A Brief History…

Washington DC seems to be convulsed this week with scandals. Most of us were well aware of the Benghazi disaster and coverup. The IRS scandal is new and does a lot to explain the quiet status of the Tea Party groups that were so active in 2010. Many of us expected to see more of them last year in the run up to the 2012 presidential election, as well as the other races for Senate and House. Now we know what happened.

The Tea Party groups that filed for 501 (c) 4 status were harassed and threatened by the IRS. 501 (c) 4 status does NOT grant tax exemption to donations, contrary to the statement of Nancy Pelosi, not a good source in any situation. It only allows tax exemption for activities intended to education the public on issues of interest to the organization. From the IRS web site:

The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f).

The Tea Parties were organized for political and educational activity, not as lobbies. There are plenty of lobbies. Other organizations singled out by the IRS in this scandal included those concerned with “The Constitution” or other philosophical topics. Several examples are included in this article.

Kookogey’s organization, Linchpins of Liberty, is one of several groups still awaiting approval of their applications for tax-exempt status after more than three years. Linchpins, a conservative mentoring program for high-school and college students, has received extensive and intrusive requests for information about the organization. Unlike most of the groups targeted, however, Linchpins of Liberty was seeking status as a 501(c)(3) educational non-profit, as opposed to a more overtly political 501(c)(4) “social welfare” group, and had no direct “tea party” affiliation. The group’s stated mission is “to challenge the imagination of the rising generation” through “the study of books about the human condition and about civic order.”

I see no evidence of lobbying intent there.

The agency sent him more than 30 questions in response to his application, including some that defied comprehension. “They asked me to identify the students I’m teaching and what I’m teaching them,” he says. “Now, imagine the disservice I’d be doing to the parents of these kids if I reported their children to the IRS. It was clearly meant to intimidate.”

This is far beyond the role of a tax agency.

How do we deal with this ?

First, donations to 501 (c) 4 organizations are NOT tax deductible for the donor. The organization benefits from the fact that its own activities are tax exempt. It cannot conduct a business that returns profits to the organization although educating members and charging for that service may be permissible.

Under this technical instruction program (pdf) the social welfare group would be allowed to engage in business as a means of financing the social welfare program. The business might consist of holding seminars on politics.

I was president of such an organization years ago. It was the Orange County Medical Association. It was tax exempt and, when we began to organize a subsidiary that would provide health care for low income persons, we made the subsidiary a for-profit company and allocated all business expenses related to the provision of health care as expenses to that subsidiary. We had no IRS trouble although Reagan was president and the IRS was not political as it is under Obama.

My suggestion is to contribute and help the Tea Party and similar organizations to organize themselves under another model. Perhaps legislation to allow educational organizations to function free of harassment would be in order although Democrats in the Senate would probably try to block it. Complaining about the IRS will only accomplish so much. The history of misuse of the IRS is long and goes back to Roosevelt

President Franklin Roosevelt used the IRS to harass newspaper publishers who were opposed to the New Deal, including William Randolph Hearst and Moses Annenberg, publisher of the Philadelphia Inquirer. Roosevelt also dropped the IRS hammer on political rivals such as the populist firebrand Huey Long and radio agitator Father Coughlin, and prominent Republicans such as former Treasury Secretary Andrew Mellon. Perhaps Roosevelt’s most pernicious tax skulduggery occurred in 1944. He spiked an IRS audit of illegal campaign contributions made by a government contractor to Congressman Lyndon Johnson, whose career might have been derailed if Texans had learned of the scandal.