In IRS scandal, why are political groups tax exempt?


WASHINGTON — The Internal Revenue Service is under fire for giving extra scrutiny to conservative organizations that asked for tax-exempt status. But the scandal begs a broader question: Why are political organizations getting this government subsidy anyway?

The section of the tax code sought by the tea party groups was established for the benefit of groups that promote social welfare, generally nonprofit operations. Examples on the IRS website involve community service and groups that provide a certain local benefit.

Somewhere along the line, this longstanding classification has become a loophole exploited by groups seeking to elect Democrats, Republicans and most recently tea party candidates and like-minded groups.

Search the membership of state associations of nonprofit organizations and you’ll have to work to find any that are political in nature. The California Association of Nonprofits in San Francisco lists online more than 1,400 members, yet none have patriot, tea party, progressive or similarly political names.

Yet compare that against the applications in recent years to the IRS for this special tax-exempt status, and a good percentage of the applications appear to be organizations that are decidedly political in nature.

The IRS late Wednesday released the names of 176 applications it had approved through May 9 in its controversial specialized review process. That process is at the heart of the controversy since specialists were flagging applications that had tea party, patriot and other politically charged conservative names.

The 176 approved applications include dozens of tea party groups, as well as others with innocuous names such as Charlotte Matters, Kentucky 912 Project and Miami-Dade Taxpayers Alliance. Some appear overtly political, such as the Coalition for a Conservative Majority, both the Denver and Colorado Springs chapters, and Progressives United Inc.

All were applying for a tax-exempt designation under section 501(c) of the tax code. This section has at least 25 tax-exempt designations, and the tea party groups were applying under a provision — 501(c) 4 — that would treat them as social welfare organizations. This allows the groups to raise money from donors and get involved in politics, as long as that’s not their primary activity. Importantly, the donors are not disclosed publicly.

Among the existing 501(c) 4 organizations are giant election-influencing political entities such as Crossroads GPS and Americans for Prosperity on the right, and the pro-Obama Organizing for America and Priorities USA on the left.

“There are two IRS scandals. The other is the IRS allowing big shadowy forces to meddle in elections anonymously through front groups that file false statements with the IRS,” Sen. Sheldon Whitehouse, D-R.I., said on the Senate floor Wednesday.

The investigative website ProPublica last year spotlighted the growing role of these shadowy groups and their “dark money” on campaign finance, noting that as the 2012 election approached they had outspent traditional political action committees in the purchase of campaign ads.

Senate Finance Committee Chairman Max Baucus, D-Mont., scheduled a hearing for next week and intends to look beyond the narrower question of tea party targeting by the IRS.

“There is another important question that needs to be asked: Is there a fault in the tax code that may have contributed to the IRS taking such unacceptable steps? Do we need a better definition of what organizations qualify for tax exemptions?” Baucus asked.

House Minority Leader Nancy Pelosi, D-Calif., said Thursday that she will push for a legal change that returns the 501 (c) 4 to its original intention of promoting social welfare.

“So from my standpoint, I think that they should not have any political purpose. And I would hope that we could change the law on that,” Pelosi said.

Republicans aren’t talking about legal changes, instead keeping the heat squarely on the IRS behavior under existing law.

“I want to know how this happened, who was responsible for it,” House Speaker John Boehner, R-Ohio, said Thursday. “Section 7214 of the Title 26 of the U.S. Code states very clearly any officer or employee of the United States acting in connection with any revenue law of the United States who is guilty of extortion or willful oppression under the color of law shall be dismissed from office and, if convicted, be fined up to $10,000 and spend five years in jail.”

A report by the Treasury Department’s inspector general for tax administration faulted the IRS for using unclear criteria to determine tax-exempt status and recommended definitions that are more specific when an application for tax-exempt status is flagged for scrutiny.

“A lot of it is guesswork, and that’s what makes it difficult. There’s also a question of what the IRS should be doing,” said Jeremy Koulish, a researcher at the Center for Non-Profits and Philanthropy at the Urban Institute, a centrist policy think tank. “Somebody has to decide whether organizations deserve the status they are getting, and that has fallen to the IRS. But because the regulatory environment is so muddy, the evidence suggests we need more clarity in the rules.”

Earl Copilevitz isn’t so sure about that. The senior partner in the Kansas City, Mo., law firm of Copilevitz & Canter has helped establish tax-exempt organizations for years. Most of the groups that sound political in nature, he cautioned, still meet the criteria of providing a social welfare function through their education and outreach efforts.

“That’s the mouse hole they’re going through to justify the tax-exempt status,” he said, noting that issues such as gun control or abortion are closely linked to the political debate but still involve a strong social welfare component.

On the issue of qualification, the IRS itself offers a very broad disclaimer.

“Although the service has been making an effort to refine and clarify this area, (section) 501(c)(4) remains in some degree a catch-all for presumptively beneficial nonprofit organizations that resist classification under the other exempting provisions of the code,” the agency noted. “Unfortunately, this condition exists because ‘social welfare’ is inherently an abstruse concept that continues to defy precise definition.”

A tax-exempt designation for social welfare groups dates back to the Tariff Act of 1913, in part because of a push by the U.S. Chamber of Commerce for exclusion of civic groups and organizations that promoted commerce. That same year, the 16th Amendment was ratified, allowing Congress to levy federal taxes, the modern income tax was born and the tax-exempt designation gravitated to the new code.

For much of its history, groups under this designation were as advertised. But over the past decade, applications for this designation took on a decidedly more political nature. There were 2,774 applications for the special tax-exempt status in fiscal 2012, vs. 2,033 in fiscal 2000.