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501(c)4 vs 501(c)3 vs 527

tax-forms-pen-crumpled-paper

Dr. Joyner has graciously granted me some pixel space to provide an institutional analysis of the current IRS Scandal. Working with the current evidence, I’m going to argue that this incident is most likely the result of bureaucratic bias and incompetence rather than a specific, intentional attack on the Tea Party or other conservative groups. My goal is not to minimize or explain away what happened. What occurred at the IRS was fundamentally unacceptable on multiple levels. What I’m interested in is exploring the lower level causes of this incident and the role that institutions, rather than individuals, played in the end result.

[5/29/2013: This article was updated with additional information about the distinctions between the different categories of Non-Profit based on definitions from the IRS Audit.]

One thing that is abundantly clear after reading the recently released redacted IRS audit: almost no one can confidently explain, let alone define, the specifics of the 501(c)4 designation.

The audit repeatedly criticizes the IRS for lacking clearly articulable criteria for determining whether or not an organization qualified for 501(c)4 status. The report also suggests that, in addition to IRS reviewers, many applicants didn’t seem to understand what 501(c)4 organization are, and are not, able to do.

So, before we can unravel the “where’s” and “why’s” of the IRS breakdown, we first need to understand the issue at the heart of this scandal: the 501(c)4 designation.

This post is a primer on 501(c)4 status, along with 501(c)3 and 527.

The framework for 501(c) organizations —what we commonly call nonprofits—was established over 75 years ago, when the federal tax laws were first codified. Because these are tax designations, any and all 501(c) organizations—regardless of function—are approved by, and primarily regulated by, the IRS. At present, there are over 29 different sub classifications for the 501(c) designation. But, for the case in question, there are only two that really matter:

  • 501(c)(3) — Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations
  • 501(c)(4) — Civic Leagues, Social Welfare Organizations, and Local Associations of Employees

The tax code also established numerous other forms of tax-exempt organizations. One in particular, the 527, is also critical to the IRS scandal. 527′s are tax-exempt organizations created primarily to influence the selection, nomination, election, appointment, or defeat of candidates to federal, state or local public office. And like 501(c)’s, 527′s are approved and regulated (at least in part) by the IRS.

While all of these organizations, the 501(c)3, the 501(c)4, and the 527, are tax-exempt, each is bound by different rules. Here are the most important differences to understand for the current situation:

Characteristics 501(c)3 501(c)4 527

Ability to engage in politics

Not supposed to engage in any political activities, though some voter registration activities are permitted May engage in political activities, as long as these activities do not become their primary purpose Politics is what 527s are *required* to do

Endorsing Candidates

CANNOT Endorse Candidates CAN Endorse Candidates CAN Endorse AND Field Candidates

Campaign Spending

Prohibited Permitted but taxed Required

Lobbying

Some lobbying Substantial lobbying No direct lobbying

General Political Advocacy (not related to legislation or the election of candidates.)

Yes, as an educational activity.) Yes, provided it is not the primary activity of the organization Yes

Contributions

Able to accept unlimited, tax-deductible donations Able to accept unlimited, non tax-deductible donations Able to accept limited (based on FEC regulations), non tax- deductible donations.

Donor Reporting

Donors kept anonymous. Donors kept anonymous. Donors are publicly reported.

Must apply with the IRS

YES NO YES

The TIGTA IRS audit defines lobbying as: “[A]ttempts to influence specific legislation by directly contacting members of a legislative body (Federal, State, or local) or encouraging the public to contact those members regarding that legislation. An organization also engages in lobbying when it encourages the public to take a position on a referendum. Lobbying is distinguished from political campaign intervention because lobbying does not involve attempts to influence the election of candidates for public office.” (TIGTA Audit, Footnote 8, Page 2/PDF p8 — Emphasis Mine)

Likewise the  audit has the following to say about “general advocacy”: “An organization engages in general advocacy when it attempts to 1) influence public opinion on issues germane to the organization’s tax-exempt purposes, 2) influence nonlegislative governing bodies (e.g., the executive branch or regulatory agencies), or 3) encourage voter participation through “get out the vote” drives, voter guides, and candidate debates in a nonpartisan, neutral manner. General advocacy basically includes all types of advocacy other than political campaign intervention and lobbying.” (TIGTA Audit, Footnote 9, IBID)

Looking at the chart above, the 501(c)4 organization starts to look a bit like the product of a one night stand between the 501(c)3 and the 527.

501(c)4′s have the ability to be far more political than 501(c)3′s—though politics cannot be the primary function of a 501(c)4. And while donations to 501(c)4′s are NOT tax-deductable, they are not regulated in the same way donations to a 527 are.

While the 501(c)4 existed for years in this hybrid state, it appears that for most of its history, few organizations exploited the designation’s political potential. That all changed in the lead up to, and aftermath of the Supreme Court’s 2010 Citizen‘s United ruling.

By the time of the ruling, many major political players, including Karl Rove, had formed 501(c)4 organizations, and 501(c)4 groups were beginning to take over a role that 527′s (such as 2004′s Swift Vets and POWs for Truth) had played in previous elections. Citizens United firmly established that any legislative attempts to regulate donations to 501(c)4′s—either by imposing limits OR forcing the publishing of donor information—were violations of First Amendment rights.

Critics of the decision continue to point out that it in essence endorsed using 501(c)4′s as quasi-political organizations to circumvent federal and state election regulations. Groups who would have originally filled for 527 status could now opt instead for the freedom of 501(c)4′s. Of course, in order to do so, those groups would have to “massage” their applications to ensure that it did not appear that they were a fundamentally “political” group.

The following chart, included in the IRS audit, demonstrates that in the wake of Citizens United, there was a marked increase (~40% a year) in the number of 501(c)4 applications being submitted to the IRS.

tax-exempt-applications

Let me note that this period—2010 to 2012—also saw the maturation of the Tea Party. And research into Tea Party communities shows that the accepted wisdom was that new Tea Party chapters should immediately file as 501(c)4 organizations. Ironically, of the three organization tax designations in question—501(c)3, 501(c)4, and 527—only 501(c)4 allows for a group to self-declare their status without first filing with the IRS. The advantage to filing is official recognition, which is only necessary if an outsider challenges the group’s 501(c)4 status. Otherwise, for all intents and purposes, the only thing required to operate as a 501(c)4 is to say that you‘re a 501(c)4.

Getting back to the IRS scandal, the broader point I’m trying to make is that, whether intentional or not, the very structure of 501(c)4, combined with the Citizens United decision, and the rise of the Tea Party, unexpectedly transformed the 501(c)4 from simply being about social welfare to being about politics. And that this was, generally speaking, a relatively rapid change.

Further, these rapid changes in the definition of what a 501(c)4 was (and was not) were accompanied by a rapid increase (for a variety of reasons) in the number of organizations filing for 501(c)4 status.

Plus, all of this change was occurring in an increasing polarized political environment, not to mention during the lead up to a presidential election, AND during ongoing cuts to government budgets and work forces.

And, here’s the kicker: An effect of the Citizens United ruling was that it inherently established that only one authority could regulate 501(c)4′s: the IRS.

As you’ll see in future posts, I’ll argue that all of this created the type of “perfect storm” that bureaucracies like the IRS are the least equipped to deal with.

Related Posts:

About Matt Bernius
Matthew is a PhD student in Cultural Anthropology at Cornell University, researching the intersection of technology and culture. Prior to Cornell, he earned a Masters in the Social Sciences from the University of Chicago and was a visiting professor at the Rochester Institute of Technology. Matt started his career at Eastman Kodak, spending eight years in a variety of web development, community and content strategy roles. In his spare time (off OTB) Matt slogs (slow-blogs) on the future of reading/media, studies martial arts and self defense, and volunteers, along with his wife, at the Rochester Animal Shelter. Follow him on twitter @mattbernius.

Comments

  1. C. Clavin says:
  2. Matt Bernius says:

    One of the things I should have mentioned in the article is that the phrase “political activities” creates some confusion.

    For tax law, “political activities” means:
    1. Actively telling people to vote (or not vote) for a specific candidate or group of candidates.
    2. Actively endorsing a candidate or group of candidates.
    3. Contributing funds to a campaign or group of campaign.

    A 501(c)3 is able to reproduce and share quotes and position statements, but *not* use them to *directly* tell you how to vote. It can also register voters, provided that it registers all voters and does not remove applications based on political preference.

    source – http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/The-Restriction-of-Political-Campaign-Intervention-by-Section-501%28c%29%283%29-Tax-Exempt-Organizations

    BTW – I am not at all sure if expressing support/opposition to ballot measures is considered “political activity.”

    Like or Dislike: Thumb up 0 Thumb down 1

  3. Septimius says:

    A couple of questions.

    If the Tea Party groups are so inherently political, how come the IRS could not come up with any evidence to deny 501(c)4 status, even with the extensive scrutiny that they applied? From what I’ve read, none of the hundreds of Tea Party applications have been denied. Shouldn’t the IRS have realized that Tea Party applicants were not likely to run afoul of 501(c)4 rules and that it was a waste of time and resources to continue to subject them to the extra scrutiny? Likewise, if the criteria for 501(c)4 status is so incomprehensible that virtually everyone gets approved, why target only Tea Party groups? Why target anyone? Unless the IRS has some evidence that Tea Party groups uniquely warranted extra scrutiny, which is impossible if none of them have had tax exempt status denied/revoked, to continue to target them becomes political harrassment.

    Like or Dislike: Thumb up 8 Thumb down 5

  4. Blue Shark says:

    That no one can define it is by design.

    …After Citizen’s United, the push is on to buy American Politics. Highest bidder gets to make the laws. Republican’s cheer this as most are better off than Democrats.

    …Strange things happen though with unlimited amounts of money and shadowy foreign involvement.

    …Just ask President Romney!

    Like or Dislike: Thumb up 5 Thumb down 4

  5. Matt Bernius says:

    @Septimius:
    There’s a lot in there that I will respond to when I have a bit more time later tonight. An in part, these topics are the subject of the next two posts.

    But in the meantime, I want to make a couple things VERY clear:

    If the Tea Party groups are so inherently political

    I’m not saying that any given Tea Party group is inherently political (in the terms I just laid out in my previous comment).

    However, many Tea Party groups have a *quasi-political* wing: in local elections, at least here in Western NY, there are “Tea Party” candidates. Now whether or not they are the candidate of a specific Tea Party is a different issue. But this is exactly the blurring of lines that creates problems.

    Plus the fact that “Party” is in their name doesn’t help. I will follow up with that final point in a future article.

    Shouldn’t the IRS have realized that Tea Party applicants were not likely to run afoul of 501(c)4 rules and that it was a waste of time and resources to continue to subject them to the extra scrutiny?

    This gets to a key point of this, and my next few posts, *the IRS reviewers did not fundamentally understand the definition of 501(c)4′s, because, in part, the definition was changing.

    Likewise, if the criteria for 501(c)4 status is so incomprehensible that virtually everyone gets approved, why target only Tea Party groups?

    I’ll address this tomorrow, but this is a fundamental misreading of the audit. Tea Party groups were disproportionately targeted, but the fact is that groups of all stripes and political persuasions got caught up in this because the IRS didn’t understand what makes a 501(c)4 a 501(c)4.

    Like or Dislike: Thumb up 5 Thumb down 2

  6. PD Shaw says:

    Excellent post. It highlights a point that I’ve come to see as important:

    All of these organizations, the 501(c)3, the 501(c)4, and the 527, are tax-exempt, each is bound by different rules.

    Along with the point that 501(c)(4) can campaign, but are taxed for doing so, its not clear to me that there are any tax advantages at issue here.

    What is at issue is that 501(c)(4)s are not required to disclose their members and contributors. That was one of the questions the Inspector General found obejectionable in its criticism of the IRS unit. That in turn goes back to principles articulated in NAACP v. Alabama. There, the SCOTUS ruled that the State of Alabama could not require the state NAACP chapter to disclose its members and donors in order to register:

    compelled disclosure of petitioner’s Alabama membership is likely to affect adversely the ability of petitioner and its members to pursue their collective effort to foster beliefs which they admittedly have the right to advocate, in that it may induce members to withdraw from the Association and dissuade others from joining it because of fear of exposure of their beliefs shown through their associations and of the consequences of this exposure.

    However, in Citizens United, the Court reaffirmed (what I think are multiple rulings) that disclosure requirements are permissible to regulate corporate political speech.

    I think the problem here is that Congress has never passed a mandatory disclosure law. IRS cannot, on its own authority, fill the void just because it thinks its just.

    Like or Dislike: Thumb up 9 Thumb down 0

  7. JKB says:

    Your thesis that the IRS scandal is “the result of bureaucratic bias and incompetence rather than a specific, intentional attack” leads to one conclusion.

    Whereas, specific, intentional attack could be dealt with by a removal from office of the corrupt political actors and a purge of the civil service of corrupt civil servants, the conclusion that it is bureaucratic bias and incompetence means that the federal government has become ungovernable.

    This is not a new concept. Earlier in Obama’s tenure several proffered the idea of a “split Presidency” to combat the fear the country had become ungovernable. But, of course, the country isn’t the part running amok using the threat of violence to impose its bias and incompetence upon The People.

    What we have is a great behemoth that looms over the lives of The People and is increasingly beyond the competence of our elected and appointed Constitutional officers to control. In fact, many of those officers welcome the monster and feed it well as they prefer to pontificate and be “new idea” people rather than see to the management and control of the bureaucracy. Like replacing bridges and repaving roads, overseeing bureaucrats is not sexy and doesn’t really get you votes until it falls down or is so pot-holed that it it is a threat to people’s every day lives. Well, we are at that point. The IRS scandal is the crack in the support beam, the pot hole that swallows a car or is it?

    The solution of a government grown to be ungovernable by those elected to manage and control it is, of course, to reduce the size, return to core duties and to put it on a slimming diet.

    Now, tax collection, as disagreeable as taxes are, is a core duty of government. So, while the IRS has to stay it doesn’t have to be let loose to terrorize the countryside. Congress, and the President, could impose draconian management controls to keep it “on mission.” Or we could change to a flat tax, removing all the loopholes the IRS manages for the benefit of politicians, their cronies and their desire to social engineer. Or we could go real crazy and do away with the income tax, shifting to less corruptible taxes, such as a sales tax or move the services down the government hierarchy closer to the voters. Or, for the particular 501(c) problem, simply do away with the corporate income tax, with limitations on retained earnings, with the taxes being paid by the only source of government money, the People.

    But one thing is certain, we should be looking at reducing the size and scope of the federal government to bring it back into a manageable shape within the oversight capabilities of our Constitutionally elected and appointed officials.

    Hot debate. What do you think? Thumb up 12 Thumb down 11

  8. gVOR08 says:

    So 501(c)4s

    May engage in political activities, as long as these activities do not become their primary purpose

    Larry O’Donnell has been making a point that this is a matter of IRS ruling. The language of the statute says they must engage “exclusively” in public welfare activities, not “primarily”, but “exclusively”. To a non-lawyer, this sounds like the IRS could have saved us all a lot of trouble by interpreting the statute literally. Then 501(C)4s would not have been able to engage in political activity and Justice Roberts et al would not have been able to ratfrack with this. In fact, could the IRS choose today to interpret the statute literally and moot the Citizens United decision?

    Like or Dislike: Thumb up 6 Thumb down 1

  9. Matt Bernius says:

    One other point, tangentially related to @Septimius’ points.

    Historically, organizations would have two “separate” wings if they wanted to engage in non-profit education AND political advocacy. There would be the educational side (broadly defined), a 501(c)3, and then there would be the political side, a 527 or increasingly commonly, a 501(c)4.

    The two organizations would be handled separately in the same way that, say, a bank builds a firewall between its savings and its investment divisions. (Please feel free to read into that last sentence what you will)

    One of the things that Tea Party groups are accused of, fairly or unfairly, is that they don’t necessarily perform that firewall as well.

    Like or Dislike: Thumb up 5 Thumb down 1

  10. Matt Bernius says:

    @PD Shaw:

    Along with the point that 501(c)(4) can campaign, but are taxed for doing so, its not clear to me that there are any tax advantages at issue here.

    What is at issue is that 501(c)(4)s are not required to disclose their members and contributors.

    THIS! THIS! A THOUSANDS TIMES THIS.

    Perhaps the biggest flaw I see in the reporting of this issue — not to mention the partisan parsing of it — is that everyone seems to be discussing the *tax implications* versus the *reporting* implication.

    This situation has ABSOLUTELY NOTHING TO DO WITH TAXES.

    Again, the reason why everyone is latching on the tax things is because the IRS is involved. Which will hopefully become increasing clear with the rest of the articles — is that regulation of potentially political organizations has been left up to the IRS because all of them are created via the tax code. Which means that an organization that has no real *organization knowledge* of politics is being charged with policing politics.

    This (along with institutional biases) sets up a no win scenario and creates the condition for this massive screw up.

    Like or Dislike: Thumb up 11 Thumb down 0

  11. PD Shaw says:

    @gVOR08: I believe Senator Levin asked the IRS this very question and they explained that there are very explicit restrictions in the Internal Revenue Code for 501(c)(3) organizations that are not repeated for 501(c)(4) organizations. The IRS adopted has adopted a long-standing interpretation that 501(c)(4) organizations are not subject to the same political restrictions as 501(c)(3) organizations, which Congress has always been free to change.

    Like or Dislike: Thumb up 3 Thumb down 0

  12. Gromitt Gunn says:

    @Septimius:

    Likewise, if the criteria for 501(c)4 status is so incomprehensible that virtually everyone gets approved, why target only Tea Party groups?

    Because – from what I have seen – they didn’t target only Tea Party groups. About 25% of the groups subject to questioning were Tea Party groups (roughly 75 out of 300).

    Like or Dislike: Thumb up 7 Thumb down 3

  13. Matt Bernius says:

    @JKB:
    The elimination of bureaucracy in the modern world is absolutely impossible. And from the moment the Constitution was signed — if not before — we were already relying on bureaucracies.

    And the fact is, that in the vast majority of cases, the bureaucratic form is the optimal form for running a complex social organism like a modern nation state. However, as I’ll lay out in the final article, when change happens fast, there is arguably *no worse* form to deal with it than a bureaucracy.

    Like or Dislike: Thumb up 6 Thumb down 1

  14. PD Shaw says:

    @Matt Bernius: I initially missed your closing statement that there would be more posts; sorry if I killed the surprise. But it did take me a while to realize that 527s are also tax exempt organizations, so some of my assumptions were wrong.

    Like or Dislike: Thumb up 0 Thumb down 0

  15. Matt Bernius says:

    @PD Shaw:
    No worries… the magic is in the proof more so than the answer.

    And yeah, I was totally surprised to learn 527′s were tax exempt.

    I wish I could find year-by-year filing data on the numbers of %01(c)4 and 527 applications for the last decade. I think that would be VERY telling.

    Like or Dislike: Thumb up 1 Thumb down 0

  16. Septimius says:

    @Matt Bernius:

    However, many Tea Party groups have a *quasi-political* wing: in local elections, at least here in Western NY, there are “Tea Party” candidates. Now whether or not they are the candidate of a specific Tea Party is a different issue. But this is exactly the blurring of lines that creates problems.

    That’s absurd. The IRS also targeted groups with names including “Patriot” and “9/12 Project.” Are you going to argue that the IRS confused these with established political parties?

    but this is a fundamental misreading of the audit. Tea Party groups were disproportionately targeted, but the fact is that groups of all stripes and political persuasions got caught up in this because the IRS didn’t understand what makes a 501(c)4 a 501(c)4.

    I think you’re misreading the audit. The IRS disseminated a BOLO memo instructing agents to flag all applications from groups with references of Tea Party, Patriots, 9/12 Project for further review. Why? There is no evidence that any of these groups were too political to qualify for 501(c)4 status. It would be understandable if the IRS had previously denied similar applications or revoked tax-exemptions from similar groups. They hadn’t. As has been mentioned many times, 501(c)4′s can engage in certain political activity. It is inconceivable that the IRS agents would not know that. And, since they had no evidence to suspect that Tea Party groups were prone to impermissable political activity, there is no plausible reason to single them out.

    Like or Dislike: Thumb up 7 Thumb down 2

  17. C. Clavin says:

    “…What we have is a great behemoth that looms over the lives of The People and is increasingly beyond the competence of our elected and appointed Constitutional officers to control…”

    What f’ing nonsense.

    Like or Dislike: Thumb up 11 Thumb down 5

  18. PD Shaw says:

    One thing to observe about the chart (Figure 2 — total applications by year) is how misleading the IRS was trying to be. After getting a chance to review the draft inspector general report, they responded with a letter that ended up getting circulated in the media, asking that the context be taken into consideration that there had been a significant increase in applications and “[b]etween 2008 and 2012, the number of applications for section 501(c)(4) status more than doubled.”

    This left the erroneous impression that the IRS was deluged with applications and was looking for tools to respond to the increase. The reality is that the IRS initiated its tea-party focus around March 1, 2010, and the doubling of 501(c)(4) applications occurred in the two years after that.

    Like or Dislike: Thumb up 2 Thumb down 1

  19. gVOR08 says:

    @PD Shaw: Unless someone shows me statute language that differs, I’ll take O’Donnell’s word for it that this wording is under (C)4, not (C) in the 1959 statute:

    “Section 501(c)(4) of the Internal Revenue Code defines tax-exempt social welfare groups like this:
    Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.”

    It appears to be, as you say, a long standing interpretation; but one at odds with the language of the statute.

    Like or Dislike: Thumb up 1 Thumb down 0

  20. gVOR08 says:

    @Gromitt Gunn: Thank you, but source please. Not arguing, I want it in the chamber if I need it.

    Like or Dislike: Thumb up 1 Thumb down 0

  21. PD Shaw says:

    @Septimius: “If the Tea Party groups are so inherently political, how come the IRS could not come up with any evidence to deny 501(c)4 status, even with the extensive scrutiny that they applied?”

    I wondered that myself at the Glittering Eye this morning, and someone indicated that there were a few applications that had not been acted on yet. But aside from them, I think one has to assume that (a) these groups were found to be social welfare organizations, or (b) they were approved for fear that a rejection, which comes with appeal rights, might not withstand scrutiny or might bring unwanted notice to the activities.

    Like or Dislike: Thumb up 0 Thumb down 0

  22. PD Shaw says:

    @gVOR08:

    That provision does not specifically mention politics. I assume O’Donnel is interpreting “social welfare” as meaning “not politics,” but that is not how the IRS interprets it. From the IRS’ response to Senator Levin regarding this same argument.

    Question 1. How can the IRS interpret the explicit language in 26 U.S.C. §501(c)(4), which provides that 510(c)(4) entities must operate “exclusively” for the promotion of social welfare, to allow any tax exempt partisan political activity by 501 (c)(4) organizations?

    We note that the current regulation has been in place for over 50 years. Moreover, unlike Internal Revenue Code section 501 (c)(3), which specifically provides that organizations may “not participate in, or intervene in … any political campaign on behalf of (or in opposition to) any candidate for public office.”), section 501 (c)(4) does not contain a specific rule or limitation on political campaign intervention by social welfare organizations.

    This is pretty normal statutory interpretation; the existence of a condition in one place, but not another is given meaning. The failure of Congress to act after this meaning has been employed in regulations, guidance and tax court decisions over decades is seen as ratification. Congress can always change the law.

    Like or Dislike: Thumb up 3 Thumb down 0

  23. Matt Bernius says:

    @Septimius:

    I think you’re misreading the audit.

    We’ll find out tomorrow when I (hopefully) post my deep read of the audit.

    @PD Shaw & @Septimius:
    While the vast majority of tea party applications were ultimately approved, some were in fact denied. I’ll be exploring more of this tomorrow.

    Additionally, just because an application was initially approved *did not mean* more information was first necessary to clarify the situations. Again, this gets back to the issue that because no one seems to quite understand 501(c)4, some applicants submitted material apparently made it appear more political than they were.

    As far as P.D.’s point about approval for fear of reaction, one thing I will discuss tomorrow is how much media coverage about Tea Party concerns apparently did influence the behavior of the IRS as this dragged on. It seems pretty clear that the office realized the debacle it was creating.

    Like or Dislike: Thumb up 0 Thumb down 0

  24. Matt Bernius says:

    @PD Shaw:
    On the issue of doubling, I agree that the IRS is playing lose with the facts, but I’m not entirely to your POV yet. What would really help would be to get a full decade of 501(c)4 application stats and see that trend.

    But it’s entirely possible (for reasons I’ll get into in two days) that they were, even at the beginning, deluged with a new type of application. And given the fact that they (inexcusably) decided to punt on all held application for more than a year (Oct 2010-Nov2011 or something like that) speaks a lot to the level of internal confusion.

    Like or Dislike: Thumb up 3 Thumb down 1

  25. Matt Bernius says:

    BTW, my kingdom for anyone who can point me to any published government docs on th # of 501(c)4 applications by year. It feels like that should be readily accessible, but damned if I can find it.

    Like or Dislike: Thumb up 1 Thumb down 0

  26. mistermix says:

    Excellent post. I’d be interested in your take on the theory that one reason the IRS could have given these groups more scrutiny is that they applied for 501(c)4 status even though application is not necessary:

    http://maddowblog.msnbc.com/_news/2013/05/16/18299733-how-to-apply-or-not-for-tax-exempt-status?lite

    Like or Dislike: Thumb up 1 Thumb down 0

  27. grumpy realist says:

    The looks to me like a shifting interpretation problem, stuck in the midst of a changing legal background problem, coupled together with an administrative law problem. It’s not surprised this turned into such a SNAFU.

    Who in the hell thought that approval of these entities should have been dropped into the laps of the IRS? They understand taxes. They don’t know what “politics” is, or all the other fine-hairsplitting they had dumped upon them as responsibilities.

    (And if anyone things that better definitions fixes things, I give you the Hatch-Waxman Act. it’s been almost 20 years since the damn sucker was passed and we’re STILL uncovering problems with it!)

    Like or Dislike: Thumb up 0 Thumb down 0

  28. grumpy realist says:

    Matt, Page 9 of this report has some info.

    Like or Dislike: Thumb up 0 Thumb down 0

  29. grumpy realist says:

    @Matt Bernius: The numbers from the above report are the following (for 501(c)(4):

    2009: 1751
    2010: 1735
    2011: 2265
    2012: 3357

    They then do mumble something about the data having been provided by the EA for background and not having been validated for accuracy or reliability, but I think that ‘s the standard ass-covering disclaimer.

    Like or Dislike: Thumb up 1 Thumb down 0

  30. JKB says:

    @Matt Bernius:

    While I’ve commented strongly on bureaucracy and its inherent evil. And I’ve rhetorically called for its demise. I have not advocated for its literal destruction for the simple fact that it is impossible. The bureaucracy is how large organizations get things done so it is a necessary evil.

    Nor are bureaucrats inherently evil as individuals. The evil arises from thousands to individualized decisions by those bureaucrat each working for their own purposes even if their purpose is to full and faithfully execute their duties. But when combined and they interact, in general bureaucracies do a lot of harm. Old bureaucracies that are no longer sexy for the politicians to take an active interest in, can do some of the worst.

    Hence, my point about keep the bureaucracies small and contained. Keeping them of a size for good oversight. It is a futile plan as the bureaucracy is seductive to the Constitutional officers. “Give it to me and I’ll see it done,” says the bureaucracy. And it does, but after a time, it has had an effect on the landscape and that generally means the citizen has been flattened. The bureaucracy feeds the politician’s ego, gives him credit, dilutes accountability, hides the political “boss” but it also acts with out emotion or empathy toward others for its own interests.

    And yet, the bureaucracy has a great fear. It fears accountability. If held accountable, it can be held in check. But now, the many bureaucracies are just a part of the monstrous whole and easily avoids accountability. Right now, the IRS is simply waiting for the focus to move so it can return to its own interests.

    A great comment on the weakness of our elected representatives is the bureaucracy doesn’t fear them, for they are, as we see with Obama, and I suspect with Bohener, et al, are weak in holding the bureaucracy accountable for long. Although the bureaucracy does dread the IG who brings the accountability light and, of course, the trick the IRS took up, the document request, which requires work and has an outside judge of the quality of that work.

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  31. anjin-san says:

    @JKB

    While I’ve commented strongly on bureaucracy and its inherent evil.

    Well, I think most people would say you’ve ranted, followed by some raving. You might want to find a good street corner and scream your message at motorists as they go by. You would blend right in.

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  32. PD Shaw says:

    @Matt Bernius: I have seen, but cannot currently find, annual reports summarizing the number of 501(c) decisions made annually, as opposed to how many applications are received. Can’t find it now, and don’t know if that helps, but those reports exist. (Though the actual number of denials is omitted to prevent anyone from knowing which applications were denied)

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  33. john personna says:

    Nice piece, Matt.

    I’m left wondering why they thought something halfway between a charitable organization and a political one was at all useful Especially with the hanging condition that this thing in the middle could never become “primarily” political. That is a structure guaranteed to bring applicants who cheat on their “primary” activity.

    And if not many 401(c)4′s have been denied, maybe that’s because a plausible deniability game is being played broadly.

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  34. Matt Bernius says:

    @PD Shaw:
    Denial numbers would be useful too. But before that, I’d really like to see how the number of applications changed (grown?) prior to 2010 to better understand the “overwhelmed” claim that the IRS put forward.

    Also an aside (as I work on the next installment of this series), one of the most frustrating aspects of the audit is that one of the few things that *was* completely redacted in it was the *first* entry of the timeline (including its date).

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  35. Matt Bernius says:

    @mistermix:

    I’d be interested in your take on the theory that one reason the IRS could have given these groups more scrutiny is that they applied for 501(c)4 status even though application is not necessary:

    It’s an *plausible* theory to the degree that bureaucracies are really bad at dealing with unexpected or out-of-the-norm inputs.

    Without having more data, I don’t think its necessary high probability scenario. That said, part of my argument is that, rather than being any one thing (i.e. a specific conspiracy), this problem was caused by a concatenation of factors (i.e. a “perfect storm”).

    This get’s back to needing a decades worth of data on the number of 501(c)4 filings (preferably 2002-12).

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  36. PD Shaw says:

    @Matt Bernius: I thought the first date was shown as February 25, 2010. The IRS has suggested the content was redacted because it could identify a specific taxpayor. Link

    My speculation would be that on February 25, 2010, the Agency received an e-mail complaining about the activities of a Tea Party organization. The IRS is suggesting that the don’t want to name that group, I think the IRS doesn’t want to name the complainant. The March 1 entry sets out to investigate “other Tea Party or similar organizations” to determine the scope of the issue.

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  37. PD Shaw says:

    Speculation on the potential significance of the February 18, 2010, terrorist attack against an IRS facility. Link Hard to imagine that an e-mail a week later would be directly related to that incident, but its credible that the IRS would have particular disdain for this movement.

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  38. Matt Bernius says:

    @PD Shaw:
    This is jumping ahead to my end argument, but I think it’s fair to say the IRS, like State and Education, as a bureaucratic entity most likely has a liberal bias (in the same way that most of the armed service and intelligence bureaucracies have a conservative bias). And that bureaucratic bias (that exists regardless of who occupies the white house) plays into this.

    Even leaving aside the attack on the IRS facility, the fact that many Tea Party groups expressed outright disdain for the IRS and advocate for significant reductions in government jobs most likely plays a factor as well.

    Like I said, all of this will be explored in much more depth soon. Still need to get through the article on the Audit.

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  39. john personna says:

    Resolved: 501(c)4′s were someone’s idea of a way to get even more money into politics, tax protecting part of it, and yes reducing reporting on all of it.

    Had there just been 501s and 507s, there would be a clean break.

    Someone had the bright idea though to make a sub-category of 501 that was pretty much a 507.

    Corruption is probably not too strong a word.

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  40. Matt Bernius says:

    @john personna:

    Resolved: 501(c)4′s were someone’s idea of a way to get even more money into politics, tax protecting part of it, and yes reducing reporting on all of it.

    Disagree… while I agree that 501(c)4′s *became* this, from what I’ve read it doesn’t appear that this was ever the initial intention. This seems to me to be a case of innovative/creative people exploiting the grey areas that had existed for quite some time without notice.

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  41. john personna says:

    @Matt Bernius:

    I suspect an iteration (like the 401k story) where someone found a niche as you say, and then new legislation broadened it. Crack meet wedge.

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  42. stonetools says:

    Larry O’Donnell has been making a point that this is a matter of IRS ruling. The language of the statute says they must engage “exclusively” in public welfare activities, not “primarily”, but “exclusively”. To a non-lawyer, this sounds like the IRS could have saved us all a lot of trouble by interpreting the statute literally.

    Bingo. There is a simple fix at hand here. The IRS can simply say that from here on it will abandon its prior interpretation allowing for political action by these groups as permitted under “social welfare” and henceforth define “social welfare” as not including political action.Alternatively, it could rule that such groups must disclose their donors if they engage in political activity.
    Watch the sudden massive drop in applications after that. Also too, watch Crossroads USA scrambling to change its designation as a 501(c)4 ( Priorities USA too).

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  43. rudderpedals says:

    @stonetools: Can it just up and do this? Fred Wertheimer had an oped piece in the last few days. In it he said he had a petition for a rulemaking sitting at the IRS since 2011 that asks to replace the revenue regulation’s predominance test with something more consistent with the statute’s exclusivity requirement.

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  44. Ann O'Connell says:

    @john personna: To understand why a social welfare organization might become involved in politics, think about an organization like the National Arbor Day Association that wishes to encourage both individuals and units of government to plant trees, establish and maintain parks, etc. Any organized effort to influence any government official or body is political activity. There is plenty of history of significant political activity on the part of groups such as the Arbor Day Association when asking for favorable tax activities they support, laws protecting those engaged in their favorite activities, support of government programs researching those activities, etc.

    For similar reasons, the ACLU has 2 separate organizations. One of them, called the ACLU Foundation, is a 501 (c) 3 and accepts tax-deductible donations. Donations to the original ACLU, which lobbies on many issues but does not support or endorse specific candidates, are not tax deductible to individuals or organizations. Both branches of the ACLU refuse to identify their donors unless the donors request such public identification. See https://www.aclu.org/donating-american-civil-liberties-union-and-aclu-foundation-what-difference

    Most Americans probably find the National Arbor Day Association innocuous and generally apolitical. Most would probably also agree that the ACLU, while much more overtly political, performs important and useful functions in US society. The ACLU does a great deal of political work, including advocacy for or against certain laws and ballot proposals, but it does not endorse or donate money to particular candidates which is how the law governing non-profit organizations is written.

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  45. john personna says:

    @Ann O’Connell:

    I can certainly see the Arbor Day Association as on the charity side of the divide. That’s an easy one. I noticed above the idea that:

    A 501(c)3 is able to reproduce and share quotes and position statements, but *not* use them to *directly* tell you how to vote. It can also register voters, provided that it registers all voters and does not remove applications based on political preference.

    That’s the way the Sierra Club does it, I think. When I’m speaking of the wedge, and the new (pointless) middle ground, I’m talking about the 501(c)4′s. Once they start endorsing candidates, IMO they’ve gone over the edge of what should be a clean divide.

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  46. john personna says:

    Put another way, 501(c)4′s sound like they should be a sub-division of 527 rather than 501.

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  47. stonetools says:

    @rudderpedals:

    In it he said he had a petition for a rulemaking sitting at the IRS since 2011 that asks to replace the revenue regulation’s predominance test with something more consistent with the statute’s exclusivity requirement.

    So maybe its time for the IRS to take up that petition. And I guarantee you that we will see instant Republican opposition to this “unjustified attempt to overturn an interpretation that has stood for 50 years”, etc.

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  48. stonetools says:

    @Ann O’Connell:

    Most Americans probably find the National Arbor Day Association innocuous and generally apolitical. Most would probably also agree that the ACLU, while much more overtly political, performs important and useful functions in US society. The ACLU does a great deal of political work, including advocacy for or against certain laws and ballot proposals, but it does not endorse or donate money to particular candidates which is how the law governing non-profit organizations is written.

    Well, maybe what’s sauce for the goose is sauce for the gander. Maybe it’s time for all groups engaged into political advocacy to disclose their donors. Liberals are OK with that, for the most part. Conservatives fiercely oppose such disclosure requirements, because it would hinder their ability to tap corporate funds. This is really what the fight about 501(c)4 enforcement is about.

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  49. PD Shaw says:

    @rudderpedals: The more promising proposal would be to maintain the existing interpretation of the statute that the IRS has used in rulemaking and court challenges for decades, but change the “facts and circumstances” test into a bright-line numeric formula, such as no more than 49% of expenditures are for political activities. It appears that many 501(c)(4)s use that as a safeguard, though the IRS has never adopted it.

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  50. M Wheeler says:

    Here is the real “bottom line” – 16th Amendment authorizes a tax on INCOME
    In the case of a 501c(3), I get a tax deduction and the organization does not pay taxes – that takes money out of the Federal Treasury…I am ok with jumping through IRS loopholes to make sure they are charitable.

    501c(4)’s come from a group of like minded people – whether its Sierra Club, Tea Party or anyone else. No tax deduction for donors – SHOULD mean unregulated, unfettered and untaxed use of the funds for ANY purpose covered under the 1st Amendment.

    Dems sent in uniformed Black Panther thugs to watch the polls and anyone who believes the targeting of conservative groups was not a criminal attempt to influence an election – really needs to stop drinking the kool-aide

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  51. rudderpedals says:

    @stonetools: I do believe it’s well past time that the IRS implemented the change but they’ve not even put it for comment (if that’s how it does rulemaking? I haven’t a clue, hoping Matt addresses this in a later post).

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  52. PD Shaw says:

    @Ann O’Connell: I think it was more accepted at one time that interest groups served an important function in disseminating ideas for and against legislation. Without 501(c)(4) groups advocating for political changes with respect to race, gender, the environment, and individual liberty, the primary voices heard by the legislature would be the commercial interests of labor and business. Businesses hire traditional lobiests, or form business trade organizations under a different section of 501(c).

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  53. Matt Bernius says:

    @PD Shaw:

    Without 501(c)(4) groups advocating for political changes with respect to race, gender, the environment, and individual liberty, the primary voices heard by the legislature would be the commercial interests of labor and business.

    Correct — if by advocating, you mean lobbying, making donations, and direct endorsements.

    The entire question of what constitutes “political” activity still remains rather confusing to me (I am NOT a tax lawyer). Part of the thing is that much of what seems to define “political activity” seems to be better referred to as “electioneering.”

    A 501(c)3, as part of its educational work, seems to be able to advocate for *policy* change. And while they are not allowed to directly lobby for changes, I believe that they can urge members to write government officials in support of specific policies or legislation.

    What it clearly cannot do is *directly* advocate for/against specific candidates or parties. Nor can they endorse parties or candidates.

    And, frankly, I have no idea what they can do, or not do, when it comes to ballot initiatives.

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  54. john personna says:

    @PD Shaw:

    We couldn’t have had a civil rights movement without 501(c)4′s … except we did?

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  55. rudderpedals says:

    @PD Shaw: I thought they’d been using a bright line predominance percentage based test. Are there any objective tests in use?

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  56. stonetools says:

    @rudderpedals:

    The problem with any 49 per cent rule is that it then becomes a matter of accounting. And any accountant worth their salt can diddle that 49 per cent rule, especially if he has help from attorneys creating shell corporations.

    I think the easiest rule would be to just require that 501(C)4 groups that engage in political activity must disclose their donors. Its hard to disguise significant political activity, the way you can shuffle money between accounts and various corporate entities.

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  57. john personna says:

    @stonetools:

    Why not kill the 501(C)4?

    As I say with the civil rights question, it’s not like these things were a precursor to … anything important whatsoever.

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  58. PD Shaw says:

    @john personna: Was the NAACP important to the civil rights movement? Link

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  59. PD Shaw says:

    @rudderpedals: I would not describe the tests as objective. I would describe them as dependent upon the specific facts and circumstances, disputes over which would ultimately be resolved in the tax courts. The tax court decisions are probably useful to people who have access to them.

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  60. john personna says:

    @PD Shaw:

    They are cited as a rare case in the 60′s. That article then talks about a gray area opening up in the 70′s and 80′s.

    I think we don’t need that gray area, and getting rid of the 4′s closes it.

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  61. Matt Bernius says:

    @john personna:

    We couldn’t have had a civil rights movement without 501(c)4′s … except we did?

    This is a potentially anachronistic argument — if for no other reason that regulatory structures and enforcement has changed since that time. While there might not have been a needs for 501(c)4′s in the 60′s/70′s, that doesn’t mean that the civil rights movement (or the gay rights movement) wouldn’t need them today if they were starting from scratch.

    I’m not a historian, but I’d be interested to know if — and how aggressively — the IRS went after 501(c)3 like African American Churches during the 60′s and 70′s for violating the politicking/electioneering rules.

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  62. PD Shaw says:

    @john personna: NAACP v. Alabama got to the Supreme Court in 1958, establishing a Constitutionally protected privacy interest in anonymous association. See my earlier link. I would think someone posting anonymously would have a feel for the conflicting concerns.

    @Matt Bernius: I’m not familiar with the exact history, but the NAACP still operates as a nationwide 501(c)(3), with local chapters as 501(c)(4)s. I think that notion of how to best further their interests dates back to the 1950s. I think we need to consider that a lot of 501(c)(4)s are local organizations in which people want to contribute to a larger cause, but don’t want to isolate friends or family or risk employment.

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  63. Bob Meyer says:

    The argument that “Citizens United” caused the increase in 501 (c)4 applications is obviously wrong. The CU decision came down in January 2010, yet the number of applications for 501(c)4′s actually fell slightly from 2009 to 2010.

    It must be understood that the 501(c)4 classification was developed to allow 527 organizations to have a lobbying arm. Prior the the “explosion” in interest in 501(c)4 s the best known one was MoveOn.org’s lobbying arm “moveon civic action”. These organizations were never intended for average individuals. They were intended for the wealthy and well connected elite. Never in their wildest dreams did legislators ever imagine that ordinary people might take advantage of the political shelters intended only for the George Soro’s of the world.

    The only solution is the complete abolition of all charitable tax deductions and allowing political organizations to only pay taxes on profits if any. They should be treated like investment firms. When you give money to someone to invest on your behalf he doesn’t pay taxes on your money, he pays taxes on any fees he charges you. The same principle should apply to political advocacy groups.

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  64. angelfoot says:

    Great post and discussion. Looking forward to your next posts, Matt.

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  65. Bob Meyer says:

    @Matt Bernius:
    Are you suggesting that the “MoveOn” triad is more respectful of the “firewall”?

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  66. matt bernius says:

    @Bob Meyer:

    Are you suggesting that the “MoveOn” triad is more respectful of the “firewall”?

    That wasn’t my intention. I think most “firewalls” are more of a public/governmental performance than something that prevents direct or indirect collusion (again, see what goes on with Investment Banks or News organizations).

    As far as Citizens United, to be clear, I don’t think that it was the single cause for the explosion in 501(c)4 filings in 2011 and 2012. That said, it plays a role (again, my argument is that there were multiple concatenating factors at play here).

    For that theory to be tested, we would need to find a more detailed, and longer (going back to at least 2002), historical record of annual 501(c)3, 501(c)4, and 527 applications.

    Thanks for the comments.

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  67. matt bernius says:

    @Bob Meyer:

    The only solution is the complete abolition of all charitable tax deductions and allowing political organizations to only pay taxes on profits if any.

    The issue, again, IS NOT CHARITABLE TAX DONATIONS. If it was, we’d be talking about 501(c)3′s exclusively. The 501(c)4 does not accept charitable tax donations.

    The issue is reporting of the *identity* of donors. Again, 501(c)3 and 501(c)4 do not have to disclose donors. 527′s do.

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  68. john personna says:

    @Matt Bernius:

    I’m talking very specifically about the “4′s” and the gray area.

    I’m sure rules have changed, that’s what makes this discussion, but I don’t see that society has changed so much that charitable 501s and political 527s can’t divide the work.

    IMO this is a common problem that we take something that works, and try to fix it, breaking it in the process. See also the US government’s “faith-based initiatives.”

    (good work for lawyers thought.)

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  69. Sandman619 says:

    @Septimius:

    Since a 501(c)(4) organization can self declare, that makes the formal process only important for groups where their tax-exempt status is being challenged, which clearly that does not seem to be the issue. These groups did not need to apply to even apply to the IRS & still receive the same benefits. So in a way, it seems understandable that when these groups applied, to assume that their 501(c)(4) status was being challenged & the IRS staff would want to scrutinize these applications more closely. Again, the 501(c)(4) status does not make contributions tax-deductible, the only tax benefit is to the group which can state in its tax returns that it is a 501(c)(4)

    Cheers !

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  70. Bob Meyer says:

    @matt bernius: You only replied to half of what I wrote.

    Political organizations should be treated like any other kind of business in that they only pay taxes on profits, not on income. Requiring that they pay income tax on all proceeds is a way of limiting political speech. It gives wealthy individuals a great advantage over average people by making it very expensive for people to pool their money in political campaigns.

    To compete with a Soros or a Koch you start off with a 39% handicap since they need not pay additional income taxes when they support certain political activities. Political “bundlers” who solicit funds from the wealthy do not pay taxes on the monies they raise but let a few hundred average people try to pool their money and they get taxed out of existence.

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  71. John D'Geek says:

    @Matt Bernius: First, great article — looking forward to the later parts. Second, “PD Shaw was right”. :D

    Okay, so trying to read this and not being a lawyer:

    For tax law, “political activities” means:
    1. Actively telling people to vote (or not vote) for a specific candidate or group of candidates.
    2. Actively endorsing a candidate or group of candidates.
    3. Contributing funds to a campaign or group of campaign.

    Let’s say that PD Shaw is running for president. Does this mean that the Dwigit Leage [a ficticious 501(c)3] could say: “PD Shaw is an idiot and does not support Dwigit Rights(TM)”, but not “Do not vote for PD Shaw” — even though the first is effectively the same as the second?

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  72. Kart Hall says:

    @Matt Bernius: @Matt Bernius:

    Maybe you’ll find what you’re looking for here: GuideStar Publications
    Under Nonprofits there’s reports/surveys going back to 2002

    and try Sunlight Foundation

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  73. Kart Hall says:

    Why are tea partiers and patriot groups having a hard time getting something they don’t even need from someone they don’t even like…Actually, Tea Party Groups Gave the IRS Lots of Good Reasons to Be Interested – IRS profiling was a fiasco. Yet, some tea party groups have left a trail of fiscal problems and possible tax-code abuse.

    Here’s something far more concerning than the tea partiers’ gripe:
    href=”http://www.cjr.org/the_audit/nonprofit_news_and_the_tax_man.php?page=all”>”IRS questions whether journalism startups qualify for tax-exempt status?”
    The other IRS target: the press “The nonprofit news experience undermines the Tea Party targeting outrage”
    How the IRS’s Nonprofit Division Got So Dysfunctional

    If that’s not enough, how about the 501c4 group that is more anarchist than anything that wrote a letter to Boehner and Cantor last week urging the GOP: Don’t Legislate, Focus On Scandals writing letters like these?

    The new Journalism Ecosystem

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  74. Dan Francis says:

    Absolutely and outstanding blog and this topic is very educational … a simple: THANK YOU, I hope will suffice. Thank you for this comparative analysis of these three current and hot topic.

    ~ Dan Francis (Watertown, NY)

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  75. Matt Bernius says:

    @Kart Hall:
    Thanks Kart. I’ll look into both of those. I’m also looking forward to reading those links. I somehow missed the CJR article.

    @Dan Francis:
    Thanks for the kind words.

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  76. Matt Bernius says:

    @John D’Geek:

    Does this mean that the Dwigit Leage [a ficticious 501(c)3] could say: “PD Shaw is an idiot and does not support Dwigit Rights(TM)”, but not “Do not vote for PD Shaw” — even though the first is effectively the same as the second?

    AGAIN, IANATL so take my words with a grain of salt…

    I think “PD Shaw is an idiot and does not support Dwigit Rights(TM)” is probably a step too far and would be considered politicing. Writing ” “PD Shaw does not support Dwigit Rights(TM)” most likely is OK.

    It should also be noted that if you said “PD Shaw is an idiot and does not support Dwigit Rights(TM)” at a meeting, you probably could get away with it. If you sent it out, in typographic form, to all of your followers, then you probably will have a BIG tax problem on your hands.

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  77. Matt Bernius says:

    @Bob Meyer:
    Bob, you make an interesting point.

    The reason I didn’t respond to that particular section of your original post was that I frankly don’t know enough/haven’t thought enough about what you wrote to contribute anything of value.

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