IRS Gives Opposite Rulings to Convention Committees

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By Kenneth P. Doyle

July 22 — When Cleveland's host committee for the just-completed Republican National Convention applied for charitable tax-exempt status nearly two years ago, approval by the IRS came in just 12 days, according to a spokeswoman for the host committee.

“We dotted our i's and crossed our t's,” the spokeswoman, Emily Lauer, told Bloomberg BNA in a phone interview. She explained that lawyers for the host committee studied previous convention host committee applications for exempt status under tax code Section 501(c)(3), all of which had been approved by the IRS, and used them as a road map.

Philadelphia's host committee for the Democratic National Convention set to begin July 25 wasn't so lucky. While neither the committee nor the IRS will discuss details, it is clear that approval of the Philadelphia committee's request for the same charitable tax-exempt status didn't come quickly and ultimately was denied.

The development was revealed in a news report in the Philadelphia Inquirer just days before the convention was set to begin.

Boost to Cleveland Fundraising

Approval of the Cleveland host committee's tax status was crucial for fundraising, Lauer explained. She said the committee had raised $58.5 million—only $5.5 million shy of its $64 million goal—by the time the convention ended.

This fundraising success came in spite of well-publicized pressure on some donors not to give due to controversy over Republican presidential nominee Donald Trump. Bloomberg News reported that several well-known companies that had contributed to the 2012 Republican Convention host committee opted not to participate this time around.

The Philadelphia host committee reportedly is trying to work around fundraising problems caused by IRS disapproval of its exempt status. It reportedly is telling donors they can give tax-deductible contributions to a local civic foundation that is helping to fund the host committee.

The full impact of the IRS ruling isn't yet clear, partly because the host committee is asking a state court in Philadelphia to keep information about its donors under wraps until a federal disclosure report must be filed with the Federal Election Commission two months after the convention ends.

Contributions Too Political?

The reason that the Philadelphia host committee was treated differently by the IRS largely remains a mystery, but legal experts speculated it had something to do with the way the committee planned to interact with the convention itself, which is being run by the Democratic National Committee.

The host committee is supposed to be set up for “filling potholes” in the host city before the convention attendees arrive and to help conventioneers have a good time and see the best side of the city when they get there, said Marcus Owens, a former top IRS official and veteran tax attorney with the firm Loeb & Loeb.

The host committee isn't supposed to be set up to fund events “inside the building,” where the convention is going on, Owens added in a phone interview with Bloomberg BNA.

To run the convention itself, the Democrats and Republicans set up party convention committees. These and all other national political party committees are barred by Federal Election Commission rules from taking the corporate and union donations and unlimited individual donations that can be provided to a host committee.

FEC Allowed Host Committees

Limits on such party contributions remain in place, though the limits were drastically increased in 2014 for special accounts to fund conventions and other party functions.

These accounts were created by Congress after a public funding program for conventions was eliminated that same year in a law known as the Gabriella Miller Kids First Research Act (Pub. L. No. 113-94). The law said convention public funding should be diverted to help research, treat and cure pediatric diseases.

Despite the remaining party contribution limits, the FEC has adopted rules creating convention host committees, which can take unlimited money. These committees are supposed to be kept legally separate from the convention committees.

Critics have charged that the FEC host-committee exemption has grown into a “loophole” that swallowed the law limiting direct convention contributions.

While the FEC created the host committee exception in campaign finance law, the IRS has in the past allowed favorable treatment of these committees under tax law.

One issue faced by officials is how to square this with a longstanding principle disallowing tax deductions for political contributions, according to Owens. The principle is based on the idea that the government shouldn't help subsidize private contributions to parties or candidate's campaigns.

`Luck of the Draw.'

Previous IRS rulings have allowed deductions for contributions to host committees, based on the idea that the money is going to help the host city put its best foot forward during a high-profile, national event, Owens said.

Owens said he wasn't involved with this year's conventions and had not seen the host committees' applications for tax-exempt status. He speculated, however, that there was something in the Philadelphia host committee's application that didn't follow closely enough the applications for tax deductible status previously approved by the IRS.

Owens added that the problems faced by the Democrats may have been simply “the luck of the draw.” The Philadelphia host committee may have been examined by an IRS official who reviewed its application closely, while the Cleveland host committee got a more cursory review.

`Hearings 24 Hours a Day.'

Either way, the result is a process that looks “arbitrary and capricious” to the public, Owens acknowledged. From outside the IRS, at least, it looks like two similarly situated entities doing similar things are being treated differently.

Owens said the situation hasn't gotten as much public attention as other recent IRS actions, perhaps because of embarrassment on the part of lawyers and consultants involved in planning the Democratic Convention. Another key factor is that the IRS is currently under a Democratic administration, which denied an application sought by a host committee linked to the Democratic Party.

If the situation was reversed—the Republican host committee's IRS application turned down while Democrats' was approved—there probably would have been outrage among Republicans and “congressional hearings 24 hours a day,” Owens said.

The IRS has been repeatedly criticized for years by congressional Republicans over allegations that conservative nonprofit groups were targeted for increased scrutiny in reviewing applications for tax-exempt status.

`Long Overdue Step.'

Brendan Fischer of the nonprofit Campaign Legal Center highlighted the recent IRS rulings on convention host committees in a July 19 blog post and called on the Service to reject charitable status for both parties' host committees.

Rejecting the Philadelphia host committee's application for charitable status under the tax code was “a long overdue step, since corporations should not be getting a tax deduction for buying political access and influence at the party conventions,” Fischer said.

He said the IRS had perpetuated “the charade” that host committees have charitable purposes, putting taxpayers in the position of subsidizing corporate political spending. Global companies and wealthy donors don’t give to the conventions for charitable reasons, Fischer maintained, but do so to buy influence with lawmakers.

The Campaign Legal Center recently released a report on funding the conventions, which faulted the FEC for allowing convention host committees to flourish. These committees have become a vehicle for corporate interests to pour tens of millions of dollars into both parties’ conventions despite the ban on corporate money in federal campaigns, the report said.

Host Committees Eclipse Parties

The center's report noted that this year's Democratic host committee in Philadelphia had a fundraising goal of $60 million, largely from corporate sources. The “official” convention committee, which is supposed to be responsible for all convention costs and can't accept corporate funds, had raised less than $4.6 million.

Similarly, the Republican host committee's $64 million fundraising goal eclipsed the official Republican Convention committee's total receipts of $7.4 million.

With the dominant role of the host committees, even people involved in running the conventions are confused about distinctions between the host committees and the convention committees.

For example, Lauer of the Cleveland host committee insisted in a phone interview with Bloomberg BNA that her committee's fundraising was especially important this year because of Congress' elimination of convention public financing in the law passed in 2014. In fact, federal campaign finance law and FEC rules always required that public money, when it was available, go directly to the national party committees, not the host committees.

To contact the reporter on this story: Kenneth P. Doyle in Washington at kdoyle@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com

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