Editorial: Disarray In IRS Exempt Organizations Division

The Connecticut Law Tribune

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Although many dabble, there probably are few lawyers in Connecticut whose practice primarily focuses on the problems of tax-exempt organizations. Their work concerns the drafting of the organizational documents, the filing of exemption applications with the Internal Revenue Service, wrestling with problems of public charity against private foundation status, avoiding potential tax penalties, and dealing with IRS audits. Of course, allowance of a charitable contribution deduction is always a crucial issue. The relationship between these practitioners and the IRS was rather a friendly one, with IRS officials frequently appearing at regularly scheduled seminars of the Exempt Organizations Committee of the American Bar Association.

This situation changed suddenly and perhaps irrevocably at the annual meeting of that committee held in Washington, D.C., in April of this year. Lois Lerner, then the head of the IRS Exempt Organizations Division, was asked a rather innocuous question as to whether there had been particular problems with the determination process, especially with regard to Section 501(c)(4) (social welfare) organizations. Her comment was that some IRS officials in the Cincinnati office had unreasonably focused on exemption applications filed by certain organizations, based on irrelevant material, such as the names of the organizations (i.e., "Tea Party" or "Patriot" or the like) leading to lengthy delays, and intrusive questions. She indicated that the situation would be remedied. Initially she denied the question was "planted," but later conceded that it was.

Immediately, conservative activists in Congress (especially in the Republican-dominated House) pounced, claiming that this was evidence of a conspiracy to inhibit the functioning of organizations of a conservative bent, thus violating freedom of speech. This situation was particularly fueled by the earlier Citizens United Supreme Court decision, which greatly enhanced the legality of significant contributions to (c)(4) entities for political purposes.

The Wall Street Journal, and others, feasted on this unfortunate situation, with headlines such as "New Links Emerge in the IRS Scandal;" "The IRS Attack on Political Speech;" "Powered by Outrage at the IRS, the Tea Party Makes a Comeback;" and "Damage Control at Fortress IRS." There were even allegations that this action by the IRS was specifically directed by the Obama administration.

Seemingly endless hearings have been held by the Republican-dominated House Ways and Means Committee, as well as the House Committee on Oversight. Lerner "took the Fifth Amendment" before a Ways and Means Committee hearing, was placed on administrative leave, and then resigned her position. The Commissioner of Internal Revenue was replaced. Although it continues to function in a haltering fashion, the entire IRS Exempt Organization operation has been demoralized, with a constant shuffling of personnel, and able senior personnel leaving government employ.

One astute lawyer in this field remarked: "I am sick and tired of this political posturing in DC, with both parties acting like spoiled children — whatever the truth may be with regard to IRS indiscretions — or not — each party has tried to disgrace the other — unfortunately, what we have come to expect."

While evidence is still evolving, a careful and dispassionate analysis of the situation indicates that there was unreasonable targeting of certain exemption applications by the Exempt Organizations Division, with unreasonably detailed questions being postured, and what seemed to be interminable delays, but that there is scant evidence of any specific intent that conservative entities be disadvantaged. At the time of writing of this editorial, the situation continues to fester.

Many remedial suggestions have been made, such as the complete restructuring of the IRS Exempt Organizations Division; perhaps its removable from the echelon of the IRS to an independent entity and, in any event, increased bipartisan oversight by Congress. In 1973, an independent commission was convened, named the Commission in Philanthropy and Public Needs, funded by the Rockefeller Foundation, and chaired by the John Filer, then chairman of the board of the Board of the Aetna Life Insurance Company in Hartford, to review the entire charitable sector. Many sessions were held, and eminent lawyers, accountants and politicians were engaged. The result was a proposal that Congress establish a permanent oversight unilateral commission on the non-profit sector, as exists in other countries such as Canada. Unfortunately, this proposal was never adopted. Perhaps its time has come again. A further debate in Congress concerns the propriety of the current charitable contribution deduction rules, some alleging (including the current administration) that the deduction favors well-to-do individuals, who unreasonably benefit from available tax deductions in their high tax brackets.

Such congressional debates, and any resultant legislation, will be crucial to the very existence of the non-profit sector.•

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