Originally published on Forbes.com Aug 29th, 2014
Tea Party Patriots Inc has announced this week that it has a new funding source.Tea Party Patriots will be allowing third parties to send e-mails to its list in exchange for a fee. TPP expects to generate between $500,000 and $1,000,000 from this activity with minimal cost. It’s a great thing, because:
Our finance team has determined that this will make a huge dent in the organization’s overhead costs, which means that we can worry less about keeping the organization’s bills paid and focus more on promoting our core values across America.
So, we want to ask you to do one thing: stay engaged. By simply staying subscribed to this email list and continuing to open emails from Tea PartyPatriots, you will help us maintain the value of our email list and keep this funding source open. If you would prefer to opt out of third-party emails while continuing to receive emails from Tea Party Patriots, please click here.
Now this message came from Tea Party Patriots Inc, the 501(c)(4) not Tea Party Patriots Citizens Fund, which as a PAC should be taxed under Section 527. There is a significant tax difference between the two. As you might guess it is a better deal for the 501(c)(4) to be receiving the third party payments than it would be for the PAC. Of course, whether TPP really qualifies as a 501(c)(4) is arguably one of the issues at the heart of the IRS scandal, although that aspect does not seem to be of nearly as much interest as elusive e-mails.
How Political Organizations Are Taxed Differently Than 501(c) Organizations
There are 29 different varieties of 501(c) organizations, many of which have peculiar wrinkles to them, but what c(3) and c(4) organizations have in common is that just about all their income is exempt. Contributions, of course, but also interest, dividends, capital gains and royalties are all exempt. The big exception is something called Unrelated Business Taxable Income. There are quite a few gray areas in UBTI, but basically, income from letting somebody use your mailing list is only slightly gray barely a dingy white.
Political (Section 527 organizations) are taxed as corporations. They file Form 1120-POL. Except for “exempt function income” everything is taxable. If who you rent the list to is sharply restricted, you might be able to construct an argument that the list rental is “exempt function income”, but it is something of a stretch.
I don’t practice in this area, so I consulted with Marcus Owens of Caplin & Drysdale. Mr. Owens spent most of his career with the IRS finishing up as the director of the Exempt Organizations Division. Here is what he wrote.
More Than You Probably Want To Know About Mailing List Rentals
Actually, it’s a bit more complex than that. Most mailing list rentals are structured as royalty arrangements, that is, the owner of the list allows the “renter” to access the names/contact info for a fee. As a result, the income stream fits within a series of court decisions, principally involving charities, that have held that right of access to be a form of intangible intellectual property, thus coming within the royalty exception from the calculation of UBTI under section 512 of the Internal Revenue Code. Assuming that the 501(c)(4) does not provide marketing services along with the IP, then the royalty exception will protect the income stream from taxation. To the extent that services are provided, a commensurate portion of the revenue would be reclassified as marketing revenue, and thus taxable income to the otherwise tax-exempt list owner. Some list owners want to maximize their income from such lists, and agree to provide various services for an increased fee, e.g. personal appearances by notable people associated with the list owner. Whether such services constitute taxable marketing or non-taxable quality control is a current point of contention between tax-exempt list owners and the IRS. Because the taxable income of 527s is not calculated using the UBIT rules, but rather the regular rules applicable to taxable corporations, royalty income would be taxable income in the hands of a 527. However, as 527s are permitted to help other 527s and candidates, if the list rentals are limited to other 527 groups, particularly those with a common purpose or orientation, e.g. other Tea Party groups or aligned candidates, then an argument could be made that the list income is not taxable, but rather akin to the income received from the sale of bumper stickers and other campaign paraphernalia. It’s not a great argument, but it would key off Treas. Reg. sect. 1.527-3(a)(2)(e) which provides that the sale of campaign materials is exempt if it relates to “organizing voters to vote for a candidate for public office.”
Have you got that? If not here is the Cliff Notes version from Mr. Owens.
….just to be clear, if a (c)(4) structures the arrangement as a license to use IP, then the argument that the income stream is excluded from taxation is very strong, close to unassailable. If the owner is a 527, then the income is likely taxable, but there is a weak argument based on an aggressive interpretation of the “organizing voters” language in the regs.
The Interminable Scandal
Don’t get me wrong. I don’t doubt for a minute that Lois Lerner may be the most wicked person who ever walked the Earth. I mean maybe we should amend the Constitution to have a Lois Lerner exception to the Eighth Amendment. Still, when TPP is beating the IRS targeting drum, it is not one that I am that moved to march to.
John Koskinen, current IRS commissioner, has questioned whether the people investigating the scandal ever want it to come to a resolution. I think there may be something to that. As long as we focus on the criteria the IRS used to look at groups like Tea Party Patriots Inc (although, it could be that TPP is sui generis), we don’t pay much attention to whether their claim to 501(c)(4) status is questionable. The most recent communication I received from TPP seems to, at least superficially, indicate that they are overtly focusing their activities on affecting the outcome of the next round of elections.
So Does This Sound Political To You?
I received a couple of fundraising emails for TPP this week. When I hear from them it is usually to ask me for money and it is usually pretty urgent. The current project is called “Make Harry Reid cry”. The goal is to raise $800,000 for a “massive nationwide voter education campaign” this fall. It’s pretty dramatic
Starting on Labor Day, Tea Party volunteers must fan out across the country.
We must educate voters on what is at stake in Washington.
We need to explain to taxpayers everywhere that Senate Majority Leader Harry Reid and his left-wing Democrats are deliberately blocking commonsense reforms.
Everything that is going wrong in America is 100% the fault of the Obama-Reid big-government agenda!
To add to the drama there is a graphic of progress. I have to say that it strikes me as, well, political.
In 2010, we could have fired Harry Reid as Majority Leader if we’d found another 174,587 votes in just four states.
In 2012, we could have fired Harry Reid as Majority Leader if we’d found another 433,722 votes in just six states.
With every dollar we raise, Harry’s hopes will fade. With every voter we can reach, every door we can knock, every phone we can call, Harry Reid’s dream of a liberal Senate will grow more and more distant.
Of course, I just have the same education as an IRS revenue agent, so maybe there is something in the definitions that would exempt this or possibly TPP has enough other social welfare activity that it would still qualify. Regardless, I think there might be just a bit of concern about its 501(c)(4) status.
Since TPP does not appear to be a dark money group, I kind of wondered why the status was so important. Well, now, given the e-mail fees, there could be some serious money at stake. The best defense is a good offense. The persecution narrative might be a license to be aggressive.
Note
The case law and rules in this area tend to talk about “mailing list rentals”, which is kind of quaint. TPP has made it clear that they are not letting anybody have their list. Rather they are sending the messages out for them, which, of course, is not all that much work. The tax principles are pretty much the same.