The Honorable William M. Thomas

The Honorable Charles B. Rangel

The Honorable Charles E. Grassley

The Honorable Max Baucus

February 7, 2006

Page 1 of 4

February 7, 2006

The Honorable William M. ThomasThe Honorable Charles E. Grassley

Chairman Chairman

House Committee on Ways and MeansSenate Finance Committee

1102 LongworthHouseOfficeBuilding219 Dirksen Senate Office Building

Washington, DC 20515Washington, DC 20510

The Honorable Charles B. RangelThe Honorable Max Baucus

Ranking MemberRanking Member

House Committee on Ways and MeansSenate Finance Committee

1106 LongworthHouseOfficeBuilding219 Dirksen Senate Office Building

Washington, DC 20515Washington, DC 20510

Re:H.R. 4297, Tax Relief Act of 2005 (as passed by the Senate, February 2, 2006)

Dear Chairmen and Ranking Members:

The American Institute of Certified Public Accountants (AICPA) is providing comments on provisions contained in H.R. 4297, (formerly S. 2020), Tax Relief Act of 2005 (hereafter “the Bill”). We previously communicated with you on December 23, 2005,with respect to the following sections of S. 2020: Sec. 501, Understatement of taxpayer’s liability by income tax return preparer; Sec. 511, Clarification of economic substance doctrine; and Sec. 523, Partial payments required with submission of offers-in-compromise. Our comments below relate to Bill Section206(c), Certification of Unrelated Business Tax Income for Certain Organizations. We appreciate the opportunity to continue working with Congress to reach our common goal of promoting compliance with our tax laws.

The AICPA is the national, professional association of CPAs, with approximately 350,000 members, including CPAs in business and industry, public practice, government, and education; student affiliates; and international associates. Our members provide audit and tax services to thousands of not-for-profit organizations. These comments were developed by members of our Not-for-Profit Organizations Expert Panel, and our Exempt Organizations Technical Resource Panel, and approved by the AICPA Tax Executive Committee.

Because of the fundamental concerns that we address in this letter, we do not support Section206(c) of the Bill, and we urge its removal in conference. Although we do not intend our comments to be overly negative or indifferent to any significant underreporting of tax in the exempt organization area, the AICPA has serious concerns about the vague and unprecedented nature of the provisions in Section 206(c).

PROVISIONS

Section206(c) would amendInternal Revenue Code section 6011 to require certain exempt organizations to include a statement by an independent auditor or independent counselwith their unrelated business income tax return (Form 990-T). The statement must contain a certification by the independent auditor or independent counsel to the effect that:

  • The information in the return has been reviewed by the independent auditor/counsel;
  • To the best of the auditor’s/counsel’s knowledge that such information is accurate;
  • To the best of the auditor’s/counsel’s knowledge that the allocation of expenses between exempt functions and unrelated business activities complies with the requirements set forth by the secretary underCode section 512; and
  • The independent auditor or independent counsel has (or has not) provided certain tax opinions to the exempt organization.

Exempt organizations that would be covered by Section206(c) are those: (1) with either $10 million in gross receipts or $10 million in gross assets; and (2) that are subject to tax under Code section 511.

Failure to file the required statement would result in a penalty equal to one-half percent of the exempt organization’s gross revenues (determined without regard to contribution or grant revenue) for the year. (Note: The penalty base is the exempt organization’s gross revenues, not its unrelated business income (UBI).)

FUNDAMENTAL CONCERNS

Section206(c) appears to hold organizations described in Code section 501(c)(3) to a higher standard than for any other taxpayer. For-profit taxpayers are not required to have certification of positions taken on a tax return. This new standard goes beyond the“level playing field” contemplated by the commerciality doctrine behind the UBI rules.

Section206(c) is tantamount to outsourcing IRS's enforcement roleto the independent auditor/counsel.

IRS has issued relatively little guidance on UBI matters, particularly regardingexpense allocation. It could be very difficult for an independent auditor/counsel to reach a conclusion regarding the treatment of a given item at a confidence level that would allow certification of the accuracy of a UBI calculation.

No apparent mechanism addresses differences of opinion between an outside auditor/counsel and the taxpayer on the treatment of a particular item. We are concerned that this will lead to opinion shopping, thereby frustrating the provision’s goal of encouraging organizations to comply with the UBI rules.

Requiring a certification if an organization has only $1 of UBI may actually encourage organizations to aggressively re-classify activities from unrelated to related in order avoid the certification entirely.

The certification requirement could be extremely costly, but yield little or no benefit to the exemptorganization or its beneficiaries, thereby diverting the exempt organization’s resources away from serving its beneficiaries. For example, a university could be required to have its sponsorship arrangements and research contracts reviewed on an annual basis – an endeavor that would undoubtedly be costly.

The penalty hasno relationship to the amount of UBI that is underreported. Underreported UBI of $1 could result in a penalty of one-half percent of gross revenues. For example, a hospital with $2 billion in gross revenues, but with only a de minimis amount of UBI, could incur a penalty of $10 million.

CLARIFICATION ISSUES

What is the definition of an “independent auditor or counsel”? For instance, if an exempt organization uses an external accountant to prepare its tax return, that accountant may not be considered “independent” with respect to the certification requirement. (An accountant’s “independence” is impaired if asked to audit or review his/her own work.) Accordingly, would the exempt organization have to engage a second accountant to make the required certification? Additionally, whose independence standards would need to be followed, those of the AICPA, the GAO, the SEC or the PCAOB?

What is meant by “certification” and “review”? Section 206(c) appears to seek some sort of assurance service, but “certification” is not a defined term to a CPA. “Review,” however, has a very specific meaning within our profession’s assurance standards. The CPA profession has a well-developed set of standards for assurance services and all CPAs, when engaged to provide assurance services, are required to provide them within the context of these standards. (A review is one type of assurance service that providesa moderate or limited level of assurance. The details of our assurance services standards are beyond the scope of this letter.) Nevertheless, if the legislation intends to use one of the forms of assurance services as defined by our standards,that should be clarified. If it does not, these terms need to be defined.

What type of materiality standards may be applied? To a CPA, “materiality” is a highly technicalconcept, the details of which are also beyond the scope of this letter. Nevertheless, if the legislation intends to use the CPA’s definition of this concept, that should be clarified. If it does not, guidance is needed as to how materiality should be determined.

How would the new certification standard interact with the existing standards imposed by the Code on income tax return preparers?

How will UBIpassedthrough from a partnership be handled? May the accountant/counsel rely on the conclusions of the pass-through entity’s tax preparers regarding UBI?

What is meant by a “tax opinion on a UBImatter”? Will the Circular 230 definition apply?

If the opinion concludes that an activity does not generate UBI, would a disclosure be required? (Perhaps because the non-UBI activity is related to the organization’s exempt purpose?)

How will matters subject to the Code section 7525privilegebe addressed?

* * * * *

We stand ready to discuss and explain our thoughts with you or others at any time. If you have any questions, please contact me at (402) 280-2062, or ; Stephen Kattell, Chair, Not-for-Profit Organizations Expert Panel, at (352) 395-6565; or ; Mary Rauschenberg, Chair, Exempt Organizations Technical Resource Panel, at (312) 486-9544, or ; or George White, AICPA Technical Manager, at (202) 434-9268, or .

Sincerely,

Thomas J. Purcell III

Chair, AICPA Tax Executive Committee

Stephen H. Kattell

Chair, AICPA Not-for-Profit Organizations Panel

Mary E. Rauschenberg

Chair,AICPAExempt Organizations Technical Resource Panel

cc:Dean Zerbe, Tax Counsel, Senate Finance Committee

Jon Selib, Tax Counsel, Senate Finance Committee

Robert Winters, Chief Tax Counsel, House Committee on Ways and Means

John Buckley, Minority Chief Counsel, House Committee on Ways and Means

Thomas Barthold, Acting Chief of Staff, Joint Committee on Taxation