Non-Profit Update #1
August 20, 1996
President Clinton recently signed into law H.R. 2337, the Taxpayer Bill of Rights 2. As summarized below, the Act contains several provisions applicable to charities and non-profit groups which I wanted to bring to your attention.
Section 904 amends IRC '6672. Section 6672 imposes a 100% penalty on particular officers and employees ("responsible persons") when the corporation fails to pay certain taxes (primarily employee withholdings). Section 904 provides with some exceptions that no penalty will be imposed on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax if such member:
(1) is solely serving in an honorary capacity;
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.
This section also requires the IRS to develop materials to better inform board members of tax-exempt organizations (including voluntary or honorary members) that they may be treated as responsible persons. The IRS is required to make such materals routinely available to tax-exempt organizations. The section also requires the IRS to clarify its instructions to IRS employees on application of the the responsible person penalty with regard to honorary or volunteer members of boards of trustees or directors of tax-exempt organizations.
The Wall Street Journal recently noted that this provision will provide significant new protection for persons who serve as unpaid members of boards of schools, museums, and other tax exempt groups.
Section 1311 creates an excise tax on "private excess benefits" where a Section 501(c)(3) or 501(c)(4) organization engages in an "excess benefit transaction." Intermediate sanctions may be imposed in such cases on insiders who improperly benefit from such transactions as well as on organization managers who participate in the transaction knowing that it is improper. As you can imagine, the definition of "excess benefit transaction" is complex. Basically it is defined as a transaction in which a benefit is provided by a relevant tax exempt group directly or indirectly to an insider where the value of the benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. The effect of the section is also to extend the prohibitions against private inurement (which currently apply to Section 501(c)(3) organizations) to Section 501(c)(4), social welfare organizations.
Section 1312 requires more detailed disclosure on Form 990 of excise taxes paid by the exempt organizations for certain lobbying and political expenditures.
Section 1313 strengthens the public's right to annually inspect the exempt organization's annual information return. The Section provides that relevant charitable organizations must provide a copy of the annual return to an individual who requests one without charge other than a reasonable fee for copying and mailing. The Section also increases from $1,000 to $5,000 the penalty for failure to comply.
Section 1314 substantially increases the penalties for large exempt organizations (those with gross revenues in excess of $1 million) which fail to file complete and timely annual returns.
The bill contains various effective dates.
I was appointed Director of the Department of Revenue in February, 1995. Prior to my current position, I worked for three years as legal counsel to the Charities Division of the Secretary of State, was one of the drafters of the current South Carolina Charities Act, and served on the Blue Ribbon Committee that adopted the American Bar Association Model Non-Profit Corporation Act for use in South Carolina. I intend to make tax-exempt organizations a priority at the Department of Revenue from both an enforcement and compliance standpoint. I welcome any input or advice that you may have on how we might simplify or otherwise improve the state tax laws relating to exempt organizations.
The Department of Revenue is currently working on two publications, State Tax Guide for Non-Profits as well as State and Federal Tax Guide for Churches, Synagogues, and Other Religious Organizations.