Wednesday, November 6, 2013
According to the Nonprofit Quarterly, the Washington Post's recent investigative piece, "Inside the hidden world of thefts, scams and phantom purchases at the nation's nonprofits," has captured the attention of Senator Charles Grassley (R-IA), the ranking member of the Senate Judiciary Committee and a long-time overseer of tax-exempt organizations. The Post's article focused on the American Legacy Foundation and its less than full disclosure of what eventually amounted to a $3.4 million loss and a delayed call to investigators. The Post found that over a four year period more than 1,000 nonprofit organizations reported on their annual Forms 990 that they had discoverd a "significant diversion" of assets arising from "theft, investment fraud, embezzlement and other unauthorized uses of funds." As part of its investigative reporting, The Post, with the assistance of GuideStar, created a searchable database of nonprofits that have reported diversions. The Post article lists numerous other nonprofit organizations, comprising public charities, trade associations, veterans' associations, and other tax-exempts, that have had discovered diversions and misappropriations of funds totalling in the millions; a truly disturbing revelation.
As Nonprofit Quarterly reported, much more exploration on this topic is needed including, but not limited to, internal financial control difficulties, challenges for smaller organizations, the frontline capabilities of state attorneys general, and the effectiveness of actions taken by affected organizations. As NQ also concluded, Congress's review should include not only the source of these problems but also a focus on solutions.
As reported by the Daily Tax Report and Nonprofit Quarterly, the Citizens fpr Responsibility and Ethics in Washington (CREW) has requested that the IRS take notice of the use of 501(c)(6)s as the new tax-exempt vehicle for political campaign activity. CREW specifically targeted Freedom Partners, a nonprofit organization linked to the Koch brothers that fundraised and distributed between $235 and $250 million in the 2012 election cycle, asking the IRS to review the organization's use of its tax-exempt status to funnel anonymous donations to other organizations conveying a predominantly conservative political message. Organizations that are tax-exempt under section 501(c)(6) are typically business leagues or trade associations associated with a particular line of business or industry. According to its website, Freedom Partners states that it is a "501(c)(6) chamber of commerce that promotes the benefits of free markets and a free society." Both the Nonprofit Quarterly and CREW similarly opine that Freedom Partners seems to lack a "common business interest" other than ideological. CREW acknowledged the "vague" rules governing 501(c)(6) organizations, requesting that the IRS provide clarification on required and restricted activities.
Matthew J. Lindsay (Baltimore) has posted "Federalism and Phantom Economic Rights in NFIB v. Sebelius" to SSRN. The abstract provides:
Few predicted that the constitutional fate of the Patient Protection and Affordable Care Act would turn on Congress’ power to lay taxes. Yet in NFIB v. Sebelius, the Supreme Court upheld the centerpiece of the Act — the minimum coverage provision (MCP), commonly known as the “individual mandate” — as a tax. The surprising constitutional basis of the Court’s holding has deflected attention from what may prove to be the decision’s more constitutionally meaningful feature: that a majority of the Court agreed that Congress lacked authority under the Commerce Clause to penalize individuals who decline to purchase health insurance. Chief Justice Roberts and the four joint dissenters endorsed the novel limiting principle advanced by the Act’s challengers, distinguishing between economic “activity,” which Congress can regulate, and “inactivity,” which it cannot. Because the commerce power extends only to “existing commercial activity,” and because the uninsured were “inactive” in the market for health care, they reasoned, Congress lacked authority under the Commerce Clause to enact the MCP. Critically, supporters of the activity/inactivity distinction insisted that it was an intrinsic constraint on congressional authority anchored in the text of Article I and the structural principle of federalism, rather than an “affirmative” prohibition rooted in a constitutional liberty interest.
This Article argues that the neat dichotomy drawn by the Chief Justice and joint dissenters’ between intrinsic and rights-based constraints on legislative authority is false, and that it obscures both the underlying logic and broader implications of the activity/inactivity distinction as a constraint on congressional authority. In fact, that distinction is animated less by the constitutional enumeration of powers or federalism than a concern about individual liberty. Even in the absence of a formal constitutional “right” to serve as a doctrinal vehicle, the justices’ defense of economic liberty operates analogously to the substantive due process right to “liberty of contract” during the Lochner era — as a trigger for heightened scrutiny of legislative means and ends — through which the justices constricted the scope of the commerce power.
Current scholarship addressing the role of individual liberty in NFIB v. Sebelius tends to deploy Lochner as a convenient rhetorical touchstone, to lend an air of illicitness or subterfuge to the majority’s Commerce Clause analysis. I argue that the Lochner-era substantive due process cases are both more nuanced and more instructive than judges and many scholars have realized. They illustrate, in particular, that constraints on legislative authority that are rooted in individual liberty and constraints on legislative authority that are rooted in enumerated powers and federalism can and do operate in dynamic relationship to one another. Reading NFIB v. Sebelius through this historical lens better equips us to interrogate the role that economic liberty plays in the majority’s Commerce Clause analysis, and provides an important alternative analytical framework to the structure/rights dichotomy advanced by the Chief Justice and joint dissenters. The activity/inactivity distinction not only portends a constitutionally dim future for federal purchase mandates, but may also herald more far-reaching restrictions on congressional interference with individual liberty, in which individual sovereignty assumes a place alongside state sovereignty in the Court’s federalism.
Wednesday, October 2, 2013
As reported by the Nonprofit Quarterly, nonprofit organizations have no choice but to contend with a potentially extended government shutdown and the loss of government funds. The article refers to guidance issued by the Office of Management and Budget (OMB), which issued a memorandum several weeks ago to all federal agencies entitled, “Planning for Agency Operations during a Potential Lapse in Appropriations.” In the memorandum, OMB advised federal agencies to update “their plans for operations in the absence of appropriations” and that “agency leaders should ensure that only those activities that are ‘excepted’ pursuant to applicable legal requirements would continue to be performed during a lapse in the appropriation for those activities.” As the article further states, one of the clear impacts of government shutdown for nonprofits are short-term financial decisions that could result in layoffs or furloughs.
Lois Lerner, the embattled former head of the IRS Exempt Organizations division, retired on Monday, September 23, 2013 after 30 years of civil service. As Politico stated in an article about Lerner's retirement: "Lois Lerner is the political piñata that Congress still loves to whack months after she awkwardly acknowledged that the IRS wrongly scrutinized conservative groups for years. Her sudden retirement on Monday after 12 years at the agency won’t change that."
The Huffington Post blog published an article yesterday entitled, "The IRS Scandal That Wasn't," providing an interesting historical and, of course, political recounting of the 501(c)(4) determination process with respect to politically-oriented organizations that led to Lerner's undoing. The article, however, makes a profound statement of caution in its conclusion: "Far more troubling is that the current brawl over the IRS may make the agency too gun shy to properly police tax-exempt groups."
Friday, September 20, 2013
We are now at Day 134 according to Paul Caron, with the IRS mess still attracting congressional press releases and media headlines. Recent significant developments include:
A Memo: The House Committee on Oversight & Government Reform released a 19-page memo providing an interim unpdate on its investgation. The memo paints a picture of a political environment in which President Obama and other leader Democrats were publicly and repeatedly criticizing Tea Party and other conservative, nonprofit groups and calling on the IRS to scrutinize them. The IRS, not surprisingly, was well aware of the political sensitivity of the pending Tea Party and 501(c)(4) applications, which led it to subject those applications to both greater scrutiny and higher-level scrutiny, with the now well-documented selectivity problems that tended to disproportionately impact conservative organizations. What the memo does not mention, presumably because the Committee has not found it, is any evidence that White House officials or others outside of the IRS directed the actions of the IRS employees that have come under criticism.
A Chart: USA Today obtained an internal IRS "Political Advocacy Cases" chart dated November 16, 2011 that lists 162 groups with comments relating to the possible political and other activities that might disqualify the groups from tax-exempt status. Of the organizations listed, more than 80 percent were conservative according to the USA Today article, although some progressive groups are also included.
IRS Responses: Recent weeks have seen several IRS actions relating to this mess, including:
- Optional Expedited Process: Over the summer, the IRS announced an optional process under which 501(c)(4) applicants with no private inurement issues and applications pending for more than 120 days as of May 28, 2013, can self-certify that their social welfare spending and time is 60% or more of their total spending and time (and political campaign intervention spendind and time is less than 40%) and by doing so receive a favorable determination within two weeks of doing so.
- Priority Guidance Plan: The IRS also provided in its 2013-14 Priority Guidance Plan that one priority will be "Guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention."
- Suspension of Political Activity Audits: In testimony earlier this week before the House Subcommittee on Oversight, Acting IRS Commissioner Daniel Werfel announced that the IRS has suspended all examinations involving possible political campaign activity pending a review of the Exempt Organizations exmination function processes and procedures. He also noted that 29 such exams had been opened during the 2013 fiscal year.
501(c)(6)s: 501(c)(4)s may be old news. A Politico article reported that in November 2011 the Koch brothers helped establish Freedom Partners, a section 501(c)(6) organization with approximately 200 donors who each pay at least $100,000 in annual dues. Freedom Partners distributed the funds its raised - $256 million in its first year of existence of which $236 million went out the door as grants - to a network of conservative groups such as the Center to Protect Patient Rights, Americans for Prosperity, and The 60 Plus Association. As others have noted (Tax Notes Today article, subscription required), a 501(c)(6) has several advantages over a 501(c)(4), including being able to advance business interests instead of social welfare, not being covered by intermediate sanctions under section 4958, possibly also avoiding the public benefit doctrine, and not being subject to state attorney general jurisdiction over charitable organizations. At the same time, donors to 501(c)(6)s are, like donors to 501(c)(4)s, not subject to public disclosure.
Friday, August 23, 2013
Following up on my post from yesterday, Chris Van Hollen (and Democaracy 21, Campaign Legal Center, and Public Citizen) did file suit yesterday against the IRS and Treasury. For those of you interested in reading the Complaint, it is in the District Court for D.C., Case 1:13-cv-01276. I retrieved my copy from Bloomberg BNA online; if anyone has a public link, let me know and I'll post it. A quick summary
1. It's a proceding under the Administrative Procedure Act (APA), 5 U.S.C. 702/703/704/706(1)/and 706(2)(A), "to compel agency action unlawfully withheld and unreasonably delayed, and to set aside agency action that is contrary to law."
2. Quote: "By redefining 'exclusively' as 'primarily' in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law and the court decisions interpreting it" (p. 2).
3. In answer to my question of yesterday, the Plaintiffs assert the following personal harms:
- Denial of information regarding election expenditures as Section 501(c)(4) organization do not need to disclose donors, and
- Candidates such as Van Hollen and their organizations must compete on unequal terms with tax-exempt organizations that are not subject to disclosure.
4. The Complaint specifically alledges that the IRS' recent 40% safe harbor pronoucements allows too much non-exempt political activity.
5. Quote: "Electoral campaign spending by section 501(c)(4) organizations soared after the U.S. Supreme Court's decisions in FEC v. Wisconsin Right to Life ... and Citizens United v. Federal Election Commission .. , which, respectively, narrowly construed and then invalidated federal laws prohibiting corporate electoral campaign expenditures. In the wake of those decisions, section 501(c)(4) organizations became the vehicles of choice for mobilizing anonymous contributions for political purposes." (p. 9, cites omitted).
6. For those interested, the paragraphs that follow the quote above give some signficant figures regarding Section 501(c)(4) spending since Citizens United - e.g., in the 2012 presidential election, approximately $310 million in electoral campaign spending was by non-disclosing groups including section 501(c)(4) and 501(c)(6) organizations. (p. 11).
7. The APA statutory standard of review is "arbitrary, capricious, and abuse of discretion, or not in accordance with law." (p. 19).
P.S. 8/26 Reader Russell Willis was kind enough to point me to the following link for the petition:
Friday, August 2, 2013
As reported by the Daily Tax Report and others, email exchanges between the Federal Election Commission and Lois Lerner, then Director of IRS Exempt Organizations Division, reveal that the IRS may have unlawfully shared confidential tax information with the FEC, according to a July 30th letter from two House Ways and Means Committee leaders. According to the letter, nine minutes after receiving the email, Lerner requested that IRS attorneys "accommodate the FEC request." The letter requests Acting IRS Commissioner Daniel Werfel to produce by August 14 all communications between the IRS and the FEC between 2008 and 2012, including specific communications to and from Lerner with respect to certain organizations: American Future Fund, American Issues Project, and Citizens for the Republic, or Avenger, Inc.
Thursday, July 25, 2013
The Washington Times reports that House Republicans are considering “a major expansion of their investigation into the Internal Revenue Service’s targeting of conservatives” by looking into the government’s audits of nonprofits. Some leaders of organizations exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (i.e., charities) reportedly find the audits “fishy” because of the IRS’s basically contemporaneous special scrutiny of tea party groups seeking recognition of exemption under section 501(c)(4). The story says that charities audited for the first time during this period include the Billy Graham Evangelistic Association (the "BGEA"), the Clare Boothe Luce Policy Institute and the Family Research Council.
Readers, kindly indulge me as I express an earnest plea for maintaining a nonpartisan, legally informed perspective in this matter. And, if it makes any difference, please understand that this perspective comes from someone who personally has long admired the leadership of the BGEA for their moral integrity and historic commitment to proclaiming the Gospel.
It is entirely appropriate for the IRS to audit a section 501(c)(3) entity to determine whether it is operating within the constraints imposed by Code section 501(c)(3). In general terms, these constraints include a prohibition against political campaign intervention (such as publicly endorsing identified candidates for public office) and limitations on lobbying. We can debate whether the law should be relaxed – and I have argued elsewhere that it should (somewhat). But the IRS is charged with enforcing current law. If the IRS discovers that a charity has engaged in public discourse of proposed laws or canddiates – and the Washington Times reports that BGEA did so in an election year – it is hardly unreasonable for the government to audit the organization to establish whether its activities complied with the law. Indeed, it is not uncommon for watchdog groups to alert the IRS when they have evidence that an entity may have crossed the line. Further, because there are other requirements for tax exemption under Code section 501(c)(3) (e.g., the prohibition against private inurement), an audit should probe the organization’s compensation policies, other transactions with insiders, and other aspects of its internal affairs. Naturally, the audit will feel intrusive. It is. It must be intrusive to be effective. It will also be time-consuming.
I have no idea whether groups identified in the story were selected for audit for the wrong reasons. Nor am I arguing that looking into the matter further is pointless. But news that a handful of religious or politically conservative section 501(c)(3) organizations have been audited, particularly when they have made public statements about proposed laws or candidates in an election year, seems quite a bit different from allegations that section 501(c)(4) applications were systematically processed according to buzzwords that distinguished tea party groups from others.
Section 501(c)(3)s and section 501(c)(4)s are subject to very different constraints on political activity. I urge caution before greatly expanding the investigation and devoting more public resources to it if it appears that the section 501(c)(3) organizations in question were visibly active participants in the political process during an election year.
Hat tip: TaxProf Blog
Wednesday, July 17, 2013
The IRS 501(c)(4) application mess continues to percolate, although most media attention has moved elsewhere. For those who want all the details, Paul Caron continues his comprehensive coverage at TaxProf Blog (The IRS Scandal, Day 69). Here are some highlights:
Congressional Hearings Relating to the IRS (including non-501(c)(4) issues)
- House Committee on Oversight & Government Reform
- House Committee on Ways and Means
- Status of IRS' Review of Taxpayer Targeting Practices (June 27th)
- Organizations Targeted by IRS for Their Personal Beliefs (June 4th)
- IRS Targeting Conservative Groups (May 17th)
- House Subcommittee on Financial Services and General Government
- Oversight Hearing - Internal Revenue Service (June 3rd)
- Senate Committee on Finance
- Treasury Inspector General for Tax Administration, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (May 14th)
- Congressional Research Service, 501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws (May 17th)
- Internal Revenue Service, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action (June 24th)
- National Taxpayer Advocate, Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status (June 30th)
No word at this point on whether the Department of Justice will eventually generate a report (or indictments) based on its investigation, announced by U.S. Attorney General Eric Holder (from about the 22:45 mark to the 25:30 mark) on May 14th, after President Barack Obama personally addressed the IRS situation on May 13th.
If there is any silver lining to this situation, it is the possibility that needed reform in this area may gain traction. As fellow blogger John Colombo has already noted (and critiqued), The Bright Lines Project has been quietly working for more than four years to revise the definition of political campaign intervention in the federal tax laws. In response to the IRS mess, it has now accelerated its public push for legislation and regulations to implement its proposals. This push has already drawn public opposition from a senior fellow at the Center for Competitive Politics, indicating that The Bright Lines Project may in fact have some hope of changing the legal landscape for politically active tax-exempt organizations. Stay tuned.
Monday, July 15, 2013
Affirming a trial court's grant of summary judgment, the U.S. Court of Appeals for the District of Columbia Circuit recently concluded that an organization seeking tax exemption under Internal Revenue Code § 501(c)(3) did not operate exclusively for charitable purposes because it operated for a substantial commercial purpose. In Family Trust of Massachusetts v. United States, decided June 28th, the named organization sought a declaratory judgement that it fell with section 501(c)(3). Family Trust of Massachusetts manages pooled account trusts that benefit individuals with disabilities without the assets in those trusts being counted for purposes of determining eligibility for certain government benefit programs.
After reviewing Family Trust's operations, the court concluded it operated in a commercial manner for several reasons. Those reasons included the fact that the organization consistently produced profits, apparently charged market rate fees, did not solicit charitable contributions to defray its costs, and did not use its accumulated funds to offset or waive trust management fees. The court also found that the Family Trust had a close relationship with its President's private law firm and marketed its services to affluent (and disabled) elder law clients who could afford both the minimum $25,000 deposit and $750 annual fee. The court therefore concluded that the Family Trust had a "pervasive commercial hue" that prevented it from qualifying for exemption under section 501(c)(3).
Monday, June 24, 2013
The IRS has issued its report on the (c)(4) "targeting" issue, available here. The report concludes that while there were "significant management and judgment failures," there is no evidence of intentional wrongdoing. The report indicates that senior IRS staff responsible for the determinations process have been replaced, and that the IRS will take a number of steps to insure similar situations do not recur.
Perhaps the most interesting part of the report is Appendix E, which provides an expedited review process for (c)(4) organizations whose applications for exempt status have been pending for more than 120 days. This process establishes a safe harbor presumption that the organization is engaged "primarily" in promoting social welfare if the organization certifies under penalties of perjury two items: The Appendix further defines relevant concepts as follows:
1. During each past tax year of the organization, during the current tax year, and during each future tax year in which the organization intends to rely on a determination letter issued under the optional expedited process, the organization has spent and anticipates that it will spend 60% or more of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on activities that promote the social welfare (within the meaning of Section 501(c)(4) and the regulations thereunder).
2. During each past tax year of the organization, during the current tax year, and during each future tax year in which the organization intends to rely on a determination letter issued under the optional expedited process, the organization has spent and anticipates that it will spend less than 40% of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (within the meaning of the regulations under Section 501(c)(4)).
The Appendix further defines relevant concepts as follows:
For purposes of these representations, activities that promote the social welfare do not include any expenditure incurred or time spent by the organization on--
- Any activity that benefits select individuals or organizations rather than the community as a whole;
- Direct or indirect participation or intervention in any political campaign on behalf of (or in oppositionto) any candidate for public office;
- Operating a social club for the benefit, pleasure, or recreation of the organization’s members; and
- Carrying on a business with the general public in a manner similar to organizations operated for profit.
For purposes of these representations, direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (“candidate”) includes any expenditure incurred or time spent by the organization on:
- Any written (printed or electronic) or oral statement supporting (or opposing) the election or nomination of a candidate;
- Financial or other support provided to (or the solicitation of such support on behalf of) any candidate, political party, political committee, or Section 527 organization;
- Conducting a voter registration drive that selects potential voters to assist on the basis of their preference for a particular candidate or party;
- Conducting a “get-out-the-vote” drive that selects potential voters to assist on the basis of their preference for a particular candidate or (in the case of general elections) a particular party;
- Distributing material prepared by a candidate, political party, political committee, or Section 527 organization; and
- Preparing and distributing a voter guide that rates favorably or unfavorably one or more candidates.
In addition, solely for purposes of determining an organization’s eligibility under this optional expedited process, direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate includes any expenditure incurred or time spent by the organization on:
- Any public communication within 60 days prior to a general election or 30 days prior to a primary election that identifies a candidate in the election. For this purpose, “public communication” means a communication by means of any broadcast, cable, or satellite communication; newspaper, magazine, or other periodical (excluding any periodical distributed only to the organization’s dues paying members); outdoor advertising facility, mass mailing, or telephone bank to the general public; and communications placed for a fee on another person’s Internet website;
- Conducting an event at which only one candidate is, or candidates of only one party are, invited to speak; and
- Any grant to an organization described in Section 501(c) if the recipient of the grant engages in political campaign intervention.
Given my earlier post on the Bright Lines project, I find it particularly interesting that the IRS has defined the relevant standard by reference to BOTH expenditures AND employee/volunteer time. Hmmm . . . .
(Hat tip to Evelyn Brody)
Although some of the hubbub about 501(c)(4)'s and political activity has settled over the past couple of weeks, we shouldn't overlook the fact that the central fault leading to this mess was (and is) a set of un-administrable (and therefore unenforceable) rules regarding political campaign activity by exempt organizations.
In my back and forth with Rosemary Fei on 501(c)(4)'s, she mentioned that she was part of a group trying to provide better guidance on the line between prohibited political activity and permitted legislative lobbying or issue advocacy activity. This work is called The Bright Lines Project, and a full draft of their effort as of May, 2013, is available here.
In many ways, the project advances the IRS's own guidance on political activity by 501(c)(3) organizations published in Revenue Ruling 2007-41, but provides additional bright lines (pun unavoidable) on what is permitted and what isn't. It is a very thoughtful effort, modeled after the regulations on what constitutes lobbying expenditures under Section 4911 and the 501(h) election and fills some nagging holes in the IRS's guidance in Rev. Rul. 2007-41.
But I do think the project makes one mistake and ignores another very deep problem in this area. The one mistake is a sort of "pulpit speech" exception that is referred to as an exeption for "personal, oral remarks at official meetings." The project's explanation of this exeption is as follows:
Oral remarks made by anyone (other than a candidate) who is present in person at an official meeting of an organization held in a single room or location, so long as no announcement of the meeting refers to any candidate, party, election, or voting. This exception covers only oral remarks about candidates made by and to persons in attendance, not any other form of communication of those remarks, whether written, electronic, recorded, broadcast, or otherwise transmitted. A prominent disclaimer must be made to those attending, stating that such remarks are the speaker's personal opinion and are not made on behalf of the organization, and that the speaker is not advocating any of the actions set forth in Rule 3 [e.g., expressly calling for the election or defeat of a specific candidate or political party]
In it's examples, the Project notes that this rule would "permit a pastor to express his or her personal views on candidates from the pulpit. It would also allow parents at a PTA meeting, including officers, to express their views on candidates for school board. It would permit speeches, sermons, or discussions at any meeting of any tax-exempt organization to include expressions of opinion on those running for public office in upcoming elections, so long as such views were not made officially or on behalf of the organization."
My own view is that this exception is a huge mistake, because it will be exploited to the hilt by organizations intent on "having their say" about candidates. Face it - a Catholic priest, giving his "opinions" on candidates at Mass on the Sunday before the election will be viewed as an official church position, regardless how strong the "disclaimer" is that is attached to the remarks. We actually have a useful bright line on this kind of activity right now under Rev. Rul. 2007-41: you can't do it. The revenue ruling makes clear that speech such as this at an official function of an organization is prohibited, whether a disclaimer is attached or not. That seems to me to be an excellent bright line, and we should not replace it with an exploitable exception that is hardly a bright line.
The second major problem with the project is that it says nothing about the core problem that plagues 501(c)(4)'s (and 5's and 6's), which is "how much political activity is too much?" The project makes no attempt to set a bright line for when political activity becomes a "primary purpose" or otherwise address the "how much" issue.
This is a critical failing. The (c)(4) problem is as much (in my opinion, more) about how much political activity is permitted as it is in the dividing line between issue advocacy and campaign activity. Right now, we have nothing other than the vague notion that a (c)(4)'s "primary purpose" can't be political campaign activity - but there is no standard for judging "primary purpose."
So why not adopt a very clear bright line on this latter issue: the amount of political campaign activity permitted by (c)(4)'s, (5)'s and (6)'s is . . . zero. None. Absolute prohibition. Many of my colleagues believe there should be some "de minimis" amount of campaign activity permitted. I've heard things like "15%" thrown around, for example. But here's the problem: 15% OF WHAT? Of expenditures? Which expenditures? Of employee time? What if volunteers are used? Is the 15% per year or on a 4-year rolling average that we use elsewhere in 501(c)? If it's a 4-year average, that means an organization can "save up" for the presidential campaigns that happen every four years. Providing a de minimis exception is hardly a "bright line" in this area, unless one is going to couple it to a specific mathematical test like that provided in 501(h)/4911 for lobbying by 501(c)(3)'s. And anyone who's worked with that regime will tell you that it is incredibly complex, particularly when it comes to allocating expenditures (and I'd argue that the test doesn't account for volunteers or the fact that modern communication - e-mail and web sites - cost very little but have major communications impact). Do we REALLY want to go down that road? And if so, why? What is gained by such a rule other than complication and confusion? What part of "NONE" is so hard to understand or hard to comply with that we need an exception of some kind?
So I'll say it again. If we're really concerned about political campaign activity by (c)(4)'s, (5)'s and (6)'s, prohibit it; any organization that engages in political campaign activity in any amount that wants exemption should be subject to disclosure rules as Lloyd Mayer and others have argued - that is, shuffle them to 527 or some similar regime.
To actually solve the problems that led to the current mess, we need both bright line tests to distinguish between issue advocacy and political activity AND we need a bright line on how much activity is permitted. In the case of political campaign activity, "NONE" is a nice bright line that is mostly (not completely, I'll admit) incapable of exploitation . . .
[This represents a bit of change to my position, by the way - I'm actually OK with a 501(c)(4) category for organizations whose primary purpose is issue advocacy, including lobbying, IF such organization is prohibited from ANY campaign activity. It's probably a good thing to have such an organization that is also prohibited from receiving deductible contributions under 170 in order to avoid having (c)(3)'s used to end-run the 162(e) limits on the deductibility of lobbying expenses, and I'm also convinced there is a useful public benefit to issue advocacy.]
Wednesday, June 19, 2013
Just as a follow up to yesterday's post on the Oregon spendig requirement, I took a quick look again at the Form 990 (go to page 10) and its instructions regarding the allocation of program service expenses (go to pages 41 through 43). My personal favorite is the instruction on how to allocate indirect costs, which requires the charity to list everything as an administrative cost in column C (that being not a program service expense) and then to add a separate, self-created line under "Other" in which the charity is instructed to place a negative number in column C in order to allocate indirect costs to program service in B or to fundraising expenses in D. So that's clear as mud -- no chance of error there.
Also, take a look at the list of administrative expenses to be reported in column C and think about a smallish charity - one that does a full Form 990 but is still relatively small in terms of revenue and expense - for example, a small medical clinic. The list in the instructions includes the CEO and staff by default (unless directly involved in program service oversight) as well as "costs of board of directors' meetings; committee meetings, and staff meetings (unless they involve specific program services or fundraising activities); general legal services; accounting (including patient accounting and billing); general liability insurance; office management; auditing, human resources, and other centralized services; preparation, publication, and distribution of an annual report; and management of investments." I wouldn't be surprised if such a charity had issues, or at least is forced into taking a fairly aggressive position on indirect cost allocations.
When we think about fradulent charities, I don't think most of us think of these types of expenses.
Just a thought. EWW
Thursday, May 30, 2013
While hospitals continue to be criticized for failing to provide sufficient charity care and other benefits - criticism that is likely to only increase as more information about such activities becomes available because of section 501(r) - Congress, the IRS, and the media appear to have an increasing and skeptical interest in nonprofit colleges and universities. Recent developments include:
- IRS Colleges & University Tax Compliance Report: As previously reported, the report identified widespread underreporting of unrelated business taxable income, although the total amount involved for the 34 institutions examined was only $90 million, and various issues with compensation setting processes and reporting.
- House Oversight Subcommittee Hearing: In response to the above report (and lost once the the 501(c)(4) mess broke), this Ways and Means Subcommittee heard from Lois Lerner regarding the above report.
- Weekly Standard: Are Universities Above the Law?: A wide-ranging critique of college and university governance, citing recent disputes ranging from the Robertson Foundation's litigation with Princeton University's to the Association of Alumni of Dartmouth's litigation against their alma mater.
- Fiscal Times: Backroom Financial Dealings of a Top University: This article highlights the generous compensation and loan packages provided by NYU, which became national news with the nomination of former NYU administrator Jack Lew for Treasury Secretary.
All of this scrutiny comes at a time when many colleges and universities are facing increasing criticism for too high tuition, too generous compensation packages, and exploitation of student athletes. Of course such concerns are not new for nonprofit scholars, including co-blogger John Colombo, who in 1993 wrote Why is Harvard Tax Exempt? (And Other Mysteries of Tax Exemption for Private Educational Institutions), 36 Arizona Law Review 841, and more recently examined the tax treatment of college athletics. But we may be seeing an unprecedented level of scrutiny that will may ultimately shift the nonprofit governance and tax exemption standards for such institutions.
Tuesday, May 28, 2013
Having read most of the news coverage of the current situation and written about at least some of the issues at the heart of it, here is my two cents (including, with self-promotion apologies, links to my relevant articles):
Contrary to John Colombo's proposal posted earlier on this blog, I believe that tax exemption (but not deductibility of contributions) for what are now classified as 501(c)(4)s is appropriate, and that exemption is also appropriate for what are now classified as 527s. With respect to exemption, without a specific provision addressing the tax status of these groups a lot of uncertainty about their tax treatment would exist. The uncertainty arises because of issues such as whether the contributions and dues they receive are “gifts” under IRC § 102 and so not includible in gross income, especially since their lobbying and political campaign intervention expenditures are generally not deducible under IRC § 162(e). I also believe that most of these groups are formed (and contributed to) not for profit-making purposes but to pursue other goals, such as advancing a particular vision of the public good or to elect one or more candidates, and so exempting them from the corporate income tax is appropriate. Donations to such groups should not be deductible, both because of concerns regarding the influence of special interest groups (discussed in a recent article by Brian Galle and to some extent in my previous lobbying article) and because allowing deductiblity would permit easy avoidance of IRC § 162(e).
As a matter of cleaning up the tax laws, I like Ellen Aprill's idea of creating a new tax-exemption category for organizations that primarily lobby and expanding the 527 category to include any organization that engages in political campaign activities. I have not thought this idea all the way through yet, however. I have thought more about the possible constitutional issues raised by such a change (most recently flagged by Bob Bauer) and my conclusion is that the Supreme Court's Taxation with Representation decision is still relatively secure and would permit this kind of line drawing (for more details, see my post-Citizens United lobbying article; a recent article by Ellen Aprill also reaches this conclusion). Bauer is right to flag this issue, however, since it is a live one, especially if the Supreme Court's Citizens United decision turns out to be only a way station to an even stronger reading of the First Amendment in this context as opposed to a high water mark.
Finally, with respect to requiring disclosure of political activities, including of donors whose funds support such activities, I favor not placing such requirements in the tax laws to be administered by the IRS but instead in the election laws to be administered by the admittedly far from perfect FEC for the institutional choice reasons described in my 527 regulation article. As to what political activities should trigger disclosure (e.g., direct lobbying and grassroots lobbying as well as election-related political activity?) and what should have to be disclosed (e.g., donors above what dollar threshold?), I have written a couple of articles (here and here) that touch on these topics and am working on another article focusing specifically on what political activities, particular political activities such as grassroots lobbying and bundling that involve private-private interactions, should trigger disclosure (watch this space!).
Others have done a great job of reporting the numerous news stories covering the 501(c)(4) exemption application mess at the IRS (see especially TaxProf Blog, which has been providing a daily "IRS Scandal" update). So here I want to focus on commentary and opeds written by a number of thoughtful exempt organizations academics and practitioners:
- Ask the Experts: What to Make of the IRS "Tea Party" Scandal, CardHub (5/22/13): Provides lengthy quotes from Ellen Aprill, David Gamage, Philip Hackney, Thomas Kelley, Nicholas Mirkay, and yours truly.
- Ellen P. Aprill, IRS and Scrutiny: Reviewing Review, Roll Call (5/23/13): "Some media reports, however, imply that the IRS cannot and should not ask any questions of applicants for exemption, that any inquiry invades privacy and violates the First Amendment. That implication is wrong. An organization that seeks an IRS acknowledgment of its exempt status subjects itself to scrutiny — scrutiny designed to ensure that the group in fact qualifies for the benefit of tax exemption." See also Ellen Aprill, The TIGTA Report on the IRS Scandal: Questions About the IRS and About the Report, TaxProf Blog (5/15/13).
- Gary D. Bass & Elizabeth J. Kingsley, Nonprofits Need Better Guidance on Tax-Exempt Standards, Washington Post (5/23/13): "But we must not lose sight of the underlying problems that led to this situation: the lack of workable standards to determine what activity the Internal Revenue Service considers 'political' and how much of it a nonprofit group can do. . . . Much of this problem could be addressed by adopting objective, substantive criteria to define political intervention for nonprofit organizations."
- Roger Colinvaux, IRS Scandal Is About Donors, Not Tax, CNN (5/17/13): "Obviously, mistakes were made in how the IRS examined the groups, but what should not get lost amid the resulting hue and cry is that this is fundamentally about disclosure of donors, not tax-exempt status."
- Victor Fleischer, Congress's Role in the I.R.S. Focus on Conservative Groups, NY Times DealBook (5/13/13): "The reality is that this is a story of institutional incompetence. And Congress should share the blame." See also Victor Fleischer, A Dickensian Delay at the I.R.S., NY Times DealBook (5/16/13).
- Phillip Hackney, The TIGTA Report on the IRS Scandal: Be on the Lookout for False Partisan Witchunts, TaxProf Blog (5/15/13): "Nevertheless, other than the disclosure problems, this TIGTA review gives an accurate picture of an organization that I came to know and love when I worked there. Good people trying to do good work, but set for failure because provided poor clay in the Internal Revenue Code provisions on exempt organizations and too little staff and money to carry out the twin aims of accuracy and speed in molding that poor clay into a consistent good product."
- John Pomeranz, On the IRS Fiasco, Election Law Blog (5/11/13): "Looking beyond the immediate scandal, I believe that part of the reason it was possible for the IRS to treat these groups this way was the failure of Congress, the Treasury Department, and the IRS to adequately define what and how much political activity is permitted for tax-exempt organizations."
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.