James J. McGovern, KPMG, Washington National Tax,© 2000 KPMG

Private Foundation Disclosure Regulations Finalized    
Final regulations requiring broader disclosure of private foundations' annual returns and exemption applications were published on January 13. The proposed regulations generally apply a disclosure regime similar to that now imposed on public charities. Thus, the new rules will require private foundations to make the Form 990-PF annual return available for inspection throughout the year, and make copies of the Form 990-PF and the exemption application available on a same day basis for walk-in requests, and within 30 days for mail-in requests.

The requirement to provide copies is waived for organizations that post their documents on the Internet in a prescribed way and for those organizations that are subject to a harassment campaign with respect to their disclosure responsibilities. The rules are backed by significantly increased penalties that impose personal tax liability on foundation officials.

The regulations apply to any Form 990-PF return due to be filed (with extensions) after March 13. Thus, foundation returns that were due prior to March 13, 2000 will not be subject to the new rules. For some foundations, this means the new rules, with respect to the Form 990-PF, may not apply until 2001. 

How the Private Foundation Rules Differ From Those Applicable to Public Charities

• The private foundation public disclosure rules will not become effective until March 13. The public charity disclosure rules became effective June 8, 1999.
• The private foundation public disclosure rules will apply only to those Form 990-PF returns due to be filed (with extensions) after March 13.  The public charity disclosure rules apply to all returns covered by the new rules, i.e., the three most recent Form 990 returns as of June 8, 1999.
• Private foundations, unlike public charities, are required to disclose the names and addresses of contributors on the annual return.

The New Requirements - In General

•  Foundations continue to be required to make their Form 1023
  (applications for tax exemption), and all supporting documents, available
  for public inspection throughout the year at their principal, regional, or
  district offices during normal business hours.
• Effective March 13, foundations are required to provide copies of
  their Form 1023, and all supporting documents, on a same day basis for
  walk-in requests, and within 30 days for mail-in requests.
• Effective for Forms 990-PF due to be filed (with extensions) after
  March 13, 2000, foundations are required to make their returns available for public inspection throughout the year at their principal, regional, or
  district offices during normal business hours. Private foundations
  ultimately will be required to make their three most current annual returns
  available for inspection.
• Effective for Forms 990-PF due to be filed (with extensions) after  
  March 13, 2000, foundations are required to make copies of their returns
  available on a same-day basis to walk-in requests, and within 30 days to mail-in requests. This requirement will evolve, on a prospective basis, so that private foundations will ultimately be required to provide copies of
  their three most current annual returns.

Public Disclosure Penalties   
The penalty for failure to allow public inspection or provide copies of information returns will be $20 per day, with a maximum penalty of $10,000 per return. This penalty applies to "any officer, director, trustee, employee, or other individual who is under a duty to allow inspection or provide copies."

The penalty for failure to allow public inspection or provide copies of exemption applications will be $20 per day with no limit. This penalty applies to "any officer, director, trustee, employee, or other individual who is under a duty to allow inspection or provide copies."

The penalty for willful failure to allow public inspection or provide copies of information returns or applications will be $5,000 per return or application. This penalty applies to "any officer, director, trustee, employee, or other individual who is under a duty to allow inspection or provide copies."

Which Documents are Subject to the Rules      
Annual Information Returns    An "exact copy" of the annual return (Form 990-PF) must be provided. This includes schedules, attachments, and supporting documents, including the name and address of any contributor to the foundation. Form 4720, the return used to report excise taxes imposed on private foundation managers and self-dealers, must also be disclosed. The rules are also extended to information returns filed by nonexempt private foundations and nonexempt charitable trusts described in section 4947(a)(1). Form 990-T, the return used to report unrelated business income tax, is excepted from the disclosure requirements.

The Exemption Application   Applications for tax exemption (Forms 1023), including all supporting statements and documents submitted by the foundation, and any letter or document issued by the IRS in connection with the application, are subject to the new rules. Foundations are not required to disclose exemption applications that have not been approved. Foundations that filed applications before July 15, 1987, need only make them available if they had copies on that date. 

Note: The new rules will not become effective until March 13, and they will only apply prospectively to Form 990-PF returns that are due to be filed (with extensions) on or after that date. The rationale for this transition rule is that foundations, unlike public charities, have only been required to make their most current return available for public inspection. 

The old rules remain in effect for Form 990-PF returns that were due priorto March 13. Thus, for returns that were due prior to March 13, 2000, foundations are only obligated to make the return available for public inspection at their principal office during regular business hours for 180 days from the date the return was filed.

Example 1. The fiscal year of V, a private foundation, ended June 30,  1999.  V timely filed its 1998 Form 990-PF on the due date of November 15, 1999.  V's return was due prior to the March 13, 2000 effective date of the final regulations. V is only required to make its 1998 Form 990-PF available for public inspection for 180 days from November 15.

Example 2. Same facts as Example 1 except that V secures two 3-month extensions for filing its 1998 Form 990-PF return and files its return on the new due date of May 15, 2000. V's return was due (as extended) after the March 13 effective date of the final regulations. Thus, V is required to make its 1998 Form 990-PF return available for public inspection and provide copies of its return throughout the next three years. When V files its 1999 Form 990-PF, it will be obligated to make both the 1998 and the 1999 Form 990-PF available for inspection and for copying. 

Example 3. V has been required since 1987 to make its Form 1023 (Exemption Application) available for public inspection. Effective March 13, 2000, V will also be required to provide copies of its exemption application, and all supporting documents.

When Documents Must Be Made Available     
Copies of the annual returns and the exemption application must generally be provided on the same day an individual appears in person at a foundation's office and requests copies.

In unusual circumstances, a foundation will be permitted to provide the requested copies on the next business day following the day that the unusual circumstances cease to exist, but no later than the fifth business day following the day after the date of the request. Unusual circumstances include receipt of a volume of requests that exceeds the foundation's daily capacity to make copies, requests received shortly before the end of regular business hours that require an extensive amount of copying, or requests received on a day when the foundation's managerial staff is conducting special duties, such as attending an offsite meeting, rather than its regular administrative duties.

When the request is in writing, the foundation generally must provide the copies within 30 days of the date it receives the request. The written request may be delivered by mail, electronic mail, facsimile, or a private delivery service, to the foundation's principal, regional, or district office, and it must set forth the address to which the copy of the documents should be sent. 

In the absence of evidence to the contrary, a properly addressed request that is mailed shall be deemed to be received 7 days after the date of the postmark. Requests transmitted by electronic mail or facsimile shall be deemed received the day the request is transmitted successfully. If an individual making a request consents, copies of the requested document may be provided exclusively by electronic mail. In such case, the material is considered to be provided on the date the foundation successfully transmits the electronic mail.

If a foundation requires advance payment of a reasonable copying and mailing fee, the 30-day period begins to run when the foundation receives payment.  If the foundation receives a written request without payment or with an insufficient payment, the foundation must, within 7 days from the date it receives the request, notify the requester of its prepayment policy and the amount due.

Where Documents Must Be Made Available   
Foundations are required to allow inspection and to provide copies of their Forms 990-PF and exemption applications at their principal, regional, and district offices during normal business hours. An office is considered a regional or district office if it has paid employees - whether part-time or full-time - whose aggregate number of paid hours per week is normally at least 120. A site is not considered a regional or district office if the only services provided at the site further exempt purposes, and the site does not serve as an office for management staff (other than those involved solely in managing the exempt function).

Regional or district offices are not required to make annual information returns available for inspection or to provide copies until 30 days after the date the return is required to be filed (including extensions) or is actually filed, whichever is later. 

Request for Parts of a Document    
A foundation must fulfill a request for a copy of the organization's entire application for tax exemption or annual information return or any specific part or schedule of its application or return. A request for a copy of less than the entire application or less than the entire return must specifically identify the requested part or schedule.

Use of an Agent to Provide Copies    
The regulations permit a foundation to retain an agent to process written requests for copies of documents, or a local agent in close geographic proximity to process personal requests for copies. Agents are subject to the same rules that apply to the foundation. 

Note: It is not permissible to retain a local agent to satisfy a foundation's public inspection requirement. It is also important to note that foundation officials who are responsible for compliance with the disclosure rules will remain personally liable for penalty taxes if the agent fails to comply with the regulations' detailed requirements. 

Fees for Providing Copies     
A reasonable fee for providing copies may be no more than the fees charged by the IRS for copies of exempt organizations information returns and related documents. That fee is currently $1.00 for the first page and $.15 for each subsequent page, plus actual postage costs. 

Foundations may require payment before providing documents. If, upon demand, the fee is not paid within 30 days, or if a check does not clear upon deposit, the foundation may disregard the request. 

Form of Payment    
A foundation is required to accept payment by cash or money order for requests made in person. Foundations are permitted, though not required, to accept other forms of payment, such as credit card or personal check. For requests made in writing, foundations are required to accept payment by certified check, money order, and either personal check or credit card.

Note: The regulations provide that foundations may limit payment to "cash and money order" for requests made in person, although they may accept other forms of payment, such as credit cards and personal check. In developing policies and procedures to implement the new rules, foundations should consider adopting the cash and money order payment rule for personal requests in order to simplify administration of the new rules. Similarly, foundations should consider adopting a certified check, money order, and credit card payment rule for written requests.

Responding to Inquiries     
The regulations provide that a foundation shall respond to any questions from potential requesters concerning its fees for copying and postage. Where a foundation does not require prepayment and a requester does not enclose payment with a request, a foundation must receive consent from a requester before providing copies for which the fee charged for copying and postage exceeds $20.00.

If a foundation requires prepayment of fees, requests received without payment must be acknowledged within seven days of receipt, notifying the requester of the prepayment policy and the amount due. Payment will be deemed to occur on the day a foundation receives the cash, check (provided the check subsequently clears), or money order. Foundations may disregard requests in those situations where individuals do not pay the fee within 30 days of notification of the requirement of advance payment, and in situations when the check does not clear when deposited.

Note: Treasury and IRS rejected the suggestions to permit the fee to begreater than the amount that the IRS charges under its FOIA obligations,asserting that "permitting organizations to charge a higher fee could hinder the public's ability to receive a copy of an application or a return."

"Dropping a Dime"    
The regulations provide that complaints that a foundation failed to comply with the new disclosure provisions should be made to the district director for the key district in which the applicable tax-exempt organization's principal office is located (or such other person as the Commissioner may designate).

Making Applications and Information Returns "Widely Available" 
Foundations are not required to comply with requests for copies of exemption applications or annual information returns if they have made the requested documents widely available. The regulations provide that foundations can meet this exception by posting the documents on their World Wide Web page on the Internet or by having the documents posted on another organization's World Wide Web page as part of a database of similar materials. To meet this exception for Internet posting, the entity maintaining the World Wide Web page must have procedures for ensuring the reliability and accuracy of the applications or returns that it posts and must take reasonable precautions to prevent alteration, destruction, or accidental loss of the documents posted. In addition, the application or return will be considered widely available only if: 

• the World Wide Web page through which it is available clearly informs readers that the document is available and provides instructions for downloading it; 
• the document is posted in a format that, when accessed, downloaded, viewed, and printed in hard copy, exactly reproduces the image of the document as it was originally filed, except for any information permitted by statute to be withheld from public disclosure; and       
• any individual with access to the Internet can access, download, view and print the document without special computer hardware or software required for that format (other than software that is readily available to members of the public without payment of any fee) and without payment of a fee to the organization maintaining the World Wide Web page. 

A foundation that makes its exemption application and returns widely available must inform individuals who request copies how and where to obtain the requested document. If the request is made in person, the foundation shall provide such notice to the individual immediately. If the request is made in writing, the notice shall be provided within 7 days of receiving the request. 

Note: The widely available exception applies only to the requirement to provide copies. It does not excuse foundations from the requirement to make returns available for public inspection. As of the effective date of the regulations, subject to the transition rule discussed above, private foundations will be obligated to make their three most recent information returns available for public inspection at their principal, regional, and  district offices. Private foundations have been obligated since 1987 to make their applications for exemption available for public inspection at their principal, regional, and district offices.

This appears to be a prime example of regulatory overkill. The government could have eliminated this duplicative requirement when section 6104 was amended in 1998 to extend the rules to private foundations. It chose not to do so.

Harassment Campaigns     
A foundation is not required to comply with a request for copies of its exemption application or annual information returns if the IRS determines that the foundation is the subject of a harassment campaign, and the foundation reasonably believes that the request is part of the harassment campaign. The regulations indicate that a group of requests that are part of a "singular coordinated effort" to disrupt the operations of the foundation rather than to obtain information is indicative of a harassment campaign. Facts and circumstances that indicate the foundation is subject to a harassment campaign include: 

• A sudden increase in the number of requests; 
• An extraordinary number of requests made through form letters or similarly worded correspondence;
  
• Evidence of a purpose to deter significantly the organization's employees or volunteers from pursuing the organization's exempt purpose;
• Requests that contain language hostile to the organization; 
• Direct evidence of bad faith by organizers of the purported harassment campaign; 
• Evidence that the organization has already provided the requested documents to a member of the purported harassing group; and 
•  A demonstration by the organization that it routinely provides copies of its documents upon request.

The regulations provide procedures for requesting a determination that a foundation is subject to a harassment campaign. A written application must be submitted to the key district director for the key district where  the foundation's principal office is located. The application must describe in detail the facts and circumstances the foundation believes support such a determination. While the IRS is considering its application, the foundation may suspend compliance with respect to any request for a copy of its documents based on a reasonable belief that the request is part of a harassment campaign, until it receives a response from the IRS with respect to its application. The foundation may suspend compliance prior to filing its application, provided it files its request for a determination within 10 business days from the day it first suspends compliance with respect to a request for documents. Generally, foundations may not suspend compliance with a request for copies from a representative of the news media. If the IRS determines that the foundation is not subject to a harassment campaign, the foundation will have 30 days after that determination to provide a copy of the requested document. If the IRS subsequently determines that the foundation did not have a reasonable basis for its belief that it was subject to a harassment campaign, or that a particular request was part of such a campaign, the foundation managers remain personally liable for penalties. 

A special rule permits foundations to disregard requests for copies of any document in excess of two within a 30-day period or four within a one-year period made by the same individual or sent from the same address, regardless of whether the IRS has determined that the foundation is subject to a harassment campaign. 

Action Plan for Foundations     
Foundations should consult with their management information systems professionals to determine their capabilities to meet the requirements for posting Forms 990-PF and the exemption application (and all supporting documents) on the Internet. Foundations that decide against Internet posting should establish and be ready to implement policies and procedures to ensure compliance with the regulations' detailed requirements. In addition, foundations should have in place policies and procedures for public inspection of their returns and exemption application. Foundations should also establish institutional responsibility for complying with these rules, ensuring that the return is properly prepared, and ensuring that it reflects the foundation's mission accomplishment and contribution to the community. 

EXOTAX on the Web    
Publications of KPMG's Exempt Organizations Tax Practice, including this newsletter, are now available on the World Wide Web. To reach the EXOTAX site, go to the KPMG-US homepage (www.us.kpmg.com). Once there, navigate to either the Tax page or the Products and Services page, where you will find a listing for Exempt Organizations Tax Practice. 

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax advisor.