Friday, September 5, 2008
Ellen Aprill (Loyola-L.A.) has written a memo exploring the tax issues raised by the recent activities of the American Issues Project (AIP) which is available through the Election Law Blog. For more information on those activities and their possible election law ramifications, see this earlier post on the Election Law Blog.
One of the most interesting issues raised by AIP and highlighted by Professor Aprill is that it originally obtained IRS recognition of its purported section 501(c)(4) tax-exempt status not in its current incarnation but under the name Citizens for the Republic and with an at least somewhat different leadership. The extent to which AIP and Citizens for the Republic share common purposes, leaders, and possibly activities is unclear, as Professor Aprill discusses in her memo, but regardless of the degree of commonality in this specific case the situation highlights an interests issue. Since IRS recognition of tax-exempt status, once granted to a particular legal entity, is permanent until such time as the IRS revokes that status, and if even significant changes to governing documents and activities appear only to have to be reported on an organization's annual information return as opposed to being resubmitted to the IRS' Exempt Organizations Determinations office for a decision on whether the entity is still tax-exempt, does this potentially create a way to avoid careful IRS scrutiny of that status? Especially given the limited ability of the IRS to audit annual information returns, the determinations process for new organizations has come to serve an important gatekeeping function. That function can be circumvented, however, to the extent an existing, perhaps dormant tax-exempt organization can easily modify its purposes and activities without being subject to significant IRS scrutiny. It is true that if the IRS determines that such a change disqualified the organization from its claimed tax-exempt status the IRS can retroactively revoke that status since the new purposes and activities were not described in the original exemption application. But until the IRS examines the new purposes and activities, the organization could function and represent itself to the public as tax-exempt.