Most of us recognize passive-aggressive behavior. As you're making good time on the interstate and you hear from the passenger seat, "Honey, would you like to stop?" you know it is not a question. Woe unto him who answers, "no," and keeps driving. An hour and perhaps 70 miles later he will learn how wrong he was.
As much as we've learned to recognize and deal with passive-aggressive techniques at home and in the office, it's still a bit of shock to see them in the tax code. But there it is--Part V of Form 1023, which is the IRS application for tax-exempt status.
Question 5a asks, essentially, "Honey, do you have a conflict-of-interest policy like the one I have in my purse?" (In this case the "purse" is really Appendix A to the instructions.) Woe unto the lawyer, who, knowing such a policy is not required for the tax exemption, answers, "no," and goes on to the next question.
The IRS just doesn't let it go at a simple "no." The next question, 5b, asks rather pointedly, "Well then, without a written conflict-of-interest policy how can I be sure you won't pay yourself an outrageous salary? Hmmm?"
You get the distinct feeling you better have something on paper the IRS will like because question 5c keeps up the not-so-subtle pressure with, "OK, tell me how you're going to spot the friends and supporters of your charity who are really after you to be their paying client? Don't you think a written conflicts policy would help you do that?"
At this point you're beginning to think you'd be much better off just going back to Appendix A and copying whatever it is the IRS says is a good conflicts policy, even if it isn't exactly right for your non-profit. And you'd be right. As a practical matter, examiners tend to set aside for later consideration any Form 1023 application that answers "no" to question 5a. At the very least, applicants that lack the suggested policy face delays if not rejections. Lawyers for new non-profits seeking exemption are smart to always answer "yes," which probably means they talk the board into adopting a policy, any policy, as they're ready to file the paperwork. They'd rather not have to concoct answers to questions 5b and 5c.
This passive-aggressiveness is the direct result of the gap between what the IRS thinks tax-exempt organizations should do and what Congress requires them to do. There is no law requiring applicants for tax exemption to have a conflicts policy, so the IRS sets up this hoop through which all applicants must jump. Even as Form 1023 clearly states: "Note: A conflict-of-interest policy is recommended though it is not required to obtain exemption" (emphasis added), the subsequent questions make it clear--except to the clueless--that the adoption of such a policy would be a good idea. Wink, wink. Nudge, nudge.
What are we to make of such an approach? We're used to unambiguous rules from government agencies, even if they are sometimes convoluted in their expression. It may bother you that the agency is telling you what you ought to do rather than what you are required to do. But you have to let it pass. Your clients are better served by adopting a conflicts policy even though, legally speaking, they don't have to. They don't want their application gathering dust on an examiner's desk just because you answered "no" when with just a little effort you could have answered "yes." Meanwhile, Congress will probably catch up with the IRS on this one and enact an unambiguous conflicts rule, ?? 1/2 la Sarbanes-Oxley, for non-profits. Then the IRS won't have to engage in passive-aggressive shtick on Form 1023. It can move on to other forms.
Bruce Collins is the corporate vice president and general counsel of C-SPAN, based in Washington, D.C.