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Sunday, May 12, 2013

Schmalbeck on the IRS 'Targeting' of Conservative Groups

Following up on my prior posts:

SchmalbeckRichard Schmalbeck (Duke) agreed to allow me to share his perspective posted on the TaxProf Email Discussion Group:

I was at the Exempt Organizations Committee meeting of the ABA Tax Section meeting when Lois Lerner, the director of the division that handles exempt organizations matters, dropped the bombshell that is in the papers today, and generating a lot of media outrage, especially but not exclusively on Fox News. I think her explanation in person was probably better than the statement that the IRS released, at least in terms of explaining why some exemption applications actually require more scrutiny than others.

The IRS position on 501(c)(4) organizations ("social welfare organizations")is that, while they can engage in campaign activities, they cannot do so as their primary activity—which they understand as more than 50% of the organization's activities. Many organizations that seek this status probably should be section 527 political organizations rather than social welfare organizations. So when the service center in Cincinnati, which handles exemption applications, was inundated with unusually large numbers of (c)(4) applications, they tried to find ways to triage them, so that the traditional social welfare organizations would not have their processing held up, but organizations that might be close to the 50% campaign activity zone would get the appropriate level of scrutiny. In developing ways to identify the applications requiring attention, one of the tests that somebody decided would work is whether the organization had "tea party" or "patriot" in its name. The IRS did also look at other organizations with potential for abuse of the social welfare organization status, but apparently did not come up with any shorthand ways of identifying any such organizations that did not have "tea party" or "patriot" in their names.

This was obviously a bad idea for a number of reasons, including its political asymmetry. But a) it didn't come from the top—Lois is herself a career employee, and it was a decision made somewhere below her level; and b) it did not involve scrutiny that was inappropriate under the circumstances. The content of some of the scrutiny may have been inappropriate, however, in seeking names of donors, which is not ordinarily done. (Even here, I can imagine some basis for thinking this was relevant to the inquiry: if all an organization's funds were coming from a party, or other 527 organizations, it would be a matter of some concern, and raise a somewhat higher suspicion that the organization was being used to finance campaign activities primarily. And while public disclosure of donors is not required, there is no absolute bar on the IRS seeking information about donors. They do it routinely in their efforts to determine private foundation status and compliance, since major donors are disqualified persons for purposes of the private foundation excise taxes. I should emphasize that Lois did not offer this explanation however—it is just my speculation on why IRS staff might have asked that question.)

I think the problem is that if you hear that tea party organizations were "targeted" for special scrutiny, it is hard to imagine an explanation that doesn't depend on partisan bias. But there is such an explanation: the need to draw the line between (c)(4) and 527 organizations. I'm not saying that this was the right way to go about this, and neither is Lois or anyone else in the IRS. But at the same time, it isn't the smoking gun that some in the media seem to think it is. It is nothing like Richard Nixon asking the IRS to audit his political enemies, though it is being compared to that.

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Comments

If the IRS targeted groups that had the words "Democratic" or "Progressive" or "Labor" in their title, would we be splitting hairs and straining to explain how this wasn't partisan targeting?

Posted by: anon | May 12, 2013 9:06:18 PM

Schmalbeck's attempt to whitewash the IRS is dubious, indeed. Have you seen the questionnaires sent to the targeted groups? the incredibly intrusive questions, and the promise that all the answers will be disclosed publicly, carry a clear threat of intimidation and retaliation by Party organs. Further, note that a Jewish organization, Z street, was informed by an IRS official that--

The Zionist group Z Street sued the IRS in the summer of 2010, alleging that a federal agent, Diane Gentry, told the group’s lawyer that the agency was “carefully scrutinizing organizations that are in any way connected with Israel.”
http://www.buzzfeed.com/bensmith/pro-israel-group-sees-same-conduct-in-irss-tea-party-campaig
The group alleged that the agent told them that “a special unit” was examining whether its activities — in pushing a hawkishly pro-Israel line — “contradict the Administration’s public policies,” referring to a provision of the tax code which can deny nonprofit status to groups that oppose “established public policy.” The provision, rarely used, has been invoked to deny that status to racist groups.

Posted by: John Cunningham | May 12, 2013 9:11:16 PM

Impossible to imagine him defending the IRS's actions if they had targeted "African-American" groups.

His defense is hypocritical and intellectual dishonest.

.

> It is nothing like Richard Nixon asking the IRS to audit his political enemies

No, back then the IRS had enough integrity and class to tell Nixon "No". Now, the President "jokes": about using the IRS against his political enemies and the IRS rushes abuse their power.

.

I can hardly wait until the government (again enforced by the IRS) gets to make decisions about the health-care coverage and procedures people get. I am sure there will be nothing partisan then either.

Here I'll help Richard Schmalbeck write his response for when that happens:
"I think the problem is that if you hear that tea party organizations were "targeted" for special scrutiny, it is hard to imagine an explanation that doesn't depend on partisan bias. But there is such an explanation: the need to [compensate for past discrimination to members of groups that have been discriminated against in the past]."

.

.

P.S.:
Hey he works at Duke. He isn't part of the Group/Gang of 88 was he?

Posted by: rolo | May 12, 2013 9:26:25 PM

All of this, of course, was done under the non-supervision of a Bush appointee who was a holdover because of changes made by the NCRIRS, for which he was chief of staff. Meanwhile, President Obama has not appointed a successor IRS Commissioner since Doug Shulman's term expired in November. Although Congress considers one of its principal functions to be rejecting Administration nominees, no one has yet complained about this omission.

As a centrist Republican, Shulman would have had good reason to stifle Tea Party activism, had he been so inclined. However, he would have had no reason to follow instructions from the White House to do so. For the moment, he's the dog we don't hear barking in this Congressional detective story.

Posted by: Bob | May 12, 2013 10:10:14 PM

Perhaps you should look at Z Street v IRS. Saying that this targeting was only at a low level, a matter of only recently taken, and did not involve political appointees at the top is just not credible.
In Z Street, the IRS was sued in 2010 for targeting a pro-Israel group. Obviously, Commissioner Shulmann was not being truthful in his testimony before Congress in 2011. And to say now that this was just some recent aberrant behavior by some low level career employees is just plainly false.
Z Street v IRS is now docketing in the D.C. Federal District Court.

Posted by: Professor Denis Kleinfeld | May 13, 2013 9:07:53 AM

Henry II, while down in the cups, commented to a few knights, "Won't anyone rid me of this meddlesome priest (Archbishop Thomas Beckett)." The knights killed Becket.

When you joke about auditing your enemies, guess how many loyal NTEU employees in the IRS might get the message?

Posted by: DLN | May 13, 2013 9:33:55 AM

rolo:

Schmalbeck is not a member of the infamous Gang of 88 at Duke, according to this list: http://www.discoverthenetworks.org/Articles/List%20of%20Gang%20of%2088%20Duke%20Professors3.html

You really shouldn't yammer on about something you know nothing about. It took me 3 minutes on Bing to find the list.

Posted by: Elmer Stoup | May 13, 2013 2:59:21 PM

I don't know anything about Schmalbeck, but that is a pathetic response.

Despite his use of quotations, it is very clear that some people at the IRS targeted conservative groups. This activity apparently was discovered quite some time ago yet was not publicly acknowledged until last week. In light of these two facts, I would have thought that a reasonable person would want to find out more details before risking his credibility to justify/explain actions of which he has no firsthand knowledge. Maybe there is a benign explanation that doesn't involve politics as Schmalbeck suggests. Or maybe there is a more sinister explanation that does involve politics. I hope that we will find out the truth, but until an investigation is conducted, it's ridiculous for him to definitively pronounce that there is no smoking guy. His email makes him look foolish. And I have a feeling that he wouldn't be very impressed if a student offered a similar defense of why he violated school policy.

Posted by: JK | May 13, 2013 6:19:08 PM

some useful info in this piece, http://freebeacon.com/heightened-scrutiny/
theteaparty.net applied for tax-exempt status in 2010, the decision is still pending...
Attorney Dan Backer, whose client TheTeaParty.net has been trying to obtain tax-exempt status since 2010, said an IRS analyst mentioned the alleged working group during a phone conversation about one of Backer’s other client organizations.

“More than a year ago, one of these guys, really a slip of the tongue, [said] ‘Yeah we have this new working group that’s really looking at all these conservative organizations,’” Backer said. “And that’s when we knew it was gonna be a problem..
Backer addedm, Once the group submitted the first round of documents to the IRS, “they came back and asked for all of our donors and their contact information, as well as a list of all of the previous events … and everything in the future we would do, including the details of who, what, when, where, and how; who was gonna be on the guest list, what interactions we had with congressmen, senators, elected people,” Hughes said.

“We still turned in all the paperwork and thought maybe that was gonna be it. Then round three happened, which was about six months ago,” Hughes added. “They wanted a list of every single email, every single fundraising and marketing email, as well as ever social media post that we’d ever done from the very beginning, which is basically three-and-a-half-to-four years work, which is ludicrous.”

Get that? In 2010, the org was told, under penalty of perjury, to list future contacts and meeting guests through 2014.

Prof. Caron, how about dropping your pose of impartiality?

Posted by: John Cunningham | May 13, 2013 7:51:36 PM

The reasons/explanations for the IRS's axns are irrelevant in the political sphere. Americans understand the IRS in a way that they cannot understand Solyndra, Benghazi or other inscrutable issues. The IRS has in fact proved the libertarian/conservative/Tea Party coalition's fear of govt correct, whether by design or sloppiness. This issue will be played to the hilt running up to 2014.

Posted by: Carlos Lam | May 14, 2013 7:10:18 AM