The Internal Revenue Service is presently reorganizing in the exempt organization area as a result of amendments to the Internal Revenue Code contained in the Employee Retirement Income Security Act of 1974, effective December 2, 1974.
The basic amendment is the establishment of a new Office of Employee Plans and Exempt Organizations, headed by an Assistant Commissioner, with responsibility for exempt organization matters and for employee pension and profit-sharing plans. At the National Office level, both the Exempt Organizations Branch (Technical) and the Exempt Organization Examination Branch (Audit) described in Chapter II above have just recently been transferred to the new Assistant Commissioner's office;
other changes are now being made at the district and regional levels.
This reorganization gives the Service a special opportunity to improve the procedures for dealing with charitable organizations, to reduce delays in processing, to upgrade the caliber of the personnel in this area, and generally to remedy existing problems. We review here the organizational changes in prospect and, to the extent possible at this early stage, the potential effect of such changes on how the Service deals with exempt organizations.
The Statutory Changes
The 1974 amendments, although relating primarily to pension and profit-sharing plans, include exempt organizations in a statutory reorganization of the Service's administration of tax exempt matters. Under new Code section 7802(b):
There is established within the Internal Revenue Service an office to be known as the "Office of Employee Plans and Exempt Organizations" to be under the supervision and direction of an Assistant Commissioner of Internal Revenue. As head of the Office, the Assistant Commissioner shall be responsible for carrying out such functions as the Secretary [of the Treasury]
or his delegate [the Commissioner] may prescribe with respect to organiza- tions exempt from tax under section 501 (a) and with respect to [pension and profit-sharing plans] . . . 2 1°
2621 In addition to its statutory establishment, the Office of Employee Plans and Exempt Organizations, unlike any other part of the Service, has its own appropriations authorization, established permanently at a level equal to the revenues from the private foundation investment income tax (Code section 4940) if the rate of such tax was 2 percent plus an amount equal to that 2 percent figure or
$30 million, whichever is larger.211 The Service currently budgets about $20 million for exempt organizations and $40 million for employee plans. At recent levels of section 4940 collections, the new formula will authorize approximately the same amount of money, although presumably the Service is to have at least some increased responsibilities. In any case, the authorization limit has practical significance only if the executive branch seeks actual appropriation of the full amount so authorized. At the present time, there are indications that projected funding for the new office is being routinely included in the executive branch's total budget request for the Service, without regard to the separate authorization, and that the funding so projected is below the authorized level.
The authorization formula is unlikely to produce sufficient funds for the new office. More serious, the formula is, we believe, conceptually deficient. The section 4940 tax on private foundations was intended to defray the cost of enforcing chapter 42 and auditing private foundations; there was thus, a nexus between the tax and the activities it was supposed to finance.212 As a partial measuring rod of the cost of dealing with all exempt organizations and employee plans, however, the tax makes no sense. Moreover, revenues raised by the section 4940 tax may be affected by general economic factors bearing no relationship to the appropriate level of funding for the new office.2 1 3 It seems to us preferable, in lieu of the section 4940 tax, to impose a modest fee oh employee plans and on a larger portion of the 501(c)(3) universe to provide adequate funding for the new office, equitably borne by the majority of organizations subject to it.
The legislative history, to which the Service can be expected to pay close attention in implementing these provisions, amplifies the purpose and the intended authority of the new Assistant Commissioner's office. Both the Ways and Means Committee and the Senate Finance Committee stated:
Concern has been expressed in the case of the administration of employee benefit plans (and also tax exempt organizations) as to whether the Internal Revenue Service with its primary concern with the collection of revenues is giving sufficient consideration to the purposes for which these organizations are exempt. Many believe that the present organization of the Service causes it to subordinate concern for the protection of the interests of the plan participants (or the educational, charitable, etc., purposes for which the exemptions are provided) . . .
. . . it must be recognized that the natural tendency is for the Service to emphasize those areas that produce revenue rather than those areas primarily concerned with maintaining the integrity and carrying out the purposes of exemption provisions. Similar concern has been expressed in the past over the Service's administration of the provisions of the tax law relating to exempt organizations.
The committee believes that in the employee benefit plan and tax exempt organization area it should be easier to emphasize the basic objectives involved if the activities relating to these plans and exempt organizations were more closely coordinated, if the activities in these areas relating to auditing, rulings, etc. whether in the field or in the national office are brought together and if the top direction for these activities also has specialized in them. For the reasons outlined, the bill establishes a separate office in the Internal Revenue Service, headed by an Assistant Commissioner for Employee Plans and Exempt Organizations to deal primarily with plans that are (or claim to be)
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qualified under section 401 of the code and organizations that are (or claim to be) exempt from income taxes under section 501 (a) of the code. This includes pension, profit-sharing and stock bonus trusts and plans, religious, educational, and charitable organizations and foundations as well as the various other exempt organizations described in section 501 (c) of the code.
Similar units are to be established in the various regional and [Ways and Means Committee says "andlor"] district offices.. .
In connection with organizations exempt from tax (under sec. 501 (a) of the code) it is intended that this office have the responsibilities as to an organiza- tion 's exempt qualification, the taxes on unrelated business income of an organization exempt from tax, and the rules relating to the private foundation provisions of the Internal Revenue Code.
To carry out the provisions of this bill, it is intended that the principal activities referred to above will be transferred from the various Assistant Commissioners' offices to the new Office of the Assistant Commissioner (Employee Plans and Exempt Organizations). With these transfers it is intended that the Assistant Commissioner (Employee Plans and Exempt Organizations), under the direction and supervision of the Secretary, or his delegate, will have the authority to direct national and field office policy in connection with the basic activities of the Service relating to employee plans and exempt organizations.214
The statutory amendment thus creates for the first time a high official within the Service whose principal function is not tax collection. The new Assistant Commis- sioner is clearly charged with carrying out the congressionally enacted public policy with regard to the management of what are basically trust funds, of both employee benefit and charitable varieties. The bifurcation of exempt organization administra- tion between the Assistant Commissioners for Compliance and for Technical matters is to be eliminated; all these activities are to be under the new Assistant Commis- sioner who will have authority to direct both "national and field office policy in connection with the basic activities of the Service relating to . . . exempt organiza- tions." Although he will be a career officer subject to the direction and supervision of the Commissioner, this new official is to hold the only assistant commissionership expressly created by statute and head the only Service office having its own statutory budget authorization.
Effect on the Organizational Structure of Exempt Organization Administration
The basic organizational changes resulting from the new statutory provision already seem fairly clear, although it is still too early to judge their effects. By amendments to the Internal Revenue Manual issued February 19, 1975,2 1 5 the Commissioner implemented structural changes planned by a Service task force that had been at work for several months after enactment of the new law first appeared imminent. We summarize below the changes that are already definite, others that may also be under consideration, and their likely implications.
National Level
The office headed by the new Assistant Commissioner includes three divisions:
an Exempt Organizations Division, an Employee Plans Division, and an Actuarial Division (the latter two concerned with pension and profit-sharing matters). The