Wednesday, April 9, 2008
District Court for the District of Columbia Reinstates 501(c)(4) Organization's Exempt Status in Face of Private Benefit Challenge
In Democratic Leadership Conference v. United States, the United States District Court for the District of Columbia rejected the Service's efforts to revoke the 501(c)(4) status of the Democratic Leadership Council. The case was decided on the issue of whether the IRS had the authority to retroactively revoke the Leadership Council's (c)(4) status. One has to wonder how it got that status in the first place. According to the opinon,
The Democratic Leadership Council is so named because it was founded by federal and state elected officials who are Democrats and who were concerned with the direction of the policy debate within their party, as well as within the country as a whole. Through the establishment of DLC, these officials and others with similar interests and goals expected to improve the overall contribution to Democratic leaders, in the federal and state government, to national policy debate, and to urge upon both the party and the general public new and innovative approaches to policy.
What is really interesting about this case is that it never once mentions American Campaign Academy v. Commissioner, 92 T.C. 1053. The American Campaign Academy was an educational organization that, according to the tax court operated essentially to benefit the Republican party. The Tax Court found impermissable private benefit because of the apparent purpose to benefit the Republican party. Here we have an organization, like the American Campaign Academy, founded, funded and operated to benefit persons belonging to a particular political party and American Campaign Academy is never once mentioned! The Democratic Leadership Council's website makes it very clear that the organizatioin exists to support the Democratic party. Does the failure to mention American Campaign Academy mean, as some have argued that American Campaign Academy is simply one of the worst cases ever decided? Or is there a different private benefit standard applicable to (c)(4) than to 501(c)(3)'s? That might be the case since (c)(4)'s cannot be supported by deductible contributions (though the tax exemption is still a government subsidy). Personally, I find the primary and secondary benefit rationale in American Campaign Academy entirely perusasive, but here is one of the best critique's I've read of the case:
A recent Tax Court opinion suggests another dimension to the private benefit analysis. In American Campaign Academy, the court considered whether the operation of a school to train individuals to function in key campaign functions could qualify as a section 501(c)(3) educational activity and upheld the Internal Revenue Service's conclusion that the school operated for the substantial nonexempt purpose of benefiting private interests of the Republican entities and candidates who hire the program's graduates. While the Tax Court's result may be sound, its analysis is indefensible. In holding that "Republicans" are too definite a class of secondary beneficiaries to support exemption, the court baldly stated, but failed to explain why, training people to work for Republican organizations and campaigns provides a more definite secondary benefit to private interests than does training people for work in the banking industry. 29 T.C. at 1073-75 (purporting to distinguish Rev. Rul. 68-504, 1968-2 C.B. 211); see also Rev. Rul. 72-1-01, 1972-1 C.B. 144 and Rev. Rul. 67-72, 1967-1 C.B. 125 (each granting section 501(c)(3) status to a program to train individuals, working or desiring to work in a particular industry and funded by industry employers). Properly analyzed, the American Campaign Academy result has little bearing on the question of the proper treatment of specific election-related activity by section 501(c)(3) organizations. The opinion repeatedly mentions the partisan focus of the Academy, but except to say that "Republicans" comprise a finite, albeit large, class, does not explain the significance of the observation. In fact, the partisan focus of the Academy provides a legitimate ground for denial, although it is a ground the court overlooks. At common law, trusts to promote the fortunes of a particular political party are not charitable. See infra notes 163-64 and accompanying text. Because consistency with common law notions of charity is a threshold for qualification as a section 501(c)(3) organization, see Bob Jones Univ. v. Simon, 416 U.S. 725 (1983), the I.R.S. and Tax Court denial of exempt status to the American Campaign Academy is justified, although the court's explanation of the result is highly problematic. Common law concepts of charity do encompass situations where the objectives of a group or a gift are described in terms of furthering an otherwise charitable cause rather than promoting the success of a particular political party. See infra notes 166-67 and accompanying text. Thus, the correct result in American Campaign Academy, reached via the correct analysis, would have no impact on the evaluation of the activities under consideration in this Article.
Laura Brown Chisolm, Politics and Charity: A Proposal for Peaceful Coexistence, 58 Geo. Wash. L. Rev. 308, footnote 159 (1990). I'm not so sure that I agree that when an organization intentionally directs its secondary benefit to a particular industry, it should lose tax exemption. This, I think, is the fallacy in Chisolm's argument, though I agree that the opinion could have been better written. There is nothing wrong in directing a secondary benefit to an industry (like training doctors, lawyers, or any other group of laborers who will benefit a particular industry) if doing so is necessary to achieve the charitable goal (like medical or legal education); there is something wrong, as in American Campaign Academy and Democratic Leadership Council, when the organizations unnecessarily direct their secondary benefit to a particular industry participant. Law schools, for example, direct secondary benefits to legal service providers, though not to just one particular legal service provider within the legal industry.