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Ways and Means Subcommittee Examines Oversight of Exempt Organizations, Form 990, UBIT

July 25, 2012

On July 25, the Oversight Subcommittee of the House Ways and Means Committee convened a hearing to examine the growing complexity of tax-exempt organizations, the revised 990, and unrelated business income tax (UBIT) issues. This was the second hearing this year that focused on nonprofit tax issues. Joanne DeStefano, Vice President for Finance and Chief Financial Officer at Cornell University, had testified on behalf of NACUBO at a May 16 hearing that touched on similar issues.

In the press release announcing the July 25 hearing, Chairman Charles Boustany (R-LA) stated:

"Given the size and scale of the operations of public charities, which in 2008 had over $2.5 trillion in assets, it is critical that the Subcommittee continue its review of the tax-exempt sector. Indeed, over the last two decades, the organizational structures of public charities have become increasingly complex, creating compliance and transparency issues. This hearing is an excellent opportunity for the Subcommittee to hear from the IRS and experts in the tax-exempt community. Their insight will allow the Subcommittee to better understand what is driving organizational complexity, and to learn about the new compliance efforts by the IRS and the UBIT rules."

In addition to the Subcommittee's continuing oversight of the IRS and the tax-exempt sector, Committee members are informing themselves and their staffs in preparation for comprehensive tax reform. The hearing provided an opportunity for Committee members to discuss how future tax reform efforts might address current issues for public charities. Specifically, the hearing focused on compliance issues related to exempt organizations; most discussion revolved around Form 990 and UBIT rules.

Steven T. Miller, Deputy Commissioner for Services and Enforcement, Internal Revenue Service, gave the initial testimony. He began by commending the exempt sector for both its role in society and for generally striving to comply with tax rules and regulations. His remarks focused largely on Form 990, its purpose (allowing the public to review, evaluate, and rate charitable organizations), its redesign in 2008, and how the transparency and accountability required by the form help promote compliance. He mentioned recent staffing downturns in the Exempt Organizations division, noting that additional resources would be welcomed to enhance oversight of the nonprofit sector.

When Chairman Boustany asked about existing UBIT rules,  Miller observed that the third,  or "relatedness," prong of the definition of unrelated business income-that the activity is not "substantially related" to the organization's charitable mission-has proved the most challenging to regulate. He also noted the difficulty of identifying what types of expenses could offset unrelated income because the IRS lacks clear guidance in that area. When the Chairman asked if Congress could help IRS in clarifying these areas, Miller replied, "Not really."  Miller also stated that limited resources make further guidance or initiatives related to these two areas unlikely in the near future.

Focus on Form 990

A second witness panel of tax practitioners and law professors presented testimony and answered questions from Committee members about Form 990 reporting burdens and benefits; the complex organizational structures of large public charities, such as hospitals and universities; interplay between parent and affiliated organizations; and suggestions for improving the UBIT rules.

When asked to recommend improvements to Form 990, nonprofit tax attorney Eve Borenstein suggested:

  • Increased education of filers, to explain that terminology used throughout the form is not value-laden.
  • Simplification of Schedule L, including the creation of more helpful instructions, streamlined definitions, and flowcharts.
  • Elimination (or scaling back) of the requirement to complete Schedule F, which requires extensive reporting of programs and operations outside the United States. (Borenstein characterized Schedule F as extremely burdensome and of questionable value.)
  • To ease burdens on small organizations, expansion of thresholds for minimal reporting on the Form 990-EZ to $1 million of gross receipts and $3 million in assets.

Generally, the witnesses concurred that the redesigned Form 990 tends to create a culture of transparency in the exempt community and, despite a sharp and challenging transition, has helped nonprofits comply with tax rules.

It is too soon to identify what reform measures touching on UBIT rules or Form 990 reporting might arise during broader tax reform considerations. The subcommittee has not announced any additional hearings on tax matters of interest to colleges and universities.

Resources

 

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
E-mail


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