501(c)(4) Mess Update: A Memo, A Chart, IRS Responses, and 501(c)(6)s

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.

Lloyd Mayer