DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224 DEPUTY COMMISSIONER March 15, 2013 The Honorable Carl Levin Chairman Permanent Subcommittee on Investigations Committee on Homeland Security and Government Affairs United States Senate Washington, DC 20510 Dear Mr. Chairman: I am responding to your letter dated January 4, 2013, requesting additional information about 501 organizations. This response supplements the previous responses dated June 4,2012, July 13, 2012, August 24, 2012, September 14, 2012, October 17, 2012, and November 23, 2012, and addresses the additional questions raised in your recent letter. Question 1. In the IRS response of September 14, 2012, you write that "during the past six months, no notices of proposed or final revocation were issued to section 501(c)(4) organizations." In the November 23, 2012 IRS response, you write that "we have issued 42 revocation notices to section 501(c)(4) organizations since January of 2007." Also in the November 23, 2012, response you write "since January 1, 2007, we have issued ten adverse determinations to section 501(c)(4) applicants." Please respond to the following: a. Please explain the difference between a "revocation notice" and an "adverse determination." An adverse determination is a written ruling denying tax-exempt status to an organization that has applied for tax exemption, but has failed to meet the applicable requirements. A revocation notice is a written notice that tax exempt status is being revoked, as the result of an examination.' 1 Revocation notices also may be issued to organizations that are automatically revoked for failing to file a Form 990 series return for three consecutive years. The revocation notices noted In Quest|on1 above resulted from examinations. b. Please explain whether or not a total of 52 organizations have now been deemed by the IRS as having not met their obligations as a 501(c)(4) social welfare organization, and if so, please describe the consequences for those organizations in terms of whether or not they were subject to tax or penalties under 527(i) and for failure to make proper disclosure, whether they were then required by the IRS to pay other taxes, including back taxes, and whether or not they did so. See Question 1bi below for information regarding the number of organizations that have not met the requirements for 501(c)(4) social welfare status. As discussed in the June 4, 2012 and September 14, 2012 responses, failure to qualify under 501 is not determinative of whether an organization qualifies as tax-exempt under 527. Sections 501(c)(4) and 527 both provide avenues for tax exemption under the Code, but for different types and levels of activity. To be tax-exempt under 527, an organization must be operated primarily for the purpose of accepting contributions or making expenditures for an exempt function influencing or attempting to influence the selection, nomination, election, or appointment of any federal, state, or local public office or office in a political organization). To be tax-exempt under 501(c)(4) an organization must be primarily engaged in social welfare activity, but may conduct some amount of non-social welfare activity. If a 501(c)(4) organization is determined not to be primarily engaged in social welfare by virtue of conducting high levels of non--socia| welfare activity, which could include political campaign intervention activity, that does not automatically mean the organization qualifies to be a 527 political organization. To be tax--exempt under 527, an organization must meet the requirements for that section, including taking action to be so treated by filing Form 8871, unless it meets one of the statutory exceptions. If it fails to timely file Form 8871, the organization will not be treated as a tax-exempt political organization for any period before the date the Form is filed, and its income will be subject to tax. i. If you have not already done so, please provide the notices or letters that the IRS sent to the groups which the IRS determined did not meet their obligations as 501(c)(4) charitable organizations. Under the disclosure restrictions of 6103 and 6110, we can only provide adverse detennination letters and revocation notices in which taxpayer identifying and certain other information have been redacted. Once we redact identifying information from an adverse determination letter or a revocation notice, copies of the original and redacted versions are sent to the organization, along with Notice 437, Notice of Intention to Disclose. Notice 437 provides the organization with an opportunity to request additional deletions or a delay in public disclosure. If the organization does not take any further action within a specified period, generally 60 days after the mailing date of the notice, the redacted documents can then be made public. If, however, the organization disagrees with the redactions or requests a delay in publication, the process can take longer. With regard to your request, we provided the ten redacted adverse determination letters with the November 23, 2012 response to your October 23, 2012 letter. The 42 instances of revocation notices identified in our earlier response resulted from queries to our automated systems, which have some limitations. In searching for the revocation notices, we noted some discrepancies between system-generated information and the actual revocation notices. To ensure that we provide responsive information to your request, we are manually reviewing case files for some of these matters. We will provide an update as we complete our review. We have enclosed nine revocation notices that have completed the redaction and taxpayer review process. Others are at various stages in that process and we will provide them as the process is completed. Question 2. In the IRS response of November 23, 2012, you write that from January 1, 2007 to September 2012, the IRS has examined 643 501(c)(4) organizations to determine whether or not they were primarily engaged in social welfare activities but that the IRS "cannot definitively conclude whether we examined an organization to determine the level of political activity" without conducting a manual review of these cases. Please respond to the following: a. Please conduct this manual review and provide the number of these 643 examinations which involved political activity; b. Please provide the number and names of the organizations that were determined to not be valid 501(c)(4) organizations from this review. As stated in the November 23, 2012, response, our system reflects that 22 of the 643 examined 501(c)(4) organizations had political campaign activity as one of the issues explored during examination. We derived this information from the selected Principal Issue Codes (PIC codes), which identify issues during an examination. Although there are some limitations to PIC codes, we do not believe a manual review of the files would significantly change the number of examinations in which political campaign activity was an issue considered. We would like to discuss with your staff any remaining concerns with this methodology. Please note that the law would not allow us to provide the names of the organizations. As previously noted, 6103 of the Internal Revenue Code prohibits the disclosure of information about specific taxpayers, including whether they are under investigation or examination, unless the disclosure is authorized by some provision of the Internal Revenue Code. 2 IRC 6103(f) of the Code sets forth the means by which congressional committees may obtain access to retum and return information (that is not otherwise made publicly available under c. Please provide an explanation as to how the IRS detennined whether or not the 501(c)(4) organization was primarily engaged in political activity including any guidance, memorandum, criteria used by the IRS to determine whether or not a 501(c)(4) organization was primarily engaged in political activity during these examinations. To maintain tax exemption as described in 501(c)(4), the organization must meet the statutory requirements in the Internal Revenue Code and accompanying regulations. Whether an organization maintains the statutory and regulatory requirements of 501(c)(4) depends upon all of the facts and circumstances, and no one factor is determinative. Thus, in making a determination, we must take into account all facts and circumstances in evaluating whether legal requirements are satisfied. A variety of legal and procedural guidance is relevant in making such determination. Legal guidance used to determine whether a 501(c)(4) organization primarily engages in exempt activities include the following: - IRC 501(c)(4) . Treas. Reg. Treas. Reg. Treas. Reg. 0 Rev. Rul. 2007-41, 2007-1 C.B. 1421 6104 and 6110). We are available to discuss these rules in more detail with your staff. Treas. Reg. In general; proof of exemption. An organization claiming exemption under 501(a) and described in any paragraph of 501(c) (other than 501(c)(1)) shall file the form of application prescribed by the IRS and shall include thereon such infonnation as required by such form and the instructions issued with respect thereto. For rules relating to the obtaining of a determination of exempt status by an employees' trust described in 401 see the regulations under 401. Treas. Reg. In addition to the information specifically called for by this section, the IRS may require any additional information deemed necessary for a proper determination of whether a particular organization is exempt under 501 and when deemed advisable in the interest of an efficient administration of the intemal revenue laws, the IRS may in the cases of particular types of organizations prescribe the form in which the proof of exemption shall be furnished. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements. A social welfare organization will qualify for exemption as a charitable organization if it falls within the definition of charitable set forth in paragraph of Reg. and is not an action organization as set forth in paragraph of Reg. The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Nor is an organization operated primarily for the promotion of social welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its members, or is carrying on a business with the general public in a manner similar to organizations which are operated for profit. Rev. Rul. 2004-6, 2004-1 C.B. 328 - Rev. Rul. 3195, 1931-1 C.B. 3325 - Rev. Rul. 67-368, 1967-2 C.B. 194? - Rev. Rul. 60-193, 1960-1 C.B. 1957 A revenue agent working a case uses sound reasoning based on tax law training and his or her experience in examining an organization. Because of the facts and circumstances nature and the need for professional judgment on the part of the revenue agent doing the review, procedural guidance is necessary to minimize variances in how cases are developed. As such, the IRS utilizes procedural guidance to promote quality and consistency in similar cases, such as the following: - Rev. Proc. 2013-93 - Form 10249 - IRM 4.751" - IRM 4.76.13" 5 Rev. Rul. 81-95 provides that "an organization may carry on lawful political activities and remain exempt under 501(c)(4) as long as it is primarily engaged in activities that promote social welfare." 5 In Rev. Rul. 67-368, an organization formed for the purpose of promoting an enlightened electorate, whose primary activity was rating candidates for public office, was not exempt under 501(c)(4) because such activity was not "the promotion of social welfare." The ruling stated that comparative rating of candidates, even though on a non-partisan basis, constitutes participation or intervention in a political campaign on behalf of candidates favorably rated and in opposition to those less favorably rated. 7 Rev. Rul. 60-193 concludes that an organization whose purpose was to encourage greater participation in governmental and political affairs promoted social welfare and therefore qualified for recognition of exemption under 501(c)(4). Activities of the organization included conducting nonpartisan seminars and workshops relating to the American political system. All lecturers were required to maintain certain technical standards and were not allowed to advocate for any particular political group. Seminars and workshops were moderated by permanent staff personnel of the organization in order to prevent the program from becoming partisan in character. Rev. Proc. 2013-9 sets forth IRS procedures for issuing, as well as for revoking and modifying, determination letters and rulings on the exempt status of organizations under 501 of the Internal Revenue Code. 9 IRS application form for organizations seeking IRS recognition of exemption under 501, including 501(c)(4). fl" IRM 4.75 provides general examination procedures. IRM 4.76.13 provides examination guidelines on social welfare organizations. Question 3. In the IRS response of November 23, 2012, you write "Section 6104(a) of the Code permits public disclosure of an application for recognition of tax exempt status and supporting materials only after the organization has been recognized as exempt." On December 14, 2012, Propublica released the 1024 application for tax exempt status filed by Crossroads Grassroots Policy Strategies with the IRS. Please respond to the following: a. Did the IRS release the 1024 application filed by Crossroads Grassroots Policy Strategies to Propublica or any other entity? b. If the IRS released the 1024 application filed by Crossroads Grassroots Policy Strategies, why did it do so since the IRS has yet to approve Crossroads' application? Section 6103 of the Internal Revenue Code prohibits the disclosure of information about specific taxpayers unless the disclosure is authorized. The protection and confidentiality of tax information is one of our top priorities. When questions arise about the release of tax information, our normal procedure is to refer the matter to the Treasury Inspector General for Tax Administration. We are unable to comment further. c. Please also provide an update as to the status of the application for tax exempt status filed by Crossroads Grassroots Policy Strategies. Section 6104(a) of the Code does permit public disclosure of an application for recognition of tax-exempt status and supporting materials only after the application has been approved for the organization to be recognized as exempt. The IRS has no record of an approved application for Crossroads GPS. Question 4. With regard to your June 4, 2012 response: a. When describing the 501(c)(4) application process, you write that situations where there are a number of cases involving similar issues (such as credit counseling organizations, down payment assistance organizations, organizations that were automatically revoked and are seeking retroactive reinstatement, and most recently, advocacy organizations), the IRS will assign cases to designated employees to promote consistency." Please explain the tenn "advocacy organization" and provide any guidelines, memorandum, or procedures used by the IRS to evaluate 501(c)(4) advocacy organizations including whether or not the IRS considers an "advocacy organization" to be an organization that is engaged in political activity. As the chart below illustrates, the Code distinguishes between advocacy activities that influence legislation, those that influence candidate elections, and those that do neither. Depending on the subsection under which an organization is exempt, there are differing rules regarding the nature and amount of advocacy an organization can conduct and still retain its exemption. As used in the prior response, "advocacy organizations" was a short hand way of describing cases that raise questions whether the type and amount of advocacy an organization undertakes is consistent with the code section under which it seeks exemption. 501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6) 527 Receive tax-deductible charitable contributions YES NO N0 N0 N0 Receive contributions or fees deductible as a business YES YES YES YES NO expense Substantially related income exempt from federal income YES YES YES YES YES tax Investment income exempt from federal income tax YES YES YES NO igage in legislative advocacy LTD YES YES YES LTD Engage in candidate election advocacy NO LTD LTD LTD YES Engage in public advocacy not related to legislation or YES YES YES YES LTD lelection of candidates *Private foundations are subject to tax on their net investment income. See also response to question 2(c) above for guidance and procedures used to determine whether a 501(c)(4) organization primarily engages in exempt activities. b. Please provide the "draft educational guide sheet on the issue of political activity for section 501(c)(4) applications that was shared for comment with some employees in E0 Determinations" that you reference on page 13 of the letter. We would like to provide some additional details regarding this document. The guide sheet draft referenced in this question was an initial staff draft, which was never approved nor finalized. It was distributed for comment only. We are able to discuss with your staff in more detail. Question 5. Please explain the difference between Rev. Rulin 2007-41, 2007-1 C.B. 1421, which is generally used by the IRS to determine whether issue advocacy crosses the line into campaign intervention and Rev. Ruling 2004-6, 2004-1 C.B. 328, which generally addresses whether an expenditure for an issue advocacy expenditure is subject to the 527(f) tax. Please also explain which of these is used by the IRS to determine whether a 501(c)(4) organization is primarily engaged in political activity. As you note in your question, Rev. Rul. 2004-6 and Rev. Rul. 2007-41 provide guidance under two different statutory provisions. Rev. Rul. 2004-6 provides guidance on the circumstances in which a public policy advocacy communication may constitute an exempt function within the meaning of 527(e)(2), which would be subject to tax under The ruling describes six factual situations involving organizations that are exempt from federal income tax under 501(a) as organizations described in 501(c)(4), 501(c)(5) or 501(c)(6). Each of the situations assumes that the organization would continue to be exempt under 501 even if the described activity is not a 501(c) exempt activity. The ruling provides nonexclusive lists of factors that tend to show that an advocacy communication on a public policy issue is (or is not) for an exempt function under 527(e)(2), but also states that all facts and circumstances must be considered. Rev. Rul. 2007-41 provides guidance on when an organization exempt from federal income tax under 501(a) as an organization described in 501(c)(3) has participated or intervened in a political campaign on behalf of (or in opposition to) any candidate for public office in violation of The ruling describes 21 factual situations. In each factual situation, all the facts and circumstances are considered in determining whether the organization's activities result in political campaign intervention for purposes of 501(c)(3). Neither Rev. Rul. 2004-6 nor Rev. Rul. 2007-41 specifically addresses whether a 501(c)(4) organization is engaged in political campaign activity within the meaning of Treas. Reg. Nevertheless, consistent with both of these revenue rulings, the Service analyzes all the facts and circumstances to detennine whether a 501(c)(4) organization participated or intervened in a political campaign. Question 6. It has been reported in the press that some 501(c)(4) organizations report to the IRS that they do not engage in political activity but then report either they do engage in political activity to the Federal Election Commission (FEC) or report widely varying amounts of political activity to the FEC and the IRS. Please respond to the following: '2 Section 527(e)(2) provides: "The term "exempt function" means the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. Such term includes the making of expenditures relating to an office described in the preceding sentence which, if incurred by the individual, would be allowable as a deduction under section '3 To qualify under 501(c)(3) an organization must "not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." 1' Treas. Reg. provides: "The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office." a. Does the IRS track a 501(c)(4) organization's filings with the b. What actions does the IRS take when there are differences in what a 501(c)(4) organization reports to the IRS versus what it reports to the c. How does the IRS coordinate with the FEC with regard to 501(c)(4) organizations? We use all publicly-available information, including FEC filings, when considering an application or conducting an examination. However, we do not have a system that formally tracks FEC filings of 501 organizations. We also do not formally coordinate with the FEC on matters related to 501(c)(4) organizations as 6103 of the Internal Revenue Code prohibits the disclosure of information about specific taxpayers unless the disclosure is authorized by some provision of the Internal Revenue Code. Therefore, exchange of confidential taxpayer information with the FEC generally is barred. Further, differences in reporting requirements such as the following make coordination between the agencies difficult. These include, for example, differences in who is responsible for filing the reports, what constitutes reportable political campaign activity, and the timing of reports. The party responsible for filing with the FEC depends upon the nature of the political campaign expenditure. So, for example, if a 501(c)(4) organization makes any contributions, including in-kind contributions and coordinated expenditures, to an FEC political organization (campaign committee, party committee or PAC), it is our understanding that the 501(c)(4) organization is not required to file anything with the FEC. Instead, it is our understanding that the recipient political organization is required to include the contribution on its report to the FEC. On the other hand, if a 501(c)(4) organization makes independent expenditures or electioneering communications, it is required to file a report with the FEC. The definition of what constitutes reportable political campaign expenditures under the two filing regimes also differs. Although most political campaign expenditures required to be reported to the FEC may constitute political campaign intervention under the Internal Revenue Code, some might not. In addition, we are not limited by the express advocacy standard or FEC case law in determining whether an activity is political campaign intervention for 501(c)(4) purposes. The regulations under 501(c)(4) provide that directly or indirectly participating or intervening in a political campaign on behalf of or in opposition to a candidate for public office is not in furtherance of 501(c)(4) exempt purposes. This determination is based upon all of the facts and circumstances. Another factor that can lead to differences in reporting is timing of the reports. Organizations report to the FEC based upon the election cycle; while organizations report to the IRS based upon their fiscal tax year, which differs among organizations. Fonns 990 10 filed with the IRS are due 5 months and 15 days after the end of the organization's fiscal tax year. So, for example, an organization with a June fiscal tax year might make independent expenditures in October that are reported to the FEC prior to the November election. However, because the Fonn 990 is not due until the 15"' day of the fifth month after the end of the fiscal tax year, those same expenses would be reported on the Form 990 that is due on November 15"' of the following year (and, because of extensions, may not actually be filed for another six months after that). All of these factors can contribute to perceived inconsistencies between FEC and IRS records of political campaign activity by 501(c)(4) organizations. I hope this infonnation is helpful. If you have questions, please contact me or have your staff contact Catherine Barr?, Director, Legislative Affairs, at (202) 622-3720. Sincerely, gteven T. Miller Deputy Commissioner for Services and Enforcement Enclosures (9)