Originally published on Forbes.com Feb 4th, 2014
Given the drama of the IRS “targeting scandal,” you would think that when the Service went from annoying document requests to issuing actual adverse rulings, there would be some howling, but the two adverse rulings on 501(c)(4) status issued last month seem to have gone unremarked. Given that one of them seems likely issued to a Republican group, I find that rather odd.
Meet Karen Schiller
There are certainly tougher government jobs than the one Karen Schiller has – being a company commander in Afghanistan would be an obvious example. If you limit yourself to clean work, no heavy lifting, office jobs that require an accounting degree, though, she may have about the worst. This summer she was assigned to be the IRS acting Director of Rulings and Agreements for Exempt Organizations. That puts her at ground zero in the so-called IRS scandal that has been gripping the nation for nearly the last year. The IRS scandal was the third item on the agenda when my possible cousin Bill O’Reilly interviewed the President before the Super Bowl. The President predicted a close game, go figure.
501(c)(4)
The scandal story brought to the fore a section of the Internal Revenue Code that I had never given much thought – 501(c)(4) – civic organizations to promote social welfare. Thinking strictly about taxes, 501(c)(4) seems kind of pointless. Unlike 501(c)(3) contributions to a 501(c)(4) are not tax deductible. The only federal tax benefit is that revenue can exceed expenses without generating corporate income tax. Of course, that is also true of political organizations which are exempt under Code Section 527. Political organizations have to disclose their donors, whereas social welfare organizations do not. So the IRS, which is responsible for collecting trillions of dollars, ends up caught up in a major scandal that has nothing to do with bringing in money.
“Dark money” organizations were pushing the envelope of allowable political activity of social welfare organizations and the IRS was pressured to do something about it. I have to tell you if you put me in charge of 20,000 accountants who had to collect a couple of trillion dollars and then threw in a problem about figuring out how political certain organizations were and it didn’t make any revenue difference to speak of, I would not put the best and the brightest on that particular problem. Of course now that it has turned into a scandal, it is a different story, so I suspect that Karen Schiller is probably among the best and the brightest.
An interesting question about the whole scandal narrative is how it would look if it turned out that many of the groups that the IRS “targeted” were in fact inappropriately claiming 501(c)(4) status. Tea Party Patriots Inc, for example, spends a lot of energy talking about how all those intrusive questions were harassment, but what if it turns that, in fact, all those phone calls that TPP Inc made telling people that November 2012 was the last chance to stop Obamacare from turning the country into a cradle to grave welfare state could be viewed as political? I have not noticed a lot of groups affirmatively explaining why it is that they deserve 501(c)(4) status. It is more a matter of them complaining about the IRS struggling to make the determination.
Well, on January 17 two determinations that groups did not qualify under 501(c)(4) signed by Karen Schiller were released. I haven’t been able to figure out who they are and as far as I can tell neither group has stood up and said “Hey, the IRS just turned us down”. At any rate, I thought it might be interesting to take a look at the rulings to get a better understanding of the issue.
Taking Out A Flier
I’ll call the group in Private Letter Ruling 201403019 Attack Flier Inc (ATFI). ATFI said that it was:
… a research and advocacy organization committed to educating the citizens of your state about the impact and/or opportunity of important public policy issues. In particular, you plan to focus on issues that you believe are extremely significant but have not garnered the level of public attention or debate you think is appropriate. You seek to facilitate education and outreach to elected officials, opinion leaders, and other community stakeholders to elevate these issues in the public discourse.
ATFI maintained a website that was mainly devoted to raising funds for political advertisements. ATFI had revenue in two federal election years, but none in the intervening non-election year. ATFI had one splash of glory:
In Year1, one week before the election, you sent out a flier to educate the public. The flier was in opposition to a candidate in that election. One side of the flier has a statement criticizing the candidate with respect to your primary issue, Descriptionl . The other side of the flier states, “This Tuesday, remember ” The candidate is a member of the U.S. House of Representatives and was running for reelection in Year1 in or near the same district in which you are located. You stated that you spent approximately $17x producing and disseminating this flier.
The flier took up 60% of ATFI’s revenue in Year1.
In Year 2 most of the money went to pay one of the directors.
In Year2, you spent 87.2% of your revenue compensating one of your directors for his efforts coordinating your activities, website, fundraising, and placement of public materials concerning your mission from Yearl to Year2. From the information you submitted with your application, your activities were the production and distribution of the flier described above, the operation of your website — both of which are political campaign intervention — and the creation of the unaired television advertisement, which you did not establish furthered social welfare purposes. Therefore, the compensation of your director for these activities does not further social welfare purposes.
What Is ATFI?
Unlike many private letter rulings on exempt status, I found the redaction on this ruling impenetrable. I suspect that a political geek might do better with it. It looks like a single issue dark money group, possibly not a very large one.
Improving The Party
Private Letter Ruling 201403020 is a different type of organization. It is meant to be a liaison between the community of a particular state and one of the political parties of that state. I’ll call it Pumping Up The Party Inc (PUPI) The adverse ruling was pretty much based on the organization’s description of itself:
You stated that you will “develop a statewide, intelligent, aggressive and serviceable X organization” and that you will provide a “practical program for the betterment of the Party of ”. Your chapters will work “to improve the public relations of the Party of , in supporting political campaigns, encouraging public forums and social programs, and in attracting a greater number of voters to work to advance the interests of the Party of State] and the state.” Your only members are registered voters. Membership in your organization can be terminated for advocating against nominees for any elected political office and/or if a member uses his or her name and title as a member of you in giving support or endorsing a candidate of another if that candidate is opposed by an X candidate.
It is kind of curious what they were up to in asking for 501(c)(4) status. It seems like they are blatantly a political group.
What Is PUPI?
This one is kind of interesting. The ruling quotes from several sections of PUPI’s by-laws. Several of those sections correspond perfectly with the by-laws of the California Republican Assembly. That does not mean that PUPI is CRA. CRA was founded in 1934
President Ronald Reagan called the California Republican Assembly, “the conscience of the Republican Party.”
Chartered in 1934, the CRA is the state’s oldest and largest Republican volunteer organization. CRA has been working to elect Republican candidates who stand unwaveringly for Republican principles.
The National Federation of Republican Assemblies has revised its model bylaws, but you can still find whole sentences that correspond with the language cited in the private letter ruling.
Maybe some state assembly that is supporting the Socialist Workers Party hijacked the CRA bylaw language, but I will be very surprised if it turns out that PUPI is not a Republican group. Of course I will only find out if the group appeals. It might just fold its big tent or meekly accept 527 status.
I could not find any Republican assemblies on guidestar.org, so my theory is that PUPI is something of a trial balloon to see if one of them can qualify for 501(c)(4) status. According to Wikipedia the National Federation of Republican Assemblies is a 527 organization. I could not find any mention of the ruling from NFRA.
The Dog That Didn’t Bark
It is curious that there does not seem to have been a peep about these organizations actually getting turned down by the IRS. My own cynical view would be that groups would rather talk about the IRS picking on them than the actual merits of their applications. Also they would not want to fight in court, because then there would be all that nasty discovery stuff. I’m hoping that some political junkies will study the rulings and do a better job at penetrating the redaction than I did.
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