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The Justice Department has opened a criminal probe into reports that the Internal Revenue Service gave special and unwarranted scrutiny to tax-exempt applications made by conservative groups. According to a Treasury Inspector General report, the practice began in early 2010. The groups in question had applied for tax exempt status as 501C-4s. These types of organizations can be set up to pursue primarily social welfare objectives, but they’re allowed to engage in some political activity. The agency has apologized for the incidents and says it’s taken corrective action, but more changes will probably be required.
- Paul S. Ryan Senior counsel at Campaign Legal Center.
- Jan Baran Head of the election law group at Wiley Rein LLP, former general counsel to the Republican National Committee and author of "The Election Law Primer for Corporations."
- Richard Schmalbeck Simpson Thacher & Bartlett professor at Duke University School of Law.
- David French Senior counsel at American Center for Law and Justice.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The IRS has apologized for a special scrutiny it gave to conservative groups seeking tax-exempt status. Atty. Gen. Eric Holder has opened a criminal probe into the matter, and investigative report alleges that IRS managers allowed the practices to go on for more than a year and a half.
MS. DIANE REHMJoining me to talk about targeting at the IRS: Jan Baran, he's an attorney specializing in election law, Paul S. Ryan of the Campaign Legal Center, joining us from a studio at Duke University, Richard Schmalbeck. He is professor at the Duke University School of Law, and joining us from Franklin, Tenn., David French of the American Center for Law and Justice. I'm sure many of you will want to weigh in. Give us a call: 800-433-8850. Send us your email to firstname.lastname@example.org, Join us on Facebook or Twitter. Good morning to all of you.
MR. JAN BARANGood morning, Diane.
PROF. RICHARD SCHMALBECKGood morning.
MR. PAUL S. RYANGood morning.
REHMGood to have you with us. Paul Ryan, if I could start with you. I'd like to understand the balance that the IRS demands when creating a 501 (c)(4) between the amount or percentage of social welfare work versus political work. Is there a clear line?
RYANWell, the IRS's current interpretation of the law is that social welfare activity must be such an organization's primary activity. And political work candidate election intervention has to be less than primary activity. The Campaign Legal Center's view is that this is an in pro per interpretation of existing statutes and court decisions that have said, on the contrary, the statute say that these groups must be engaged exclusively in social welfare activity. The candidate election activity is not a social welfare activity.
RYANAnd then you have some court decisions that are now decades old that have said to the IRS, in essence, IRS don't strip a group of its tax-exempt status so long as its impermissible activity is insubstantial. So the statute says exclusive social welfare. The courts have said, we'll allow some insubstantial candidate election activity. And the IRS has blown insubstantial up into the primary which tax lawyers have interpreted, some of them at least, to mean up to 49.9 percent of the organization's budget.
RYANThat's the most aggressive reading by tax lawyers who have said, hey, I know what primary means. Primary means more than 50 percent. So as long as social welfare activity is 50.1 percent, then other activity, including candidate election work, can be 49.9 percent. But again, Campaign Legal Center thinks this is a misinterpretation of the law. We petitioned the IRS in 2011 to change this interpretation of the law. But the IRS has not acted on our rule-making petition.
REHMJan Baran, how do you interpret that?
BARANWell, I think that it is accurate to say that for the over 50 years that this tax provision has been in the law that the IRS has said that campaign activity, which is permissible, should be the -- should not be the primary purpose of this organization. These organizations -- I think, it's important to point for you and your listeners -- are not charities.
BARANThey're not like schools or charities or churches. These are social welfare organizations. They are actually called action organizations. They may be involved in politics. In effect, they're exclusive purpose could be, for example, lobbying and being active in promoting of public policy. That's why...
REHMBut then why would they be given tax-exempt status?
BARANBecause they depend on voluntary contributions, which are not automatically deductible, by the way, so they're organizations that raise money. I think the more common long-standing historical type of organization that listeners would be familiar with would be like the Sierra Club, the National Rifle Association, the NAACP. They also have -- separate from their action organizations, they have charities or education organizations, and they operate under very different rules. They may not be engaged in politics at all, these charities.
REHMOK. You used a word I want to follow up on. You said that their contributions are not automatically tax-deductible. So where does the automatic versus non-automatic come in?
BARANYeah. The automatic deduction or organizations that have been granted, so-called 501 (c)(3) tax-exempt status, these would be religious, educational, charitable organizations.
BARANAnd someone contributes to such an entity, he or she may take a deduction on the tax returns.
REHMRight. Now, what about...
BARANFor these organizations, if somebody...
REHM...501 (c)(4) s.
BARANRight. For a (c)(4) organization, the only possible deduction that I'm aware of would be a business deduction. If there were a valid business purpose, then the donor might claim a deduction. But I would point out very quickly that political activity and lobbying, even by these tax-exempt organizations, do not qualify for deductions. So if an organization is involved in politics, is involved in lobbying and somebody gives them money, they have to, under the rules, inform the donor that we used X percent of your donation for lobbying or campaign purposes. And, therefore, you may not deduct it.
REHMAll right. Now, I want to turn to Richard Schmalbeck, professor of law at Duke University School of Law. How do you interpret that primary social welfare versus political work?
SCHMALBECKWell, I've essentially respected, I guess, the IRS determination on this statute. It's true. It does say exclusively. But the definition of social welfare is not totally unambiguous either. And so they've decided campaign activities do not contribute to social welfare and therefore can't count. But on the other hand, they can be anything up to, but not including, half of the activities that are conducted. It is an awkward scheme of things, though, under the present circumstances where we have another category of tax-exempt organization, under section 527, political organizations.
SCHMALBECKAnd political organizations are subject to some substantially different rules, among which, probably the most important, is that political organizations have to disclose their donors. And since the Citizens United decision, there has been money from corporations that is designed to influence the outcome of elections. And the natural place for that money to go would be to a 527 political organization, but for the disclosure requirement.
SCHMALBECKAnd since there is a disclosure requirement as to 527 organizations but no disclosure requirement as to 501 (c)(4) organizations, a lot of donors would prefer to channel their campaign activities through 501 (c)(4) organizations. But they need to stop short of that 50 percent limit. But it's not at all clear why it would make sense to allow an organization to do 49.9 percent of activities under rules that are substantially different from other organizations doing the same thing, just -- that they're doing 100 percent of their activities along those lines.
REHMAll right. And now I want to turn to David French, who is senior counsel for the American Center for Law and Justice. How do you read these rules, David?
MR. DAVID FRENCHWell, you know, it seems to me they're actually relatively clear. When it comes to a 501 (c)(4), obviously, when you're talking about you can't do majority of your activities (unintelligible). But you have a wide range of flexibility when you're talking about issue advocates. In other words, arguing for the issues that you were formed to educate the public on, formed to advance the social welfare.
MR. DAVID FRENCHAnd so many of our clients are trying to educate, for example, the public about the founding of the country, the original meaning of the Constitution. When you're looking at a lot of our clients, and we represent 27 Tea Party and other conservative groups who are in 17 states around the country that are embroiled in this issue, one of them, for example, tries to mentor young people and bring -- and teach them things that the public schools are not teaching them about our founding.
MR. DAVID FRENCHOthers try to rent out space in church fellowship halls for seminars on political issues. So that kind of issue advocacy is absolutely clearly within the scope of a 501 (c)(4). Now, there's an enormous amount of controversy, obviously, after a particularly -- well, in the run up to the midterms in 2010, after the midterms in 2012 about Citizens United and donor disclosure.
MR. DAVID FRENCHWith our clients, the overwhelming amount of their activity was educational, with issue advocacy. And so these were, you know, these gray lines we're talking about were not all that great for them, yet the IRS imposed upon them an unbelievable level of scrutiny.
REHMAn unbelievable level of scrutiny. But talk about the Tea Party, David. Exactly how much of that work was involved in politics, and how much work was involved, as you put it, in the mentoring of young people? Seems to me the lines here are very, very big.
FRENCHWell, you know, it -- we have to define our term when you're talking about politics. I mean, you're saying elect Jane Smith and not John Smith, that's obviously politics.
FRENCHYou're saying support and uphold life or, for example, you know, the ACLU is one of our more famous 501 (c)(4) organizations in the United States, and yet it has consistently advocated for issues such as, you know, treatment of prisoners in Guantanamo Bay or the closing of prisoners -- closing of Gitmo that are in the middle of political debate but is not political action.
REHMAll right. We've got to take a short break here. David French is at the American Center for Law and Justice. Short break. We'll be right back.
REHMAnd welcome back. We're talking about recent events involving the IRS when it apparently targeted conservative organizations looking carefully, scrutinizing their activities. There is now, perhaps, going to be a criminal probe into the matter. Here in the studio, Paul S. Ryan. He is senior counsel for the Campaign Legal Center. Jan Baran is former general counsel to the Republican National Committee.
REHMHe is head of the election law group at Wiley Rein. Richard Schmalbeck joins us. He is professor of law at Duke University. And David French, he is senior counsel at American Center for Law and Justice. And, David French, I'd like to come back to you because you represent a number of conservative organizations that apply for tax-exempt status. Tell us what happened.
FRENCHWhat happened is they applied many of them back in early 2011, late 2010, and then nothing -- they heard nothing for sometimes up to a year.
REHMSo they applied for tax-exempt status under a 501 (c)(4).
FRENCHAnd some (c)(3) s as well.
FRENCHSo the majority were (c)(4) s, the minority were (c)(3) s.
FRENCHAnd they heard nothing for about a year on average, sometimes 18 months. And then when they did hear back from the IRS, they begin to get these incredibly long and intrusive questionnaires asking for things like donor list, asking for -- even family member's charitable activities, asking for all social media postings, public and personal, incredibly intrusive, and I believe unconstitutionally intrusive with a very fast turnaround time.
FRENCHIn other words, we've heard nothing, and we have to -- we have about 30 days to produce the amount of information that would make a major corporation bulk. So we got involved. At that point, we represented a number of these groups. And we raised the alarm with the IRS, and we raised the alarm with Congress.
FRENCHThere were inquiries that members of Congress made, and we were met initially in last spring of 2012 with flat-out denials from the IRS that anything untoward was going on. And those denials were maintained until the apology last Friday, and that's where we are today. We still have 10 groups that have not received approval. Fifteen have been approved after sometimes a 2 1/2-year process. The 10 have not been approved.
REHMAll right. And turning to you, Richard Schmalbeck, as you just heard David French say the IRS has apologized, are you surprised that this is turning into a criminal probe?
SCHMALBECKI was a little surprised to hear that. And I am not sure what crimes exactly the Justice Department is going to be looking at. There is a felony that consists of improper disclosure of taxpayer information. And the general practice of the IRS has been to keep applications confidential until they are granted.
SCHMALBECKOnce they -- the status is approved, then as a matter of law, must be made public. And that, too, is a somewhat strange rule. You might wonder why the public wouldn't have a legitimate interest in knowing about organizations that have applied for tax-exempt status. They might have input to offer to the IRS that would be useful, so not clear why that shouldn't be something that can be disclosed.
SCHMALBECKBut under current IRS interpretation, taxpayer information includes an application that has not yet been -- not yet reached the determination phase. So I think that is a possible basis for our criminal prosecution if that is true, and there have been allegations that some of these applications were leaked. So that may be the primary focus of what they're looking at right now.
REHMJan Baran, I understand that the application numbers for these 501 (c)(4) s has doubled. Does the IRS have sufficient employees to really go through these numbers of applications carefully without sort of grouping them into some kinds of various groups?
BARANMm hmm. Well, the applications apparently doubled from about 1,500 during a normal two-year period to over 3,000. So that means there are approximately an additional 1,500 applications that come in. That may contribute to a little slowing down of the process. It doesn't necessarily justify selecting certain ideological or political groups for extra scrutiny.
BARANThat would be like saying in the (c)(3) charitable application process, if there was all of a sudden a surge in the number of applications from Islamic organizations that somehow there ought to be increased scrutiny just because somebody is an Islamic applicant. We wouldn't accept that. I don't think we should accept additional scrutiny on that basis when it comes to (c)(4) s.
SCHMALBECKOne of the things, I think, that it's worth noting about this workload problem is that it's not just the sheer numbers of applications that have increased but the number of somewhat troublesome applications. That is, there is a sort of regular volume of (c)(4) applications from volunteer fire departments and civic betterment groups and things of that sort that the IRS processes and usually rather quickly and routinely because they've been doing it for a long time, and they don't raise any particular issues.
SCHMALBECKSo this wave of additional applications included a disproportionate number of ones that raised some significant problems. The rules regarding disclosure of donor names in 527 groups are relatively recent and, I think, have led to a much increased interest on the part of those who want to engage in campaign activity in the use of the (c)(4).
SCHMALBECKSo the wave consisted of these applications that were particularly difficult. And if I could just something, and Mr. French talked about the gray lines being not so very gray, but I think they often are gray. For example, you need to distinguish educational activities from campaign activities. Well, how do you categorize something like a meeting of a local gun club that focuses exclusively on the voting records of congressional candidates as to gun issues?
SCHMALBECKThat's education of a sort. They are telling people about the positions of the candidates, but it's pretty clearly intended to motivate voting behavior on one side or the other of an issue. Similarly, we've all seen ads that say, call senator so and so and tell him to stop exporting American jobs. Now, that could be considered lobbying activity if it's designed to influence Congress on a vote on whether to ratify the NAFTA treaty.
SCHMALBECKBut in many cases, I think it's transparently disparaging of the candidate who is the target of these calls that are being stimulated by this ad. So in many cases, activity that can sound neutral in some context isn't really neutral in the context of a political campaign.
RYANYou know, the inspector general's report that was published yesterday contains a very important footnote that should not be overlooked. Footnote 12 in the report notes that the inspector general is at least considering an audit of the IRS' staff, the exempt organization's division of the IRS' staff to make sure, to ensure that political campaign intervention is not the primary activity of many of these (c)(4) groups and to clarify the standards that distinguish political campaign intervention from other types of permissible primary purpose activities for these groups.
RYANSo when it comes to resources, we need clarity at the agency from the highest levels on how much political activity these groups can get involved in and how to determine whether a particular activity is can an election intervention or issue advocacy. That's where the resources need to be invested, and they need to be invested on the enforcement level.
RYANI'm looking at the big fish who are raising and spending tens of millions of dollars on candidate election ads to influence candidate elections. You know, we need stronger enforcement of restrictions on campaign intervention by (c)(4) s, but it needs to be without partisan bias, and it needs to be without political ideology bias.
BARANAnd without vagueness.
BARANYes. I think this points out to the problem here that both the professor at Duke and Paul just touched on, which is there are no standards here. It's all vague. In fact, the IRS has a so-called total facts and circumstances standard to determine whether something is lobbying or political or something else. You can't enforce aggressively a law with a lack of standards. It's ambiguous. It actually potentially violates due process, constitutional rights. So you can have some more precision. It would be nice to have the IRS give more clear lines on how to operate.
REHMBut is it the IRS that is creating those lines, or is it the Congress?
BARANWell, Congress is primarily responsible for passing clear constitutional laws, and, of course, this (c)(4) provision has been on the books now for almost 60 years. We didn't have any controversy about (c)(4) s until (c)(4) s recognized that they could do political campaign activity.
REHMUntil Citizens United came on.
BARANActually, it was, as the professor alluded to, it was starting after 2000, which is the year in which the tax laws for 527 organizations were amended, requiring disclosure. Up to that point, there was no disclosure of contributors.
RYANBut there is a direct link to Citizens United because the organization, Citizens United, that brought that lawsuit is a 501 (c)(4) corporation, and it was prohibited under federal law, up until the Citizens United decision, from spending money on candidate election intervention at the federal level.
RYANIt is precisely because the Supreme Court said corporations, nonprofit and for-profit alike, can get involved in candidate elections that, I think, we've seen a direct and dramatic increase in the number of applications of groups trying to get involved in elections. But they serve as very convenient vehicles for hiding the identity of the true sources of funds who may not want their name on the public record. Business corporations, wealthy individuals -- we don't know what we don't know, but there was over $250 million spent through these (c)(4) groups in the 2012 election cycle at the federal level.
REHMDavid French, do you disagree that the standards for these 501 (c)(4) s are unclear?
FRENCHWell, I think they're more clear than my fellow panelists would argue. But let me deal with one issue really quickly -- I mean, dealing with the volume of applications. As the inspector general's report indicate, 2010 was the year when problems really began. 2010, the number of applications for (c)(4) status actually went down from 2009. In 2010, there were fewer applications. Now, what was happening in 2010 was a -- the rise of the Tea Party and the Tea Party rising as a powerful force in American politics and then quite a controversial force in American politics and often extremely misunderstood.
FRENCHI think some of the misunderstandings carry over even into this discussion. I mean, we have 27 clients. None of these are the big fish that people spending hundreds of millions of dollars. Some of these are people who want to raise $10,000, $15,000. And the educational component the Tea Party consistently gets overlooked are those people who focus so much on individual, primary or election outcome.
REHMAll right. And you're listening to "The Diane Rehm Show." Let's open the phones. We'll go first to Marie in Long Island, N.Y. Good morning. You're on the air.
MARIEDiane, I mean, I just, first things first, have been listening to you for 25 years working in the IRS, and I love -- I admire you. I love your show.
MARIEI love when you talk back to your guests, and I just admire you so much. You're wonderful. But working here for 25 years, we get a lot of stuff in the media, and it's just one bad apple that causes -- so everybody that works here does not do what had just happened. I used to actually give copies of those forms to taxpayers 'cause they are open for public reading. But you have to sanitize them and take off the donations 'cause that's disclosure. But anyway, this was back in the '90s when I did that. I do something totally different now, but anyway, I just wanted to say my point. Thank you.
REHMAll right. You've said your point. Paul Ryan.
RYANYou know, I agree that a couple of bad apples should not indict the entire agency. The IRS has a difficult job to do. But the reality is that the inspector general's report that was published yesterday criticized the agency for a lack of oversight from the toppest (sic) level down -- from the highest levels of leadership down to the rank-and-file staff.
RYANAnd we need to see some -- an assertion of leadership from the highest levels. And Congress has a role here. Congress can step in. I also just want to make clear for the record that the Campaign Legal Center, we don't have any particular concerns about the current legal standards distinguishing candidate election activity from social welfare activity.
RYANWe think the biggest problem here is that the IRS has misinterpreted the statute to allow these groups to have up to 49.9 percent of their activity on candidate election stuff. If they instead interpreted the law properly to make clear that a (c)(4) can only engage in an insubstantial amount of candidate election intervention, when we interpret insubstantial, it means something like 10 percent. That would relieve a lot of the pressure on the...
REHMBut that's how you interpret insubstantial. Somebody also is going to interpret insubstantial as 49.9 percent.
RYANI don't think 49.9 percent is a reasonable interpretation of insubstantial. I think...
REHMHow about 25 percent?
RYANYeah. We can have that conversation.
REHMHow about 30 percent? I mean, it seems to me that without clear standards, the IRS is perhaps doing the only thing it can do.
RYANBut here's the problem. Congress drew a clear line. Congress said exclusively social welfare, meaning no candidate election intervention, and then courts got involved to do what they do. And they said, hmm, insubstantial is the test. We're stuck with that.
BARANWell, Congress ought to change the law. That's what you think. It is the problem, and the proper way to do that is to change the law. In fact, a lot of these problems we're talking about, I think, are a consequence of Congress' failure to change the law. They tried to three years ago. You may recall the DISCLOSE Act.
BARANI think you've had Congressman Van Hollen on this program to discuss that legislation. It failed. And once Congress fails to do something about it, everyone turns their attention to the rest of government to see if they can do something there. They file lawsuits. They go to the IRS. They go to the Securities and Exchange Commission. They even go to the Federal Election Commission.
REHMIs a lawsuit appropriate in this case, Jan Baran?
BARANWell, there is a lawsuit pending here against the IRS by a group saying that their regulation of 50 years is wrong. We'll see if that succeeds. I don't think it will.
REHMJan Baran, head of the election law group at Wiley Rein. And we'll take a short break here. When we come back, more of your calls, your email. I look forward to hearing from you.
REHMAnd welcome back. As we talk about the ongoing furor over the IRS targeting certain groups, especially the Tea Party. There is a lawsuit that is in place brought by some of those groups that were targeted.
REHMHere's an email from Elena, who asks, "Is it possible the IRS was just doing its job? Apparently, there was a spike on request for tax exemptions whether coming from the Tea Party or groups that included words like hate, et cetera. In my opinion, the IR" -- pardon me. "In my opinion, they were justified to request as much information as possible to validate their request. We all know of the abuse of this tax-exempt status." And to you, Richard Schmalbeck.
SCHMALBECKI think that's a wonderful question and one that needs to be more prominently featured in the discussion. I think when we all first heard that groups like -- that have Tea Party in their name were target for special scrutiny by the IRS, it was hard to imagine an explanation behind that that did not depend on political bias. But I think everybody in this room, this virtual room recognizes that there is a reason that can explain this, and that is this necessity of drawing a line between 527 political organizations and (c)(3) social welfare organizations.
SCHMALBECKThat's a legitimate line. It could be changed and perhaps it should be changed, but that's the law as the Congress and the IRS interpretations have it at the moment. That's a hard question to answer in the case of a lot of organizations. And I think Tea Party organizations, to be honest, do raise some particular questions.
SCHMALBECKIf you asked a hundred people on the street what kind of organization is the Tea Party, I think most would say it's a political organization. Nothing wrong with being a political organization, but there is something wrong with being a political organization and trying to be a social welfare organization instead because that allows you to keep confidential your list of donors. So the presence of these...
FRENCHNot everyone in this virtual room agrees with you here.
REHMAll right. David French.
SCHMALBECKWell, I know but...
REHMGo ahead, David.
FRENCHWell, I mean let's -- certainly there's a reason for scrutiny of any given individual group. But to single out Tea Party, which has a particular connotation on one side of the political spectrum when USA Today reported today that other groups on the left side of the spectrum that had explicitly ideological purposes sailed through pretty quickly.
FRENCHIt's that viewpoint discrimination that is the problem. And as far as, what, 100 people in the street think about what the Tea party is, that couldn't be more irrelevant because there's an actual application for each individual group. And each individual group have stated purposes and stated activities. And so, you know, some average, you know, person's idea of what the Tea Party is -- heck, half the media doesn't even know what it is.
FRENCHThey use it as a short hand to describe a particular kind of conservative. I mean, these groups were all formed for very particular purposes with particular plans of action that many times it didn't have much to do at all with the political campaign and had a lot to do with civic education, often about our founding and about our Constitution.
FRENCHAnd that's the problem here is they said Tea party, and they took this sort of prejudicial view of it rather than doing what an organization should do, examine application by application evenhandedly. That's viewpoint discrimination. It's unconstitutional, whether it's motivated by malice, motivated by incompetence or motivated by bureaucratic inertia. It's...
REHMOr how about motivated by lack of specificity in the law, Peter -- Paul Ryan.
RYANI don't have any doubt that the agency was trying to do its job here. But it made mistakes in doing its job. It used screening mechanisms when reviewing these applications that were wholly inappropriate. They were politically biased. They were based on political ideology. They targeted conservatives.
RYANAnd whether or not a particular group's activities are conservative or liberal has no bearing irrelevance to whether that group should be eligible for tax-exempt status under Section 501 (c)(4). What the agency should be looking at is whether these groups are intending to primarily get involved in candidate elections. If they are, they should be registered as 527 groups.
REHMHere is an email from Pat, who says, "The bottom line is that the IRS has not been tough enough on these organizations, both conservative and liberal. Many are totally political, and granting them tax-exempt status is stealing from the American public." Jan Baran.
BARANWell, we've talked about earlier that, you know, these groups don't get donations that qualify for deductions, particularly if they're engaged in lobbying and political activity. So they're not "stealing any money from anybody." They're actually utilizing voluntary donations that are not deductible to advance their causes. And...
REHMDo we know how much was deducted in the way of all these organizations, how much money was deductible from the U.S. Treasury?
BARANWe know that none of it was automatically deductible.
REHMI understand automatic.
BARANYeah. And we do not know. It would have to be an individual deducting something as a business expense, which would have to be specifically justified. We do know that there was about $250 million in advertising. It was reported to the Federal Election Commission from these types of groups. That, by the way, constitutes about 5 percent of all the money that was spent in the campaign.
BARANAnd, of course, President Obama just single-handedly raised over $1 billion. So the amount of money, while in the -- literally is a large sum in the totality of what was being raised and spent in that last campaign, it was not that significant.
REHMAll right. Let's go to Johnny in La Marque, Texas. Good morning. You're on the air.
JOHNNYGood morning, and you pronounced La Marque perfectly.
JOHNNYI have two objections. The first one is that the IRS actually apologized for doing its job, and number two, that our tax money, as limited as it is, has to go to subsidize groups that are hate-based. And if they like to have a -- to pay for their banners, putting -- having Obama shown as a Hitler, and they like to have chartered buses with alcohol and all kinds of nice, fancy frills for their volunteers, then let them go back to the Koch brothers and let them pay for that.
SCHMALBECKSo I'd like to say I think that there is actually very little lost public revenue from this for reasons that Jan and others have mentioned. These organizations are tax-exempt, meaning that they don't pay corporate income taxes. But they don't have much that looks like corporate income either. They receive most of their contributions in the form of gifts that would probably not be taxable income to them, and the donors are not allowed deductions for anything that goes for political or lobbying purposes.
SCHMALBECKThat's not to say that a little bit doesn't slip in under the rug here and there. But, by and large, this is very different from 501 (c)(3) charities where there is a loss associated with the deductibility of contributions. But we're completely in a different territory here, and I don't think there's much revenue at stake. I did want to say, in response to Jan's response to my comments, that I certainly believe that the IRS bungled this.
SCHMALBECKThey shouldn't have litmus tests that are based on keywords. They should've understood that that was going to lead to some asymmetry in the way that they reviewed these applications. I was simply trying to say that the IRS did face this deluge of applications of -- from organizations that might have problems with this line between social welfare and political activity.
SCHMALBECKAnd they were struggling to come up with triage mechanisms that would allow them to sort the applications into the baskets that required close scrutiny from ones that didn't. And they made mistakes in doing that. My point only was that that is an explanation that does not necessarily reflect any sort of political bias or political enemies' list approach on the part of the IRS.
SCHMALBECKAnd I think the inspector general's report that just came out last night does not have much of a tone of that. It has a tone of poor supervision of the lower-level employees and not a tone of a word has come down from the top to start harassing right-wing organizations. That simply is not the story here. But I think if you read the headlines of the major newspapers and the major news shows of the last four days, you think that was the story, and it really is not.
RYANYou know, I agree with my colleagues on the program today that this isn't about tax liability. This isn't about tax dollars that should have been paid that aren't because even the most overtly political organizations -- candidate committees, political party committees -- they are exempt from federal income tax in the same way that 501 (c)(4) groups is. What this is about is disclosure.
RYANAnd we have a Supreme Court that for decades have -- has said repeatedly that money being used to influence candidate elections should be transparent and disclosed, the sources of the money, because voters need that information to hold corporate officers accountable, to hold their elected officials accountable and to make informed decisions on Election Day. This is about disclosure.
BARANI agree. And so if you want to effectuate disclosure properly, you've got to pass a law to do that. And there are attempts in Congress to do it. I do think that the inspector general was highly critical of the selectivity process that the IRS engaged in because it was discriminatory, and it was discriminatory, in fact. And when it is partisan in this fashion, whether it was intended or not, it undermines the legitimacy of the internal revenue service. It cannot be seen as being partisan or discriminatory.
BARANThey have to be evenhanded, and they were not. And that is a big problem for the institution. And we'll see what else what comes to the public information because there are going to be congressional hearings. We do know that at least the former IRS commissioner and the current acting commissioner inaccurately assured Congress that this was not going on when, in fact, it had been going on. And that is a big problem too because you can't lie to Congress without committing a crime potentially.
FRENCHLet me address this disclosure point for minute because...
FRENCH...the fact to the matter is that disclosure -- anonymous speech has a long and proud history in the United States and, in fact, you know, anonymity that was protected in the seminal case as NAACP v. Alabama in the civil rights era. And as our politics gets uglier -- and I think you heard a little bit of example of that from the last caller -- anonymity becomes more important.
FRENCHI mean, just in my own family, we had to mandate a disclosure as a result of our own political activities. And we had an individual show up at our house when I was in home threatening my wife and children. So this is an ugly era in American politics, and the prize of participation in that -- in providing your own voice and giving money should not be opening yourselves up to economic reprisals and the kind of activity that you've seen occur from coast to coast.
FRENCHAnd, of course, it happens on both sides of the political spectrum. I'm mostly exposed to the consequences that are felt by those on the conservative side. I'm not sure why we are so unanimous on this idea that we have to have public disclosure if everyone is involved in the civic action groups, especially when majority of their activity isn't even involved in the partisan process.
REHMAll right. Paul.
RYANWe have a well-established, long-standing exemption for disclosure laws for groups that suffer or would face a reasonable probability of treats, harassments or reprisals. It dates back to NAACP. And a few weeks ago, actually about a month ago, the Federal Election Commission re-upped the exemption for the Socialist Workers Party. They've been exempt since, you know, for a couple decades now, and they had a continuation of that exemption earlier this year.
REHMAnd you're listening to "The Diane Rehm Show." Let's go to Javier in Orlando, Fla. Javier, are you there?
JAVIERYes, ma'am. I'm right here.
REHMGo right ahead, sir.
JAVIERFirst, I'd like to say I'm first-time caller and very proud to be on your show.
JAVIERYes. You know, I was listening to this story. From my point of view, the veterans, you know, out of 2,800 applications, the eight -- only eight were denied. It's being treated like such a conspiracy theory, when in reality, I'd love to know how many out of those 2,800 had the word Tea Party or patriot.
SCHMALBECKWell, apparently, the inspector general looked at a sample of about 300, I think, applications. And about a third of them looked like they had either Tea Party or patriot or 912, which were some of the code words that the IRS was -- and again let me say -- was inappropriately using to filter the cases. So the others did not have that coding. So that's based on sample numbers. You could extrapolate the percentages to the whole group...
REHMAll right. And...
SCHMALBECK...probably because the inspector general said they were using statistically valid sampling techniques.
REHMAnd last question for all of you from an email from Robert, who says, "They should do a way with 501 (c)(4) s because way too many are bogus or bend the rules 'till they screen. I have no problem with revealing donor names for all who had any political education." So what do you think about that? Is the 501 (c)(4) at risk? Paul.
RYANI don't think we're going to see the elimination of (c)(4) groups. I don't think we need to see the elimination of (c)(4) groups. I think that it's wholly reasonable to enhance our disclosure requirements, not only necessarily for candidate election work but also for other types of political issue advocacy. The Supreme Court has said, even that is OK, but that's Congress' job.
FRENCHWell, you know, I think it's entirely appropriate and right for Congress to create a statutory regime and the IRS to enforce a regulatory regime. It incentivizes civic engagement. It incentivizes this kind of educational programs. This is, after all, core First Amendment activity. A lot of people dislike the engagement in education from the other side of the political spectrum.
FRENCHAnd if the First Amendment means anything, it means that the government must evenhanded as it approaches all groups from the across the ideological spectrum. And that's where the IRS failed. Whether what their motivations were, we don't know quite yet, but that's where they failed.
REHMAll right. Jan Baran.
BARANI agree that we do need this type of a tax-exempt status, and the debate is really over whether there should be increased disclosure. And that's something that should be debated and ought to be debated in Congress, which has a responsibility for passing laws of that nature.
REHMIncreased disclosure plus greater definition of percentages?
BARANWell, you know, if there was increased disclosure so that the (c)(4) s had to disclose the same way as a 527, we wouldn't care about the distinction.
REHMAll right. And to you finally, Richard Schmalbeck, very briefly, please.
SCHMALBECKWell, I agree with the other panelists that the (c)(4) category isn't important when it's hard to think of where we would put a large number of organizations if the (c)(4) category didn't exist. I do think there is room for standardization of disclosure requirements. I think most of this controversy occurs simply because one category of organization has to disclose and the other category doesn't. And there is not a principled reason that I can see for protecting confidentiality in one of those cases and completely prohibiting confidentiality in the other.
REHMThank you all, Richard Schmalbeck, David French, Jan Baran, Paul Ryan, for a very good discussion. Thank you.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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