The battle lines have taken shape after the release Tuesday of the IRS inspector general’s report documenting the tax agency’s handling of applications for tax-exempt status from Tea Party and other conservative nonprofits.
On the right, critics say the report’s statistics could not be clearer: Conservative applicants were singled out for extended and intrusive review.
On the left, observers say the fault lies with the U.S. Supreme Court’s decision in Citizens United, which unleashed a flood of political activity that overwhelmed IRS resources.
Others are raising darker issues: What did political appointees outside the IRS know, and when did they know it?
But the inspector general’s report also teaches another kind of lesson, this one about the inherent difficulty in trying to regulate an increasingly attractive activity that is impossible to define clearly.
The solution might be simply to stop trying to impose limits on advocacy by any tax-exempt groups except charities.
The origin of the current controversy goes back as far as the 1913 income-tax act. It exempted not only charities from taxation but also “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare,” which we now know as 501(c)(4) groups.
As with much else in the income-tax act, the inclusion of civic leagues promoting social welfare was not thought to require explicit legislative explanation. According to a history published a decade ago by the IRS Exempt Organizations Division, it is “generally assumed” that the provision grew out of a request by the U.S. Chamber of Commerce to exempt “civic and commercial” groups. The Chamber got some but not all of what it wanted:
The statute extended the exemption only to civic groups “not organized for profit.” “Social welfare” was defined negatively, in opposition to for-profit activity.
In 1960 the Treasury Department tried to make something more positive out of “social welfare,” providing in a Treasury regulation that “an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community.”
What with “social welfare” defined as promoting the common good “in some way” and “exclusively” becoming “primarily,” the idea behind 501(c)(4) organizations had become even more of a conceptual mess than it was to begin with.
If Americans agreed about what “social welfare” really means—if, like pornography, you know it when you see it—then it wouldn’t be fatal if laws or regulations didn’t define it.
But increasingly, the public doesn’t agree on what this means, so we need another approach.
Lawmakers and regulators could decide to stick closely to the statutory language that defines social-welfare activity in opposition to for-profit activity but take a tolerant view of what organizations actually do—saying, in effect, “Social welfare is what you say it is.”
After all, 501(c)(4) organizations are not the same as charities: People aren’t reducing their taxes by contributing to them. Only donors to groups that have status as charities under Section 501(c)(3) are allowed to take a tax deduction for their gifts.
However, that expansive approach has become increasingly problematic as nonprofit groups, for a variety of reasons, have become more involved in politics. For several decades, influential nonprofits and their boosters have worked assiduously to broaden the definition of “charitable” activity to include many forms of advocacy. And as the idea of advocacy as an appropriate (not to say essential) charitable activity has expanded, so too has the idea that this is a key part of improving social welfare. So it’s not surprising that social-welfare groups have added political and election campaigning to their repertoire.
The Citizens United decision may have added more resources for advocacy work, but it did not change the underlying dynamic: As advocacy became more important to tax-exempt organizations, social-welfare groups became more attractive to both advocates and their financial supporters, even though contributions to them are not tax-deductible.
Not surprisingly, taxpayers, members of Congress, campaign-finance reformers, and others have long been complaining to the IRS about the advantages 501(c)(4) organizations have in politics.
Their prime advantages: They don’t have to disclose the names of their donors or the sums they provided, nor do donors face the limits imposed by campaign-contributions law.
But absent evidence that social-welfare groups are helping particular candidates (rather than “the common good”), all the agency can do, really, is to deny tax exemptions on grounds that a group is not “primarily” organized for social-welfare purposes rather than political ones—grounds that often cannot be explained with much clarity when advocacy is so widely accepted as a way to promote social welfare.
Now we come to the saga of the unfortunate IRS operatives in the Cincinnati office who were asked to review applications for tax-exempt status. In the spring of 2010, they began searching for applications involving the terms “Tea Party,” “Patriots,” “9/12,” and “political-sounding” names like “We the People” and “Take Back the Country” so that they could refer these groups to the agency’s tax specialists for more intensive examination. When, a year later, Lois Lerner, the head of the Exempt Organizations Division put her foot down, the IRS agents were ordered to change the search criteria to “organizations involved with political, lobbying, or advocacy.”
The Cincinnati folks thought—rightly—that these were no criteria at all; so, they made the standards more concrete again, changing them to “political-action type organizations involved in limiting/expanding government, educating on the constitution and Bill of Rights, social economic reform/movement.”
The new formulation included nods to political neutrality, but Ms. Lerner was not fooled and the criteria were changed yet again, to “organizations with indicators of significant amounts of political campaign intervention (raising questions as to exempt purpose and/or excess private benefit).”
There is no denying the political element of this IRS enforcement effort. It was not a case of an “enemies list” or a directive from above; it was simply the fact that when the reasonable folks in the IRS determinations unit searched for a short-hand term for “impermissible political activity,” all that came to mind were terms like “Tea Party” and “Patriot.” We can be fairly confident that no one had a similar thought about terms like “Environmental Justice” or “Occupy.” If anyone had entertained such a notion, we would surely have heard about it in the IRS answer to the inspector general’s report.
Beyond the small-bore politics, however, is the fact that America’s tax collectors have been asked to distinguish between permissible and impermissible political activities on the basis of criteria that perhaps no one has, and certainly they do not have, the capacity to apply. Perhaps the time has come for them to stop trying.