Thursday, May 17, 2012

Loophole: Questions about the 501(c) Tax Exemption for Certain Right-Wing Groups

In the last post, we then asked how the political organization can claim a 501(c)(3) tax exempt status when it is clearly engaged in influencing legislation. 
We’ll now look at the larger issue of the abuse of the loophole by a plethora of right wing groups.

Questions from an Unexpected Source
Not long ago, questions about the misuse of the 501(c)(3) status was brought up by the right wing news site, The Daily Caller, against media watchdog Media Matters for America (MMfA). For some time, Fox News and Media Matters have been at war and clearly, the right wing was willing to try any means to attack the opposition.

The conservative blog, The Daily Caller was founded a couple of years ago by journalist and political pundit Tucker Carlson and Neil Patel, former adviser to former Vice President Dick Cheney. The site decided to take up this question, asking whether Media Matters should qualify for a tax exemption. The question was based on allegations that the organization was privately sharing information with President Barack Obama’s staff. 
What was very interesting was the cool reception. There’s a very good reason for this too. It’s really the right wing’s weakest link. As one source noted:
I had a conversation the other day with a well known conservative who runs a 501(c)(3). His take is that anything used against Media Matters would likely then be turned on similar conservative organizations. In other words, this may be a new front in the political war that we don’t want to open at this point.
Meaning: we won't open this can of worms until we have attained power or until the organizations on the left begin doing it more successfully.

To nobody’s surprise, Fox News was eager to jump onto the bandwagon, defending The Daily Caller’s attack on Media Matters attack on Fox News. Despite the usual Fox News hyperbole, the evidence contained in Media Matters is disappointing.
Now, one memo from 2009 written to the founder and president reads quote, "Simply put, the progressive movement is in need of an enemy. George W. Bush is gone. We really don't have John McCain to kick around anymore. Filling the lack of leadership on the right, Fox News has emerged as the central enemy and antagonist of the Obama administration, our Congressional majorities and the progressive movement as a whole."

Now, the same memo also suggested that it would be a good idea to do opposition research on the people that work at this network. It reads, quote, "We should also hire a team of trackers to stake out private and public events with Fox News anchors, hosts, reporters, prominent contributors and senior network corporate staff."
“Should” isn’t “did” and it isn’t even “will.” Since Media Matters considers itself a media watchdog, watching and double checking Fox News is hardly extraordinary. It is, however, cause for concern and overreaction from the likes of Sean Hannity. The guest on Hannity’s show made this laughable claim:
Their sole existence, Sean, the sole purpose of Media Matters is to take out a for profit company which is News Corp, the parent company of this network.
Hannity joined in: 
But the reason they want to take it out is they don't want opposition speech. They don't want alternative voices heard in the media. Now, as strange as this may it sound -- now I think if they are collaborating with the White House that's proven. They are not tax exempt, that would be a violation of law.
So the claim of collaborating with the White House is unsubstantiated. Hannity seems to imply that all political activity is banned under this type exemption and that is, like most things Hannity claims, only partially true.
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
Ignorance is Fox News' bread and butter and this is no exception. Political activity is perfectly acceptable. However, attempting to influence legislation or supporting one candidate over another is not. There's been no evidence of this in the case Hannity refers to. There's not even an allegation.

Additionally, according to the laws, an organization may not be an action organization, that is, any organization whose only reason for existing is to conduct political activities or to lobby. Again, this is not saying that such organizations are in any way illegal, but only that they are ineligible of a tax exemption. 

Since Fox News opened the topic, perhaps it IS time to look over other organization which, unlike Media Matters, actually do conduct possible violations of their tax-exempt status. (Thanks, Sean, for the tip!)

Larger Questions
My first question, I suppose, is probably naive but here goes: Why do organizations founded by extraordinarily wealthy people seek a 501(3)c tax exemption in the first place? Why should they need them? After a bit of investigation I found my answer (slap on forehead) 
The tax exempt status isn’t merely for the fat cats but also for all the little people who wish to donate and take the amount off their taxes. Those super wealthy Koch brothers and Art Popes of the world don’t want to use all of their own money. 
As Wikipedia explains, a tax exempt status can be make-or-break for an organization:
Due to the tax deductions associated with donations, loss of 501(c)(3) status can be highly challenging to a charity's continued operation, as many foundations and corporate matching programs do not grant funds to a charity without such status, and individual donors often do not donate to such a charity due to the unavailability of the deduction
You didn’t think the individual donors were entirely motivated by altruistic reasons, only from a desire to change the world. Well, did you? They want a better world and a tax deduction to boot. 

As least in theory, the IRS is pretty touchy about the rule breakers.
As the Supreme Court put it in Better Business Bureau v. United States, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed. 67 "...the presence of a single [noncharitable] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [charitable] purposes."
So all it takes is one example of a substantial violation of a non-charitable purpose and the organization loses its tax exemption. Just one itsy-bitsy violation and you're out. As we shall soon see, there are more than enough violations to go around.

In fact, Fox News and The Daily Caller aren’t the only ones calling for an investigation of the tax exempt status of certain organizations. According to the New York Times, Common Cause has asked the IRS to review the tax-exempt status of the American Legislative Exchange Council (ALEC), a nonprofit network of conservative state lawmakers. If any organization can be legitimately accused of influencing legislation, then it has to be ALEC
“We know its mission is to bring together corporations and state legislators to draft profit-driven, anti-public-interest legislation, and then help those elected officials pass the bills in statehouses from coast to coast,” said the president of Common Cause, Bob Edgar. “If that’s not lobbying, what is?”
To be fair, lobbying in itself is acceptable as long as it is reported and doesn’t constitute the entirety of the organizations activities. i.e. not its sole mission. In ALEC’s case, that is very much in question. In any case, it is hard to see ALEC as a charity.

The case of Americans for Prosperity, a Koch-funded organization, is somewhat more complicated. Americans for Prosperity Foundation is a 501(C3) not for profit organization. Tax Exempt
Americans for Prosperity is a 501(c)4 not-for-profit organization. Not tax-exempt. Organizations in this classification are usually civic organizations aimed exclusively at "social welfare" and are allowed to participate in federal and local campaign as long as it is not its sole or primary purpose. To quote:
The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f).
Obviously this allows a lot of wiggle room, but you may plow through the IRS definitions at this link.           
In 2010, Americans for Prosperity, the group’s affiliated 501(c)(4) tax-exempt “social welfare” organization spent more than $1.3 million on electioneering. When the group told the IRS in its annual disclosure that it does not engage in political activity, tax experts questioned whether the group was complying with the laws governing nonprofits.
Americans for Prosperity Foundation, a conservative group chaired by David Koch, is pumping at least $700,000 in ads defending Wisconsin Gov. Scott Walker's (R) record as he faces a possible recall attempt, according to the Washington Post.
Americans for Prosperity Foundation got around the tax laws simply by not mentioning Scott Walker by name and thus protected its tax exempt status for another day. 
(By the way, You can find a comparison of the categories here.)
The list literally goes on and on. Here’s another big league player in the conservative wing. As one source tells us:
Heritage Foundation is a 501(c)(3) that routinely crows about its political influence. While 501(c)(3)s are allowed to do a limited amount of lobbying as long as they report it to the IRS, the Heritage Foundation does not use this allowance -- it actually certifies to the IRS that it has not "attempted to influence national, state, or local legislation, including any attempt to influence public opinion." (Heritage also claims to have spent zero dollars on lobbying activities in 2006, despite an estimated $40,000 paid to the lobbying firm Foley and Lardner in 2006 disclosed in the Senate's lobbyist registry.)
Here's another example.
The National Right to Life- a conservative pro-life organization, recently threw its support behind Mitt Romney. The National Right to Life Committee is the nation’s oldest and largest anti-abortion organization, with affiliates in all 50 states and over 3,000 local chapters. It too claims a tax exempt status. And yet, the organization’s president can make statements such as this:
“On pro-life issues, Mitt Romney and Barack Obama provide a stark contrast. As the country’s most pro-abortion president, Barack Obama has pursued a radical pro-abortion agenda,” said National Right to Life President Carol Tobias. “It is now time for pro-life Americans to unite behind Mitt Romney. For the sake of unborn children, the disabled, and the elderly, we must win.”
Additionally this group devotes much of its energy attempting to influence anti-abortion legislation.

To repeat, according to the law, in order to be eligible for a tax exemption, the organization may not participate in any campaign activity for or against political candidates.
So how is this not a violation?

And Religious Organizations too?

Church organizations are also claiming exempt status for activities that seem questionable. Here is the tax code:
Under section 501(c)(3) of that code, churches are exempt from income tax and are entitled to receive tax-deductible contributions from members and other donors. As 501(c)(3) organizations, churches must comply with IRS rules One IRS rule specifically states that an organization under its provisions:

. . . does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

( Internal Revenue Code,1996 , Volume 1:856).
However, back in January of this year, Christian conservative leaders met in Texas away from the prying eyes of the media and eventually emerged announcing that they backed GOP presidential hopeful Rick Santorum. As CNN tells us, all of the powerful names in the Christian Right Wing were there. 
Well-known evangelicals flocked to the event, including Focus on the Family founder James Dobson, Perkins, National Hispanic Christian Leadership Conference president Rev. Samuel Rodriguez and former presidential candidate Gary Bauer. Members of the media were barred from attending.
Once they had made their secret plans and emerged into sunlight, Family Research Council president Tony Perkins had this to say:
"After three rounds of balloting this morning, and vigorous and passionate discussion, there emerged a strong consensus around Rick Santorum as the preferred candidate for this group," Perkins said on a conference call Saturday.

Perkins expressed surprise the group was able to come to a consensus, but said what resulted would be a stronger chance of beating President Barack Obama.
Yet, very clearly on the Family Research Council website, the FRC claims a 501(c)3 tax exemption despite this endorsement. Keep in mind, Perkins did not make it clear he was not speaking of a personal endorsement.
Possibly in an attempt to cover this glaring balking of the tax laws, Perkins made this additional remark. 
The individual organizations represented at the meeting will not coordinate in their efforts to back Santorum, Perkins said. "It will manifest itself in many different ways," he said.
Sounds pretty ominous, doesn't it? Like something from a horror film. The numbers of examples of violations multiply daily. Here's another: 
American Family Association spokesman Bryan Fischer on Focal Point yesterday said that Obama is “toast” and “just handed the election to Mitt Romney” because he favors “behavior that will kill you if you don’t catch yourself in time”
How this can pass the criteria set by the IRS is a mystery. Is this campaigning or is it making a personal political statement? 

Some organizations don't claim openly to be 501(c)3 but tell potential donors that all contributions are tax-deductible. Take American Values, headed by the outspoken and well-connected Gary Bauer. (Bauer has been profiled in a previous post regarding the unwholesome role he played in the Reagan administration and charges that his influence was one factor in that administration's slow reaction to the AIDS crisis.) 
In public statements, Bauer has repeatedly attacked the President's decisions.
Gary Bauer, president of American Values, was one of Santorum's supporters who told the New York Times said that he will now support Romney.
“Going to the general election, I will do everything I can for Governor Romney,” Bauer said. “But his campaign has got to make it easy for me to help them, and not make it hard by being tempted to pull back on conservative issues.”
If Bauer's remarks were clearly stated as personal opinions, it might be a different matter. However, in every public statement and in every news item, Bauer is referred to as the president of American Values. Bauer is quite brazen about flaunting these tax laws.
In one press release, Bauer used his position to castigate the president's position on same-sex marriages and the source of this announcement is the Bauer's own organization, American Values. Is that not a smoking gun? In 2008, he came out in favor of McCain in that year's election. This year he publicly endorsed Santorum and then Romney.

It's important to note that this is not a theoretical risk for religious organizations. Religious organizations have lost their tax exemptions in the past. 

For example, On September 11, 2006, the IRS announced that it had revoked the nonprofit 501(c)(3) status of Youth Ministries, Inc., which did business as Operation Rescue West (ORW). The details about the reasons for the revocation are sketchy but apparently it was related to ORW’s electoral activities during the Boston Democratic Party convention. Members of the ORW were asked for donation that, ORW said were to be spent in Boston during the Democratic Party convention, where it planned to distribute antiabortion, anti-Kerry materials and display highly visible ads on trucks at key sites.

Even churches themselves have come under IRS scrutiny for political activities. When the church at Pierce Creek in Vestal, New York, published an anti-Clinton ad in a national newspaper, it lost its tax-exempt status.

In fairness, it's not just right-wing organizations engaged in this sort of thing. The New Yorker, in a examination of Art Pope, also noted that this is becoming a trend on both sides of the political spectrum.
Fred Wertheimer, who heads Democracy 21, another group that works for campaign-finance reform, says, “Tax-exempt organizations that are supposed to ‘promote the social welfare’ are being improperly used by Democratic and Republican supporters alike to engage in extensive campaign activities.” He just filed a complaint about the practice with the Internal Revenue Service. “The disastrous Citizens United decision has opened the door wide to influence-buying,” he says.
Still the tax laws seem pretty clear on this issue and this is really truly the tip of the iceberg. Taking a look at the each of the right wing organizations that may (or may not) be engaged in the abuse of their tax exempt status and studying their activities and statements is really the only way to know how widespread the problem actually is. 
The site, Public Research Associates, has compiled a list of some of the top  political organizations, hiding behind a religious tax exemption.

Here's an incomplete of some other right wing organizations.

I am certainly not claiming that every organization on this list is guilty of anything, either knowingly or unknowingly. Still why shouldn't there be an  investigation? Many of the organizations might not even be aware of the laws.
Removing the tax exemption from even one major offender in the corporate and the religious categories would have a necessary chilling effect for the others. 
And just think, you'd be helping the government lower the deficit too! 
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