Friday, May 17, 2013
Just to follow up on my post from earlier this week, at this point there seem to be two leading contenders for the criminal issues involved in the Section 501(c)(4) investigation:
1. Unauthorized disclosure and use of taxpayer information, specifically including the release of some information to ProPublica; and
2. If today's hearing was any indication, some members seemed to be interested in pursuing whether IRS officials made full disclosures to Congress in prior hearings.
I have now had the opportunity to go through the TIGTA report as well as listen to this morning’s Ways & Means hearing. Here are some random thoughts and questions on the matter:
1. The report refers to a “BOLO” list (“be on the look out”) of terms that would trigger an additional look. I note this from the report: “[b]ased on our review of other BOLO listing criteria, the use of organization names on the BOLO listing is not unique to potential political cases.” (TIGTA Report, page 6 (my references refer to the .pdf version on the website)). When I read that, the first thing that came to my mind was credit counseling organizations – and in fact, Steve Miller mentioned credit counseling organizations in this respect today. From what I can tell, I think we know that these were not the only terms on the BOLO list, but I don’t think we know what else is on there. Footnote 16 specifically states, “[w]e did not review the use of other named organizations on the BOLO listing to determine if their use was appropriate.”
2. The report’s primary problem with the use of these terms was that “the criteria [in the BOLO listing] focused narrowly on the names and policy positions of organizations instead of tax-exempt laws and Treasury Regulations. Criteria for selecting applications for the team of specialists should focus on the activities of the organizations and whether they fulfill the requirements of law. Using the names or policy positions of organizations is not an appropriate basis for identifying applications for review by the team of specialists.” (TIGTA Report, p. 7). The TIGTA report does NOT appear to say that the actual scrutiny given was inappropriate – in fact, if the same organizations had been selected for scrutiny using different criteria, that appears to have been appropriate in most cases. Of the 298 applications that were selected for special scrutiny, the Inspector General thought that there were no indicia of additional political activity for 91 (or 31%) of the cases (note that the IRS disagreed with this finding, by the way.) As far as I can tell, we don’t know how many of these 91 cases were “Tea Party”, “912,” or “Patriot” organizations.
3. I am amused and dismayed that suddenly people are worried about Form 1023/1024 processing delays at the IRS. Where have they been? This is new and unique to advocacy 501(c)(4)s, right? Of course it’s not – all of this who work in the nonprofit sector (including the IRS) have complained about Form 1023/1024 processing times for years. Steve Miller was pretty clear today – they simply don’t have the people. Not that I think the IRS hasn’t been entirely clear about this point that in the past. That being said, the TIGTA report does make the point that the cases selected for special scrutiny sat for significantly longer than average for “regular” cases, at least in part due to the fact that it took the Determinations Unit “more than 20 months (February, 2010 to November, 2011) to receive draft written guidance from the Technical Unit for processing potential political cases.” (TIGTA Report, p. 12). To me, this is one of the most troubling aspects of this issue - I am truly concerned about why it took so long to provide that type of guidance. (Side note: the IRS letter indicating that it would cease using resources to look at gift tax return issues with regard to contributions to Section 501(c)(4) organizations was issued on July 7, 2011).
4. The TIGTA report also is concerned that IRS agents have asked for inappropriate information, such as donor lists. I agree – this was probably not appropriate to request donor lists. But, again, this isn’t a new issue. One need only revisit the nonprofit sector’s concerns regarding the governance questions on the redesigned Form 990 to see that we’ve struggled with this problem for some time. In my view, it is yet another side effect of the long standing personnel and budget issues at the IRS. Along these lines, another disturbing (but unfortunately, not surprising) part of the report for me is the finding that the Determinations Unit was sufficiently confused about what constituted appropriate Section 501(c)(4) activity that the IRS had to provide employees with a two-day workshop on the topic – in May, 2012. (TIGTA, p. 14).
5. As I indicated below as I watched the hearings, I am troubled by the notion that follow up questions from the IRS are now burdensome and inappropriate. The organization is asking to be exempt from federal taxation – presumably, we want that status to go only to those organizations that are so qualified. Unnecessary does not equal burdensome. When necessary, a tax-exempt organization should have to shoulder some burden for the privilege of not paying taxes.
From the tenor of today’s hearing, I’m sure there will be more to follow on this issue. EWW
Here's the link... it's still going. I'll try to post the transcript when done. EWW
Update 1 - Just a quick thought as Rep. Earl Blumenauer of Oregon talks about staffing and Congress' role in this issue. The real lesson to me in all of this is there is a consequence to the long term budget cuts and the attrition in personnel (hiring freeze/retirements, etc.) at the IRS. I'll say it... it is infuriating to hear some of these folks be shocked ... *shocked I tell you*... that after what's happened with staffing at the IRS over the last 10-15 years that there would overworked staffers and issues with management at the IRS. The IRS and the bar have been telling you this for years, Congress...
Update 2 - I'm really sort of shocked that Congress people are surprised that asking about a nonprofit's relationship with various individuals is somehow per se inappropriate. And asking for board member resumes and copies of websites. I'm not going to say that all of these requests were appropriate, however, the IRS does have to ask follow up questions, folks - follow up questions are not in and of themselves in burdensome.
Update 3 - Again, my opinion only... this has turned into an anti-IRS free-for-all that, as a tax professional, is hard to watch. I'm not going to say that the IRS is without fault but this is really troubling.
Update 4 - Apparently, CSPAN will replay the hearing in full tonight at 8 p.m. EST.
Thursday, May 16, 2013
As you all must know by now, either from prior posts on this blog or any of a million other sources, the IRS is in deep trouble for its handling of certain 501(c)(4) applications. I’m not going to comment directly on what the IRS did or didn’t do in its administrative systems that resulted in the current mess. But I do think it is time to comment on the root of all the trouble, which is the existence of 501(c)(4) itself.
Today in the NYT on-line "Room for Debate" feature, which you can view here, I proposed my solution: just get rid of 501(c)(4) (there are also very thoughtful contributions from Lloyd Mayer - who also posts on this blog, Ellen Aprill, Doug Mancino and Rosemary Fei). But I was limited to 300 words in that format; here I have the freedom to flesh out my argument a bit more, so I’m going to take advantage.
The argument boils down to this: the administrative havoc created by the (c)(4) designation in conjuntion with the Citizens United case simply does not outweigh whatever marginal public benefit the (c)(4) designation produces. Accordingly, we should repeal it.
So let’s begin with some background. Have you ever asked what the difference is between a "social welfare" organization under (c)(4) and a charity under (c)(3)? My students in my Tax-exempt Organizations class do so every year. And here is the convoluted, though ultimately simple, answer.
A 501(c)(4) organization is one that, according to IRS regulations, “is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.” Now it should be fairly obvious that “bringing about civic betterments and social improvements” is a charitable purpose that would qualify an organization for tax-exemption under 501(c)(3), rather than 501(c)(4). Indeed, “improving society” is a core rationale for the existence of charity. So why do we have 501(c)(4) at all? Why aren’t these organizations simply exempt under 501(c)(3)?
The answer lies principally in two acute differences in the statutory language between 501(c)(3) and 501(c)(4). 501(c)(3) states that an organization qualifies for exemption under that section only if “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” In other words, 501(c)(3) organizations cannot engage in a “substantial” amount of lobbying, and cannot engage AT ALL in political campaign activity. In contrast, 501(c)(4) contains no such limitations, and in fact the IRS’s view is that lobbying to advance social welfare is itself a social welfare purpose. As a result, a (c)(4) can engage in an unlimited amount of lobbying, contrary to the (c)(3) limitation. On the other hand, the regulations under (c)(4) confirm that political campaign activity is NOT a social welfare purpose; but note that (c)(4) does not have the absolute prohibition against political campaign activity that a (c)(3) does. Accordingly, a (c)(4) also can engage in political campaign activity, as long as its primary purpose remains promotion of social welfare.
So when you boil all this down, a 501(c)(4) is essentially an organization with a charitable purpose that either engages in too much lobbying or too much (i.e., ANY) political campaign activity to qualify as a 501(c)(3) organization. And that in turn leads to the ultimate question: why should we grant tax exemption to an organization that would qualify as a charity but essentially violates the limitations on political activity in 501(c)(3)?
[Side note here: Ms. Fei and Mr. Mancino note that there are a few organizations that don’t engage in excessive lobbying but are (c)(4)’s because they don’t meet some other requirement of (c)(3) status, like the strict private benefit rule. I’ll pen a longer response to that at some point, but my quick response is pretty much the same: even if that is true – and I think the IRS hasn’t been entirely clear on these points – it shouldn’t be. Why give a tax break to organizations that don’t serve a broad enough charitable class or generate private benefits that would disqualify them from charitable status?]
My answer is, we shouldn’t. Part of the problem with answering questions like this is that we do not have any coherent theory for why we give “charities” tax exemption – or indeed, what a “charity” is for exemption purposes. But most people agree that charities are organizations that provide a “public benefit” by offering services otherwise unavailable from the private market and which government either chooses not to provide or is affirmatively prohibited from providing (e.g., religion). Different folks explain this differently - the economists talk about market failure; the political scientists and sociologists talk about “pluralism” and so forth. But the general concept is the same: we can think of charities as organizations that are “gap fillers” – they fill the holes left by the private market and government. Exemption is a partial government subsidy to help these organizations provide their services – partial, because the government can’t or won’t fully fund the activities of these organizations, but government can “help” by freeing them from tax payments (it also helps by permitting a tax deduction for charitable contributions to these organizations and permitting them to issue tax-exempt bonds).
If you buy this explanation (and admittedly not everyone does), then the (c)(4) essentially is filling a highly specialized niche – it’s a charity that lobbies too much, or engages in political campaign activity. So my question is whether this is a kind of market failure (or pluralism or whatever) that justifies the partial government subsidy of tax exemption. My answer is “no” – why should government subsidize organizations to lobby the government? Do we really believe there is a serious market failure in lobbying? That there is too little lobbying in the world? So much so that the government should give a partial subsidy for lobbying?
But, you may respond, don’t (c)(4) organizations lobby on behalf of groups that otherwise have little voice in government? Suppose that an organization’s primary purpose is to lobby for more government programs for the poor. Surely that is something that is worth subsidizing, right? I disagree. Note that a charity exempt under 501(c)(3) and conducting some kind of active program for the poor can in fact engage in SOME lobbying – just not a “substantial amount” of lobbying. I think one can make a good case that if you are concerned about “giving voice” to otherwise-disenfranchised groups, that voice is best expressed by groups that have active programs involving services to those disenfranchised, rather than organizations that do nothing but purport to represent those groups in legislation. And if your primary activity is conducting a charitable program other than lobbying, you get exemption under 501(c)(3) AND you can lobby (some). But even if you disagree with this argument, I come back to the following point: if we think too much lobbying (and ANY political campaign activity) is "bad" for a charity, what is the justification for creating a "charity lite" category that permits these things?
So my bottom line is this. The (c)(4) designation doesn’t get us much public benefit that we couldn’t get with a (c)(3) that has an active program of service and lobbies on the side. And yet as we have seen over the past two years, the (c)(4) presents virtually insoluble administrative problems of line-drawing regarding when political campaign activity is “primary” and between “issue advocacy” and lobbying (completely permitted) and “political campaign activity” (permitted as long as it is not the “primary purpose”). Despite Ms. Fei and Mr. Mancino's pleas for better enforcement, I'm highly doubtful that the IRS will ever be able to adequately enforce these lines in the (c)(4) context. They can't even enforce them in the (c)(3) context very well, where the backdrop is an absolute prohibition on political campaign activity coupled with a softer limit on lobbying. So what would make anyone think there is some "magic formula" that will make these things enforceable in the (c)(4) context with even less-well-defined limits?
So my solution: get rid of the (c)(4). It just isn’t worth the angst.
Wednesday, May 15, 2013
First, thanks to Darryll for his insights last night - for the record, I whole heartedly agree. Lost in this whole discussion is that there is a serious tax compliance issue that needs to be addressed. As I read all of the news, I can only think of the Ways & Means hearings that were held a few months ago. I distinctly remember how many pointed questions on Section 501(c)(4)s the committee asked the panel, even though it was really off topic. I fear that the IRS has been simultaneously told to give guidance and yet do nothing (see also, gift taxes and Section 501(c)(4) contributions) that will mess up the status quo. I do not envy the position of the folks at the IRS, may of whom I've had the pleasure of working with personally and know to be dedicated civil servants.
The two biggest updates from yesterday in 501(c)(4) gate:
Yesterday, the Treasury Inspector General for Tax Administration released its report, entitled "Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review." The link is here, but I will try to update my post below so it's one-stop shopping. My hope is to provide a more comprehensive review of the IG's report tomorrow for you all.
To some degree more shocking to me, AG Holder has indicated that a criminal investigation into the issue. I know many of us are thinking - criminal, really? On what basis? The primary speculation at this point is release/misuse of confidential taxpayer information, but there may be other causes of action floating around. I will try to collect those and do an additional update on that point as well.
That's all for now... more to follow tomorrow (now that grading is over!) EWW
Tuesday, May 14, 2013
Targeting Conservative (c)(4)'s and the Next IRS Watergate Scandal: Service Workers between a rock and a hard place.
The good thing about blogs is that you can always add some "op-ed." Let me just add a little op-ed to Elaine's helpful post below.
A long time ago, a federal district court judge imposed sanctions on the Nixon Watergate imploding Whitehouse for what it viewed as improper political interference in process by which applications for exemptions were reviewed:
A looming issue in this case has been whether political interference or intrusion has played a role in the Internal Revenue Service's consideration of the Plaintiff's exemption application. Should this specter prove to have substance, the complexion of this case changes. A showing of political influence renders the Service's ruling null and void. It is outside the law.
The Court is concerned not only with direct political intervention, but also with the creation of a political atmosphere generated by the White House in the Internal Revenue Service which may have affected the objectivity of those participating in the ruling in the Plaintiff's case. The inference of political intervention has been unmistakenly raised: (1) by the handwritten memo in the Plaintiff's file indicating "perhaps White House pressure"; (2) by John Dean's testimony before the Ervin Committee; (3) by the memoranda Mr. Dean submitted to the Ervin Committee; (4) by the testimony of Patrick J. Buchanan, White House Staff Member, before the same committee (September 27, 1973);(5) by the Deposition of Roy Kinsey, Assistant to Mr. Dean, (July 30, 1973, at 10-18); and (6) by the four documents submitted for in camera inspection. These indicia of political intervention, combined with the unusual and protracted processing of the Plaintiff's application, have triggered a warning signal requiring the Court to fully investigate the issue. Through its Discovery Orders, the Court has endeavored to obtain all the information necessary to make an informed evaluation of the issue. However, the time has come for the Court to make that evaluation, and the Court is without the requested materials to do so.
The Defendants have failed to comply with the Court's Order of July 6. Within the scope of the Order were all White House files plus the Treasury and the IRS files regarding tax-exempt organizations since Jan. 20, 1969, and certain tape recordings now before Judge Sirica.
Neither of the two searches of the White House files met the scope of the Order. The first was limited solely to materials in the White House files which mentioned the Plaintiff. In addition, Mr. Kehrli's affidavit regarding the first search of "all White House 872*872 files" was misleading. As his deposition indicates, he did not in fact search all of the White House files. He did not search the impounded files of Messrs. Colson, Ehrlichman, Haldeman, Dean or Caulfield.
The second time, the Defendants limited the search to documents, memoranda or writings in the White House central and special files which either related to or mentioned the Plaintiff or related to "White House interest in the tax-exempt status of left-wing activist organizations." Mr. Buzhardt's affidavit indicated that he conducted a complete search of the files which produced four documents which he submitted for in camera inspection. Mr. Buzhardt's complete search, however, failed to produce the documents, memoranda, and writings relating to this issue which were specifically referred to by Mr. Dean and Mr. Buchanan in their Ervin Committee testimony and by Mr. Kinsey in his deposition.
Center on Corporate Responsbility, Inc. v. Shultz, 368 F. Supp. 863 (1973). What's old is new again. Readers are no doubt well aware, by now, of the bruhaha over the controversy sorrounding the Service's admitted over-scrutinization of conservative 501(c)(4)'S. As Center for Corporate Responsibitility indicates, these matters are not simply political fodder but can have impact on an organization's entitlement to exempt status. It appears that heads will eventually roll for all of this, I' m sorry to say.
I think the IRS workers and their leaders in The Service were caught in a trap not of their own making. Ever since Citizens United, its been no secret that most (c)(4)'s are hardly organized for "social welfare" as that term is apparently intended in the regulations -- i.e., something other than political action. On the one hand, the IRS has been faulted for not doing enough to make sure (c)(4)'s are not simply political action committees in disguise, but on the other they are faulted for looking more closely at (c)(4)'s that appear to have an exclusively political purpose. And while it is certainly wrong to target just one side of the political spectrum, I am not sure that is what happened. The press is on a virtual feeding frenzy but there is evidence that the Service simply looked for "political buzz words" in the title of the 'social welfare" organizations before deciding to give enhanced scrutiny to certain groups. The fault lies in the disparate impact -- more conservative groups ended up being subjected to enhanced scrutiny than did liberal groups, if that is what happened. Even the WSJ, hardly left leaning, admits that the Service personnel were looking for "political" labels, not just "conservative" labels in deciding whether to scrutinize applications from (c)(4)'s. If that be the case, then the only fault lies in whether the result was that conservative leaning groups were more often or more likely subjected to enheanced scrutiny because the Service looked for catch phrases more often used by conservative groups in identifying which (c)(4) applications to pull. In other words, the Service might be faulted only for having a limited vocabulary, not necessarily a political bias. Hopefully the soon to be released Inspector General report will enlighten us all. In the meantime, let's not get the lynch mob all riled up just yet.
With apologies for the latness of this post (I plead grading)... I wanted to at least give everyone a summary of where we are with 501(c)(4)-Gate.
As I am sure most of you know by now, the IRS has admitted to using the terms "Tea Party" and "Patriot" in trying to prioritize which Section 501(c)(4) applications to scrutinze. We have a House Ways and Means hearing on Friday; I don't think a Senate Finance hearing has been set yet but Senator Hatch wants one; a IG report is in the works (a draft portion of which is linked below); and the late word on the street is that AG Holder may be involved soon enough.
For now, I'm just going to highlight some resources in one place and try to keep a master list of relevant documents:
- Lois Lerner's Remarks at the EO Tax Meeting (h/t Election Law Blog with imbedded h/t to EO Tax Journal)
- Baucus Comments, Senate Finance
- Ways and Means Hearing Announcement for this Friday (May 17, 2013)
- May 10 Press Briefing by Jay Carney
- Draft IG Report Appendix Per ABC News
- Treasury Inspector General for Tax Administration Report
- Statement of Secretary Lew on Resignation of IRS Acting Commissioner
- The NYTimes via TaxProf Blog: Should 501(c)(4)'s be eliminated
Paul Streckfus' EO Tax Journal has good coverage if you have a subscription.
If there is something else you'd like to see added to the list of resources, please let me know in the comments or via email. I am trying to stay with primary sources and not with news articles, for now.
More to follow, no doubt. EWW
Updated 5/17 to include more links.