IN 1996, CONGRESS AMENDED THE PUBLIC disclosure rules applicable to organizations that are exempt from federal income tax under section 501(c), and the IRS has recently issued proposed regulations to implement these changes. This article traces the evolution of the public disclosure requirements for all exempt organizations and examines the impact of the new requirements on private foundations.
Over the past half century, organizations that are exempt from federal income tax under section 501(a) (and predecessor sections of prior Internal Revenue laws) have been subject to increasing public disclosure of their annual information returns (Forms 990 and 990-PF) and their applications for recognition of exemption by the IRS (Forms 1023 and 1024), as well as all the schedules and attachments filed with the returns and applications. Only limited information is protected from disclosure, including unfavorable rulings and revocation letters, the names and addresses of contributors, trade secrets, and unrelated business income tax returns (Forms 990-T).
Originally, the requirement was that the IRS make exempt organizations’ information returns and applications for exemption available to the public at the offices of the IRS. Over time, however, the disclosure requirement has been expanded to apply to exempt organizations themselves.
In 1969, at the time of the enactment of the private foundations excise tax provisions, the requirement was imposed on private foundations themselves to make their annual returns (Form 990-PF) available for public inspection. Since that time, private foundations have been required, no later than the return due date, to publish a notice in a newspaper of general circulation in the county in which the foundation’s principal office is located that the foundation’s annual return will be available for public inspection at the foundation’s principal office during regular business hours for 180 days. The foundation need not honor requests for inspection if they are made after the 180-day period, nor must the foundation disclose any past-year returns.
In 1987, the disclosure requirement was extended to require all organizations described in sections 501(c) and (d) to make their applications for exemption available for public inspection. An organization that had filed its application prior to July 15, 1987, but no longer had a copy of its application as of that date, is excused from this obligation. The requirement applies to the application form itself as well as any supporting documents filed by the organization in support of its application, any letter or document issued by the IRS in connection with the application, and the organization’s response to any such letter or document. At the same time, the requirement was imposed on all exempt organizations, except for private foundations, to make their three most recent information returns available for inspection during normal business hours at their principal, regional, and district offices.
The 1996 amendments added the requirement that all exempt organizations, including private foundations, must provide copies of their exemption applications without charge (other than a reasonable fee for copying and mailing) within 30 days of a written request, or immediately upon an in-person request. In addition, exempt organizations other than private foundations are required to provide copies of their three most recent information returns, upon request, on the same terms.
An organization is not required to provide copies of its application or returns if:
- The organization has made the documents “widely available,” or
- The organization obtains a determination from the IRS that a request for the documents is part of a harassment campaign.
The requirement that organizations must provide copies of their applications and returns is not effective until 60 days after the issuance of final regulations. Proposed regulations were issued on September 25, 1997, but they are not effective until 60 days after their publication as final regulations, which will most likely occur some time this year.
Under the proposed regulations, an organization’s application and returns must be made available for public inspection or copies supplied at its principal, regional, and district offices during normal business hours. An organization may charge a reasonable fee for copies, up to the amount charged by the IRS for copies of exempt organization returns (currently $1.00 for the first page and $.15 for each subsequent page), plus actual postage costs. When an individual appears in person at an organization’s office and requests copies, the organization generally must provide the copies on the same day. When the request is in writing, the organization generally must provide the copies within 30 days of the date it receives the request.
The regulations provide that an organization may avoid the requirement to provide copies by posting the document on the organization’s web site or on another organization’s web site as part of a database of similar materials, thus making the information “widely available.”
The regulations also provide procedures for obtaining a determination from the IRS that the organization is the subject of a harassment campaign. However, even without such a determination from the IRS, the regulations do not require an organization to comply with a request for copies after the organization has already received two requests for a document within a 30-day period, or four requests within a one- year period, from the same individual or the same address.
As indicated above, private foundations and public charities are subject to the same rules regarding disclosure of applications for exemption, but they are not subject to the same rules regarding disclosure of annual information returns. The rationale behind this discrepancy is not clear. Advocates of increased public disclosure in the philanthropic sector argue that private foundations need “sunshine” at least as much as public charities, while advocates of the status quo have already countered that the more highly regulated nature of private foundations makes additional public disclosure unnecessary. This is, at minimum, an issue that deserves more debate within the foundation community.
Richard A. Speizman is a partner, and Vivian A. Moore is a senior manager, in the exempt organizations tax practice of KPMG Peat Marwick LLP. For more information on the contents of this article or the services KPMG provides to private foundations, please contact Mr. Speizman at (202) 467-3814.