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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, March 19, 2016

The IRS Scandal, Day 1045

IRS Logo 2Forbes:  IRS And Liquor By The Wink, by Peter J. Reilly:

Groucho Marx is supposed to have sent a telegram to a club stating – “Please accept my resignation. I don’t want to belong to any club that will accept people like me as a member.”  That sentiment is not exactly a tax principle, but it is very akin to one.  The idea is that for an organization to be recognized as a social club exempt under 501(c)(7) belonging to it has to mean something, maybe not much, but something. That was the essence of Private Letter Ruling 201605021.  Private letter rulings are redacted, so I’m going to call “the club” – How Dry I Am (HDIA).

HDIA has some high sounding purposes in its Articles of Incorporation.  It is intended to provide for the social, cultural and civic betterment of its member, support charitable endeavors, provide for recreation and the like and establish and maintain facilities where all this good stuff can go on. That’s the Articles of Incorporation.  It advertises itself a little differently.

HDIA advertises itself as a family restaurant and bar and grill.  The facility is leased from two of its members.  It seems like a pretty convoluted way to run a restaurant, but there is a reason from it.  HDIA is in a dry county where restaurants are not allowed to serve liquor.  Private clubs are another matter.  They can serve liquor to members.  Thus the proliferation of private clubs in dry counties where liquor is served "by the wink." ... The IRS broke HDIA the bad news that it did not qualify as an exempt organization. ...

This little comedy may seem far removed from the interminable IRS scandal now on Day 1043 by TaxProf Count. We privilege not for profit organizations in a variety of ways, not just through federal tax benefits but also by letting them sell liquor, where other cannot, run gambling, or make significant political expenditures without disclosing donors.  There is even an entirely unmerited dose of credibility that organizations get for having achieved exempt status.

Yet we lay the regulation of entities seeking exemption from a variety of rules at the doorstep of our tax collection agency, even when the status has little or no tax significance as was the case with the 501(c)(4) organizations that made up the core scandal and this particular attempt at 501(c)(7) that just wants to serve liquor. ...

In a recent article in Tax Analysts – The IRS’s Multi-Mission Mismatch Problem – Kristin Hickman makes a strong argument for moving Exempt Organization regulation out of the IRS as part of a larger effort to focus it on its core competency.

IRS personnel have tremendous capacity to process and evaluate hundreds of millions of taxpayer filings and collect the taxes owed. But they are not typically social workers, environmental scientists, health policy experts, or First Amendment scholars. Consequently, however talented IRS employees may be at pursuing the IRS’s traditional revenue-raising mission, they may not be as good at addressing the needs of socioeconomically disadvantaged persons, promoting new sources of energy, remaking the healthcare system, or recognizing when administrative decisions implicate politically sensitive values like freedom of speech or religion.

Perhaps Congress could spin off exempt organization determinations and monitoring wholesale and have the responsible agency just provide the IRS with a list of approved entities. If the IRS suspects a problem with a particular entity, it could refer the matter back to the responsible agency.

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