A few readers with tax expertise chime in:
All I do all day is advise c3s and c4s on this stuff (only liberal and nonpartisan ones – so I write this email as an ideological opponent of the Tea Party groups). And I can tell you Noam’s argument is off. Only a very experienced nonprofit tax lawyer is likely to know that c4s don’t have to file IRS Form 1024 in order to be recognized as tax-exempt. In fact, within the past few months, it was a topic of discussion on an email list of nonprofit tax lawyers, with the “experts” trying in vain to find confirmation from the IRS that these groups aren’t required to file.
Most importantly, the IRS deceptively tried to get groups to think they needed to file.
If you’re a grassroots group of activists trying to figure out the law without paying an expert, you’d never know you can skip the 1024. An activist would do some Googling and find IRS Publication 557, which says on pg. 57, as the first sentence of the section on c4s: “If your organization is not organized for profit and will be operated only to promote social welfare to benefit the community, you should file Form 1024 to apply for recognition of exemption from federal income tax under section 501(c)(4).” (Not the IRS used “should” rather than “must.” Who but a tax lawyer would notice?) In addition, earlier this year the IRS issued a new revenue procedure (Rev. Proc. 2013-9) that was intended to force c4s to file a form 1024.
So it’s only the big, well-funded c4s that would know enough to skip the 1024, and the IRS is changing its rules to try to get them to file, too.
An accounting professor here. Scheiber’s argument is weak at best. Yes, a social welfare organization can theoretically operate as a tax exempt entity without filing for 501(c)(4) status. However, being tax exempt is not the point. After all, PACs and Super PACs are also tax exempt entities. A social welfare organization cannot represent to the public (i.e., donors) that they are a 501(c)(4) without applying for recognition as such (by filing form 1024). What distinguishes 501(c)(4)s from (explicitly) politically-minded tax exempt entities is that they don’t have to disclose their donors. If a social welfare organization wants to represent to its donors that they will remain anonymous, the only way of doing so is applying for 501(c)(4) status.
For what it’s worth, saying these guys singled themselves out is even worse. The IRS chose to conduct a further review of a disproportionate sample of those who applied. That is, even among those who “singled themselves out”, the IRS further singled out tea party groups. Is it a big scandal? Maybe not. But it is unfair to dismiss the whole thing as meaningless.