Everybody including President Obama, Congress, and the chattering class seem to agree that it was a scandal that IRS bureaucrats slow-walked applications by Tea Party groups for tax exempt status under Internal Revenue Code Section 501(c)(4). The acting commissioner of the IRS has been fired, and John Boehner wants to know who is going to jail, but is there really a scandal here and if so what exactly is it? Suppose eminently fair-minded and smart people—like you and me, for example—were running that IRS bureaucracy in Cincinnati. What would we have done with the numerous applications from new Tea Party groups?
Section 501(c)(4) of the Internal Revenue Code allows tax exempt status for “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare . . . .” IRS regulations, rulings, and court decisions summarized here have developed a body of law about what kinds of political activities are permitted and what kinds are not. The IRS regulations give examples including this one:
Example (2) Organization B conducts research, seminars, forums, and other educational programs for the public on issues of public concern. It also engages in substantial lobbying activities. Its activities are under the direction of a Board of Directors whose members were appointed by the national committee of a major political party. It selects issues to study based on the needs of the party, and receives substantial financial support from the party. B's activities are not primarily "educational," given their partisan nature; accordingly, it does not qualify for exemption under IRC 501(c)(4).
So here we are, you and I, having responsibility for processing exemption applications and it is reported to us that our processing unit is receiving a large number of applications from organizations that have the word “party” in their names and/or describe political activities as amongst their purposes. Uh oh, there’s an even more delicate problem: Most of those applications are coming from organizations with “Tea Party” in the name, such as Georgia Tea Party for a Free America. We know, because we do read the mainstream media, that there is a nationwide Tea Party movement that works on tax issues, health care, and other public issues, that it is generally hostile to government and especially to the IRS, and that at least some parts of it are partisan in that they select, fund, campaign for, and ultimately elect their preferred candidates for public office. Indeed, there is a “Tea Party Caucus” of several dozen Republican Members of Congress.
Staff have requested guidance. What are we going to tell them? Well there are some things we know for sure, aren’t there? We know we can’t approve applications from organizations with names like Santa Monica Democratic Club or Peace and Freedom Party of Los Angeles County or California Republican Warriors without some very careful scrutiny because the faces of all those applications scream at us that their primary purpose is to influence partisan elections. In fact, it could be a major scandal if we approved any of those applications--even if the files contained solid evidence that the names of the organizations were completely misleading, couldn’t it?
What are our options? We can agree, can’t we, that we cannot favor, or appear to favor, any one political party or ideology, but that we are legally obliged to deny tax exempt status to any group that engages in partisan political activities and to grant tax exempt status to groups that do qualify? Clearly, our directive to staff should apply to all applications that use the word “party” in the organization name and/or that state that one of the purposes is to select, fund, or support political candidates because our directive must apply even-handedly to liberal and conservative groups alike. But the harder question is how to direct staff to handle such applications?
We could direct that they all be approved. However, it seems clear that some of these organizations are not entitled to exemption under Section 501(c)(4), and we would face a public scandal and disciplinary action if we approve them despite the obviousness of their disqualifying partisan purposes.
We could deny all applications that lack clear evidence that they are non-partisan despite their names. Those denied can appeal, and the final decisions will become somebody else’s problem. Of course, instead of or in addition to appealing, they may go public and try to embarrass and influence us by creating a public sense of scandal.
We could process each application, with enhanced questioning and scrutiny, and issue timely decisions to the applicants even though staff will have great difficulty articulating solid distinctions between those that are approved and those that are denied. Staff will hate doing this because they think these tough decisions are above their pay grade. They are reasonable to think that, are they not?
We could keep requesting more information until we run out of questions to ask and then, if necessary, defer decisions until somebody above our pay grade makes a policy decision.
Is there any other option? What do you think we should do? I’m counting on you to get this right.
If these questions seem difficult, try these: What policy directives should be issued by the new IRS management that has just taken over this week? Should it approve all the Tea Party exemption applications? None of them? Flip coins? Instruct front-line reviewers to clear the backlog of decision-making within 30 days applying only existing published guidelines? Form a team of more senior reviewers to make individual decisions on each of the Tea Party applications? If so, what guidance will they have that the front-line reviewers haven’t had? Should the new acting commissioner personally review all these decisions?
NYT has been talking to IRS staffers and former staffers in and involved with the Cincinnati determinations unit and reports the difficulties and dynamics were much as I speculated above. But it wasn't just Tea Party applications that got flagged--staffers were also doing key word searches for other indicia of partisan political purposes and intentions. The determinations unit got only occasional--and inconsistent--guidance from headquarters, and it was simultaneously overwhelmed by a flood of organizations reapplying for 501(c)(3) status. It appears that one bureaucratic reaction was to work on the easy applications and put the hard ones on the back burner.
LAT has a similar story here. A recurrent theme in the LAT story, and other reporting, is that IRS questions about applicants' political attitudes and activities was "inappropriate." How can it be inapproriate to ask for evidence about the precise issues that the law says shall be the bases for these legal decisions? A further question of my own: Why were the applicant organizations and their Congressional allies so upset that the IRS decisions were not issued before the elections if they were not planning to participate in those elections?
Tax law professor Linda Beale has a good explanation of some of the key legal issues confronting the Cincinnati determination group, including this quotation she lifted from Stuart Levine's comments on her blog:
An organization seeking to qualify under 501(c)(4) does not need a determination letter. Why then were they seeking these letters? Well, the (likely well-founded) suspicion of the people in Cincinnati was that these organizations wanted a determination letter under 501(c)(4) to assure donors that they weren't 527 organizations and that their political donations would be anonymous.
[He notes further that] the applications for all organizations seeking a determination letter are reviewed. That's 100% subject to review, not 1% or 2%. Second, one of the issues that has to be focused on in a 501(c)(4) review is whether the organization was engaged in an undue amount of political activity.
Beale also links us to this PowerPoint presentation by tax law professor Ellen Aprill giving a good overview of the various kinds of groups that can or cannot engage in political activity including 501(c) and 527 organization.
I been reading press reports and the analyses of others and am ready to say I think the only possible scandal in this situation is that liberal or non-Tea Party, non-conservative groups were not targeted for the same kind of enhanced scrutiny. I don't know whether the were or were not, but this story on Yahoo! News lists 1017 groups that got favorable determinations under 501(c)(4) since 2012. (Hat tip Angry Bear.) Readers are invited to search that list and identify those that seem particularly likely to be liberal political action organizations.