The exempt organizations function will have an enhanced position in the structure, but appropriations will still determine if it becomes more effective. ROBERT A. BOISTURE, JULIE W. DAVIS, and LLOYD H. MAYER the Service's administration of lection and enforcement func- p UbliC trust is the charitable the exempt organization rules. tions. Recognizing this differ- sector's most important asset, and one important factor in As discussed below, however, this ence, Congress expressed concern restructuring must also be ac- that the IRS was subordinating its that trust is effective IRS admin- companied by a significant increase efforts to conduct oversight ac- istration of the federal tax rules in funding for exempt organiza- tivities with respect to employee designed to ensure that charitable tion administration if it is to re- plans and exempt organizations to organizations operate exclusively alize its potential and restore its efforts to collect revenues.l for charitable purposes. In re- effective IRS oversight of exempt Therefore, ERISA also authorized cent years, declining resources funding for the EP/EO office, and the departure of many senior organizations. tying the funding level to the exempt organizations staff have total collected from the Section badly undermined the Service's ex- EP/EO 4940 excise tax on private foun- empt organizations function, as re- Before 1974, no one specific of- dation net investment income.2 flected most dramatically in a fice in the IRS had primary re- That funding mechanism was sharp decline in published guid- sponsibility for overseeing never implemented, however, and ance on exempt organizations is- employee plans and exempt or- the EP/EO budget has always sues. Fortunately, the current ganizations. This raised concern been part of the overall IRS ap- top-to-bottom restructuring of in Congress that the level of re- propriation. the IRS provides an important op- sources devoted by the IRS to ex- Today, the Assistant Commis- portunity to reverse this trend. While important "design " issues empt organization oversight was sioner for EP/EO oversees both not adequate. As part of the Em- National Office headquarters ac- remain to be addressed, the over- ployee Retirement Income secu- tivities and the activities of five key all framework promises to provide rity Act of 1974 (ERISA), Congress district offices (KDOs) relating to a more effective administrative therefore enacted Section 7802(b), tax-exempt entities. The head- structure and higher priority for creating the Office of Employee quarters of EP/EO includes the Em- Plans and Exempt Organizations ployee Plans Division, the Exempt (EP/EO) under the direction of an Organizations Division, and the ROBERT A. BOISTURE is a member in the Assistant Commissioner . Field Services Branch.3 The KDO Washington, DC firm of Caplin & Drysdale, In creating EP/EO, Congress ex- located in Cincinnati has recently Chartered, and is the co-Editor-in-Chief of plicitly acknowledged that the become the centralized site for pro- The Journal of Taxation of Exempt Organiza- cessing exemption determination tions. JULIE W. DA VIS is a member and regulatory oversight responsibil- ities delegated to the office differed letters for both exempt organiza- LLOYD H. MA YER is an associate in the same firm. from the Service's core revenue col- tions and employee plans. Exam- March/April199i Vol10/NoS IRS RESTRUCTURING 195
ination jurisdiction is vested in the the Exempt Organizations small community-based organi- other four KDOs-Northeast Division have grown dramatically, zations run by volunteers to multi- {Brooklyn), Southeast {Baltimore), due both to the significantly billion dollar hospitals, universities, Midstates {Dallas), and Western greater number of entities and to and private foundations. Their {Los Angeles). Although pro- the increasing demands their needs causes include international evan- grammatic authority over the field place on the system. In 1974, for gelism, providing direct health rests in the EP/EO Assistant Com- example, there were approxi- and educational services, envi- mately 690,000 tax-exempt or- ronmental preservation, and pro- moting amateur sports. In other ganizations {excluding churches). By the end of 1996, that number words, the Exempt Organizations had grown to approximately Division faces the challenge of reg- 1,280,000, nearly double the 1974 ulating a sector that is not only figure. These organizations, plus growing rapidly but that includes over 266,000 churches, controlled a huge and ever-increasing vari- $1.9 trillion in assets and annual ety of organizations. missioner, there is no direct line revenues of almost $900 billion, or a uthority .Therefore, the district more than 10% of the nation's Funding and stall levels. From fiscal directors of the KDOs rather than gross domestic product.6 years 1970 through 1995, the the National Office initiate and As impressive as these numbers overall IRS budget grew much oversee the day-to-day conduct of are, they only begin to suggest the faster than the economy. On examinations, limiting the ability variety and complexity of!the ex- average, the inflation-adjusted of the National Office to set pri- empt organizations universe. Only growth rate of the IRS budget orities and ensure consistent in- about half of these organizations during the 1970s, 1980s, and early terpretation of the applicable tax {not including churches) are char- 1990s was at least one full per- laws.4 Until recently, processing itable organizations described in of exempt organization returns centage point greater than the real Section 501 {c){3 ). The remainder was divided among all ten of the rate of growth of the gross do- IRS Service Centers, but it is now are social welfare organizations, mestic product.8 Starting in the centralized at the Ogden, Utah, labor unions, business leagues, so- mid-1990s, however, the budget Service Center .5 cial and recreation clubs, and or- began shrinking in the face of ganizations in the other Section 501 withering congressional criticism The growth of the tax-exempt sector. categories.7 The charitable orga- of the IRS. Since 1974, the responsibilities of nizations themselves range from For fiscal 1996, the IRS appro- 1 S. Rep't No.93-383, 93d Cong., 1st 5 See Ann. 96-63, 1996-29 IRB 18. 31998 Joint Committee Report, pages Sess.107-08 (1973); H. Rep'tNo. 93-779, 9-10. The Employee Plans Division has pri- 6 See "Soaring Assets and Revenues May 93d Cong., 2d Sess. 102-03 (1974). See also mary responsibility relating to the federal Invite Look by Congress," VI The Chron- Staff of the Jbint Committee on Taxation, income tax qualification of employee General Explanation of Tax Legislation En- plans and related trusts, the tax treatment icle of Philanthropy 39 (12/3/98); 1998 acted in 1998 (Blue Book), page 29 (here- of employees participating in such plans Joint Committee Report, page 13. The 1998 inafter, "1998 Blue Book"); Staff of the Joint and their beneficiaties, and deductions for Joint Committee Report reported assets of Committee on Taxation, Description and employer contributions to plans. The Ex- only $1.1 trillion, but more recently Mar- Analysis of Proposals Relating to the Rec- empt Organizations Division has primary cus Owens, Director of theIRS Exempt Or- ommendations of the National Commission responsibility relating to tax-exempt or- ganizations Technical Division, stated on Restructuring the Internal Revenue ganizations, including unrelated business Service S. 1096 and H.R. 2676 as passed that soon-to-be-released IRS figures place income tax rules and Section 527 politi- by the House, page 65 (JCS-1-98) (here- cal organizations, and, as of 1993, re- the amount of assets at $1.9 billion as of inafter "1998 Joint Committee Report"). sponsibility for the administration of IRS 1995, and data collected by the National 2 Employee Retirement Income secu- activities with respect to tax-exempt Center for Charitable Statistics of the bonds. rity Act of 1974, p .L. 93-406,912174, sec- Urban Institute confirms the $1.9 billion 4 1998 Joint Committee Report, page tion 1052,88 Stat. 829. This authorization figure. was later codified at Section 7802(b)(2) of 12; see also American Bar Association sec- 7 Department of the Treasury, Internal the Code. As discussed below, the Inter- tion of Taxation Committee on Exempt Or- nal Revenue Service Restructuring and Re- ganizations, "White Paper," reprinted in Revenue Service Data Book 25 (1996) form Act of 1998, p .L. 105-206,7122198, 10 Exempt Org. Tax Rev 74 (July 1994) (hereinafter "1996 IRS Data Book"). 112 Stat. 685 (hereinafter "Restructuring (hereinafter "1994 ABA White Paper"), dis- 8 See "Perspective on the IRS Budget, " Act") repealed Sections 7802(b)(1) and cussing the problems created by this lack of line authotity. 71 Tax Notes 1720 (6/24/96). 7802(b)(2). March/Aprl11999 Vo110/No5 198 JOURNAL OF TAXATION OF EXEMPT ORGANIZATIONS
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