The Sept. 21, 2006 Daily Tax Report (BNA), at G-14, reports that the District Court in Washington, DC will rule soon on the IRS's decision to revoke the Democratic Leadership Council's (DLC's) Section 501(c)(4) tax exempt status. The case is significant, though it involves only a small amount of taxes ($20,083) for 1997 through 1999, because:
(1) The IRS appears to claim that an organization that develops public policy positions that it believes promote the social welfare operates for private benefit (and therefore cannot be a 501(c)(4) organization) whenever its members share a political affiliation that is aided by the development of public policy positions.
(2) That position would seem to prohibit exempt status for any politically oriented group in the business of policy development intended to influence the political party, yet the IRS appears to be applying that position unevenly to groups with similar purposes and operational modes.
Section 501(c)(4) provides tax exempt status for (in relevant part) "civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare..." so long as "no part of the net earnings of such entity inures to the benefit of any private shareholder or individual." The "operated exclusively" language that appears in both 501(c)(3) and 501(c)(4) is the basis for the "private benefit" theory that requires organizations to operate for the public good and not for private benefit. See this IRS document (statutory source of theory) and this article by Darryl Jones (extensive discussion of private benefit theory). The private benefit theory in the 501(c)(4) context was "developed to prevent section 501(c)(4) organizations from becoming purely member service providers." DLC summary judgment memorandum.
The government claims that the DLC is not eligible for tax exempt status because it operates for the private benefit of Democratic officeholders and candidates. Specifically, the government's summary judgment memorandum states that
The Service determined, however, that during 1997, 1998, and 1999 the DLC primarily operated to benefit a private group: individuals who might run for office, were running for elected office, or had been elected to office as Democrats, or particularly New Democrats.
DLC, in contrast, argues that the IRS approved its status years ago; its By-Laws do not permit it to take part in campaigns; it has never endorsed any candidate; it is devoted to addressing policy issues of bipartisan concern, such as opportunity, responsibility and community, just as it claimed in its original application; and though it was founded by Democrats, it has no formal connection to the Democratic Party and does not take part in electioneering.
The DLC's application for tax exempt status explicitly acknowledged that its founders were members of the Democratic Party who hoped to address policy issues for the benefit of the party and the public at large. This is the excerpt provided in the DLC summary judgment memorandum.
The Democratic leadership Council is so named because it was founded by federal and state elected officials who are Democrats and who were concerned with the direction of policy debate within their party, as well as within the country as a whole. Through the establishment of DLC, these officials and others with similar interests and goals expected to improve the overall contribution [of] Democratic leaders in the federal and state government[] to national policy debate, and to urge upon both the party and the general public new and innovative approaches to policy.
Similar groups may be much more actively engaged in electioneering. For example, the BNA article notes that Public Citizen did a report on "Stealth PACs" in 2004 and discussed 26 groups that were linked to the major parties and had actively engaged in activities intended to sway elections. That report didn't discuss the DLC because it apparently "does not conduct the kinds of direct, campaign-related activities that many other 501(c) groups do." Groups covered by Public Citizen's report include the AFL-CIO and the U.S. Chamber of Commerce.
The Daily Tax Report further notes that there have been only a few cases involving potential loss of exempt status of 501(c)(4) groups. Those include the Christian Coalition and Kemp's Empower America organization. The DLC, it suggests, seems a less likely target because it operates as a policy "think tank". The DLC's memorandum in support of its motion for summary judgment indicates in fact that "This [version of the private benefit] theory had never before been used by the IRS to revoke the exemption of a section 501(c)(4) public policy organization." The DLC's complaint lists the Log Cabin Republicans, the Ripon Society and the National Rifle Association (an organization that has specifically supported candidates favorable to its positions on gun availability) as organizations with similar purposes to its own whose status has not been challenged. The summary judgement memorandum discusses at length Newt Gingrich's organization, that explicitly had partisan goals in its organizational documents yet was ultimately found entitled to 501(c)(4) status.
The complaint (filed by DLC on May 27, 2005 to recover taxes erroneously assessed and collected), answer, and DLC and government motions for summary judgment and DLC and government responses to those motions are available in BNA's TaxCore.
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