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.