TaxProf Blog

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

Sunday, May 13, 2018

The IRS Scandal, Day 1828: Smith Responds To Johnston's 'Ad Hominem Attack' On His WSJ Op-Ed

IRS Logo 2TaxProf Blog op-ed:  David Cay Johnston's Ad Hominem Attack On My WSJ Op-Ed, by Bradley Smith (Capital University Law School; former Chair, Federal Election Commission):

David Cay Johnston claims that I have a “moral obligation” to address the claims of his op-ed, Bradley Smith's WSJ Op-Ed Is A 'Breathtaking' Distortion Of The Facts Of The IRS 'Scandal'. Well, OK then.

In fact, most of Mr. Johnston’s reply consists of ad hominem attacks on the integrity, motives, and intelligence of me, the Treasury Inspector General for Tax Administration, the Chairman of the House Oversight and Government Reform Committee, the very groups that were singled out for harassment, and unnamed “lawyers and advisors to conservative groups.” But he does make a few claims that actually can be addressed.

First, Mr. Johnston begins by arguing that “The law Congress passed does not allow C4s to be engaged in political activity, but a 1959 IRS regulation does. Regulations should implement, not expand or contract the will of Congress.” Thus, he suggests that 501(c)(4) organizations should not be allowed to engage in any political activity at all, and that the IRS regulation permitting (c)(4) organizations to engage in political activity so long as that is not their primary activity (26 C.F.R. 1.501(c)(4)-1)) is ultra vires, because “[r]egulations should implement, not expand or contract the will of Congress.”

Now, first, it’s not clear that any of the harassed conservative groups were engaged in “political activity” as defined by the IRS. But let’s leave that trivial fact aside. The law originally passed by Congress (the Revenue Act of 1954) did indeed create section 501(c)(4) for “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” But it did not define “social welfare.” It is only because of IRS regulations that “social welfare” was defined to exclude “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” One of the key points of my op-ed is that this definition is not required by statute, and is ill-conceived as a matter of policy—in a democracy, it is hard to understand how political engagement is not part of the “promotion of social welfare.”

In any case, what the IRS taketh away, the IRS giveth back—its regs go on to provide that a group qualifies as a “social welfare” organization so long as it is operated “primarily” for social welfare, thus allowing (c)(4) organizations to engage in other activities, including political activities. It is true that, taken in isolation, this language would seem to contradict the “exclusively” requirement of 26 U.S.C. 501(c)(4), but in fact the IRS could just have easily have written its original regulation to define “social welfare” to include political activity, entirely or in limited amounts, and that would have yielded the same result with no apparent conflict.

Further, some allowance for political activity by (c)(4) organizations is a necessity to make sense of the statute at all. Why? Because in the 1970s Congress added Section 527 to the code for “political organizations,” which are defined as organizations organized and operated “primarily” for “influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office … .” As 501(c)(3) organizations are prohibited from engaging in political campaigns, and 527 organizations must be primarily engaged in political activity, there must be some section of the tax code for organizations that engage in limited political activity. (Or perhaps Mr. Johnston agrees that they should simply exist outside the Internal Revenue Code, as they did before section 527 was added in the 1970s. That would functionally accomplish the same thing as my suggestion in the Journal, so I’m quite open to that, but I don’t think that’s what he has in mind). The IRS, in accordance with the statute, has placed such organizations in Section 501(c)(4). In practice, however, there is no meaningful differentiation in the tax treatment of (c)(4) and 527 organizations. Thus, the modest suggestion of my article is that Congress get the IRS out of trying to police political speech at all, and leave such determinations to the Federal Election Commission, which by statute has “exclusive jurisdiction with respect to the civil enforcement” of the Federal Election Campaign Act.

With that legal primer out of the way, let me respond to Mr. Johnston’s few substantive claims. First, he argues that “there was no “targeting” of right wing groups,” and that any “hassling” was limited to “dubious applicants.”

Of course, this is not the conclusion of TIGTA, which notes that the inappropriate IRS scrutiny began with organizations with the words “tea party” in their names, later expanded to include many other names, starting with “Patriot” and gradually expanding to include many others. (Here is how the U.S. Court of Appeals for the Sixth Circuit summed up the TIGTA Report: “Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called ‘unnecessary information.’”)

Oddly, Mr. Johnston later admits that extra scrutiny was in fact applied based on nothing more than the names of applicants, and defends the use of the “Be On the Lookout (BOLO)” list as having eventually included many names likely to be associated with progressive organizations. But it really can’t be both, can it? That is, extra scrutiny could not have been limited to “dubious applicants,” if at the same time that extra scrutiny was triggered by nothing more than certain words in an organization’s name.

Mr. Johnston’s claim that there was no targeting is not the finding of the House Oversight and Government Reform Committee, and it is not the testimony of Lois Lerner, who stated flat out that agents in her division had targeted organizations with “tea party” and “patriot” in their names, and that "It was an error in judgment, and it was not appropriate, but that's what they did," before clamming up and invoking her 5th Amendment rights the rest of the way. (Mr. Johnston brushes aside Ms. Lerner’s 5th Amendment invocation on the grounds that “any competent lawyer” would have advised her to invoke the 5th. I’m all in favor of 5th Amendment rights, but in civil cases judges and juries are free to draw adverse inferences from their invocation. It strikes me as a curious defense of the legality of IRS targeting that “any competent lawyer” would have told her to take the Fifth.)

It is true that the IRS had eventually expanded the BOLO list to include other words, and that some liberal groups were also flagged. But just because a few liberal groups were snagged doesn’t wash away the stain, and the fact is, far more conservative groups were targeted. In fact, Judy Kindell of the IRS’s Exempt Organizations office wrote to Lerner in 2012 that “Of the 199 (c)(4) cases [to that time], approximately ¾ appear to be conservative leaning, while fewer than 10 appear to be liberal/progressive leaning groups.”  TIGTA, Review of Selected Criteria Used to Identify Tax-Exempt Applications for Review (p. 102). As exempt organizations expert Barnaby Zall explains, there is simply no comparison between the treatment of conservative and liberal/progressive groups.

We might think of it a bit like we understand disparate impact in the race arena. If an employer adopts facially neutral criteria such as “no curly hair,” we know this will have a disparate impact on African Americans, and it is illegal. Similarly, as a campaign finance attorney, scholar, and regulator, I’ve long pointed out that it is easy to draw up campaign finance regulations that are facially neutral, but will mainly hit one’s political opponents. You just have to know how different groups are engaging in politics. That doesn’t mean your side will escape unscathed, only that the other side will bear the brunt of the rule. That’s how the BOLO list worked in practice, but all this is lost on Mr. Johnston.

Also lost on Mr. Johnston is the other point of my op-ed: that the IRS crisis was a natural response to partisan political pressure. Mr. Johnston argues that there was no involvement of the “White House or Obama operative[s].” Of course not, if by “involvement” you mean a direct order or specific approval. The very point I make in the WSJ editorial, and in numerous other publications over the years, is that there didn’t need to be. Instead, President Obama repeatedly and publicly denounced tea party and other new conservative groups as “a threat to democracy” and worse, and repeatedly claimed, sans evidence, that they were possibly funded by foreign operatives. Meanwhile, numerous Democratic Senators did the same, and indeed pressured and sometimes threatened the IRS in letters, committee hearings, and speeches, to deny applications from, or to prosecute, both conservative organizations generally and certain specific organizations. They also accused specific organizations of operating unlawfully (though presumably they hadn’t seen their filings).  See Congress Abetted the IRS Targeting of Conservatives, Wall St. J. op-ed, June 2, 2014. Indeed, in the congressional testimony that Mr. Johnston cites as justifying the use of BOLO lists, the IRS manager who first instigated the list specifically states that he did so because of “media attention” that had been focused on these groups, making them “high profile” cases. ). That’s my point.

Finally, we know from the TIGTA reports that after the lists were started and revealed, IRS higher ups simply sat on the issue rather than acting to end it. Why? Either they were blind to a major and obvious mismanagement problem dropped in their laps, or they decided that this was a desirable course of action. If the latter, again, why?

I will admit that I had never heard of Mr. Johnston before this, so I looked him up. I quickly learned that earlier this very week, he accused President Trump of being “in the cocaine trafficking business.”  That left me wondering if he was really the best guy to accuse me of a “breathtaking” “failure to rely on well-established facts.”

Readers of this blog can look back on Paul Caron’s extensive compilation of IRS coverage and decide for themselves, I guess.

http://taxprof.typepad.com/taxprof_blog/2018/05/the-irs-scandal-day-1828-smith-responds-to-johnstons-ad-hominem-attack-on-his-wsj-op-ed.html

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Comments

Thank you for this courageous article. Thank you for the continued coverage.

Posted by: Abe Carnow | May 13, 2018 10:55:54 AM

Remember! The IRS admitted it had I inappropriately targeted conservatives in the day the scandal came to light.

https://www.washingtonpost.com/business/economy/irs-admits-targeting-conservatives-for-tax-scrutiny-in-2012-election/2013/05/10/3b6a0ada-b987-11e2-92f3-f291801936b8_story.html?utm_term=.c7b8fe487ce6

Posted by: Fred | May 13, 2018 1:54:51 PM

The fundamental argument of many a government employee would be that how can an organization that advocates less taxing, and ergo less spending be promoting "Social Welfare" as if the only social welfare that mattered was that of the recipients of government largesse; never mind the effect on the group they view as greedy S.O.B.'s being taxed to make those income transfers possible. The fact that lower taxes also mean a smaller state and fewer government employees, therefore putting their own jobs at risk, only adds to their perceived justification of their position on the issue.

Posted by: Doug Wenzel | May 13, 2018 2:06:26 PM

“The law Congress passed does not allow C4s to be engaged in political activity, but a 1959 IRS regulation does. Regulations should implement, not expand or contract the will of Congress.”

And yet so many extreme left wing groups do this, like the one that uses the Parkeland kids as spokespeople.

Posted by: wodun | May 13, 2018 3:59:15 PM

Why is Lois Lerner's deposition still sealed?

Posted by: Smitty | May 14, 2018 2:50:31 PM

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