By Diane Freda
Jan. 27 --This could be the year
the Internal Revenue Service finally issues guidance on how much political
activity social welfare organizations can do without risking their tax-exempt
status--a development that many political observers and watchdog groups have
The IRS has taken the first step by issuing proposed
rules. The reception has been largely cool due to a perception that the rules
are overly broad, but the conversation has at least started and many commenters
are expected to weigh in.
The Tea Party scandal, which consumed the
agency in 2013, is expected to have many spillover effects in 2014, not the
least of which is that all types of applications for tax exemption--not just
the problematic tax code Section 501(c)(4) ones--will be processed slower,
“We have certainly experienced a standstill since
May, when Lois [Lerner] gave her speech, until late 2013,” LaVerne Woods, a
partner with Davis Wright Tremaine LLP, told Bloomberg BNA Jan. 7. “While we
always have a large number of applications pending at any one time, we were
getting nothing coming back out. Things are starting to move now.”
Lerner, the former IRS director of exempt organizations, rocked the exempt
world when she announced in May that the agency had inappropriately handled Tea
Party and other conservative groups' applications for tax-exempt status
beginning in 2012.
Her public apology, extended congressional hearings
in both the House and Senate, and the media blitz of the scandal were a long
and painful chapter in the agency's history from which practitioners said the
IRS is now beginning to emerge.
Practitioners told Bloomberg BNA that new
management at the top is expected to help.
IRS's selection to succeed Lerner, Tamera Ripperda, industry director of Global
High Wealth in the agency's Large Business and International Division, is a
mystery to several practitioners interviewed by Bloomberg BNA.
whatever her style of governing will be, practitioners said they are glad to
have someone permanent in place. “We haven't known who to ask any questions
of,” Woods said.
They found comfort that Sunita Lough, a former tax law
specialist in the Exempt Organizations division, a somewhat known figure, will
be taking over the position of commissioner of the Tax Exempt and Government
Entities Division. Lough has held several other positions in the IRS, including
director of the Office of Federal, State, and Local Governments.
is known about Ripperda, but her background in tax law enforcement has been
duly noted. In her Global High Wealth position, she oversaw the examination
activities of high-wealth individuals with global holdings and interests. Prior
to that, she was director of abusive transactions and technical issues in the
Small Business/Self-Employed Division where she was responsible for
Service-wide policy and guidance in the identification and investigation of
abusive transactions. Ripperda didn't respond to a Bloomberg BNA request to be
“If you're going to have to pick a background other than
familiarity with tax-exempt organizations, that's probably not a bad one to
pick,” Marc Owens, a member of Caplin & Drysdale, and a former IRS director
of exempt organizations, said March 2. “It suggests she is familiar with tax
Lloyd Mayer, a professor at Notre Dame Law School,
said Jan. 16 that the new TE/GE managers will have two goals as they assume
their posts--avoiding anything controversial and learning the part of the
Internal Revenue Code that pertains to exempts.
That means that controversial guidance projects--such as one on the
current guidance priority list of finalizing proposed rules on beginning church
tax inquiries, pending since 2009--aren't likely to get done any time soon,
As for the proposed Section
501(c)(4) rules on politicking (REG-134417-13) that the IRS released in
November 2013, Owens said they are flawed in that they insert terminology from
election law--such as “clearly identified candidate” and “express
advocacy”--into tax law. IRS agents will be applying those terms and creating a
body of tax precedent defining them, he said.
“But because there's no
way for the IRS to coordinate the application of those terms with the Federal
Election Commission, a revenue agent who is doing an audit and trying to figure
out if there is a clearly identified candidate, or not, won't be able to call
the FEC and ask what they think,” Owens said. “He will have to come up with his
definition independent of what the FEC is doing.”
Over time, the
definitions of those terms will begin to differ, he said, which means that
ultimately it will provide a way for those who want to avoid the FEC rules or
the IRS tax rules to play the definitions off against each other. “Those terms
aren't even definite in the FEC world,” he said. “They are still being
In addition, as stakeholders on both sides of the political
aisle have pointed out, another big problem with the proposed rules is that
certain activity that was deemed to be appropriate if conducted in a
nonpartisan fashion before would now be deemed political, even if conducted in
a nonpartisan way. This would include voter registration, get-out-the-vote
drives and voter guides.
“The NAACP has been doing voter registration
and get-out-the-vote drives in places like Mississippi and Alabama for 100
years, and this rule would make it impossible for them to continue,” Owens
Meanwhile, House Ways and Means Committee
Chairman Dave Camp (R-Mich.) announced Jan. 16 that he will holding hearings on
the proposed rules and introduced legislation that would halt the rules process
for one year.
Mayer said the proposed rules aren't likely to be
finalized until after the election anyway. “It would avoid the appearance that
the Treasury and IRS are acting for the administration in some way,” he
Mayer also said he has concerns with the breadth of the definition
of candidate-related political activity. The rules would prevent Section
501(c)(4) groups from doing clearly nonpartisan activity, and there should be
no difference in the definitions for 501(c)(4)s and 501(c)(3)s, he said.
While Owens dismissed the Tea Party scandal as one in which conservative
groups suffered nothing more than being subjected to “silly questions,” and
Woods described the Tea Party scandal as “a tempest in a teapot,” one
practitioner who thinks the situation was much more serious is Cleta Mitchell,
a Foley& Lardner LLP partner. Mitchell represents many of the conservative
groups whose applications for tax-exempt status were held up for years, as the
IRS applied extra scrutiny to them based solely on the names of organizations
that may have had political connotations.
Many 501(c)(4)s will be
spending the first part of the year trying to stop the IRS rules as proposed,
Mitchell said. “We'll be trying to focus attention on how draconian they are.
They've taken everything that 501(c)(4) organizations do in the normal course
of business and proposed to convert that all to candidate-related activity,
even if a candidate is never mentioned.”
Mitchell said congressional
hearings are needed on the proposed rules and if all else fails, legal action
may be required. The proposed rules won't pass constitutional muster, she
“They are both over-broad and under-inclusive,” she said,
subjecting 501(c)(4) organizations to provisions of law that wouldn't be
similarly applied to other types of nonprofit organizations.
predicted that groups and individuals would cross political lines to oppose the
Moreover, she has filed a Freedom of Information Act
request to try to get all the documents and records pertaining to the
Mitchell said the timing of the proposed rules'
release--just before the Thanksgiving holiday--was designed by the IRS to
eliminate five weeks of a 90-day comment period.
She said she thinks IRS
officials are trying to codify their treatment of conservative organizations in
order to build a record that will protect the agency from litigation, and to
influence the next election by stifling the same conservative speech that
caused the IRS controversy in the first place.
“That's why the proposed
rules were rushed through,” Mitchell said. “The objective is to get the rules
in place before the 2014 election.”
business appears to be getting back to normal in the Exempt Organizations unit
at the IRS, Owens said there are lingering concerns. One of them is the
approach that will be taken toward tax administration going forward.
“What we are missing is the annual work plan,” he said. That document
traditionally outlines the exempt unit's plans for guidance and enforcement
projects for the upcoming year.
Nothing has been forthcoming from the
acting managers on how the laws are to be enforced for tax exempts, Owens said.
All the pronouncements to date have addressed the Section 501(c)(4)
applications, with the exception of several revenue procedures.
will be watching to see what signals the newcomers send on what they are going
to do,” he said.
In other areas, Woods said
the rules she is most anxious to see completed are those relating to
Donor-advised funds, tax code Section 501(c)(3)s,
allow the donor to advise the sponsoring organization where the money should
go. The IRS has expressed concerns that some donor-advised funds may be used to
create questionable charitable deductions, as well as impermissible
tax-sheltered investment income for donors and their families.
Donor-advised funds are a growing part of the exempt organizations landscape,
Woods said, with $45 billion in assets. “Some of the biggest charities in
America are donor-advised fund sponsors and we had quite sweeping statutory
change in the area in 2006, yet we still do not even have proposed
regulations,” she said.
According to Treasury Department officials,
these rules will be a long time coming, as other projects bump them aside.
The project that is new on the priority guidance plan for 2014 is guidance
under Section 4941 on private foundations investing in partnerships in
situations where disqualified persons are also investors. This is an
increasingly common fact pattern, Woods said, where families, and sometimes
corporations, are investing in the same hedge fund with private foundations.
Woods said there are inconsistent rulings on when that is a self-dealing
transaction, and more guidance is needed.
To contact the
reporter on this story: Diane Freda in Washington at email@example.com
To contact the editor responsible
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