Friday, July 29, 2011
Having just returned from a vacation trip to Seattle, I logged on to the blog site to see Darryll's July 21 post about the IRS using American Campaign Academy to deny 501(c)(4) status to political party training academies.
Though he criticizes this use of the ACA case, Darryll opines that the ACA opinion was "a sound one."
I'm going to spend a few moments taking issue with that statement (and I'm sure Darryll will have a rejoinder!). A "sound" opinion in my view is one that has a logical doctrinal base, or which breaks new doctrinal ground for sound policy reasons. A decision that makes up new doctrine to reach a silly result is not "sound" in my world. And that is precisely what American Campaign Academy did.
Both Darryll and I have written about the private benefit doctrine and its lack of doctrinal clarity. Both of us have reached similar conclusions about what the doctrine SHOULD be - essentially, it should forbid charities from engaging in deals with non-charitable parties that give the non-charitable parties "special" access to charitable resources without an extremely good reason for doing so. We've phrased this differently in our writing, and our analysis is not identical, but it's close enough.
And if the American Campaign Academy case were properly documented as one of these cases of a noncharitable organization having special access to charitable benefits denied to others, it might be sound. But in fact there is no evidence of such special access being part of the "deal" behind ACA. It is true that most ACA graduates worked for Republican political candidates, although at least some did not. But there is no evidence whatsoever that the noncharitable parties (the Republican Party and its individual candidates) had any kind of "special" access to ACA graduates; they didn't get "first crack" at the best students (at least, not according to the case record); they didn't have a deal in which students had to buy materials from the Republican Party that resulted in a profit to the Party, or any other "lock-in" arrangement that gave the Party special access to the charitable benefits (a trained workforce) provided by ACA. Students didn't sign a pledge to work only for Republicans; this wasn't an ROTC-like arrangement where students agree to work for the military in exchange for them paying for one's education. ACA graduates could work for Democrats; or campaigns in foreign countries (at least one graduate did so). What the Republican Party got was what every business entity in the world gets from education: a trained workforce. At the end of the day, this was no different from Microsoft benefitting from the excellent Computer Engineering programs at Stanford, MIT, Cal-Tech or my own university (the University of Illinois); or indeed no different from the NFL or NBA teams benefitting from the excellent athletic training provided by major university athletic programs. This is what education does. It trains folks in the skills necessary to operate in a particular labor environment. Noncharitable interests benefit from this; big surprise.
The notion that this training violates the private benefit rule because a majority of graduates gravitate to one political party over another is preposterous. This is like saying that Notre Dame should lose its tax exemption because its students gravitate towards jobs compatible with Catholic religious tradition; or that Stanford should lose exemption if we found that its graduates disproportionately worked for Apple Computer. Or let me give another hypothetical. Suppose that Intel decided that there was a dearth of individuals trained in the precise engineering skills needed to produce its complex computer microprocessor chips. So one day it organizes a new "trade school" focused entirely on these skills, gives it $1 billion to start up, appoints a Board of Trustees made up largely of top Intel officers, and that board hires the best engineering faculty away from MIT, U of I, Stanford and others to do this. Because of the special skills involved, the overwhelming majority of graduates go work for Intel (after all, there aren't many other advanced microprocessor manufacturing companies in the US; AMD would be the other one). Would the IRS argue that this school should be denied exemption because of the "private benefit" flowing to Intel? You've got to be kidding me.
ACA is exactly the kind of perversion of doctrine the IRS should not get away with, regardless whether one considers the end result appropriate in specific cases. The court decision in ACA was not "sound"; it was a decision reached without any doctrinal basis or sound rationale. And the result has been a doctrine (the Private Benefit Doctrine) that has no doctrinal content, which the IRS routinely uses to deny exemption in cases in which it has a "bad feeling" about things, but no other well-defined doctrinal rationale for taking action. Police don't get to throw folks in jail because they have a "bad feeling" about them (well, at least the laws say they don't, although minority members of our society may disagree with that statement). Legal doctrines under which we grant and take away tax exemption should be similarly well-defined.
Late edit: On re-reading Darryll's post, I see that he actually said "the theory" behind ACA is sound, not the case itself. Well, OK. I'll be happy to concede that one could come up with a "sound theory" to support something that one could name "the private benefit doctrine." In fact, I'd suggest that both Darryll and I have done just that in our writing. But the theory certainly didn't come from the abominable analysis in ACA!