While initial reports said that the IRS targeted groups with “tea
party” or “patriot” in their names, reports now indicate that the agency
used a much broader brush, applying extra scrutiny to applicants
critical of the government or engaging in other kinds of speech that is
political in nature. And that part, quite frankly, isn’t a surprise. Let
me tell you how the IRS feels about political speech: they are not
fans. The IRS is very clear that
“[s]ection 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct.”
There are 29 different nonprofit types of organizations under section
501(c) of the Tax Code for tax exempt purposes but the ones that get
the most attention are 501(c)(3) and 501(c)(4). The applications that
appear to have been targeted most for additional scrutiny in this case
are section 501(c)(4) organizations.
Those are defined under the Code as:
Civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare, or local
associations of employees, the membership of which is limited to the
employees of a designated person or persons in a particular
municipality, and the net earnings of which are devoted exclusively to
charitable, educational, or recreational purposes.
While the rules are similar, there is, however, an important
distinction here as between 501(c)(3) and 501(c)(4) organizations: the
latter may participate in political campaigns and elections, so long as
the organization’s
primary activity
is the promotion of social welfare. Donations are not generally
deductible and any income devoted to political activities is not tax
exempt.
And while the criteria for the 501(c)(4) does allow for
some (with an emphasis on
some) politicking, the rules are largely the same as those for 501(c)(3) organizations; in fact,
the IRS manual actually states that
“there is considerable overlap between IRC 501(c)(4) and IRC
501(c)(3).” The politicking must not outweigh other goals of the
organization and the primary activity must still be the promotion of
social welfare. The
IRS Regs at 1.501(c)(4)–1(a)(2)(ii)
make it clear that “the promotion of social welfare does not include
participation in political campaigns on behalf of or in opposition to
any political candidate.” Additionally, the rules for determining what
constitutes intervention in a political campaign for an IRC 501(c)(4)
organization are the same as those governing IRC 501(c)(3)
organizations.
So what’s the appeal? The key draw is that unlike 501(c)(3)
organizations, 501(c)(4) organizations are not required to disclose the
the names of their donors publicly; they are also not required to pay
attention to those pesky contribution limits for campaign finance
purposes. That combination has made the organizations extremely
attractive to so-called Super PACs who have been accused of using the
organizations to circumvent existing campaign laws.
That makes these organizations extremely controversial. The IRS has
shown increasing concern about the potential for abuse. This accelerated
a few years ago after the darling of the time, section 527 groups,
began to get a bad rap based largely on the Swift Boat saga during the
Bush-Kerry 2004 election and
Hillary Clinton supporters’ American Leadership Project in 2008.
The bad taste those efforts left in the mouths of taxpayers forced
political strategists to switch gears – and they focused their sights on
501(c)(4) organizations.
The IRS scrambled to react to this influx of new organizations. And
they clearly reacted badly. Very badly. But while it’s easy to make
assumptions about who did what and when and why, it’s important to slow
down and figure out the facts.
The question that will likely get the most focus is whether this
behavior was the result of a directive. So far, there’s no evidence to
support such a charge.
Realistically, no matter who is President, there
is very little direct oversight from the Oval Office over tax exempt
organizations: it’s just not a priority for any administration. The
majority of the targeted applications were submitted between 2010 and
2012 while President Obama was in office. That is not disputed. Who was
at the head of the IRS during that term? Doug Shulman, an appointee of
former President Bush. Do I think either of President Obama or former
President Bush ordered Shulman to focus on tax exempts? Of course I
don’t. In fact, I think the focus on the Oval Office is misplaced in
terms of directives (reactions are another issue altogether).
There has also been a lot of discussion about whether this behavior
was a violation of the right to free speech under the First Amendment.
As Americans, we completely have the right to free speech. Agreed.
But let’s take a peek at the text:
Congress shall make no law respecting an establishment of
religion, or prohibiting the free exercise thereof; or abridging the
freedom of speech, or of the press; or the right of the people peaceably
to assemble, and to petition the government for a redress of
grievances.
Sure, you have the right to say what you want. Shout it from the
mountaintops. Just don’t use the Tax Code to subsidize and/or justify
it. While it is a free country and we do have the freedom of speech, the
Tax Code has had, since 1954, prohibited tax-exempt organizations “from
directly or indirectly participating in, or intervening in, any
political campaign on behalf of [or opposing] any candidate for elective
public office.” And that includes churches. And every other tax exempt
organization. Crossing that line can result in the loss of tax-exempt
status. It doesn’t matter if you’re conservative, center or liberal.
In fact, the 2008 election – a few years before this increased
scrutiny – saw the IRS investigating a number of incidents of tax exempt
organizations (largely churches) using their platforms to support or
oppose candidates and issues.
First Baptist Church of Buena Park Pastor
Wiley Drake was investigated for
formally endorsing Mike Huckabee for President on church letterhead
– and later praying that those who objected to his endorsement would
die. During that same race, Bill Keller of liveprayer.com was called out
for
advising his followers that a vote for Mitt Romney was a vote for Satan because, writing, “Romney winning the White House will lead millions of people into the Mormon cult…” And, who can forget
Pastor James David Manning of Atlah World Ministries, made headlines for repeatedly calling then Senator Barack Obama a pimp before later referring to him as an “emissary of the devil”?
As I wrote that same year:
[W]hether you’re Pastor Manning speaking from the pulpit,
Joe Paterno, Coach of Penn State University’s football team on the field
or Gail J. McGovern, President and CEO of the American Red Cross
speaking from the front lines of natural disasters, your speeches,
articles and appearances will be subject to scrutiny (to be clear, the
last two folks are merely examples of high profile leaders of tax exempt
organizations and are not examples of folks who have said anything
inappropriate with respect to the elections). Tax exempt organizations
are aware of the rules that govern them – and most have guidelines in
place to remind employees and representatives of the dangers of ignoring
the rules against politicking. The ramifications, if such rules are
broken, can be severe, including loss of tax-exempt status.
Anyone who was aware of what was going on in the tax exempt world
after 2008 knew that these 501(c)(4) organizations (and, in fact, a
number of 501(c)(3) organizations) were trying their darnedest to get
around those rules.
I suggested that the move to expand the role of politics in tax
exempt organizations would increase, thanks to the internet, with such
organizations becoming “even bolder in their approach.” And that’s
exactly what happened.
That’s exactly why I’m not giving IRS a pass here. It could not have
come as a surprise to IRS that applications for tax exempt would heat up
after the 2004 and 2008 elections. In fact, over the time period that’s
now being questioned, those applications doubled. There should have
been a strategy in place – and it’s clear now that didn’t happen.
Similarly, to pick and choose which organizations deserve a second
glance based on key words is, to quote Lerner, “absolutely
inappropriate.” But I don’t even think that was politically motivated
per se.
I think it’s lazy. And the worst kind of lazy. It’s like pulling over
all of the red sports cars because you assume red cars tend to speed
more rather than actually get the radar gun out. According to what we
know so far, about 75 groups were selected for extra inquiry due to
those key words; that constituted about 25% of all of the groups flagged
for additional examination. None of those groups were ultimately denied
status. That outcome suggests that while there was a link between
politics and scrutiny, politics didn’t sway the final determination.
To be clear, I’m not saying that these arguments don’t have anything
to do with politics. I think politics have played a huge part in all of
this from start to finish. But I think you need to dig a little deeper
and not make it a surface “us versus them” issue. That’s the easy way
out.
If you look back to 2011, the IRS raised eyebrows when it announced
that it would no longer pursue an investigation into certain donors to
nonprofit groups for the purpose of political ads. Specifically, the IRS
was investigating whether donors to certain tax-exempt organizations
organized under – you guessed it – section 501(c)(4) of the Tax Code
would be liable for gift tax on those donations. The IRS had taken the
position for about thirty years that those transfers were subject to the
federal gift tax but they had not made much noise about enforcing it.
That’s not surprising since the IRS often has rules on the books that
they don’t make an issue until
something happens. So
something
must have happened in 2011 to make transfers to 501(c)(4) organizations
an enforcement target. My non-cynical guess at the time was “that the
sheer numbers – and dollars – of transfers have increased and that’s
attracting attention.”
The more cynical answer circulating at the time was that it was
politically motivated. Rep. Dave Camp (R-MI), Chairman of the House Ways
and Means Committee, vowed to look into what happened, claiming that he
was “troubled that the IRS did not explain why the investigations were
started in the first place” and added that he will “continue my
investigation until the complete story behind the actions of the IRS has
been told.”
Sound familiar?
This week, Sen. Carl Levin (D-MI)
seemed to take a page from that playbook by ordering
“that the subcommittee should investigate that additional issue as
well.” He also vowed to “continue to work… to ensure the integrity of
our political process and of enforcement efforts.”
Right. It’s easy for Congress to sit back and complain about IRS’ bad
behavior. And again, yes, I think they erred. And they lied about it
which is even worse. And those are terrible, terrible acts. But Congress
has happily given them plenty of rope.
The IRS has practically begged for clarity on the issue of 501(c)(4)
organizations. With respect to the gift tax, for example, they publicly
stated that “it is possible that Congress may choose to clearly
articulate through legislation the applicability of the gift tax to
contributions to 501(c)(4) organizations.” And Congress did not. They
chose instead to look the other way, as they continue to do. Congress is
one of the the biggest beneficiaries here (presidential candidates are a
close second) since these organizations are how many election campaigns
are supported, even if indirectly.
So mark my words: this round of screaming will end with no real
reform. Not with respect to campaign finance. Not with respect to IRS.
Not with respect to tax exempt organizations. There will be, instead,
lots of hand slapping and finger waggling. The Republicans will crow and
the Democrats will vow “to get to the bottom of this” – just like 2011 –
and nothing will really happen.
I am not saying that means that we should look the other way. Someone
at IRS knew this was happening. It’s clear that those at the top knew
something (
it has been reported that Shulman was alerted to the issue in 2012)
and that it wasn’t the work of a handful of rogue operatives. It was a
plan. And then IRS lied about it. And they should be held accountable.
But it still disturbs me that no one in Washington really seemed to care until the behavior went public. When
Sen. Orrin Hatch (R-UT)
now complains that he asked for answer three times last year because he
had heard that there might be issues, it should give you pause. Why
didn’t he push harder? Why didn’t anyone ask these kinds of questions
publicly? Why wasn’t he – and the President – and every other Washington
official that can now get themselves in front of a camera making the
same kind of noise last year? Or in 2011?
I would suggest that we all really know the answer.
–
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