I think it’s Hamilton’s influence; not the Founder, but the musical Hamilton. In fact, I’m listening to the original Broadway cast hip-hop recording at the moment.

But what brought that to mind was a further escalation in the ES (elephant seal) combat I discussed yesterday. In today’s EO Tax Journal Bruce Hopkins, of the Bruce R. Hopkins Law Firm in St. Louis, Missouri, responds to Marv Friedlander’s objection to the thesis of his new book challenging the IRS’s authority to require governance questions on the annual Form 990 report most tax-exempt organizations must file.

Hopkins writes that he was “stunned” to read Friedlander’s comments. He first points to California Independent System Operation Corp. v. FERC, 372 F.3d 395 (D.C. Cir. 2004). At ¶ 26, the D.C. Circuit wrote:

Every state has statutes affecting corporate governance. Presumably the members of the federal and state commissions charged with securities and corporate regulation are chosen with an eye to their expertise in matters corporate. Certainly the legislative bodies have given them powers with a view to that subject matter. The same cannot be said of the legislative empowerment of FERC, nor presumably are its members chosen principally for their expertise in corporate structure.

Hopkins obviously believes the same is true of the IRS, even its Exempt Organizations Division.

But even more, Hopkins begins to sing: “Marv seems to advocate turning the book into a musical!  How did he know?  (This leaking in Washington has got to stop.)  This revelation has forced me to send you the text of the opening number in the screenplay being drafted.”

Um, Hamilton it is not.  Nor is it even apparently a “screenplay.” It is, however, Hopkins succinctly stating his case:

The IRS says that a poorly governed entity will violate the tax law and otherwise become unruly. For many decades, nonprofit governance was the singular province and concern of the states. Their corporation, trust registration, and charitable solicitation acts ruled nonprofits’ fates. Then, without warning, the IRS struck, announcing it was regulating governance in 2007.

The nonprofit community was aghast; only its lawyers were secretly in regulatory heaven. The IRS pushed its regulation agenda, with tax exemption for public charities on the line. It began dictating policies, dealing with conflicts of interest, whistle-blowing, avoidance of crime. Also document retention, expense reimbursement, joint venturing, gift acceptance, investing. It got to the point that nearly everything a charity did had to be in a policy, rigidly vesting.

The agency revamped the annual information return, asking over 30 governance questions. It drafted good governance policies, many so ridiculous they were abandoned and shunned. The worst part was the IRS ruling policy, wrongly predicated on the private benefit doctrine.

The view of the IRS became this: small boards and related boards are universally forbidden. No matter that state law permits one-individual boards; the IRS summarily preempted that. If the entity has a small board, maybe as “small” as five or seven, it can stick exemption in its hat. The IRS hates boards consisting of related parties, such as brother, sister, son, daughter, father, or mother. It despises nonprofit boards comprised of individuals who are married, particularly to each other.

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