Sanctions

Penalties could be imposed (unless reasonable cause is shown) in the

case of an organization that fails to provide the information fully and

promptly in response to a proper request from the public for the

information. Such penalties could be patterned after those imposed

under section 6652 of the present law. Equitable remedies (or, alterna-

tively, penalty taxes patterned after the Chapter 42 excise tax structure)

could be utilized to assure that reports comply with the requirement

and set forth the required information in full.

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Commission Recommendation

2. That larger grant-making organizations be required to hold annual, public meetings to discuss their programs, priorities, and contributions.

Commentary

The Commission's recommendation would apply only to grant-making organizations (except for churches and church affiliates) whose annual grants equal or exceed $100,000 (under standards described heretofore).

Governmental grant-making organizations such as the National Science Foundation and the National Endowments for the Arts and Humanities could (for reasons described in connection with the filing of reports) also be included within this rule.

Operating charities would be excluded from the requirement, how- ever, where their principal function is the direct conduct of nonprofit activities.

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°

Grant-making organizations subject to the annual meeting rule include private foundations and publicly supported charities (such as federated fund-raising organizations) which disburse funds to operating charities.

A business corporation with annual contributions that equal or exceed $100,000 would be subject to this rule, but only with respect to its contribution program. If the corporation so desired, discussion of its corporate giving program could be had in conjunction with the annual meeting of stockholders, but this would require that non-stock- holders be admitted, at least to this portion of the meeting. Although the Commission's recommendation relates solely to corporations, its application to any business entity with a contribution program at the

$100,000 level or more would not be inconsistent with the Commission recommendation. Questions may be raised, however, as to whether a meeting requirement should be applicable to business entities on the same basis as to tax-exempt charitable organizations.

It is recognized that a grant-making organization may experience

difficulties in determining its constituency for purposes of the notifica-

tion procedures. This could particularly be the case where the corporate

charter is very broad or where programs change from time to time or

are geographically scattered. The grant-making organization could there-

fore itself determine its own constituency on the basis of "self-examina-

tion" of its own constituency.

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Notice of the meeting could also be provided in newspapers or other publications with a readership whose interests could be expected to place them among the organization's constituency. No inference is intended that the requirement of notice would necessitate continual or other broad-scale publication of the meetings. Organizations would be expected to take steps to assure reasonable access to the meetings by as wide a range of the interested public as is feasible under the circum- stances.

An organization that failed to hold the annual meeting would not be deprived of its tax exemption, nor would contributions to it lose their deductible status. On the other hand, the managers of the organization, and the organization itself, would be subject to penalty taxes for a willful failure to hold such meetings. Thus, the organization could become subject to a per diem tax for every day after the appointed time that a scheduled meeting is not held.

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Responsible officers who knowingly failed to hold the annual meeting would also be liable for a penalty tax. Alternatively, if such penalties are deemed to be overly stringent, enforcement might be achieved via equitable remedies administered by court action.

Commission Recommendation

3. That the present 4 percent "audit" tax on private foundations be repealed and replaced by a fee on all private foundations based on the total actual costs of auditing them.

Commentary

Under the Commission's recommendation, private and independent foundations would continue to bear the costs of their own audit. In the case of all other section 501(c)(3) organizations, their costs of audit would continue to be borne from general government funds as under present law.

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This recommendation could be implemented as follows:

(1) Section 4940 would be repealed.

(2) The administrative provisions of the Code could be amended

to enable the Service to charge a fee measured by a percentage of

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the "distributable amount" of a private foundation computed under section 4942. Such fee would be applied annually, based upon the Service's published determination of the actual costs of audit of private foundations for the three years preceding the year in question. In making this determination, appropriate allowances could be made for inflation, with adjustment in the determination for any excess collection received in earlier years. The costs of auditing exempt organizations other than private foundations would be borne by the government. Differences between charges imposed and actual audit costs for private foundations would be corrected by adjustments in charges levied in future years.

Commission Recommendation

4. That the Internal Revenue Service continue to be the principal agency responsible for the oversight of tax-exempt organizations.

Commentary

The Commission's recommendation reflects an expectation that the Service will continue to function with particular vigor and impartiality respecting its administration of exempt organization tax matters.

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This expectation also takes into account the statutory office of Assistant Commissioner, Employee Plans and Exempt Organizations. It anticipates that the Service will provide that office with sufficient funds for the task before it respecting exempt organizations. If this does not prove to be the case within a reasonable period of time (for example, by the end of 1978) whether because of the complexities of administration of the ERISA program or otherwise, then further statutory steps might be taken to rectify any administrative deficiencies.

To assure that the nonprofit sector and the public are fully aware of

the Service's attention to exempt organizations, and to enable interested

persons to participate in an ongoing process of improvement, the

Internal Revenue Service should publish within six months of the close

of each calendar year a statement which would contain the following

information respecting the administration of its duties with respect to

the exempt organization field:

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