Tuesday, May 21, 2013

The Slim Prospects for Executive or Judicial Action Interpreting "Exclusively" to Mean "Exclusively"

By Mike Dorf

Even as the IRS "scandal" continues to cause hyper-ventilation on the right, various progressives have been beating a different drum.  Tea Party and similar groups, they say, never should have been permitted tax exemptions in the first place because the relevant statutory language (Section 501(c)(4) of the Internal Revenue Code) says that an organization is entitled to such status only if it "exclusively" promotes the social welfare, but the IRS was merely requiring that such organizations "primarily" promote the social welfare, permitting them to engage in some political activity.  According to these critics from the left, the real problem is the longstanding regulation  and implementing tax opinions (described in an IRS tax manual) that have been too permissive in granting tax-exempt status.

Are these critics correct?  Well, no and yes.  On the face of it, it seems quite odd to interpret "exclusively" to mean "primarily," but in practice that strikes me as just about right.  Suppose that a group of kazoo players in Kalamazoo, MI want tax-exempt status for their new organization, the Kalamazoo Kazoos.  (That was the name of a now-defunct minor league baseball team, but I digress.)  The group gets together weekly to practice kazoo and gives occasional concerts.  Should this group qualify for 501(c)(4) status?  Sure.  Does the organization "exclusively" promote the social welfare?  Not literally.  Perhaps the Kazoos spend some portion of their meetings gossiping or networking or eating or engaging in other activities that are not exactly social welfare promoting.  But no organization engages exclusively in promotion of social welfare in the sense that every second of every event is directed at the social good.  And yet we can assume that Congress meant 501(c)(4) to apply to real organizations.  Accordingly, it makes sense for the IRS to interpret "exclusively" to mean "primarily."  Even textualists (like Justice Scalia) are not literalists, and so in the context of a statutory provision meant to have actual application, "exclusively" cannot be interpreted literally.

Nonetheless, one might think that the word "exclusively" in the statutory language should signal a  stricter attitude than the IRS has adopted.  Perhaps the provision should be construed to mean something like this: the organization must exist exclusively for purposes that promote the social welfare, with non-social-welfare-promoting activities and purposes being only incidental to the main aims of the organization.  The most thoughtful criticisms of the IRS from the left object that in practice the definition has been looser still.  I haven't followed the details of enough cases sufficiently closely to know whether that's broadly true, but on the face of things, that does strike me as at least a plausible criticism, especially with respect to the new politically active groups seeking 501(c)(4) status.

Suppose one were persuaded by this critique.  What could be done to change the law?  Well, the Obama Administration could, through executive action alone, tighten the operative definition.  It's true that Congress has effectively acquiesced in the longstanding IRS working definition of "exclusively," but the leading admin law cases permit an agency or administration to change its understanding of unclear statutory language so long as that language is in fact unclear and the new understanding is reasonable.  Here, a tightened interpretation would likely satisfy those criteria.

Does that mean the Obama Administration would do it?  Fat chance.  Had the Administration come out swinging--arguing that although the Cincinnati office of the IRS used improper criteria, the real problem was a too-permissive approach to 501(c)(4), not a too-restrictive approach--it would now be well positioned to make the case to the public that what we need is to protect hard-working Americans from the giveaways that the IRS has for too long been allowing.  But, having accepted the Republican narrative that low-level officials acted "scandalously", and having fired the acting head of the IRS, the President would likely take too much political heat for such a seeming about-face.  Accordingly, in the short term executive action appears quite unlikely as a means of changing the IRS approach.

What about lawsuits?  As a general matter, SCOTUS case law disallows taxpayer standing.  Thus, no individual taxpayer would be permitted to go into court to complain that, by allowing 501(c)(4) status for, say, American Crossroads, the IRS reduces its take from such entities, thereby requiring it to obtain more money from the likes of individual taxpayers.  Except for a very narrow exception for a narrow category of Establishment Clause challenges, there is no such taxpayer standing.

To be sure, not every individual lawsuit must rely on taxpayer standing.  Consider the case of Dr. David Gill, who is one of the plaintiffs in a lawsuit filed in February against the IRS alleging that by employing an overly lax standard for 501(c)(4) status, the government effectively subsidized attacks on his (ultimately unsuccessful) campaign for Congress by an organization that received substantial anonymous donations from an insurance company and the pharmaceutical industry.  Gill is not asserting standing as a taxpayer.  Rather, he is alleging a conventional injury: He was at a competitive disadvantage in the race because, he says, the IRS under-enforced the law.

The IRS has nonetheless moved to dismiss the case for lack of standing, invoking various longstanding precedents that limit the ability of private parties to insist that the government enforce the law against some third party.  Allen v. Wright is a typical and seemingly highly relevant case.  There, plaintiffs--parents of minority schoolchildren--argued that by failing to police tax-exempt status for segregated private schools, the IRS effectively subsidized such private schools, and thereby undermined the ability of the plaintiffs to send their children to desegregated public schools.  The SCOTUS rejected standing on the ground that the causal connection between the government under-enforcement of the law and the plaintiffs' injury was too tenuous.

In their response to the IRS motion to dismiss, Gill and his fellow plaintiffs gamely attempt to distinguish Allen and similar cases by saying that the new case is simply a straightforward admin law challenge to a reg that violates a statute.  I hope they succeed, because I don't like the Allen rule and I share the sense that the IRS has indeed been too lax in its implementation of 501(c)(4).  But I wouldn't bet on it.  Post-Allen cases emphasize the point that private parties (whether suing as taxpayers or to vindicate some more particularized interest) generally should not be heard to complain that the government is under-enforcing the law against some other private party--even when there is a pretty obvious connection between the interests of the plaintiff and the conduct of that other private party.  These cases are related to conservatives' dislike of lawsuits generally and their fondness for the "unitary executive" in particular.  (When courts, acting at the direction of private parties, tell agencies to enforce the law, they undermine the President's ability to direct the executive branch.)

Hence, if this were just a straight-out admin case, I would expect the conservative DC Circuit or, on cert, the conservative majority on the SCOTUS, to be skeptical of the claim for standing.  Throw in the now-ideological stakes derived from the current "scandal" and the odds against the courts ultimately upholding standing by a party challenging IRS under-enforcement of 501(c)(4)'s limits look quite long.


Bob Hockett said...

Thanks much for this, Mike - thoughtful, measured, and helpful as always.

Three quick points in response:

1) I think your proposed regulatory guideline for application of 501(c)(4)'s exclusivity provision would be far superior to the present guideline couched in terms of 'primary' activity. Here's hoping that the IRS, sua sponte or under instruction from the Administration, makes that change!

2) I am perhaps somewhat more optimistic than you are about what would happen were the President to announce tomorrow that, after further investigation, he has come to the conclusion that he was mistaken to buy in, last week, to the Republicans' bad faith attempt to portray IRS implementation of IRC 504(c)(4) as a 'scandal.' My guess is that the public would respond favorably were he to announce instead that further investigation has convinced him that the real problem at IRS was its being, thanks mainly to Republicans, understaffed, underfunded, and charged with a nearly impossible task in administering an overly discretionary rule under IRC Sec. 501(c)(4).

3) Finally, and relatedly, I think the President might even do well to go on the offensive here, publicly crying foul over the Republicans' manufacture of this 'scandal' as simply the latest tactic in their now years-long effort to sabotage governance any time that they lack control of the White House and both chambers of Congress. Perhaps I am unduly impatient after the last two decades' observation of this party's tactics, but I do not think so. More on why can be read here: http://www.religiousleftlaw.com/2013/05/for-gods-sake-mr-president-recover-your-spine.html

Thanks again!

Shag from Brookline said...

Last night, Stephen Colbert had segments on the IRS "scandal," one of which included his attorney. Colbert asked, indignantly, why the IRS had not approved his 501(c)(4) and was visibly "surprised" when his attorney had said it was because an application was not filed with the IRS. Colbert, wide-eyed, asked why it wasn't filed and was informed that this decision not to file was based upon advice of counsel, because IRS approval is not required to operate at a 501(c)(4) organization. (The incorporation of Colbert's SuperPac set forth that it was a social welfare organization.) Apparently the IRS can challenge such an organization if its operation does not conform with 501(c)(4) exclusivity, however defined. Maybe Colbert and his attorney will have more to offer on this tonight, tomorrow nigth and Thursday night. [Note: As I recall Colbert actually revealed donors to his SuperPac, perhaps as a cautionary measure if 501(c)(4) compliance was questioned. Tea Party-type organizations apparently did not wish to disclose their donors to the public for what may be obvious political reasons.]

As for "exclusively" meaning something other than "exclusively," such as "primarily," does that boil down to 51% of activity or some greater amount? Did the Court in Citizens United define or address "primarily"?

By the way, Kalamazoo does not remind me of Kazoos but of a popular song about a gal from Kalamazoo supported lyrically by part of the alphabet.

David Ricardo said...

This post by Mr. Dorf clearly sets out the problem with 501(c)(4) organizations that are created for political activities. With very rare exceptions these organizations will gain approval from the IRS, (and in reality don’t even need that approval, they can ‘self declare’ tax exempt status) and going forward given the huge reaction to the IRS attempts to actually enforce the law, these rare exceptions, particularly for conservative groups, will almost certainly disappear. As pointed out in the post, the ‘exclusivity’ concept will not serve to regulate these groups.

The IRS guidelines here are impossible to enforce. Consider this from the IRS

“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.”

That makes no sense whatsoever. How can one engage in ‘some political activities’ and at the same time not participate directly or indirectly in political campaigns?

This should lead to an examination of whether or not any organization created for political activities should have to pay income taxes. Federal income taxes are what the 501(c)(4) issue is all about. Groups that have this designation do not have a federal income tax liability, (and unlike a 501(c)(3) organizations their contributors do not get a deduction for their contribution). So the question here is should such an organization have to pay income taxes.

A strong case can be made that the answer is NO. Political organizations are not created to make a business profit; they are created to expend money on political causes. As such a case can be made that as long as they are not a “business” they should be exempt from income taxes regardless of their activities. This would leave the IRS to examine only the issue of whether or not they are profit making companies disguised as political support companies. Adequate regulation could insure that this abuse does not exist. In fact the IRS is supposed to be doing this anyway, and in theory has the authority to mount a full investigation to prohibit sham organizations.

In return for automatic granting of tax exempt status these organizations should be required to disclose their donors. Hidden donors are the real abuse here, not escape from income taxation. Allowing the public to know just who is funding these groups will do far more for public discourse than attacking them for their tax status.

Shag from Brookline said...

The ACLU is a 501(c)(4) organization. Its social welfare mission includes challenges to both Republican and Democrat parties at the Executive and Congressional levels. It is a membership organization. While DPE's closing paragraph might make some sense with respect to efforts to use 501(c)(4) tax-exempt status by post-Citizens United political organizations, should membership organizations such as the ACLU (and there are others) be required to disclose membership lists? I was for many years a proud card-carrying member of the ACLU and had no objections to being so known. But many members of such organizations have legitimate concerns with membership lists being available to the public as such disclosure may be misused, including effecting one's livelihood. Recall George H.W. Bush's pejorative reference to presidential candidate Mike Dukakis as a card carrying ACLU member. [Bush41 gave us Willie Horton and Clarence Thomas - and Bush-43.] Perhaps membership organizations could be better defined to permit non-disclosure of membership lists.

David Ricardo said...


You make a valid point, and that is the same point that those who would shield donors to politically oriented 501(c)(4) groups also make, that releasing the names of donors would subject them to persecution or bias or unwanted and unasked for attention.

This issue is particularly sensitive in my own personal situation, because I write a very satirical, caustic, (and hopefully sometimes funny and entertaining) blog under the name of The Dismal Political Economist, and then masquerade that authorship under the nom-de-plume of David Ricardo. So who am I to say that identities should be revealed?

Maybe a workable compromise would be to make public the names of major donors, those who provide more than say, 5% of financing for a group and those who provide more than $______ in contributions. In this way the people largely responsible for an organization’s existence would be identified, while those who support the organization but do so with only a small contribution would be protected.

But my major point I think is valid. As long as a group is not hiding a for-profit enterprise in Sec. 501(c)(4) clothing than maybe it should be tax exempt regardless of its political activities. And in return for automatic tax exempt status, the public should know at least who the major donors or supporters are.

BDG said...

Though I claim no special expertise on the standing analysis, I think Mike's interpretation of 501(c)(4) is right. Probably the most directly on-point case is People's Education Camp v. Comm'r, 331 F.2d 923 (2d Cir. 1964), which holds (as Mike suggests) that "primarily" furthering social welfare means having only an insubstantial non-exempt purpose. (That is, primarily does not equal "up to 49%," which is the legal position Crossroads' counsel has relied on in his public comments).

Shag from Brookline said...


" Political organizations are not created to make a business profit; they are created to expend money on political causes. "

does not address excessive compensation paid by such organizations - including perks - available to officers, directors, employees. Are there adequate controls with respect thereto to keep such organizations from being "piggy banks" for political figures engaging in their political causes? [I am aware of controversies involving charitable tax-empts and excess compensation.]

David Ricardo said...

There is limited regulation against excessive salaries and benefits with respect to taxes, and I am not certain there is a tax abuse here. The compensation that those who manage tax exempt organizations receive is fully taxable. So if those sponsoring a 501(c)(4) organization take an excessive compensation, they are primarily ripping off the donors who gave after tax donations to support the cause. If donors know of the practices and don’t like them, they don’t have to give.

I feel it is likely that Karl Rove, for example is making millions from his Crossroads activities, and but that is between Karl and the wealthy folks who support him. The important thing here is full disclosure, so that donors know exactly how their money is being spent.

The real abuse possible with 501(c)(4) organizations is the potential for using them to disguise profit making businesses that should pay taxes. This is where the Cincinnati office of the IRS should have been focusing their attention.

Blogger said...

Reading legal language contrary to its ordinary meaning is hardly unique to the tax code. The Constitution, for instance, is abound with unorthodox interpretations. A couple examples:

In the Necessary and Proper Clause, "necessary" doesn't mean necessary.

In the First Amendment, "Congress," "no law," and "speech" do not mean what they say.

Shag from Brookline said...

Norm Ornstein's National Journal essay "GOP Switch on Financial Disclosure Wins Gold Medal in Hypocrisy Olympics" spells out this IRS "scandal" in perspective, at:


Shag from Brookline said...

Today's (5/17/13) NYTimes features Nicholas Confessore and Michael Luo's "Groups Targeted by I.R.S. Tested Rules on Politics" is a limited investigative report of sorts that should be followed up with more investigative reports on the operations of 501(c)(4) organizations. The House won't address this but perhaps the Senate will.

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