Monday, April 22, 2019

Nonprofit Cultural Wars Continue with New Private Benefit, Inurement, Commerciality, and Excess Benefit Complaint against National Rifle Association

A few weeks ago we posted about the coordinated effort against the Southern Poverty Law Center's tax exempt status led by right leaning groups -- including media groups -- and assisted most recently by a letter from Republican Senator Tom Cotton to the IRS demanding that the Service yank SPLC's tax exempt status.  Now in the wake of a New Yorker Magazine article entitled "Secrecy, Self-Dealing, and Greed at the NRA," a gun control group has filed a complaint against the NRA with the IRS.  The complaint does not have the support of a Senator just yet, but it gets an assist from former EO Division Director Marc Owens, who is also quoted in the New Yorker Article.  Here is the gist of the complaint from "Everytown For Gun Safety:"

The NRA is a purported charity and exempt from federal tax under section 501(c)(4) of the Internal Revenue Code and we write today to alert you to what we believe are activities that clearly fall outside of the NRA’s charitable purpose and mission. After reviewing the facts contained in the NRA Expose, Marc Owens, who for ten years headed the IRS division overseeing tax-exempt enterprises, said, “[t]he litany of red flags is just extraordinary … The materials reflect one of the broadest arrays of likely transgressions that I’ve ever seen. There is a tremendous range of what appears to be the misuse of assets for the benefit of certain venders and people in control. ... Those facts, if confirmed, could lead to the revocation of the NRA’s tax-exempt status.” Accordingly, and for the reasons set forth below, we call on the IRS to commence an investigation into whether (i) the NRA has violated the federal laws governing 501(c)(4) charitable organizations, and (ii) if so, consider what remedies are warranted, including potential revocation of the NRA’s 501(c)(4) status.

The complaint -- which is in the form of a letter accompanying a Form 13909 (Tax-Exempt Organization Complaint (Referral) -- lists ten examples, variously and without using the legal terms, of private benefit, private inurement, excess benefit and commerciality problems.   Its hard to see how this complaint will go anywhere given that the Service has effectively been prohibited from investigating 501(c)(4) groups anymore.

Darryll K. Jones

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Do they not know that a 501(c)(4), while tax exempt, is not a charity? The NRA has a related 501(c)(3), but the complaint appears to be going after the main nonprofit, which is indeed a 501(c)(4).

501(c)(4) was initially designed in the 1954 tax code revisions as the "miscellaneous" exemption for tax exempt groups that did not fit any of the other existing categories. The Treasury didn't even address definitions for the 501(c)(4) "exclusively for social welfare" description until 1959. It was then that the "primary purpose" standard was developed, though it wasn't described in terms of budget, program/service activities, staff allocations, etc.

As Dr. Jones notes, it's unlikely the complaint can go anywhere at present. Until more specificity in 501(c)(4) regulatory guidance can be developed and implemented, it's difficult to know what rubric(s) would be used to evaluate any organization's qualification for exemption under 501(c)(4) that would survive judicial review.

Posted by: Michael L. Wyland | Apr 23, 2019 6:38:19 AM

The word "charitable" is also used in (c)(4). The allegation seems to be that the org is being used for the private benefit of vendors. The lack of clarity on the degree to which a (c)(4) can engage in electioneering should not be relevant here.

Posted by: Russ Willis | Apr 24, 2019 1:24:19 PM

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