Pennell & Zhang: Proposals to Restore Faith in Exempt Organizations

Jeffrey N> Pennell and Alex Zhang (both Emory University) have published Proposals to Restore Faith in Exempt Organizations, 183 Tax Notes Federal 284 (Apr. 8, 2024) (subscription required). From the introduction:

This article is about organizations that are exempt from federal income taxation, typically under section 501(c)(3). It is not about restricting the deduction under section 170 for donations to those organizations, nor is it directed toward issues that have spawned controversy about the speed with which certain donees (such as donor-advised funds or private foundations) must distribute or use funds donated to them. It is not a call to arms about the purposes for which certain organizations may use or distribute their funds, nor is it meant to address the alleged politics involved in being regarded as exempt. And it is not a call for all exempt organizations to reveal their donors.

Rather, this article is about the administrative process by which an organization’s exempt status is recognized, and the oversight or review of those organizations after exempt status is approved. It contains a proposal that recognizes the difficulty with which the IRS performs these pre- and post-approval processes, and it acknowledges a nearly indisputable truth: that neither function is being performed effectively or efficiently.

This proposal has implications for federal, state, and local taxation. It consists of three separate but related elements: (1) that the pre- and post-approval processes be delegated to a separate agency, not the IRS; (2) that all EOs be required to report on their activity annually; and (3) that the exempt status of all currently exempt organizations be reconfirmed once. All three elements are meant to restore faith in the integrity of exempt status and to better ensure that exemptions are current and appropriate.

Lloyd Mayer