For earlier coverage, please see:
What? Another post on an obscure tax form? Yup, just because it’s obscure doesn’t mean it isn’t important.
In addition to the substance of the proposed form and what it means (see far below), there’s a much bigger issue at work here:
Should the IRS issue rules designed to capture every possible problem or violation, at a cost of burdening speech by smaller organizations or those without good lawyers? Or should the IRS use modern techniques of computer modeling and analytics to focus on the problem areas and take some of the burdens off the little guys?
The IRS’s deadline for commenting on the proposed Form 1024-A, for organizations that want to get an official IRS determination letter on their section 501(c)(4) status is tomorrow. Other organizations, such as the American Bar Association’s Section on Taxation, have filed generally favorable comments.
PPLI’s Comments on Form 1024-A, in contrast, are generally quite negative about the Form, and more importantly, about the IRS’s approach to the whole issue of Congressional intent and actions responding to its recent processing of applications for exemption for advocacy and small organizations.
The ABA’s comments were prepared under the guidance of Beth Kingsley, my friend, colleague and co-founder of the First Tuesday Lunch Group discussion group. That means I’m generally favorably inclined to her way of seeing things, but we do have some different ways of seeing things, and those are reflected in the differing approaches to this proposed Form. The ABA’s comments (at footnote 6) cited PPLI’s earlier post, but said:
In preparing these comments we considered this suggestion but ultimately did not adopt it. Unlike section 501(c)(3) organizations, section 501(c)(4) organizations seeking tax-exempt status are free to self-declare their tax-exempt status and avoid the burdens of filing an application for recognition of that status. For those organizations that do desire a determination of their section 501(c)(4) status, it is appropriate for the Service to do a review sufficient to determine that the organization meets the requirements for exemption under section 501(c)(4).
Let’s compare the ABA’s comments and PPLI’s to see what this means:
The ABA says, for example, on Page 4 that: “Political campaign activities by section 501(c)(4) social welfare organizations have been the main source of controversy for such organizations in recent years, and are likely a key reason for the passage of section 501(c)(4)-related provisions in the PATH Act and, thus, the separate Form 1024-A application.” That is certainly a popular narrative, backed up by a 2016 letter by the New York State Bar Association asking for regulations on the new IRC section 506.
But it’s certainly different from the legislative history of Section 506 that I read. There was a move by Democrats on the House Ways & Means Committee to require section 501(c)(4) organizations to report whether they intended to engage in political activities, but that failed 11-20 in committee, and it didn’t even come up on the House floor. There’s also language in the Additional Views in the report on H.R. 1295, the bill that became Section 506 in the final PATH Act, about political activities, but nothing came of that.
Wasn’t even a partisan issue in the end. In those Additional Views, Sander Levin, Ranking Member of the Committee on that bill, said: “We support the improvements made by H.R. 1295 for section 501(c)(4) organizations applying to the Internal Revenue Service for tax exemption. However, we believe the bill can do more.” And when H.R. 1295 came to the floor, the Democratic floor manager, Rep. John Lewis, talked about the political activities of 501(c)(4)s, but still said: “I support the improvements the bill makes to the taxpayers’ exempt process for social welfare organizations. … The intent is to provide the agency with certain key information.” So the political activities fight, still going on at the moment, wasn’t actually part of the Section 506 fight in any meaningful way.
Actually the legislative history of the language that sparked the IRS to prepare Form 1024-A was pretty clear. The bill’s sponsor, Rep. George Holding, told the House: “this legislation before us would simplify the review process for the IRS and allow them to better focus their resources on the thousands – thousands, Mr. Speaker – of 501(c)(3) applications which are outstanding and languishing for review.” Rep. Peter Roskam, Chairman of the Oversight Subcommittee overseeing the IRS, said:
[The IRS has] said that they have spent 10,000 hours reviewing 4,000 applications for 501(c)(4) organizations, which sounds sort of interesting. … that is 10,000 hours of a complete waste of time. That is 10,000 hours from an organization that is saying, Oh, we are just begging for mercy, and we are not able to meet these claims, and we are not able to make these calls. … But my point is this: Representative HOLDING’s concept says, this is a complete waste of time. Let’s clean this up. Let’s free up 10,000 hours so that we can do more with less and reject the IRS notion that the best that they can do is to do less with less.
So what Congress was telling the IRS was that it didn’t want the IRS to spend all that time on voluntary 1024s. Now this is a difficult message to accept for the IRS, and for lots of practitioners who see all the potential troubles that could (and do) come from a less rigorous 1024 application process. After all, why not stop the bad guys from the start? And there is certainly some truth to the IRS’s views on this, since they will likely get blamed if some miscreants go through the process and become public controversies.
But that’s not the world the IRS lives in today. Congress has said pretty clearly that it doesn’t want the IRS to spend its time on these applications. And the IRS’s job is to implement what Congress tells it to do.
Fortunately, the IRS is doing an increasingly-good job of leveraging its resources to minimize the burdens of “front-end” processing. Many people complain loudly about the Form 1023-EZ “self-declaring” application form, but the bottom line, the IRS officials tell us, is that they have to move the paper, and they are getting pretty good job of finding bad guys on the back side through reviews of the annual Form 990 tax returns.
And the point here is that someone has to be looking out for the interests of the little guys. There are probably a lot more tax-exempt organizations out there who cannot afford my legal services, or Beth’s or other law firms’ tax-exempt law specialists. In fact, a large part of any tax-exempt organization lawyer’s practice is picking up the messes when one of these non-represented organizations makes big mistakes.
The ABA’s approach of “it’s voluntary, so we don’t have to worry about the little guys,” simply means that only those who have experienced counsel can get the benefits of a determination letter, such as status retroactive to their creation, assurance for donors of status, and so on.
So why not try the less-burdensome approach? If it doesn’t work, then it will be easy to change tracks, with the evidence well in hand.