Revocation of exempt status is still the Service's only available enforcement remedy for public charities. Both revocation and chapter 42 excise taxes deplete the resources available for charitable purposes.
A much more comprehensive proposal for equity enforcement powers was recommended to Congress by the Treasury Department in 1969.
3 3 5The Treasury proposal, although addressed only to private foundations, could apply as well to all 501(c)(3) organizations; it was also designed to accommodate the interest of the states in supervising charities.
As presented to the Ways and Means Committee in 1969,
3 3 6Treasury's proposal recommended substantive standards with respect to self-dealing, adequacy of distributions for charitable purposes, and excess business holdings,
337with two kinds of sanctions: (1) tax penalties, such as those enacted in chapter 42, and (2) civil suits in equity before U.S. District Courts, to be instituted by the Justice Department upon referral from the Service, in the name of the United States as plaintiff.
The Treasury Department proposed that U.S. District Courts be invested with equity powers to remedy any detriment to a charity resulting from violation of the substantive standards (including power to rescind transactions, surcharge trustees, and order accountings), to ensure that the organization's assets were preserved for charitable purposes, and to prevent recurring violations (including the power to substitute trustees, divest assets, enjoin activities, and appoint receivers). Once an equity action was instituted, the district court would also have exclusive jurisdiction to review any tax penalties imposed administratively by the Service. Equity powers would automatically be used to preserve charitable assets upon loss of exempt status.
The Treasury proposal provided that if state authorities instituted action before state courts to remedy violations, the U.S. District Court before which the federal action was pending would defer until the state court action was concluded. The district court could then take such further action, consistent with the state action, as was necessary.
The Treasury Department did not press its equity enforcement proposal in 1969 because, we understand, the Service and the Justice Department were unable to agree on who should represent the government in such litigation. Broad federal equity powers such as proposed by Treasury are essential to supplement the present sanctions of revocation or penalty taxes. Such powers would provide flexibility to fashion sanctions that meet the exigencies of the particular case without penalizing intended charitable beneficiaries by reducing the funds available for charitable programs. The provision to stay federal proceedings pending the conclusion of parallel state proceedings would defer appropriately to state authorities to the extent that they develop effective supervisory programs.
We assume that federal equitable remedies would only be used to enforce substantive standards provided by federal statute, rather than any broad common law of trusts and fiduciary responsibilities. The substantive standards now contained in the Internal Revenue Code consist basically of section 501(c)(3), which applies to all charitable organizations, and the special provisions of chapter 42 that apply to private foundations.
Prior to the Tax Reform Act of 1969, section 503 of the Code prohibited some
501(c)(3) organizations from engaging in certain self-dealing transactions with their
creators. However, even then section 503 was inapplicable to religious organizations,
schools and colleges, hospitals and medical research organizations, and publicly
supported charities (section 170(b)(1)(A)(vi) organizations). The Tax Reform Act of
1969 repealed section 503, as it applied to any 501(c)(3) organizations, apparently
on the ground that it was redundant in light of chapter 4 2 .
3 3 8The result was to
subject private foundations to the more stringent provisions of chapter 42 but to
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leave all other 501(c)(3) organizations subject to no self-dealing restrictions whatever. This seems to have been inadvertent.
The present statutory scheme may be satisfactory, insofar as substantive standards are concerned, but some consideration should be given to the question whether public charities should be subject to federal prohibitions on self-dealing, either by restoring applicability of section 503 or by enacting some other provision such as that of section 4941 which restricts self-dealing by private foundations.
While there are some indications that closer supervision may be needed in this area,339 we have found virtually no data (apart from an occasional newspaper article) on the extent of self-dealing abuses among public charities; opinions on the subject varied widely among attorneys with whom we discussed the matter.
Considerably more reliable information on this subject should be produced by the Service's Taxpayer Compliance Measurement Program (TCMP), which currently in- cludes 3,500 public charities randomly selected by stratified sample (see pages 2610-11 above); one of the items to be evaluated in each of those special TCMP audits is whether such public charities would be in violation of the self-dealing restrictions of section 4941 if they were assumed to be subject to those restrictions, and if so, the total dollar amount involved.340
Regardless of the position taken on this issue, we believe that federal equitable sanctions should apply to all 501(c)(3) organizations. Even with respect to violations of the standards set forth in section 501(c)(3) itself, occasions arise frequently in which equitable relief rather than revocation would seem to be more appropriate.
Judicial Review of Adverse Status Determinations
To protect the tax system from premature judicial interference, the Code permits a suit in the Tax Court for review of a deficiency assessment or a suit in a U.S.
District Court or the Court of Claims for a refund.3 4 1 Section 7421 (a) of the Code provides that apart from these procedures, "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." Judicial review of Service decisions is thus available only after a tax has been assessed.
This works no unusual hardship for most taxpayers, but it creates a major problem for charitable organizations. Denial or revocation of exempt status, or failure to act on an exemption application, are not judicially reviewable even though they may destroy a charitable organization.342 The organization may contest the denial of exempt status by earning a profit from operations and then contesting the income tax when it is assessed,343 or it may find a donor willing to make a contribution, claim a deduction, and contest the disallowance of the deduction, but neither alternative is realistic. By the time such remedies could be used, the organization would have succumbed financially. Moreover, both remedies are circuitous and artificial.3 4 4
Addressing the adequacy of present remedies, the Supreme Court recently noted:
In holding that §7421 (a) blocks the present suit, we are not unaware that Congress has imposed an especially harsh regime on §501(c)(3) organizations threatened with loss of tax-exempt status and with withdrawal of advance assurance of deductibility of contributions . . . The degree of bureaucratic control that, practically speaking, has been placed in the Service over those in petitioner's position is susceptible to abuse, regardless of how conscientiously the Service may attempt to carry out its responsibilities. Specific treatment of not-for-profit organizations to allow them to seek preenforcement review may well merit consideration. But this matter is for Congress, which is the appropriate body to weigh the relevant, policy-laden considerations, such as the harshness of the present law, the consequences of an unjustified revoca- tion of §501(c)(3) status, the number of organizations in any year threatened
2661 with such revocation, the comparability of those organizations to others who rely on the Service's ruling letter program, and the litigation burden on the Service and the effect on the assessment and collection of federal taxes if the law were to be changed.345
Prompt judicial review of adverse 501(c)(3) rulings, failure to rule, or revocations would benefit the Service's administration of charitable organizations. The lack of judicial precedents deprives the Service of standards and guidance in deciding exemption issues that present innovative charitable concepts. As former Commis- sioner Thrower observed: "This is an extremely unfortunate situation for several reasons. First, it offends my sense of justice for undue delay to be imposed on one who needs a prompt decision. Second, in practical effect it gives a greater finality to IRS decisions than we would want or Congress intended. Third, it inhibits the growth of a body of case law interpretative of the exempt organization provisions
that could guide the IRS in its further deliberations." [Emphasis added]3 4 6
Congress recently provided a right of Tax Court review of adverse Service determi- nations or failure to make a determination within nine months, with respect to the exemption qualification of the retirement plans under the Employee Retirement In- come Security Act of 1974.3 4 7 Commissioner Alexander has recommended that such judicial review be provided for 501 (c)(3) determinations as well.3 4 8
We recommend a statutory right to judicial review for any organization denied 501(c)(3) status, or not granted such status within a reasonable time after applica- tion.
vin
RECOMMENDED ADMINISTRATIVE ACTIONS WITHIN THE SERVICE
Dissemination of Data on Philanthropy
Lack of data is a major problem for philanthropy. We believe the Service should undertake to collect, analyze, and publish statistics about philanthropy; if it does not wish to do so, or is unable to obtain the necessary funds, the new agency recommended above (pages 2653-58) might assume responsibility. The Service requires no additional statutory authority to undertake the expanded information program here proposed.
Code section 6108 directs the Service to "prepare and publish annually statistics reasonably available with respect to the operation of the income tax laws, including classifications of taxpayers and of income, the amounts allowed as deductions, exemptions and credits, and any other facts deemed pertinent and valuable."
The Assistant Commissioner (Planning and Research) now publishes substantial data, but not about exempt organizations.
The Need for Data on Philanthropy
Surprisingly little specific information is publicly available about charitable funds
— who provides them, who spends them, and what they are spent for. The lack of information is striking, compared with the data published regularly by the Commerce and Labor Departments. It has been noted that lack of information may have affected consideration of the Tax Reform Act of 1969.3 4 9 Commenting on lack of data, the Senate Subcommittee on Foundations recently stated that "neither
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Congress nor the public can assess the amount of public benefit derived from the tax exempt status accorded foundations and other organizations."
350Lack of information deprives the Service, the Congress, and philanthropy of data on which appropriate regulatory measures may be fashioned. It impedes an informed allocation of charitable resources. It may contribute to misunderstanding by a public that already has some misgivings.
The Internal Revenue Service receives more data on philanthropy than any other institution, principally through the information returns filed annually by 501(c)(3) organizations and the annual reports filed since 1969 by private foundations.
However, only limited portions of this data are currently entered into the computerized Exempt Organizations Master File (EOMF). Data have been computerized, and the EOMF has been programmed, primarily to serve internal needs rather than to provide useful data to the public. As a result, much of the data received by the Service is inaccessible.
There is no Service publication in the exempt organization field similar to the Statistics of Income series, which provides statistical analyses of data from income tax returns. (That series includes some data on charitable deductions reported by donors, but it is not sufficiently detailed or current to be useful.)
351Few facts concerning exempt organizations appear in the Commissioner's annual reports.
The only available summary of data pertaining to contributions is Giving USA, published annually by the American Association of Fund-Raising Counsel. That publication, as the editors caution, provides estimates based on data provided voluntarily by a variety of private sources and several government agencies. In some areas such as education, substantial information is available; in other areas, very little. The information is fragmentary; it can produce only broad and highly imperfect extrapolations.
352Private efforts to compile data are also frustrated by the widespread preference of charitable organizations for privacy — what Waldemar Nielsen calls the "enclave mentality."
353As noted earlier (page 2646),between 20 percent and 25 percent of soliciting charities refuse to respond to questionnaires of the Council of Better Business Bureaus or respond less than forthrightly.
We believe that the public responsibilities of charitable organizations, while properly carried out through private decision making, include openness to public disclosure. This is a concomitant to the special advantages of philanthropy and provides an important assurance against abuse of those advantages.
Categories of Data Needed