Gene Takagi's Nonprofit Law Blog covered it very well in a recent post, Re-Embracing the Commensurate Test. At the risk of over-simplifying a decision, the IRS examined the activities and governance of a nonprofit and found that they did not match its exempt purpose and took away their tax exemption. The Chronicle of Philanthropy also covered the issue in this article.
It is a complex decision but I recommend reading the actual IRS letter if you want to learn more.
I am such a nerd that even this seemingly arcane matter made me think of a suggestion: Next time you are reviewing your 990 ask the following questions of your auditor or whoever is responsible for your 990.
- "How does this document prove that we deserve to be tax-exempt? Do our program descriptions and financial activity match our stated tax exempt purpose? Who benefited most from the way we spent our resources?"
Answering those questions is not as easy as it looks. Studying the new IRS Form 990 is a good place to start learning more. Most people may not know that the commensurate test has risen again. Those who do know about this will point out that the chances of it being applied to your organization are slim.
Every nonprofit has an annual opportunity to establish that its tax exemption is deserved. I would hope we all take it seriously. Maybe, if all 990s were complete and accurate, the commensurate test would fade away again. I would have to find a better reason to use the word commensurate.