[EL] Lawsuits Against the IRS Claiming the Statute Says No c4 Political Activity

Wed Aug 21 06:48:50 PDT 2013

Sigh. Most of us, for reasons amply discussed earlier in regard to the  
similar CREW lawsuit against the IRS, expect these cases to be tossed on Rule  
12(b)(1) preliminary motions, if nothing else, on standing. But this meme 
that  the statute and the regulations are at odds just won't die.

I am preparing a paper for delivery at a panel discussion on the subject,  
including a discussion of the "Bright Lines" Project, to be held  at the 
Sept 20 San Francisco meeting of the American Bar Association's  Committee on 
Exempt Organizations (the same group where Lois Lerner made  her apology for 
the IRS Advocacy Project in May). I assume these lawsuits  will be 
discussed. 

Here is a shortened version of the discussion on this point from my draft  
materials:

            Leaving aside the numerous other errors in Cong. Grisham’s 
analysis, it  appears that her repeated assertion that “federal law requires” 
that 501(c)(4)  organizations not engage in political activity is not 
consistent with federal  statutes, the legislative history of the IRC, Supreme 
Court and other judicial  holdings, and long-standing IRS positions. 

In any such statutory interpretation analysis, after determining federal  
power under the Constitution, one turns to the text of the statute itself.  
Section 501(c)(4) of the IRC reads, in relevant  part: 
(4)(A) Civic leagues or organizations not organized for  profit but 
operated exclusively for the  promotion of social welfare, or local associations of 
employees, the  membership of which is limited to the employees of a 
designated person or  persons in a particular municipality, and the net earnings 
of which are devoted  exclusively to charitable, educational, or recreational 
 purposes. 
Section 501(c)(4) does not contain an express prohibition on political  
activity. Nor does it contain a definition of “operated exclusively for the  
promotion of social welfare.” This is a classic example of a statute in which  
the implementing agency would have the authority, under Chevron and the 
related cases involving  authority over statutory interpretation of the IRC, to 
interpret the undefined  language.  
In contrast, Section 501(c)(3) contains an express prohibition on  
political activity: 
*** 
The other sections of Section 501(c) which have been interpreted as  
including a “primary purpose” test on political activities, also don’t contain  
express language on political activity. See, e.g.,  IRC 501(c)(5): “(5) 
Labor, agricultural,  or horticultural organizations”; IRC 501(c)(6): “(6) 
Business leagues, chambers  of commerce, real-estate boards, boards of trade, or 
professional football  leagues (whether or not administering a pension fund 
for football players), not  organized for profit and no part of the net 
earnings of which inures to the  benefit of any private shareholder or 
individual.” 
Section 527 of the Code also affects Congressional treatment of political  
activities of exempt organizations. Section 527 is, in essence, the mirror 
image  of Section 501(c)(4), requiring political organizations subject to its 
terms to  engage primarily in political activity, and to keep non-political 
activity to a  less-than-primary level. Unlike Section 501(c)(4), which 
does not mention  political activity, however, Section 527(e) defines political 
activity in  express terms, though with a different name: 
***  
In other words, Congress knows how to reference political  activity, either 
generally or less explicitly, when it means to include it  within a 
prohibition or limitation. It did not do so in the text of Section  501(c)(4). 
Perhaps more importantly, Section 527, which was added by Pub.L. 93-625,  
January 3, 1975, 1975-1 C.B. 510, 515, and amended by Pub.L. 95-502, October 
21,  1978, 1978-2 C.B. 393-395,  has a  relevant legislative history. The 
report of the Senate Finance Committee on Pub.  L. 93-625 specifically 
indicates that the provisions of section 527(f) apply to  organizations that are 
exempt under section 501(c)(4). It  states: 
“Exempt organizations which are not political  organizations. - Under 
present law,  certain tax-exempt organizations (such as sec. 501(c)(4) 
organizations) may  engage in political campaign activities. The bill generally treats 
these  organizations on an equal basis for tax purposes with political 
organizations.  Under the bill organizations which are exempt under section 
501(a) and are  described in section 501(c), that engage in political activity, 
are to be taxed  on their net investment income in part as if they were 
political  organizations....”  
S. Rep. No. 93-1358, 93d Cong., 2d Sess., 29 (1974),  1975-1 C.B. 517, 533. 

Not only did Congress contemplate political activity by 501(c)(4)  
organizations, but it intended to tax, not prohibit, that activity and thus  treat 
political activities by 501(c)(4) organizations the same as those by  Section 
527 political organizations. The flip side of that analysis is that  
Congress noted that 501(c)(4) organizations “may engage in political campaign  
activities.” Nothing that Congress has passed since 1974 undercuts that  
analysis.  
Thus, under settled principles of statutory interpretation, it does not  
appear that the Service has exceeded its authority in promulgating  
interpretative regulations so that it can implement the requirement that  501(c)(4) 
organizations engage “exclusively” in the “promotion of social  welfare.” 

And note also, from one of Prof. Hasen's favorite decisions, the  Supreme 
Court recognizes that history and the basis for the IRS regulations at  issue:

Section 501(c)(4)(A) grants exemption to “[c]ivic leagues or  organizations 
not organized for profit but operated exclusively for the  promotion of 
social welfare, ... the net earnings of which are devoted  exclusively to 
charitable, educational, or recreational purposes.” An organization “may carry 
on lawful  political activities and remain exempt under section 501(c)(4) as 
long as it is  primarily engaged in activities that promote social welfare.” 
Rev. Rul.  81–95, 1981–1 Cum. Bull. 332, 1981 WL 166125. Unlike 
contributions to §  501(c)(3) organizations, donations to those recognized under § 
501(c)(4) are not  tax deductible. See Regan v. Taxation With Representation of 
Wash., 461  U.S. 540, 543, 103 S.Ct. 1997, 76 L.Ed.2d 129  (1983). 
Fed. Election  Comm'n v. Beaumont, 539 U.S. 146, 150 n. 1  (2003).

I would most appreciate any criticisms or comments, particularly those that 
 illuminate some weakness in this analysis. 

Barnaby Zall 
Of Counsel 
Weinberg, Jacobs & Tolani,  LLP 
10411 Motor City Drive, Suite 500
Bethesda, MD 20817
301-231-6943  (direct dial) 
bzall at aol.com  
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In a message dated 8/21/2013 12:47:34 A.M. Eastern Daylight Time,  
rhasen at law.uci.edu writes:

_“Top Democrat files  suit against IRS over tax-exemption rules”_ 
(http://electionlawblog.org/?p=54614)  
Posted  on _August 20, 2013 9:45 pm_ (http://electionlawblog.org/?p=54614)  
by _Rick Hasen_ (http://electionlawblog.org/?author=3)   

_Washington  Post_ 
(http://www.washingtonpost.com/politics/federal_government/top-democrat-files-suit-against-irs-over-tax-exemption-rules/2013/08/20/a8
8a3d52-09d1-11e3-b87c-476db8ac34cd_story.html) : 
A top House Democrat plans to file a lawsuit in federal district court  
Wednesday challenging the Internal Revenue Service’s interpretation of a law  
that governs whether groups qualify for tax-exempt status as so-called  
social welfare organizations. 
Rep. Chris Van Hollen (D-Md.), the ranking member of the House Budget  
Committee, said Tuesday that he will serve as lead plaintiff in the case,  which 
addresses one of the main concerns that surfaced with the recent _IRS 
targeting controversy_ 
(http://www.washingtonpost.com/politics/obama-denounces-reported-irs-targeting-of-conservative-groups/2013/05/13/a0185644-bbdf-11e2-97d
4-a479289a31f9_story.html) : differences  between federal law and the IRS 
rules on eligibility for 501(c)(4)  candidates.

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