Friday, February 7, 2014

501(c)(4) Developments: Another Hearing, Controversial Proposed Regs, Cryptic Legislation, and More

IRSAccording to TaxProf Blog we are now 274 days into the firestorm that erupted in the wake of Lois Lerner's acknowledgment last May that the IRS had used inappropriate criteria for selecting certain 501(c)(4) applications for additional scrutiny.   The resulting controversy not only continues, but it has recently been renewed by another congressional hearing, controversial proposed regulations that are taking hits from both the left and the right, and cryptic legislation that may - or may not - change how and whether the IRS can enforce the existing limits on political activity by tax-exempt organizations.

House Economic Growth, Job Creation and Regulatory Affairs Subcommittee Hearing

Yesterday a subcommittee of the Committee on Oversight & Government Reform held a hearing where the witnesses uniformly blasted the executive branch's handling of the controversy.  Their views were not a surprise, given they are all individuals who have been vocal in their criticism of how the Obama administration has handled this situation.  The subcommittee also invited DOJ trial attorney Barbara Bosserman, who is leading the DOJ's investigation into this matter, to testify, but she chose not to do so.  Despite its one-sided nature, the hearing illustrates that the continuing drumbeat of criticism is not fading away, and is unlikely to do so given . . .

Controversial Proposed Regulations

While I and others have commented that one likely consequences of this mess is that the IRS will be gun shy for some time, particularly when it comes to enforcing the limits on political activity by tax-exempt organizations, the Treasury Department as a whole cannot be criticized for a lack of boldness.  The regulations it proposed in late November to redefine what would be considered political activity (or rather "candidate-related political activity") for 501(c)(4) organizations have already generated over 22,000 comments, and the deadline for submitting comments is not until the end of this month.  While many comments have been supportive in part, most appear to give mixed reviews. 

Some of the most detailed and thoughtful comments to date include the ACLU Comments and the Center for Competitive Politics Comments (which appear on a webpage also gathering some other comments, including ones focused on the paperwork burden imposed by the proposed regulations).  Other groups working on commetns that likely will be worth the read are the ABA Tax Section, the Alliance for Justice, Independent Sector, and a coalition that is being spearheaded by Cleta Mitchell (Foley & Lardner) and John Pomeranz (Harmon, Curran, Spielberg & Eisenberg).   The Bright Lines Project has also created a model comment that any organization or individual can customize and and then submit.   Finally, Rep. Dave Camp has introduced legislation that woudl block finalization of the proposed regulations for a year.

Cryptic Legislation

Buried in the recently enacted omnibus spending bill were 68 words that may - or may not - change how and whether the IRS can enforce the current and future limits on political activity by tax-exempt organizations.  As reported by Mother Jones, Public Law 113-76 included in the section relating to the Internal Revenue Service the following provisions:

SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.

SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.

Given that the legislation did not repeal the limits on political activity found in section 501(c)(3) and the relevant charitable contribution provisions, nor did it explicitly address the current interpretation of section 501(c)(4) and other exemption provisions relating to political activity, to say the effect of these two provisions is unclear is to put it mildly.  What is not unclear, however, is that these provision will provide an additional arrow for groups that challenge the IRS in court for denying exemption or examining them allegedly because of their political activity, so the courts will almost certainly need to resolve the actual effect of these provisions.

Other Matters

Tax Analysts recently forced the IRS to release thousands of pages of internal training materials for the exempt organizations determiniations unit.  Included in the materials was a "Lesson Plan" on section 501(c)(4) organizations.

News outlets, and particularly the Washington Post, continue to publish accounts of how the Koch brothers created and funded a network of primarily tax-exempt organizations to further their political goals in previous election cycles.  Recent articles include "Koch-Backed Political Coalition, Designed to Shield Donors, Raised $400 Million in 2012" and "A Rare Look Inside the Koch Brothers Political Empire".

There are a bevy of new leaders with in the Tax-Exempt/Government Entities Division at the IRS, including Sunita Lough (Commissioner, TE/GE), Donna Hansberry (Deputy Commissioner, TE/GE), Tammy Ripperda (Director, Exempt Organizations Division), and Robert Malone (Acting Director, Exempt Organizations Rulings & Agreements).  They join continuing EO Division leaders Melaney Partner (Director, Exempt Organizations Customer Education & Outreach) and Nanette Downing (Director, Exempt Organizations Examinations).

Lloyd Mayer

http://lawprofessors.typepad.com/nonprofit/2014/02/501c4-developments-another-hearing-controversial-proposed-regs-cryptic-legislation-and-more.html

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Comments

Great post, Lloyd. Thanks for the summary of pertinent materials and your thoughts on them. Go WaPo -- get Koch! And greetings from snowy NW CT!

Posted by: Karla Simon | Feb 8, 2014 3:54:45 AM

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