35 often fatal delay to the organization seeking exemption. And the mere

threat of sanctions doubtless inhibits many organizations from function- ing effectively, if at all.

During the course of its deliberations, the Commission was made aware of legislation pending in the Congress which would establish procedures whereby an organization seeking exemption could also petition the U.S. Tax Court or the appropriate U.S. District Court for a declaratory judgment as to its exempt status under section 501(e)(3).

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While this would represent a major beneficial step, additional, and more varied, remedies are needed, both from the standpoint of the organiza- tion and its managers, and also from the standpoint of the government.

The Commission's recommendation respecting sanctions could be implemented as follows:

(1) Provisions comparable to section 4945(d)(5) (treating as a taxable expenditure any amount paid or incurred by a private foundation for other than a charitable purpose) would be applied to all organizations exempt under section 501(c)(3), thus providing a means for limiting noncharitable expenditures in a greater range of institutions. For example, amounts expended for direct election- eering (and therefore, not an appropriate charitable activity) if carried on by a "public" charity would fall within the scope of this provision. As under Chapter 42, monetary penalties would be assessed against the organization and those members of its govern- ing body who participated in the improper act. The Service might be given discretion to waive such penalties if the organization demonstrates reasonable cause for its action or omission.

(2) The Service could establish an internal appeals procedure to operate with respect to any question within the jurisdiction of the Office of Assistant Commissioner, Employee Plans and Exempt Organizations. Before the imposition of any penalty excise taxes (such as those now applied under Chapter 42 and those which may be imposed if that chapter is expanded to cover other categories of exempt organizations), the new appeals procedure would be made available.

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The new procedure could conceivably also be utilized in defining new areas of charitable activity. For example, public interest law firms were, according to some estimates, slow to receive recognition as charitable activities under section 501(c)(3).

Under the appeals procedure, the appeals body (and the staff that

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supports it) would be available to facilitate examination of such emerging charitable activities. In this manner, fears, sometimes alleged,

8 s

that fair and objective review is not given by the Service may be allayed.

The appeals body would consist of persons with experience in various areas of charitable activity.

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Such a group would be expected to exercise its own independent judgment, within, of course, the framework of the Service's general administrative structure. This procedure would be available after the standard administrative appeals (including the Appellate Division Con- ference) have been exhausted. Special time constraints could be imposed upon the Service to assure prompt resolution of issues reviewed under the new procedure; further, organizations desiring to utilize declaratory judgment procedures could be given the right to waive administrative review by the Service.

8 s

In prosecuting an appeal, the person against whom a deficiency is asserted would be furnished an opportunity to present arguments rebutting those which give rise to the proposed deficiency at the National Office level. If processing of such appeals involves a substantial number of cases, the matters could (along with other aspects of administration in the exempt organization field) be resolved at levels below the National Office.

(3) The Justice Department, acting at the instance of the Service and the Treasury, would be empowered to seek to enjoin non- charitable acts that do not involve monetary expenditures and otherwise to seek equitable remedies short of revocation of exemp- tion in appropriate cases. The U.S. District Courts would be granted residual equity jurisdiction to take appropriate corrective measures on the motion of the Justice Department in instances where state authorities having jurisdiction fail to take action within an appropriate period (for example, 120 days, or longer, if such state authorities request an extension) to correct an improper course of action by a charitable organization. The potential for such intervention should foster a uniformly high level of adherence to charitable standards.

Commission Recommendation

12. That nonprofit organizations, other than foundations, be allowed

the same freedoms to attempt to influence legislation as are business

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corporations and trade associations, that toward this end Congress remove the current limitation on such activity by charitable groups eligible to receive tax-deductible gifts.

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Commentary

This recommendation would remove limitations on the right of nonprofit organizations to engage in legislative activity. Because of the strictures of present law, the public is deprived of the expertise of these organizations except in narrow and ambiguously defined circumstances.

The restrictions under present law whereby charitable organizations are prohibited from engaging in any "substantial" legislative activities should be eliminated, thus placing such organizations on a parity with trade associations, labor unions, business interests, and other organiza- tions. The Commission was made aware of proposals by the American Bar Association Section of Taxation and others

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which would permit only limited authority to engage in legislative activities. In lieu of such an approach, however, the recommendation would bring a general elimination of restrictions, with the following exceptions:

(1) An organization would not be accorded exemption under section 501(c)(3) if it is formed or availed of for the principal purpose of conducting federal, state, or local legislative activities.

Instead, legislative activities would have to relate to, and be subordinate to, exempt programs of the organization. It is recognized that factual problems may arise respecting the determi- nation of the circumstances in which legislative activities constitute the "principal purpose" of the organization. Although problems of interpretation will persist, substantially greater latitude for the conduct of legislative activities will, notwithstanding, be provided.

Under the Commission's recommendation, an activity respecting legislation will be presumed to be consistent with the exemption so long as the organization establishes that it conducts additional, meaningful, nonlegislative, charitable activities, and that these activities are the principal activities of the organization.

(2) No charitable organization could engage in activities in

support of or opposition to the campaign of any individual for

public office.

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III