded [from UBIT] all gains or losses from the sale, exchange, or other disposition of property." Therefore, since the property is not considered debt-financed, the gain would be treated as a regular sale of property under 512(b)(5) and the income from the sale of the property would not be subject to UBIT.

Extension of Exemption to Churches and Religious Organizations

Clearly the extension of this benefit to Churches and similar religious organizations would be beneficial. Most of the time churches acquire real property with the intention of it being used to advance its religious purposes; however, sometimes it is not possible for the church to immediately convert the property to such use. In fact, sometimes the property is purchased subject to existing leases. Allowing churches to have the same flexibility that is currently granted to educational institutions would allow greater flexibility in the acquisition, use and disposition of such property.

Relates to Issue 8

Posted by Lisa A. Runquist, Panel of Legal Experts on 4/2/2012 2:31:41 PM ET

Churches Should Not be Required to File Form 990

Churches should not be required to file Form 990 for many reasons.

1. Under the Internal Revenue Code, churches are automatically exempt. They do not have to have their exempt status recognized by the IRS in order to be considered exempt. If churches do not have to file to establish their exempt status in the first place, what would be the penalty for not filing Form 990's? Revocation of the exempt status that is automatic?

2. The suggestion that some churches should be treated differently than others (e.g. exemptions for hierarchical churches or those who have consented to be governed in accordance with the ECFA rules) is totally unconstitutional. It would be an unconstitutional discrimination on the basis of religion to allow some churches to be exempt, but require reporting of others, because of their differing religious beliefs as to the proper form of church governance.

3. Form 990 has a definite bias as to what the IRS regards as proper governance. Although the IRS concedes that it has no real authority with regard to governance matters, it has attempted, through the Form 990, which is required to be made available for public inspection, to force changes in governance by public disclosure/pressure. It is unconstitutional for the government to become involved, in any way, with matters of church governance, much less be able to dictate as being “correct,” or “preferable” some methods of church governance.

4. I have had significant experience in working with churches that have decided, after many years of operation, to establish their exempt status by filing a Form 1023 with the IRS. In virtually all of these cases, the hardest information to obtain was financial statements that made sense and actually balanced. This is because these churches operated, in many cases, out of a checkbook. Often, the treasurer was a volunteer with no experience in developing budgets or setting up financial statements. They knew how much was in the bank account, and paid bills as they came due, to the extent that funds were available. However, the process of furnishing financial information in the form necessary to complete the Form 1023 often meant that someone had to go through the records and categorize each expense. Although an individual church has the option of paying for someone to restate their financial information, to require every church to do this in order to correctly complete Form 990, especially when there is no evidence of wrongdoing, is a significant burden.

5. ECFA has its own concepts of what makes up good governance. The concept that churches should be required to be a member of an accreditation organization such as ECFA is likely, in some instances, to require that the method of church governance be revised. However, if the church has a firmly held religious belief that is contradicted by those concepts, requiring the church to be a member of such an accreditation organization is likely, in and of itself, to be a violation of constitutional rights allowing the church to determine, for itself, its method of governance.

Relates to Issue 4

Posted by Lisa A. Runquist, Panel of Legal Experts on 4/2/2012 2:30:09 PM ET

Parsonage Allowance Should be Limited to Residence(s) Necessary to Carry Out Religious Duties

The vast majority of clergy serve one congregation. Some may serve a few related congregations within a specific geographical area. Neither of these situations are likely to call for more than one parsonage.

However, there are some situations where the responsibilities of the minister require that he or she spend significant amounts of time in several different locations, in different states. Although in such a situation, it may be more cost efficient to have a separate residence in each such area, rather than having the minister stay in a hotel. Allowing more than one parsonage would be reasonable in such a situation.

Relates to Issue 2

Posted by Lisa A. Runquist, Panel of Legal Experts on 4/2/2012 2:28:55 PM ET

Ministers Entitled to Parsonage Are Not Limited to Those Who Perform Exclusively Religious Functions

The recent decision by the United States Supreme court in Hosanna-Tabor Evangelical Lutheran Church and School v. EEOC makes it clear that:

1. It is appropriate to distinguish between teachers who are commissioned ministers ("called" teachers) and those who are lay teachers. ("it cannot be dispositive that others not formally recognized as ministers by the church perform the same functions--particularly when, as here, they did so only because commissioned ministers were unavailable." p.18)

2. The government has no role in determining, for a church, who their ministers are to be.

3. The ministerial exception is not limited to the head of a religious congregation.

4. The relative amount of time the individual spends on exclusively religious functions does not control whether the person is a minister. ("the Sixth Circuit placed too much emphasis on Perich's performance of secular duties. It is true that her religious duties consumed only 45 minutes of each workday, and that the rest of her day was devoted to teaching secular subjects. The EEOC regards that as conclusive, contending that any ministerial exception 'should be limited to those employees who perform exclusively religious functions.’... We cannot accept that view. Indeed, we are unsure whether any such employees exist. The heads of congregations themselves often have a mix of duties...") (See also Alito, J., concurring: "the constitutional protection of religious teachers is not somehow diminished when they take on secular functions in addition to their religious ones.")

Based on the position of the court in this case, I would be extremely concerned if the Commission were to take a position that would, in any way, suggest that it is the government's perogative to decide that some ministers are more entitled to a parsonage allowance than others.

It should also be noted that the court cites, as support for the finding that Perich was not only recognized by the church as a minister, but held herself out as a minister, the fact that "she claimed a special housing allowance on her taxes that was available only to employees earning their compensation 'in the exercise of the ministry.'"

Relates to Issue 2

Posted by Lisa A. Runquist, Panel of Legal Experts on 4/2/2012 2:27:53 PM ET

Governing Documents Should Not Prohibit Excess Benefit Transactions as a Condition of Exempt Status

When an organization that falls under the prohibition against excess benefit transactions is found to have engaged in one, the typical consequence is a tax penalty for the beneficiary and for the organization manager responsible. This would not be so if recommendations were followed to make excess benefit transactions part of the governing documents of nonprofits. In this case, any excess benefit transaction an organization was found to have engaged in could be grounds for loss of tax-exempt status and the destruction of the organization.

The rule against private inurement, which overlaps widely with the rule against excess benefit transactions, provides only for the loss of an organization’s exempt status as a penalty for violation. Current regulations allow the IRS to take into account the scope of excess benefit transactions in relation to the scope of an organization’s activities, along with surrounding circumstances, in determining whether to use private inurement doctrine to revoke exempt status. Functioning charities with an errant manager are thus distinguished from nonprofits that operate largely for private benefit when the decision is made whether to exact the ultimate penalty on a charitable organization.

If adherence to the rule against excess benefit transactions were made a condition of exempt status, there would be no excess benefit so small that it could not trigger loss of status. The entire charitable organization, along with all its employees and those it served, would suffer for the mistake.

Private inurement doctrine already provides a mechanism to revoke the exempt status of charities that are not performing as such. The current framework, which allows regulators to assess the severity and pervasiveness of excess benefit transactions in determining an appropriate penalty, should be maintained.

Relates to Issue 12

Posted by Kyle H. Hybl, Panel of Nonprofit Sector Representatives on 4/2/2012 2:21:20 PM ET

Rebuttable presumption protection should not be eliminated

The rebuttable presumption rule provides a route to a safe harbor for organizations that make compensation decisions using certain procedures. The rebuttable presumption is that such compensation decisions are reasonable, and the burden to show otherwise is very high. Eliminating the safe harbor protection would make it easier in many cases for regulators to show compensation rates to be improper, and changing the rebuttable presumption procedures into “minimum standards of due-diligence” would maintain the incentive for organizations to follow them. However, such changes are unnecessary and would do away with the benefits of the current regime regarding the efficient use of resources by charitable organizations.

The procedures required to establish the rebuttable presumption of reasonableness are extensive and require a significant investment of time and resources by an organization. In short, the organization must create a body of conflict-of-interest-free individuals to study data about comparable compensation decisions, make a complex determination based on this data, and keep detailed records about the data used and the method of arriving at a decision. The reasonableness of a decision properly arrived at under these procedures can still be rebutted with sufficient evidence. It is clear that such procedures would be unduly burdensome and unnecessary for the many small charitable organizations whose compensation of employees is moderate and not in danger of being shown to be unreasonable.

The rebuttable presumption creates an incentive for organizations large enough to provide significant employee compensation to go through the procedures it requires. Such organizations gain relative confidence that their compensation decisions will not be held to be unreasonable, and in doing so they engage in ideal practices for making those decisions. Small organizations avoid the burden of the extensive safe harbor procedures so long as, given their rates of compensation, the rebuttable presumption is not worth it. If the rebuttable presumption was done away with, or if the procedure involved was redefined as a minimum standard, these incentives for the efficient use of resources by organizations of all sizes would no longer operate.

Relates to Issue 15, 16

Posted by Kyle H. Hybl, Panel of Nonprofit Sector Representatives on 4/2/2012 2:20:39 PM ET