Current Events:  
Special Comment on May 2013
coverage & discussion about alleged IRS Scrutiny of
Conservative Tax Exemption Applications
(Comment ver 2.0; 1.0 is at bottom)
Recent news coverage and editorials, not to
mention politicians’ grandstanding about the IRS
supposed bias towards investigating “tea party”
and “patriot” groups has been almost
consistently mis-reported, and most of the
indignation is misplaced.  

These stories all resulted from an admission by
Lois Lerner, IRS Director of Exempt
Organizations, which seemed unduly defensive
to begin with to me based on what I know.  
Details below.

The topic at hand concerned questionnaires sent to
applicants for tax exempt status under Internal
Revenue Code Section 501(c)(4), and not about
“audits” or “investigations.”  

I have not seen the questionnaires in the specific
instance, but have any number of times been on the
receiving end, while working for a law firm which did
such work, and from time to time as a solo, lists of
questions sometimes going to three pages and being
single-spaced.  It is true that usually when a
questionnaire goes on at that length it has the feeling
of a fishing expedition of some sort, and I was once
involved in a case where that seemed evident and we
brought it to the attention of one of Lois Lerner’s
predecessors even while responding, point by point,
to the questions as required.

It is even noteworthy to point out that a group may
“self-declare” as a 501(c)(4) exempt organization and
file accordingly.  Another project of IRS Exempt
Organizations (EO) this fiscal year is to send a
questionnaire to 501(c)(4),(5) and (6) self-declarers
to ask who they are, what they do from a mission level
as well as a specific activities level, and then digest
that information to see if continuing to allow such ‘self-
declaration’ is a good idea.  (Such projects are more
than one year long; EO discusses them in a
reasonably transparent annual “workplan” produced,
posted, and notified to a free ‘EO-Update’ newsletter
to interested members of the public by EO.  This
project is at least “current” if not entirely within FY13.)

First of all, section 501(c)(4) is often misunderstood,
by activists as well as the media.  It is technically
named a “social welfare” organization, sometimes a
“civic league.”  Similar to 501(c)(3) charities, in states
which distinguish types of nonprofit corporations, (c)
(4) organizations are typically incorporated as “public
benefit” corporations and are under the jurisdiction of
the attorney general’s broad authority to enforce the
charitable and public trust.  NOT similar to this are 501
(c)(5) labor and horticultural (think Farm Bureau)
organizations and 501(c)(6) business leagues,
chambers of commerce, and professional
associations which are organized as “mutual benefit”
corporations.

A 501(c)(3) public charity (“charity”), when working in
the realm of public policy, may engage in:  A)
unlimited public education on broad social problems
and possible solutions;  B) limited legislative lobbying
-- on “specific legislative proposals” -- which definition
begins before a specific bill number is attached but
sometime after it is mere discussion of a social
problem; the “limited” refers either to “insubstantial” or
to a specific sliding scale at the charity’s option (with
one or two exceptions where the insubstantial test is
the only option);  C) zero candidate electioneering (for
or against).  The prohibition on electioneering by
charities is an absolute “bright line” prohibition at least
in theory, although recent reports suggest a harsh
warning often comes before revocation of 501(c)(3)
status.
Like charities, 501(c)(4) “social welfare” organizations
may engage in: A) unlimited public education.  By
contrast with charities, social welfare organizations
may engage in: B) UNlimited legislative lobbying (with
certain anti-abuse limits if the organization is
predominantly supported by business-deducted dues
rather than the usual broad-base contributions one
sees with social welfare organizations); and C)
LIMITED candidate electioneering, so long as it is
conducted legally, and is not the primary purpose – in
any/each year.  (More in a minute on how “not
primary” is defined in this case.)

Both types of exempt organization are allowed to keep
their donors confidential, though they both report
substantial contributors to IRS on a schedule not
open to public inspection.  The word “exempt
organization” means that the organizations are not
taxed if they have a surplus at the end of a year, but
that surplus must be irrevocably dedicated to the
purposes of the organization.  “Tax exempt” is not
synonymous with “tax deductible.”

Contributors to charities may deduct the contribution
from any taxable income they have, and private
foundations may most easily make grants to
recognized charities.  

Contributors to social welfare organizations may NOT
deduct their contributions as a charitable contribution,
and private foundations may only make grants to
them for specific charitable work and only if they
exercise special oversight called “expenditure
responsibility,” which is not terribly difficult, but is
anathema to the often-cautious types who run private
foundations.

Historically, in the public policy realm, social welfare
organizations are those such as Sierra Club, National
Rifle Association, NARRAL, Right to Life.  These
organizations have broad bases, a very active
lobbying agenda, are fueled with a large number of
individual contributions, and believe themselves to be
working in the public interest, even if they represent
one “side” of a big issue.  From a public policy
perspective, we, as taxpayers, have concluded in
essence that it is a good idea to encourage the
aggregation of such voices in ‘public interest lobby’
organizations, so we allow their non-commercial
earnings to be exempt from income tax, but we do not
encourage them to the degree we do charities.  Most
big social welfare organizations I mentioned maintain
an affiliated public charity ‘foundation’ or ‘research &
education fund’ which receives charitable gifts and
supports specific charitable work of the main
organization, and most of them also maintain various
“PAC” political committees (527 organizations under
the Internal Revenue Code) duly registered and
compliant with the laws of whatever jurisdiction is in
play.

From the same public policy perspective, we, as
taxpayers, strongly encourage support for charities –
roughly ‘charitable, educational, scientific and
religious’ missions, by making gifts tax deductible.  
From the working of the tax deduction, you can think
of charities as being perhaps 1/3 publicly funded
since but for the deductions, we’d collect more tax
revenue; in addition, we exempt their earnings.  We
also encourage charities to engage in limited
legislative lobbying, concluding, for example, that in a
debate about family planning laws, we would like to
hear from a charity concerned with over-population,
and not just from churches and profit-making
organizations with some kind of financial interest.  
However, since we forgo tax collections when gifts are
made to them, we want charities to keep out of
candidate politics – what has become our ugly
national mud-wrestling match.  This keeps them with a
relatively safe “halo.”

For a 501(c)(4) organization, candidate electioneering
activity is not considered to be a “social welfare”
purpose, and to maintain its [tax] exempt status, it
must be organized and operated for social welfare
[exempt] purposes in each year.  The cumulative non-
exempt purposes of such an organization (commercial
+ electioneering) must not dwarf the exempt
purposes.  Going further, while there is not yet legal
guidance, some aggressive tax attorneys have
argued that candidate electioneering may constitute
49% of a social welfare organization’s work.  However,
it is not clear that if there were three distinct programs
of 30% 30% and 40% each, and candidate
electioneering was the largest -- the 40% -- that the
organization would be assured of classification in
Section 501(c)(4) of the Internal Revenue Code and
could face revocation.  Therefore, that “49%” (which I
heard reported on NPR last night as the law) is legal
advice, not the law.

So far, what I have described was the state of affairs
until the Supreme Court’s “Citizens United” decision.  
(That decision will, I believe, reflect poorly on the
historic reputation of this Court and these justices,
and the justices who voted with the majority on both
Citizens United and Bush v. Gore will be held up to
future generations of law classes contemptuously as
political hacks and ideologues unworthy of their
office.  But I digress.)

Citizens United allowed corporations to spend
unlimited amounts of candidate electioneering money
so long as it was conducted independently of the
candidate’s own strategy and tactics.  (Given the
incestuous relationship among campaign operatives, I
say good luck with that!)  Social welfare organizations
are most often themselves corporations, and had
been previously constrained by the Federal Election
Campaign Act from many types of candidate
electioneering since a primary goal of FECA, dating
back to Richard Nixon’s brown bags of corporate cash
materializing for the Committee to RE-Elect the
President, a/k/a CREEP).
Since candidate electioneering must be conducted legally,
social welfare organizations were unable to engage in it.  
With Citizens United, they now can, at least so long as it is
not their primary purpose.  Better yet, if you are the Koch
Brothers or George Soros, they do not need to publicly
disclose the names of their donors.  Donors can avoid
having their reputations influence the public’s view of a
given candidate by forming a 501(c)(4) “paper
organization” to do their electioneering without any public
knowledge as to their identity, which has been a bedrock
thrust of campaign law (sunshine as a disinfectant) for a
couple generations or more.

Now, think back to 2010, the year of the August of the tea
party rebellion against “Obamacare” (the same ones who
wanted the government to stay out of their Medicare, but I’
m a partisan so I should avoid such digressions).  

The IRS received a sudden onslaught of 501(c)(4)
applications [for recognition of exemption].

Now lets talk about tax exemption applications.  Some time
in the late 1990’s, prior to which the IRS had been
distributing tax exemption applications around the country
wherever it had revenue agents with extra capacity and
some training in the subject, the IRS realized it should
centralize the knowledge base around tax exemption, and
so it built an organization in Cincinnati to handle this.  The
quality of review questions rose once the Cincinnati staff
became fully competent, circa 2002.  

For a long time now, assorted issues or new nonprofit
sectors of activity suddenly arise where there were
arguably conflicting ways to view the activity.  One example
would be when is “economic development” charitable
because it’s in a blighted area and when is it just the sort
of thing any local chamber of commerce would do and
therefore be better described in 501(c)(6)?  In these
cases, IRS would often ask the Cincinnati screeners to see
to it that all applications on a given topic be centralized
somewhere or with a specified team of reviewers –
sometimes in the national office where the Service’s top
level lawyers and technical staff could chew over the
assorted presentations.  The goal being to render
consistent rulings and not have half a given sector be (c)
(3) and half be (c)(6) for instance.  Another example is
internet activity: when do clicks through to a commercial
sponsor’s web site render the sponsor’s payments to the
charity as advertising income rather than the clickable link
being merely sponsor acknowledgement?  Similarly, when
do clicks through to other exempt issue organizations’ sites
might become electioneering rather than just the
meandering of an internet surfer who began at a charity’s
site?  It is very much in our interest as taxpayers that the
IRS centralize these emerging sectors and areas of
economic activity so as to develop expertise, make good
and consistent rulings, and only pass up tax revenue when
the public policy implied by tax law is being advanced.

So many of these stories have reported some ulterior
motive to centralize the sudden burst of 501(c)(4)
applications in Cincinnati as some nefarious plot.  To the
contrary, MOST exempt applications are processed in
Cincinnati since 2000, and it would not surprise me that a
specific team would be assigned to review them so as to
match apples to apples.

So the next question the reviewers were faced with is to
determine how to look at these applications and figure out
if they are being genuinely formed to promote a social
welfare point of view (which would include the broad view
that smaller more local government is the way to go, and
which activities might range from a national civics class like
Newt Gingrich once developed all the way up to Federal
candidate electioneering).  Anyone who believes that Karl
Rove’s 501(c)(4)/Federal 527 tandem operation and the
similar one maintained by Obama’s former staff are
focused on broad social welfare rather than on influencing
elections is arguably being intentionally ingenuous.  Even
so, the IRS has had real trouble winning these cases; it
pursued Ralph Reed’s Christian Coalition for many tax
years and never succeeded in revoking its 501(c)(4)
classification on the basis of more-than-primary-purpose
candidate electioneering.  From the outside view, this is
mind-boggling because of the relatively brass-naked
electioneering agenda promoted by the Christian Coalition
in its day.

So the specialized review team in Cincinnati, facing a
substantial pile of suddenly-materialized 501(c)(4)
organizations, which anyone other than an intentionally
ingenuous naïf would grasp as national electioneering
strategies, had to decide which ones to send
questionnaires to in an attempt to probe for more-than-
primary candidate-electioneering purposes.  (In addition to
potentially refusing to grant recognition of exemption,
these questionnaires are viewed by IRS, along with many
of its enforcement activities, as “taxpayer education” and
so in some cases applicants withdraw after getting the
questions; this is particularly common with D-I-Y
applications for charitable recognition when the underlying
business plan is really a commercial idea with a social
“hook” in the manner of Newman’s Own or Working Assets
Long Distance.)

So the news reports that of the 501(c)(4)’s selected for
further workup – meaning more questions rather than
granting of recognition of exemption on the face of the
application – were 25% comprised of organizations with
“tea party” or “patriot” in the name.  And this is 2010?  And
that is considered to be a discriminatory line of
reasoning?  I think not; perhaps the left wing wolves-in-
sheep’s-clothing were not as easy to spot, and perhaps
some of these tea party patriots were genuinely interested
in a very broad public education, lobbying and limited
candidate electioneering menu of tactics.  However:  1)
speaking as a close reader of the public arena and based
on my memory from the summer of 2010; 2) from since
watching the nearly treasonous (risking the credit rating of
the country to advance Grover Norquist’s agenda to shrink
the government and drown it in a bathtub) and intransigent
Republican caucus in the House; 3) watching Mitch
McConnell’s Senate Republican caucus similarly almost
treasonous willingness to gum up the wheels of
government and destroy any remaining public faith in
government by hijacking the filibuster as Standard
Operating Procedure so that the Senate skews even
further to over-representation of low-population states
than designed by the framers; and 4) seeing all
Congressional Republicans’ nakedly apparent fear of
being “primaried” – by TEA PARTY organizations back
home; it all strongly suggests that the review team was
simply doing its job; and doing it well.

I suppose that Lois Lerner is not allowed to speak up
vehemently in defense of her team.

I also suppose that it’s possible that if I saw a list of all the
applicant (c)(4) organization names and the lists of
questions they got, that I could detect an anti-Tea Party
agenda on the part of the reviewers and unduly intrusive
questions compared to those asked of left-wing (c)(4)
applicants, but the mere use of those terms to select ones
for closer scrutiny?  Seems entirely reasonable.

I have had personal experience with an exemption
application questionnaire that was too-apparently
motivated by personal animosity to the mission.  It was an
application for (c)(3) recognition for a secular charity
attached to an LGBT Christian protestant church in San
Francisco to raise and spend money on a community
center the church owned which hosted – free of charge – a
wide range of domestic violence, substance abuse
recovery, and HIV/AIDS prevention organizations, and
needed a secular charity to raise grants to pay for the
replacement of carpeting and furniture worn out over time.  
This relatively “mom and apple pie” application resulted in
a three-page single-spaced questionnaire from an IRS
reviewer in Richmond Virginia (home of the Moral Majority
and a number of other Christian right organizations
somewhat akin to Colorado Springs).  As mentioned
earlier, what we did in that case was answer the questions,
one by one as is expected/required, and also forwarded it
to one of Lois Lerner’s predecessors, Marcus Owens, so
that he’d have a sense of the behavior of his field agents.  
(This was either prior to the Cincinnati reorganization or
while it was still in process.)  I do not believe that IRS
employees are generally prone to ideologically motivated
execution of their work, and I have probably been involved
with around 100 tax exemption applications over the last
two decades.

For a case where it seemed the “fix is in” see the Progress
and Freedom Foundation ruling out of IRS where they
overturned a prior revocation, restored the 501(c)(3)
status to PFF which was the sponsor of Gingrich’s national
civics class which he openly described as a training
program for the next cadre of “2,000 candidates for public
office” but which was let off the hook because the actual
PFF board and officers had very carefully maintained
clean minutes and corporate “whereas” actions.  Once the
revocation was overturned and the (c)(3) status restored,
one of Newt’s pocket donors – a Sheldon Adelson of his
day – had his substantial charitable deduction restored.  
This was probably the most nakedly ideological IRS action I’
ve personally seen in my career; written as if Alito, Thomas
and Scalia were IRS national office lawyers.
Original Post Version 1.0
Recent news coverage and editorials, not to
mention politicians’ grandstanding about
supposed bias by the Internal Revenue Service
manifested by closely scrutinizing “tea party”
and “patriot” groups applications for
recognition of exemption was initially almost
CONSISTENTLY mis-reported.
 

In turn, most of the indignation is misplaced. The
paranoiac stance of the right wing fringe is to be
expected; it is their primary way of viewing the
world, but the left wing got all in a lather too,
without, I think, understanding that it was more a
question of simplistic methodology.
  (Late last
week (May 13-17)
Talking Points Memo did some
good work capturing the specific context through
which IRS’ EO Director Lois Lerner’s remarks first
surfaced, and by the weekend, the
New York Times
finally began to produce more accurate, more
granular, and more useful reportage including
speaking to IRS Cincinnati employees outside the
building on smoke breaks.)

My goal is to 1) explain what the basic process in
question is and what I know about it, and 2) apply my
experience to what was initially reported.  This piece is
a “version 2.0” re-write of my initial screed, with some
edits, some additional background (sorry to those of
you calling for more brevity – not my strength!) – and
changes here and there based on what I’ve gleaned
over the weekend without having actually pored over
C-SPAN coverage or the like.  I was absolutely
flattered and floored (and a wee bit embarrassed at
my “first draft” writing) when
The Atlantic's James
Fallows linked to my post.  Just to be clear, his link
was to Version 1.0 which in the interest of fairness I’ll
put at the bottom of this update, but it is all contained
within this.  I am a total fan of Fallows' work, both day-
to-day and in long form; balance, brains, kindness,
and whimsy.

These stories all resulted from an admission at the
American Bar Association conference by Lois Lerner,
IRS Director of Exempt Organizations, which seemed
unduly defensive to begin with to me based on what I
know.   Details below on why I say that.   (Interestingly,
Lerner was responding to a question from tax-
exemption law elder Celia Roady who initially denied
and later acknowledged that she’d posed the question
to Lerner at Lerner’s request a day earlier, without
knowing what answer Lerner had in mind.)

THE PROCESS AT HAND concerned follow-up
questionnaires sent to applicants for recognition of tax
exempt status under Internal Revenue Code Section
501(c)(4), and not about “audits” or “investigations.”  
To file such a request for recognition, you use Form
1024 which is not nearly as intrusive as the one for
501(c)(3) charities, Form 1023, but which attempts to
ask a wide range of questions.  IRS has a very difficult
job in exempt organizations.  In the regular taxable
world the question is “are they making any money?”
and that alone has given rise to endless numbers of
tax accountants, tax attorneys, and all manner of
schemers, legitimate and much less-so.  

PROMOTERS  Sometimes actual patterns of scams
emerge where some “promoter” is going around
recommending the scurrilous use of “family trusts” or
some sort of “360 [degree]” circular transaction; these
illegal promoter schemes are easily enough spotted if
the taxpayer or charity keeps in mind that money does
not grow on trees, tax-free income is a rare thing and
usually well-discussed and part of a public policy
agenda to encourage some sort of activity; more
generally:  if it SEEMS to good to be true it IS too
good to be true.  Nonetheless, when such a promoter
is loose in the land with a scheme involving exempt
organizations, one department that can see it is the
EO Determinations staff.  (Anecdotally, I have no clue
why, but many of these cases seem to arise in
CO/AZ/NM.  In recent years, we saw a spate of
patterns of abuses of the Donor Advised Fund
(“DAF”) operation.  The abuses led to DAF’s being
defined, and obvious abuses defined and penalized.   
(Abuse 1: Use a DAF to donate to a charity that’s not
really public AND tell it to employ your nair-do-well
offspring as a condition of the gift.  Abuse 2: Use a
DAF to donate to any given charity but as a condition
of the gift insist that the DAF invest in your brother-in-
law’s hapless start-up.)  This define-and-penalize set
of steps was taken in the Pension Protection Act of
2006, one thing (the only thing?) that Charles
Grassley got right (did I interpret a
HuffPo post
correctly that he equated this IRS dust-up with
Hitler?]  May be time for a chill break dude; I don’t
think the Cincinnati reviewers had gas chambers in
mind for anyone, not even feral cats.)

DETERMINATIONS ARE DIFFICULT  Imagine the
problem in the large scale:  while the question of
whether there is taxable income is hard enough, the
exempt organizations people at IRS are charged with
trying to determine, with an honor-based filing system,
whether organizations are doing enough good to
continue to deserve whatever level of tax benefit they
enjoy.   This is a very difficult task.  Meanwhile,
NYTimes reports that the exempt organizations
section is viewed as a backwater at IRS.  (I suspect
this is incorrect, and have always told my own clients
not to fear exempt organizations staff that they are
probably more like us as nonprofit workers than not.  
If those IRS workers wanted to parlay an IRS career
into a lucrative later job for corporate interests, they
would not soldier away in the exempt organizations
arena.  So perhaps rather than “backwater” we (and
the Times, if only it were listening to me as if Keller or
the new Editrix would care, though I think Sulzberger
would) might consider words such as PUBLIC
SERVICE.  What a concept!  The Times along with the
rest of the country has coarsened so much this writer
is glad to be in the autumn of life.  It is truly sad that
when a person takes on a career with lesser financial
rewards and higher intrinsic rewards that it is an
indicator of soft-headedness rather than of community
oriented virtue and humanistic caring.

THE DETERMINATION PROCESS  So groups file this
long Form 1024 with a lot of attachments such as
board and officer lists, articles and bylaws, clippings
about any work done, fundraising materials and the
like and the IRS takes a look.  On the first review at
Cincinnati where the Forms are filed, I am told that
IRS assigns fairly senior staff to do the first read, and
based on this initial review, IRS ‘merit closes’ a good
portion of them.  These are usually really straight-up
“mom and apple pie” community theatre companies,
or private foundations which have wide latitude in
some ways and are tightly constricted by tax laws in
other ways but usually don’t have much interesting to
say in the application.  When IRS merit closes an
application, it grants exemption on just the face of the
original well-filed application and the desired letter
arrives in record time, occasionally before the form-
acknowledgement.   Most of the time, they write back
with a list of questions, which comes under an
unnecessarily snarky first sentence saying you have
“failed” to provide sufficiently detailed answers (first
step on my end is to calm the client down about the
snarky lead sentence.)   

LESSON FOR APPLICANTS  As a side note about
tactics in applying, it is ALWAYS easier to apply
immediately when all you have is plans and ideas and
representations and no actual facts to explain.  The
Devil is in the details as always.  Any application will
slide through more quickly if the applicant lies and
papers over edgy plans but this is a shoddy idea.  
Talking Points Memo linked to a long exemplary
ProPublica piece showing how big (c)(4)’s evade the
limits on candidate electioneering and about 1/3 of
the ones they dissected had asserted that they would
do zero candidate electioneering in their application.  

Instead, it is better to get any issues out in front and
on paper, so that once you have the determination
letter, you are in a stronger position provided you do
what you said you would do.  (Programs may evolve,
and you may report that evolution on annual tax filings
as they do evolve, and I am told by senior IRS audit
staff that they look favorably on conscious, disclosed,
evolutions as more likely done with an eye toward
compliance as vs. mere “program drift.”)

QUESTIONS THAT COME BACK FROM IRS  Those
lists of questions can range widely.  The “types” are
roughly:  A) a handful of stupid questions that were
already answered; B) a handful of incisive questions
zeroing in on the most “high risk” issues where the
applicant organization might stray outside the
boundary of the type of exemption sought; C) a long
single-spaced list of questions which usually is a
combination of off-target and on-target questions and
is a clear indicator that the reviewer has concerns.  I
tell clients that the eye-rolling Type A are the best
because though annoying it feels like the reviewer is
just making work to show their boss they’re doing
something and there are no serious issues so just re-
answer the questions one by one and it’s done.  Type
B can range from “time to retain a lawyer to make
sure we get this right” to just the need to be careful,
and Type C, no doubt the type in question in this
controversy, can be unsettling indeed.

I have not seen the questionnaires in the specific
instance of this controversy, but have seen snippets.  
In the past, I have been on the receiving end any
number of times, especially while working 1996-2004
for a law firm that did such work, and from time to time
since as a solo.  

It is true that usually when a questionnaire goes on at
that length it has the feeling of a fishing expedition of
some sort, and I was once personally involved in a
case where ideological bias by the reviewer seemed
evident.  In that case, we brought it to the attention of
one of Lois Lerner’s predecessors, even as we
responded, point by point, to the questions as
required.  This cost the client an extra ~$1.5K I
reckon, and this in late 90’s dollars.

SIDE NOTE ON SELF-DECLARERS  As a side note, I
should point out that a group may “self-declare” as a
501(c)(4) exempt organization and file accordingly.  
Another project of IRS Exempt Organizations (EO) this
fiscal year is to send a questionnaire to 501(c)(4),(5)
and (6) self-declarers to ask who they are, what they
do from a mission level as well as a specific activities
level, and then digest that information to see if
continuing to allow such ‘self- declaration’ is a good
idea.  (Such projects are more than one year long;
EO discusses them in a reasonably transparent
annual “workplan” produced, posted, and notified to a
free ‘
EO-Update’ newsletter to interested members of
the public by EO.  This project is at least “current” if
not likely to fit from start to finish within FY13;
especially now where we can assume the FY13
workplan will be “respond to Congressional hearings.”)

SIDE NOTE ON FOLLOW-UP  Within IRS, the
application reviewers, even as they grant exemption,
can tag an organization to come up for review in five
years.  This is helpful when the representations are
OK, but the agent has reason to think that the good
intentions might ‘fail to materialize’ and indeed
something else may be going on.  From the press, it is
not clear to me why these reviewers did not rely more
heavily on this process to tag the more dodgy
applicants rather than try to pepper them with
questions.

BACKGROUND ON 501(c) TYPES AT HAND  First of
all, section 501(c)(4) is often misunderstood, by
activists as well as the media.  It is technically named
a “social welfare” organization, sometimes a “civic
league.”  Similar to 501(c)(3) charities, in states which
distinguish types of nonprofit corporations, (c) (4)
organizations are typically incorporated as “public
benefit” corporations and are under the jurisdiction of
the attorney general’s broad authority to enforce the
charitable and public trust.  NOT similar to this are 501
(c)(5) labor unions and horticultural organizations
(think Farm Bureau) and 501(c)(6) business leagues,
chambers of commerce, and professional
associations which are both comprised of
organizations incorporated as “mutual benefit”
corporations, or as similar unincorporated
associations.  So 501(c)(4)’s are truly intended to
benefit the public in some way and not serve mere
private interests, but are not actual charities.  

ALLOWABLE POLICY ADVOCACY ACTIVITIES  A
501(c)(3) public charity (“charity”), when working in
the realm of public policy, may engage in:  A)
unlimited public education on broad social problems
and possible solutions;  B) limited legislative lobbying
-- on “specific legislative proposals” -- which definition
begins before a specific bill number is attached but
sometime after it is mere discussion of a social
problem; the “limited” refers either to “insubstantial” or
to a specific sliding scale at the charity’s option (with
one or two exceptions where the insubstantial test is
the only option);  C) zero candidate electioneering (for
or against).  The prohibition on electioneering by
charities is an absolute “bright line” prohibition at least
in theory, although recent reports suggest a harsh
warning often comes before revocation of 501(c)(3)
status.  LIKE charities, 501(c)(4) “social welfare”
organizations may engage in: A) unlimited public
education.  UNLIKE charities, social welfare
organizations may engage in: B) UNlimited legislative
lobbying (within their overall mission, and with certain
anti-abuse limits if the organization is predominantly
supported by business-deducted dues rather than the
usual broad-base contributions one sees with social
welfare organizations); and C) LIMITED candidate
electioneering, so long as it is conducted legally, and
is not the primary purpose in any one year.  (More in
a minute on the how and why of “not primary” in this
case.)

CONFIDENTIAL DONORS  Both types of exempt
organization are allowed to keep their donors
confidential, though they both report substantial
contributors to IRS on annual tax forms on a schedule
not open to public inspection.  (One clear error of the
Determinations Team in this instance was to ask for
donor names; the exemption application and all
related correspondence with IRS becomes a publicly
disclosable document once approved.  Because of
that, donors should not have to be revealed, even
though they will eventually be revealed on Form 990
Schedule B.  But it is also easy to see how the
Determinations team got to the point of asking:  the
whole notion of whether an applicant is a bona fide
social welfare organization or a handy disguise for a
self-interested billionaire is entirely germane to the
topic at hand, which I promise I am about to define.  
Perhaps the team could have found an exception and
asked for a schedule of donors to be sent which
would be allowed to be redacted from the public
disclosure copy, but this may not be something with
room for administrative rulemaking (i.e. Congress may
have used blanket language in making successful
applications publicly disclosable).

TAX-EXEMPT vs. TAX-DEDUCTIBLE  The word
“exempt organization” means that the organizations
are not taxed if they have a surplus at the end of a
year, but that surplus must be irrevocably dedicated
to the purposes of the organization.  “Tax exempt” is
not synonymous with “tax deductible.”

Contributors to charities MAY deduct the contribution
from any taxable income they have, and private
foundations may most easily make grants to
recognized charities.  

Contributors to social welfare organizations MAY NOT
deduct their contributions as a charitable contribution,
and private foundations may only make grants to
them for specific charitable work and only if they
exercise special oversight called “expenditure
responsibility,” which is not terribly difficult, but is
anathema to the often-cautious types who run private
foundations.

THE ROLE OF SOCIAL WELFARE ORGANIZATIONS  
Historically, in the public policy realm, social welfare
organizations are those such as
Sierra Club, National
Rifle Association, NARRAL, Right to Life
.  These
organizations have broad bases, a very active
lobbying agenda, are fueled with a large number of
individual contributions, and believe themselves to be
working in the public interest, even if they represent
one “side” of a big issue.  

WE ENCOURAGE THE FORMATION OF SOCIAL
WELFARE ORGANIZATIONS BY EXEMPTING THEM
FROM INCOME TAX
 From a public policy
perspective, we, as taxpayers, have concluded in
essence that it is a good idea to encourage the
aggregation of such voices in ‘public interest lobby’
organizations, so we allow their non-commercial
earnings to be exempt from income tax, but we do not
encourage them to the degree we do charities.  Most
big social welfare organizations I mentioned maintain
an affiliated public charity ‘foundation’ or ‘research &
education fund’ which receives charitable gifts and
supports specific charitable work of the main
organization, and most of them also maintain various
“PAC” political committees (527 organizations under
the Internal Revenue Code) duly registered and
compliant with the laws of whatever jurisdiction is in
play.

WE ALLOW CHARITIES BOTH EXEMPTION AND
THE ABILITY TO RECEIVE DEDUCTIBLE
CONTRIBUTIONS
 From the same public policy
perspective, we, as taxpayers, strongly encourage
support for charities – roughly ‘charitable,
educational, scientific and religious’ missions, by
making gifts tax deductible.   Therefore, owing to the
workings of tax deductions writ large, you might think
of charities as being ~1/3 publicly funded, because
were it not for the tax deductions taken by those
charities’ donors, we the taxpayers / US Treasury
would collect more tax revenue.  In addition to this
substantial subsidy, we exempt the non-commercial
earnings of charities as we do social welfare
organizations.  

WE ENCOURAGE CHARITIES TO DO SOME
LOBBYING
 We also encourage charities to engage
in limited legislative lobbying, concluding, for example,
that in a debate about family planning laws, we would
like to hear from a charity concerned with over-
population, and not just from churches and profit-
making organizations with some kind of financial
interest.   However, since we forgo tax collections
when gifts are made to them, we want charities to
keep out of candidate politics and do pretty much
things we can all agree are for the greater good and
avoid candidate politics – which has truly devolved to
the ugly beast that is our national mud-wrestling
match.  This provides charities with a relatively safe
“halo,” and is put at risk whenever pastors organize to
try to allow candidate electioneering from the pulpit:  
separate church and state please.
SOCIAL WELFARE PURPOSES  For a 501(c)(4)
organization, candidate electioneering activity is NOT
considered to be a “social welfare” purpose, and to
maintain its [tax] exempt status, it must be organized and
operated for social welfare [exempt] purposes in each
year.  The cumulative non- exempt purposes of such an
organization (commercial + electioneering) must not dwarf
the exempt purposes.  Going further, while there is not yet
legal guidance, some aggressive tax attorneys have
argued that candidate electioneering may constitute 49%
of a social welfare organization’s work.  However, it is not
clear that if there were three distinct programs of 30% 30%
and 40% each, and candidate electioneering was the
largest -- the 40% -- that the organization would be
assured of classification in Section 501(c)(4) of the Internal
Revenue Code and could face revocation.  Therefore, that
“49%” (which I heard reported on NPR last night as the
law) is legal advice, not the law.

ALONG COMES CITIZENS UNITED  So far, what I have
described was the state of affairs until US Supreme Court's
"
Citizens United” decision that corporations have human
rights at least of free speech.   (That decision will, I
believe, reflect very poorly on the historic reputation of this
Court and each of the concurring justices.  Those justices
who voted with the majority on both
Citizens United and
Bush v. Gore will be held up to future generations of law
classes contemptuously, as political hacks and ideologues
unworthy of their office and representative of a time where
our governing officials had collectively lost sight of their
civic duty to us all.  But I digress.)

POLITICAL MONEY IS POLITICAL SPEECH  Citizens
United allowed corporations to spend unlimited amounts of
candidate electioneering money so long as it was
conducted independently of the candidate’s own strategy
and tactics.  (Given the incestuous relationship among
campaign operatives, I say good luck with that!)  Social
welfare organizations are most often themselves
corporations, and as such had been previously
constrained by the Federal Election Campaign Act from
many types of candidate electioneering.  A/the primary
goal of FECA, dates back to Richard Nixon’s brown paper
bags of corporate cash materializing for his Committee to
RE-Elect the President (a/k/a CREEP; I’m not making that
up) had been to prohibit such unaccountable both in name
and due to the imPERSONal nature of corporations.  Since
candidate electioneering must be conducted legally, social
welfare organizations, as corporations, were unable to
engage in such.   With the advent of Citizens United, they
now may, at least so long as it is not their primary
purpose.  

A ROAD-MAP FOR DONORS  Better yet, if you are the
Koch Brothers or George Soros, they do not need to
publicly disclose the names of their donors.  Donors can
avoid having their reputations influence the public’s view of
a given candidate by forming a 501(c)(4) “paper
organization” to do their electioneering without any public
knowledge as to their identity, which has been a bedrock
thrust of campaign law (sunshine as a disinfectant) for a
couple generations or more.

THE RISE OF THE TEA PARTY  Now, think back to 2010,
the year of the August of the tea party rebellion against
“Obamacare.”   The IRS received, we were told, though
this has been debunked in the Atlantic, a sudden
onslaught of 501(c)(4) applications; whether the total
number was a sudden increase or  just the pattern of types
is perhaps not germane; c.f. my description above of
“promoter schemes” which is something IRS must watch for.

EXEMPTION APPLICATIONS REVIEW PROCESS  Now
lets talk more about tax exemption applications.  Some time
in the late 1990’s, prior to which the IRS had been
distributing tax exemption applications around the country
wherever it had revenue agents with extra capacity and
some training in the subject, the IRS realized it should
centralize the knowledge base around tax exemption, and
so it built an organization in Cincinnati to handle this.  
(Press reports have since said that around this time the
IRS did the same thing with any number of internal units;
EO is the only one I know so I was unaware of that broader
context.)  The quality of review questions rose once the
Cincinnati staff became fully competent, circa 2002.  

THE NEED FOR SPECIALIZED TEAMS – BOLO topics  
For a long time now, assorted issues or new nonprofit
sectors of activity suddenly arise where there were
arguably conflicting ways to view the activity.  One example
would be when is “economic development” charitable
because it’s in a blighted area and when is it just the sort
of thing any local chamber of commerce would do and
therefore be better described in 501(c)(6)?  A second
example is internet activity: when do clicks through to a
commercial sponsor’s web site render the sponsor’s
payments to the charity as advertising income rather than
the clickable link being merely sponsor
acknowledgement?  Or a third example: when do clicks
through to other exempt issue organizations’ sites become
electioneering by the starting point charity website rather
than just the meandering of an internet surfer who began
at a charity’s site?  It is very much in our interest as
taxpayers that the IRS centralize the review of such
emerging sectors and areas of economic activity so as to
spot illegal promoters, develop expertise, make good and
consistent rulings, and only pass up tax revenue when the
public policy implied by tax law is being advanced.  From
press reports we have since learned that such topics are
internally dubbed “BOLO” -- Be On the Look Out [for].”

HANDLING BOLOs  In BOLO cases, IRS would often ask
the Cincinnati screeners to see to it that all applications on
the given topic be centralized somewhere or with a
specified team of reviewers – sometimes in the national
office where the Service’s top level exempt organization
lawyers and technical staff could chew over the assorted
presentations.  The goal being to render consistent rulings
and not have half a given sector be (c) (3) and half be (c)
(6) for instance (which I have seen close up in the field of
“downtown management” where such organizations range
through (c)(3), (4) and (6) with no apparent overall rhyme
or reason).  

Many of the IRS Controversy stories have reported some
ulterior motive to centralize the sudden burst of 501(c)(4)
applications in Cincinnati as some nefarious plot.  To the
contrary, MOST exempt applications are processed in
Cincinnati since 2000, and it would not surprise me that a
specific team would be assigned to review 501(c)(4) apps
and BOLO for political agendas sparked by Citizens
United, and so as to match apples to apples and given
even-handed treatment.

HOW WOULD YOU MAKE THIS DETERMINATION?  So
the next question the reviewers were faced with is to
determine how to look at these applications and figure out
if they are being genuinely formed to promote a social
welfare point of view, and whether and from whom, to ask
for more? (A genuine tea party social welfare agenda
would include the broad view that smaller more local
government is the way to go, and activities might range
from a national community/college civics class like Newt
Gingrich once developed, all the way up to explicit Federal
candidate electioneering).  But anyone who believes that
Karl Rove’s Crossroads 501(c)(4)/Federal 527 tandem
operation and the similar Priorities USA tandem formed by
Obama’s former operatives are focused on a broad long-
term social welfare community organizing agenda rather
than on much more immediately influencing elections is
arguably being intentionally ingenuous.  Even so, know
that the IRS has had real trouble winning cases where a (c)
(4) appears to have candidate electioneering as more than
a primary purpose; it pursued Ralph Reed’s Christian
Coalition for MANY tax years, and never succeeded in
revoking its 501(c)(4) classification on the basis of more-
than-primary-purpose candidate electioneering.  From the
outside view, this is mind-boggling because of the
relatively brass-tacks electioneering agenda promoted by
the Christian Coalition in its day.

MEANWHILE, BACK IN 2010 IN CINCINNATI   The
specialized review team in Cincinnati, facing a substantial
pile of suddenly-materialized 501(c)(4) organizations
particularly of the Tea Party / Patriot / constitutionalist
bent, which anyone other than an intentionally ingenuous
naïf would grasp as national electioneering strategies (I
mean let’s be clear, Dick Armey?  Michelle Bachmann?)
had to decide which applicants to send questionnaires to
in an attempt to probe for more-than- primary candidate-
electioneering purposes, and what to ask them.  

SIDE-NOTE; QUESTIONNAIRES AS “TAXPAYER
EDUCATION”
 In addition to potentially giving IRS grounds
to refuse recognition of exemption, these questionnaires
are viewed by IRS, along with many of its enforcement
activities, as “taxpayer education.”   In some cases,
applicants withdraw applications after getting the questions
because they had failed to understand the parameters of
the exempt status they seek.  This is particularly common
with D-I-Y applications for charitable recognition when the
underlying plan is really a commercial idea with a social
“hook” in the manner of Newman’s Own or Working Assets
Long Distance.

SELECTION CRITERIA  So the news reports that, of the
501(c)(4)’s selected for further workup and more
questions, [prefaced with the regrettably snarky
boilerplate] rather than granting immediate merit
recognition of exemption on the face of the application,
were 25% or 33% comprised of organizations with “tea
party” or “patriot” in the name.  And this is 2010?  And that
is considered to be evidence of a discriminatory line of
reasoning?  Talk of jailing IRS employees?  I think not;
perhaps the left wing wolves-in- sheep’s-clothing were not
as easy to spot, and perhaps some of these tea party
patriots were genuinely interested in a very broad public
education, lobbying and limited candidate electioneering
menu of tactics.  

REVERSE VIEW:  REWARD NOT PUNISH  How about we
talk of some IRS employee merit awards for trying to figure
out how to do an almost impossible job with some
reasonable degree of efficiency?

WHY WOULD A REVIEWER THINK A TEA PARTY
ORGANIZATION WAS PRIMARILY A CANDIDATE
ELECTIONEERING OPERATION?
  Speaking as a close
reader of the public arena and based on my memory from
the summer of 2010; from since watching the nearly-
treasonous intransigent Republican caucus in the House
(treasonous:  risking the credit rating of the country to
advance Grover Norquist’s agenda to shrink the
government and drown it in a bathtub); from watching
Mitch McConnell’s Senate Republican caucus similarly
nearly-treasonous willingness to gum up the wheels of
government by hijacking the filibuster as Standard
Operating Procedure so that the Senate skews even
further to over-representation of low-population states
than designed by the framers, even while that gumming up
and paralysis of government spreads fear and paranoia in
a time of tremendous economic dislocation and destroys
any remaining public faith in government; from seeing all
Congressional Republicans’ nakedly apparent fear of
being “primaried” by TEA PARTY organizations back
home; my conclusion is that this all strongly suggests that
the review team was simply doing its job; and doing it well.

Is it wrong for the Tea Party to organize this way?  Not at
all, they are a remarkable force, if sometimes a bit
uninformed to my ears.  As organizers they have been
peerless, save perhaps Occupy Wall Street in its heyday.  
But this is NOT ACTIVITY DEFINED IN INTERNAL
REVENUE CODE 501(c)(4).  The main reason that (c)(4)
status was sought was to provide cover to major donors
and allow organizations to appear mass-based when they
were fueled by very self-interested corporate chiefs.

I suppose that Lois Lerner is not allowed to speak up
vehemently in defense of her team.

ERRORS WE CAN IDENTIFY ALREADY

1.  I suppose if I saw a list of all the applicant (c)(4)
organization names and the lists of questions they got, that
I could detect an anti-Tea Party agenda on the part of the
reviewers, or at the very least, unduly intrusive questions
compared to those asked of left-wing (c)(4) applicants, but
the mere use of those terms to select ones for closer
scrutiny?  Seems entirely reasonable if clumsy through the
“optics.”  In the
Times (I think, maybe Talking Points
Memo
, maybe Atlantic, pardons to all and kudos to all
three) Marcus Owens speculated that it sounded as if the
review team had tried to develop an omnibus
questionnaire which made it too long and ask questions
not germane in some cases; this is a staff-level error.

2.  I described above why asking for donors was
inappropriate.  

3.  Three-year turnaround is also inappropriate and
inexcusable.  I’ve seen edgy applications take up to two
years, but as soon as it hits six months or so (different
today, that mark is now a year due to other factors) it
becomes time to start asking for supervisors.  Ditto when
the fourth round of intrusive questions comes, it’s time to
escalate up the chain of command and usually they stop.  
And finally, if a reviewer refuses to grant (c)(4) recognition
(don’t forget that recognition is NOT required – (c)(4)’s
may “self-declare” and operate immediately since they do
not grant tax deductions).

4.  The fact that after Congress groused that suddenly the
gates open is suspicious, I agree with that.

WORKING CONCLUSION:  remove donor anonymity from
candidate electioneering regardless of vehicle used.  Stop
hanging lower level employees out to dry when they have
a very difficult task.  And when all is said and done, how
about everyone starts by trying to tell the actual truth.  
What a concept!

##

PERSONAL EXAMPLE OF EXPERIENCING BIAS, FROM
THE RIGHT RATHER THAN LEFT
  I have had personal
experience with an exemption application questionnaire
that was too-apparently motivated by personal animosity to
the mission.  It was an application for (c)(3) recognition for
a secular charity attached to an LGBT Christian protestant
church in San Francisco to raise and spend money on a
community center the church owned which hosted – free of
charge – a wide range of domestic violence, substance
abuse recovery, and HIV/AIDS prevention organizations,
and needed a secular charity to raise grants to pay for the
replacement of carpeting and furniture worn out over
time.   This relatively “mom and apple pie” application
resulted in a three-page single-spaced questionnaire from
an IRS reviewer in Richmond Virginia (home of the Moral
Majority and a number of other Christian right
organizations somewhat akin to Colorado Springs).  As
mentioned earlier, what we did in that case was answer the
questions, one by one as is expected/required, and also
forwarded it to one of Lois Lerner’s predecessors, Marcus
Owens, so that he’d have a sense of the behavior of his
field agents.   (This was either prior to the Cincinnati
reorganization or while it was still in process.)  I do not
believe that IRS employees are generally prone to
ideologically motivated execution of their work, and I have
probably been involved with around 100 tax exemption
applications over the last two decades.

BACKGROUND READING ON A TIME THE FIX WAS IN
ON THE "RIGHT" SIDE
 For a case where it really did
seem that the “fix [was] in” see the Progress and Freedom
Foundation ruling out of IRS (Technical Advice
Memorandum, August 5, 1998) where IRS overturned a
prior (c)(3) revocation, restored the (c)(3) status to PFF,
which had been the sponsor of Gingrich’s national civics
class.  Gingrich openly described it as a training program
for the next cadre of ‘2,000 candidates for public office’ but
PFF was let off the hook because the actual PFF board
and officers had very carefully maintained clean minutes
and corporate “whereas” actions.  Once the revocation
was overturned and the (c)(3) status restored, one of Newt’
s pocket donors – a Sheldon Adelson of his day – had his
substantial charitable deduction restored.   This was
probably the most nakedly ideological IRS action I’ve
personally seen in my career; written as if Alito, Thomas
and Scalia were IRS national office lawyers.  

MORE BACKGROUND READING ON THE MUDDY
WATERS OF WHAT CONSTITUTES POLITICAL
ACTIVITY
  Subtle activities that may be candidate
electioneering even if they might appear to be social
welfare activities.  If nothing else, this paragraph might give
the reader some sympathy for those Cincinnati reviewers:   
For some time, gifts to 501(c)(4) organizations were
potentially subject to the pricey gift tax, payable by the
donor.  However, gifts to “527” organizations were not
subject to that tax.  In 1997 and 1998, two IRS “private
letter rulings” were issued in response to a request for a
ruling on a proposed set of activities, basically targeted
canvassing and “issue ads.”  The canvasser scripts and
issue ads, on their face, might appear to be mere lobbying
messages, but because they’d be targeted around
elections and vulnerable incumbents, would in fact be 527
activity.  By being 527, and clearly exempt from gift tax, yet
stopping short of “express advocacy” and bringing the
organizations under FECA disclosure rules, these
organizations for a time threaded the needle and managed
the holy grail of donor anonymity with substantial (millions
of dollars) of candidate electioneering.  [
PLR 1998-08-037
& 1997-25-036
.]   These are the rulings which gave rise to
what the press calls “527 organizations” and really means
‘organizations sufficiently political to be 527 for tax
purposes and not 501(c)(4) but stop short of FECA
jurisdiction by avoiding express advocacy.’  These type of
organizations were made subject to donor disclosure via
IRS filings in the summer of…1998?  2000?  In any case,
this framing of “issue ads,” which later became dubbed
“electioneering communications” under McCain-
Feingold/BRCA until it was in turn gutted by Citizens
United, is part of why the activities of the (c)(4)s in
question appear to political tax law scholars as not viable
under the contemplated 501(c)(4).  A third PLR defined a
set of activities that an organization wanting to spend
money only on ballot measures in Western States from the
environmental preservation side could have its status
classified under 527 if it adequately documented that it
was choosing those ballot measures because of their
“nexus” to candidates running for office (i.e.
weaken/strengthen the candidate by putting juice into one
side of a ballot measure on which candidates have staked
out stances.   [
PLR 1999-25-051]

EVEN MORE BACKGROUND READING ON THE MUDDY
WATER
 In 2004, tax lawyer Greg Colvin, and tax law
professor Miriam Galston authored a
call to IRS to better
define 501(c)(4) political activity
.  This paper was put
forth by the Exempt Organizations Sub-committee of the
Tax Section of the American Bar Association to the IRS (I
think I got that title right).  The current blow-up suggests
that if IRS had responded to the 2004 prod, that we would
not be in this predicament.  The paper can be found
here
(or by googling >ABA Tax Section calling on IRS to define
501(c)(4)< which is how I found it)
IRS has released a good Q&A / FAQ on the topic of the recent so-called scandal:
http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-501(c)-Organizations

(if you are interested in these topics be sure to subscribe to the free "EO-Update" e-newsletter at www.irs.gov/charities)
My Original Post Version 2.0 (more soon)