In concluding that the IRS used “inappropriate criteria” in screening tax exempt applications, an Inspector General’s review cites as one source of this mismanagement “confusion” among employees about the law. The report recommends further internal guidance on the nature of an organization’s “primary” activity, and training or workshops designed to educate staff about “ political campaign intervention versus general advocacy.” Treasury Inspector General for Tax Administration, Ref. Number: 2013-10-053, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (May 14, 2013) at 17.
After this guidance and training, the IRS may well improve performance of its task, achieving more consistency and clarity in its interpretations. Gains in consistency and clarity will help limit the risk of discriminatory application of the law. They may reduce delays in processing. But under the prevailing “facts and circumstances” test, which the agency by law must apply, the Service will be stuck with the task of making judgments about what constitutes “political” activity. It will remain in the same position the FEC has found vexing in its own world—separating out public policy advocacy from campaign activity—and it is not easy to see how it will calm its critics or meet the demand that it “stay out of politics.”
The problem is not just one of recent years, brought about by Citizens United and other developments in the campaign finance law. The IRS’s attempted revocation of the (c)(4) exemption granted to the Democratic Leadership Council is one instructive example from past. Democratic Leadership Council, Inc. v. United States of America, 542 F. Supp. 2d 63 (D.D.C. 2008). The case involved an organization established and managed by Democrats and a revocation pursued and litigated in a Republican Administration; and in this respect, it may offer a clear view, somewhat freer of contemporary political conflicts, of the structural and doctrinal issues the IRS faces in policing political activity. (Disclosure: My colleagues and I in Perkins Coie’s Political Law Group litigated the case on behalf of DLC.)
The DLC applied for and was granted its exemption in 1986. As set out in its application, it was dedicated to public policy formation and advocacy, and it represented that it would not engage in campaign-related activity, a pledge which it kept. The DLC explained that it was “Democratic” in the sense that it was formed and led by senior Democratic elected officials who were looking to recast the direction of the Party’s public policy dialogue and proposals. But DLC stated that it would welcome the involvement of ‘others with similar interests and goals’ in devising and promoting to ‘both the party and the general public new and innovative approaches to policy.’ Id. at 65 (quoting from the DLC Form 1024 application). The activities of DLC for the years in question consisted principally, and 95-99 per cent of its budget was spent on, conferences and materials available to the public. Id. 66.
The Service had second thoughts later, coming to the view that the DLC objective was too partisan or political, and it first initiated a review of the operations of a local chapter. Later, settling this local case with no adverse finding, the IRS turned to the national level, and concluded that, for at least the years 1997-1999, DLC was too political to retain its (c)(4) exemption. The IRS did not assert, because it could not, that DLC was an official party organization, or that it supported candidates with contributions or expenditures. The objection pressed by the Service was that the DLC was unacceptably political because it was partisan in leadership and, at least in part, in objective—it was organized by Democrats to improve the party’s standing on specific issues with the public at large, and therefore its benefits were a “private benefit,” enjoyed in the first instance by Democrats and only secondarily by the general public. In the litigation that followed, the DLC successfully argued that the exemption could not be retroactively revoked in circumstances where it had operated substantially as it said it would.
Throughout the case, the IRS struggled to clearly establish what, for its purposes, was political. While trying to come up with the answer, it made expansive requests for information of both the local chapter and the national organization. Full financial information was included among these requests. Also, more curiously, the IRS investigative team asked for a tour of the DLC’s facilities and then walked its corridors, observing the lay-out of the space and the wall hangings. The entire inquiry, from start to finish, ran for roughly three years, and the Court noted that the case agent devoted over 400 hours to a review of the evidence the Service collected.
The question of when a policy enterprise was, for (c)(4) purposes, improperly partisan met with only inconclusive answers in the deposition of the case agent. He testified that he saw no evidence of campaign activity but that he wished he had because “that would have made my life easy.” Transcript of Deposition at 42 (no. 1:05-cv-1067 (JGP). The “social welfare” definition did not lend itself to easy answers, and as he examined the DLC’s program:
This is totally something else to me. That’s to me personally. To me personally. It doesn’t fit the description of a social welfare organization. That’s my personal [opinion], not the law.
Id. at 53. The problem, he eventually decided, was that “this organization wasn’t made up of—including everybody in the universe. It was people of like-minded.” Id. at 95. Democratic officials had established the organization and Democrats were active in it, and this was enough to render it a partisan political undertaking that could not yield the broad community benefit required for a “social welfare” finding.
The Court, ruling in DLC’s favor only on the retroactivity issue, did not render a decision on the question of whether the organization was too partisan, and the benefit it offered too “private,” to meet the social welfare test. The case ended years after it began. The total tax at issue was just over $20,000.
The IRS is caught between conflicting expectations—enforce a law that requires inquiries into political activity, but avoid even the appearance of intruding into the political sphere. It can do better, no doubt, in meeting the first expectation. But then it will then have that much more difficulty in meeting the second. The FEC’s experience is similar: it been under pressure from the beginning to enforce the law vigorously while respecting constitutional limits about which there is considerable disagreement. Along with this similarity in views of the two agencies comes a major difference, which is the general acceptance that the FEC has a role in regulating aspects of the political process. The IRS’ role bears re-thinking.