Originally published on Forbes.com.
Loren Parks is certainly a colorful character. Mother Jones introduces him as the Sex Hypnotherapist Helping the GOP Retake the Senate. The hypnotherapist thing is more of a hobby actually. Mr. Parks, apparently, made his fortune in the medical device business. He has been spending some of that fortune supporting conservative causes and candidates. A report by Common Cause dubs him Oregon’s $13 Million Man as it details his various contributions over the years. Well now Mr. Parks will be famous among tax geeks as he is the subject of a regular Tax Court decision last week – one about excise tax on a foundation’s political expenditure.
The Tax
Back in the day (the day being the Tax Reform Act of 1969), Congress decided that loss of exempt status was not enough of a disincentive for political expenditures when it came to private foundations. Presumably it is too easy to fold your tents and start a new one. Instead there is an excise tax under Code Section 4945.
The initial excise was 10% if the expenditure charged to the foundation and 2.5% to the foundation manager (That was doubled in 2006, which is after the expenditures addressed in this case). That does not seem like much of a disincentive, since by running political expenditures through a private foundation you are making them tax deductible. The kicker is that if the expenditure is not corrected, there is an additional excise of 100% to the foundation and 50% to he manager. (The excise on the manager was capped at $5,000 on the initial tax and $10,000 on the additional tax.
Tough On Crime And Limited Government
The expenditures on which the IRS asserted the excise tax were amounts paid to run radio ads in Oregon between 1997 and 2000. All in there were over $630,000 in expenditures. Taxable expenditures under 4945 include attempts to influence legislation through an attempt to affect the opinion of the general public or any segment thereof and attempts to influence legislation through contact with members of a legislative body or other government officials.
On the other hand making available the results of nonpartisan analysis, study or research is not subject to the excise tax.
The radio ads over the four years were is support of a requirement that prisoners work a forty hour week, mandatory minimum sentences, crime victim rights, review of state agency administrative rules and limiting the growth of state government.
What Does Refers To Mean?
The question was whether the ads could be tied to specific legislation or specific ballot measures. The Tax Court ruled that an expenditure could be tied to a specific ballot measure without mentioning it by name.
On the basis of the principles illustrated in the regulatory examples, we hold that a communication “refers to” a ballot measure within the meaning of the regulations if it either refers to the measure by name or, without naming it, employs terms widely used in connection with the measure or describes the content or effect of the measure. This made for a rather lengthy decision as the content of ballot provisions and legisaltion was compared with the text of the radio ads.
One example was 1998 Measure 65 which would have amended the Oregon constitution to create a process for petitioning the legislature to require a review of administrative rules. The radio ad was not “Vote Yes on Measure 65”, but was nonetheless subject to the excise tax.
On this record, we are persuaded that the use of the term “administrative rules” in the explanatory statement for Measure 65 demonstrates that the term had been widely used in connection with Measure 65 at the time the radio messages were broadcast. Petitioners have offered no evidence to support a contrary conclusion. Consequently, we find that the term “administrative rules” was “widely used in connection with” Measure 65. Therefore each message “refers to” Measure 65 within the meaning of the regulations.
This painfully detailed analysis led to the Tax Court sustaining the IRS on charging the excise on most but not all of the ads that it had targeted. Discussing one of the ads that was not subject to the excise, the Court noted.
The absence of the “will soon be asked” language tips the balance against a finding that the second radio message is a “direct lobbying communication” within the meaning of the regulations. 46 While the second message, in comparing the rates of growth of State revenues and personal income, employs “terms widely used in connection with” Measure 8, the message is more accurately characterized as direct criticism of the Oregon State government without a suggestion of a remedy. The message’s central thrust is no longer advocacy for Measure 8 but instead an attack on the Oregon State government as wasteful and as retaliatory with respect to its critics.
The Court was also unmoved by the Mr. Parks’s First Amendment argument. Although Citizens United holds that corporation have free speech rights, they are not entitled to tax subsidies in exercising those rights.
Other Coverage
I’m near the front of the pack on this one.
Nigel Jaquiss in Willamette Week wrote:
Loren Parks, the largest individual contributor in Oregon political history, lost a case this week in U.S. Tax Court.
And of course Lew Taishoff has something – titled Two Little Words.
Two little words spark a 108-page full-dress T. C. opinion from Judge Gale. The two little words? “Refers to.” The full-dress T. C. opinion?
Me, I’m a simple guy, so I couldn’t tell the difference. Maybe that’s why I don’t give “a reasoned written legal opinion” to private foundations or their managers when these want to duck the excise taxes, per Reg. 53.4945-1(a)(2)(vi), of which sub-subsection’s existence and purport I was, until now, delightfully unaware.
But if you do give such opinions, practitioner, read this case. Mark, learn and inwardly digest it, because here be dragons.
Lew, there, is referring to an aspect of the decision I did not get into which was whether legal advice that Mr. Parks got on the ads was solid enough to spare him the excise.
Paul Streckfus had something this morning and will probably have quite a bit more later in the week. This decision will probably be a very big deal in the Exempt Organization world.
The recently handed down Opinion in Parks v. Commissioner, a Tax Court case, reprinted below — the one I wrote to the judge about (see email update 2015-169) — has something for everyone. If you care about private foundations and section 4945, you’ll see the case revolves around whether there were attempts to influence legislation under section 4945(e) and hence taxable expenditures under section 4945(d)(1). Or whether the same conduct was for a purpose other than one specified in section 170(c)(2)(B) and hence taxable expenditures.
If you care about the definition of educational in the EO context, then there is an interesting discussion of whether a radio message satisfied Rev. Proc. 86-43, the so-called methodology test. The IRS is very reticent in discussing what is or is not educational in view of the difficulties in defining such and the courts have offered only limited, sometimes conflicting, guidance.
If you care about when advice of counsel reliance applies in the tax context, theOpinion has that, too. If you care about the First Amendment and constitutional challenges to IRS actions, the Opinion has that, too.
Other Notes
The most interesting part of the story is probably Loren Parks himself. You might want to check out his youtube channel.
The other thing worth noting is how long ago the radio ads were. The current state of the IRS is such that it is unlikely that enforcement efforts like this one are being mounted currently, but people who are currently pushing the envelope on political expenditures might want to reflect that there might be a pendulum swing by the time today’s activities might get looked at.