05/20/2013 02:24 pm ET

IRS Scandal Exposes Tensions Between Law, Expectation In Policing Political Activity


WASHINGTON -- Facing questions over the Internal Revenue Service's allegedly focused examination of conservative groups applying for nonprofit tax-exempt status, acting IRS Commissioner Steve Miller agreed with members of the House Ways and Means Committee Monday that the agency's criteria for investigation -- names like "tea party" and "patriot" -- were "inappropriate" and "offensive."

As committee members grilled Miller on how and why the IRS developed the criteria, which only used terms associated with conservative groups, he also defended the IRS' role in monitoring and questioning whether political groups are abusing the tax code by seeking nonprofit status.

"Politics is an area where we always ask more questions," Miller said. "It is our obligation under the law to do so."

That law, and its interpretations in regulatory rulings made by the IRS, does not provide meaningful guidance on what constitutes political campaign activity, a fact noted in the Department of the Treasury Inspector General report into the IRS' alleged targeting of conservative groups.

Rep. Xavier Becerra (D-Calif.) asked Miller whether the law is "clear, in your mind, on what is political campaign activity?"

Miller, who is resigning his post in June, responded, "No, it's very difficult."

This lack of clear rules and definitions on what constitutes political campaign activity and the subjective "facts and determinations" standard used by the IRS ensures that, even after the who, what, where and why of the current scandal are uncovered, the underlying problem of how the IRS is supposed to investigate and determine the political activities of nonprofits will still remain.

The inspector general report called for further guidance and training in this area and, in a footnote, states that a "future audit is being considered to assess how the [exempt organizations division] monitors [certain nonprofit] organizations to ensure that political campaign intervention does not constitute their primary activity."

This does not, however, get to the core issue of how difficult it is to apply a subjective standard on political activity. Many are concerned that the current scandal will lead to a steady stream of nonprofits claiming harassment from the IRS, as has already begun, and a continued sense held by some groups seeking exempt status that IRS questions and requests in general are inappropriate and targeted.

"[U]nder the prevailing 'facts and circumstances' test, which the agency by law must apply, the Service will be stuck with the task of making judgments about what constitutes 'political' activity," Bob Bauer, former White House Counsel and general counsel for Obama for America, wrote on his blog, "More Soft Money Hard Law," after the inspector general's report was released. "It will remain in the same position the [Federal Election Commission] has found vexing in its own world -- separating out public policy advocacy from campaign activity -- and it is not easy to see how it will calm its critics or meet the demand that it 'stay out of politics.'"

Bauer detailed his experience as part of the political law group at Perkins Coie in defending the Democratic Leadership Council, a nonprofit group founded by Democrats to promote centrist political policies. In 2002, the IRS decided to retroactively revoke the DLC's nonprofit status because it believed to group to be too politically partisan.

The DLC case, and other cases of the denial or revocation of nonprofit status, helps to highlight how the IRS' subjective standard for political activity was a problem long before the agency developed criteria singling out conservative groups for review under this standard.

Throughout the IRS' investigation of the DLC, Bauer explains, the service "struggled to establish" what constituted political activity or what, specifically, "political" even meant. How the agency went about looking for political activity would be familiar to the tea party groups allegedly singled out by the IRS from 2010 to 2012.

"[The IRS] made expansive requests for information of both the local chapter and the national organization," Bauer wrote. "Full financial information was included among these requests. Also, more curiously, the IRS investigative team asked for a tour of the DLC’s facilities and then walked its corridors, observing the lay-out of the space and the wall hangings."

To determine whether a group is too political to qualify for tax-exempt status the IRS must also decide if the social welfare purpose of the group is appropriate. This involves a subjective finding by IRS agents, just as in determining what constitutes political activity.

Under deposition during the court case challenging the revocation of the DLC's status, the IRS case agent, who spent 400 hours reviewing the DLC for partisan political activity, explained how he felt about the organization as he reviewed it. "This is totally something else to me," he said, according to Bauer's post. "That’s to me personally. To me personally. It doesn’t fit the description of a social welfare organization. That’s my personal [opinion], not the law."

The legal reason ultimately used to revoke the DLC's nonprofit status was that the group was made up of "like-minded" Democratic officials and, in the IRS' opinion, this made the primary beneficiary of the group's mission the Democratic Party. The IRS' finding concluded that the nonprofit's social welfare purpose must primarily benefit the general public and not just the "private benefit" of a single party -- in this case a political party.

The revocation of the DLC's nonprofit status was ultimately overturned by a court. The court did not, however, rule on what makes a group too political under the law administered by the IRS.

In a more recent case, the IRS denied exempt status in 2012 to a state chapter of Emerge America, a group training women for a future in the Democratic Party. The denial of the state chapter's exemption eventually led to the revocation of the national organization's nonprofit status, forcing it to reorganize as a 527 political organization.

The IRS wrote of its decision to Emerge America, telling the group it served "private interests."

"Because your primary activity is an educational program that is limited to women who are members of the [Democratic] Party and that is conducted with the partisan objective of increasing the number of the Party's elected officials, you primarily serve private interests," the IRS wrote. "Therefore, the operation of your program does not promote social welfare within the meaning of section 501(c)(4) of the Code."

In neither the DLC nor the Emerge America case did the groups in question spend money on election-related activity. Instead, the IRS challenged the groups based on their relationships with political party members while examining who benefited from their tax-exempt activity. The pressure to police nonprofits for political campaign activity, even of the nebulous kind that goes unreported, will still persist under the current law.

While the IRS will undergo a review of the way it carries out the law, some believe that that does not go far enough. Bauer writes that requiring the IRS to inquire into political activity while expecting the service to "avoid even the appearance of intruding into the political sphere" puts the service into a double bind. This dilemma, according to Bauer, means that, "The IRS’ role bears re-thinking."



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