Watch Video | Listen to the Audio
JUDY WOODRUFF: And late today, the House Ways and Means Committee announced that it will hold a hearing this Friday.
To help us understand the tax law and what the groups are charging, we are joined by Duke University Law School professor Richard Schmalbeck. He's a former tax attorney. And former IRS attorney Jay Sekulow, as chief counsel at the American Center for the Law and Justice, he is representing tea party organizations. He also hosts a conservative talk radio program.
Gentlemen, welcome to you both.
And, Jay Sekulow, let me start with you. Let's go back to the applications that these groups made for tax-exempt status. What sort of tax treatment exactly were they asking for?
JAY SEKULOW, American Center for Law and Justice: Most of them were asking for -- our clients were asking for (c)(4) status, which is -- allows for the -- money given is not taxable. It's not tax-deductible by the donor, but it's not a taxable event to the organization.
So it was a 501(c)(4) legal status. And the application actually is very straightforward. And the first series of questions were not terribly intrusive. It was the second round of questions that were very intrusive and has caused the problem here.
JUDY WOODRUFF: Well, let me ask you Professor Schmalbeck.
Why -- if they were seeking this status, which is tax-exempt, as we just heard him say, why then are they eligible for tax exemption?
RICHARD SCHMALBECK, Duke University School of Law: Well, there are a number of organizations that are eligible. And I think in many cases, the primary explanation is that they are simply not activities that are engaged in for profit.
And so the normal course of things wouldn't be that they would generate profit. They spend their funds on activities that advance some purpose. In the case of (c)(4) organizations, they're considered social welfare organizations. And they are presumed to advance social welfare.
So it includes things like volunteer fire departments. It includes organizations -- I believe the ACLU is a 501(c)(4). I think the National Rifle Association is a 501(c)(4).
JUDY WOODRUFF: And, Jay Sekulow, I just want to pursue this very quickly to help people understand because some people are confused about the term “tax-exempt.”
They get this status, they're seeking this status even though they pursue a very strong set of beliefs, as we just heard, whether it's the National Rifle Association or another group. For example, today I got an e-mail from a group that is a 501(c)(4), but they are, they said, strategically partnered with a Republican group.
But that's OK, right?
JAY SEKULOW: Well, you can't be part of the national Republican Party or the Democratic Party, per se, and that's not allowed.
But it's exactly what was just said. The ACLU is a 501(c)(4). They advance a particular agenda. That agenda is deemed to be beneficial to the social welfare. That includes their educational activities and their litigation activities. My clients were engaged in mostly educational activities. They had civic forums. They had discussions on issues. They were not involved with a particular political party.
That's where the line gets different. The standards are different. It's a facts and circumstance test. But, Judy, at the outset I think it's important to understand the 501(c)(4)s have been around for a long time. The ACLU has been one for decades. And they're entitled -- I believe they're completely entitled to it.
The fact is that what has happened here is, as the IRS has admitted, they engaged in targeted discrimination in picking out the groups with the name “tea party” or “patriot” and then broadening it out to groups that were concerned about the Constitution. The IRS has admitted that, but that doesn't prevent what's happened here.
JUDY WOODRUFF: Then, Professor Schmalbeck, what normally should happen or would happen? If a group is applying for this status, what does the IRS -- what are they supposed to do? What kinds of questions would they ask?
RICHARD SCHMALBECK: OK.
So, in this case, there is another type of organization also tax-exempt called political organizations. And they're exempt under Section 527 of the Internal Revenue Code. And the IRS position on this has long been that if you want to be a (c)(4) social welfare organization, you cannot engage primarily in political activity.
And they define primarily as essentially more than 50 percent of your activity. So I think the concern on the part of the IRS -- and I think this is a legitimate concern, a concern that they have an obligation to act on -- is that organizations that are probably more accurately considered 527 political organizations prefer to be social welfare organizations under 501(c)(4).
And the primary reason for that is that 527 organizations have to disclose publicly the names of their donors. And no such obligation exists for 501(c)(4) organizations. So ...
JUDY WOODRUFF: Jay Sekulow, does that sound like the principal distinction there, is these groups, these tea party groups ...
JAY SEKULOW: Well, that's exactly the law.
But the difference here is that the questions that were asked by the Internal Revenue Service in their subsequent follow-ups, which is where the questions and the problems started, as the IRS acknowledged, were outside the scope of a 501(c)(4) question. They weren't relative to 527 questions, for that matter. These were questions that were inappropriate under any circumstances.
JUDY WOODRUFF: What is an example of a question?
JAY SEKULOW: Well, how about conversations you had with members of your family and what they may have said to members of Congress, or your membership lists?
The -- if you're applying for (c)(4) status, those membership lists are off-limits. And the professor is right. And that's the difference between a 527 and a 501(c)(4). The (c)(4) organizations can engage in activity that is deemed political as long as that's not their primary purpose. That wasn't the question, though, that was asked, Judy.
And that's the problem here. It's the IRS intrusive nature of their questions, which has created their own problem. And the only reason we know about it now, besides the fact that our organization objected to those questions when they were raised, is that the inspector general acknowledged that that was a problem. That report is about to be made public.
And that's the only reason that this is out today is the IRS tried to get ahead of it. They asked the wrong questions to the wrong organizations. So, they weren't looking at the 527 applications. These were 501(c)(4)s. The IRS could have said, well, they didn't qualify. But that was never what they asked. These were intrusive questions, nothing to do with 27s.
JUDY WOODRUFF: Professor Schmalbeck, what is the limit if the IRS would be asking if they're determining legitimate tax-exempt status?
RICHARD SCHMALBECK: Well, I think one of the problems here is that these questions do seem to me, at least in some cases, relevant to the question of whether they are more accurately considered political organizations or social welfare organizations.
So, for example, if you knew that the primary donors ...
JAY SEKULOW: Your membership data?
RICHARD SCHMALBECK: ... to an organization were the Democratic Senatorial Committee, that would incline you to think that it was more of a political organization, rather than a social welfare organization.
So things like names of donors are not irrelevant. I am sympathetic to the tea party in this respect, though. It is true that if you are awarded (c)(4) status, your application must be made public. And application is defined in such a way that it includes all communications with the Internal Revenue Service.
So there is a bit of a catch-22 here. The IRS says basically that you are entitled to privacy as to your donors if you qualify for (c)(4) status, but we're not going to approve your (c)(4) application unless you disclose your donors. And once you disclose them to us, they will be disclosed to the public.
JAY SEKULOW: Right.
RICHARD SCHMALBECK: So, there is a problem. And that's largely a problem of Congress' making. There is a statute, Section 6104 of the Internal Revenue Code, that requires that public disclosure of the application materials.
That could be amended to permit redaction of some of the information that I think they regard as most sensitive.
JUDY WOODRUFF: In less than a minute, Jay Sekulow, so what questions remain to be answered to get to the bottom of this?
JAY SEKULOW: Well, I think we don't -- number one, need to find out who authorized this, because this did not come from -- this idea that these were low-level agencies, where tax law, tax-exempt specialists -- I was -- as you said, I in chief counsel's office of the IRS -- that we were their lawyers. So these were not low-level people. These were well-trained revenue agents specializing in tax-exempt.
We need to decide who determined to coordinate these audits, why they picked names to go after, and find out who is responsible. At the end of the day, the president said today, if this in fact happened -- well, his own staff, his own team has acknowledged this has happened. And, as I said, the White House counsel was notified of this in late April.
JUDY WOODRUFF: And, very quickly, Professor Schmalbeck, what would you add? What questions need to be answered to get to the bottom of this?
RICHARD SCHMALBECK: I don't disagree with the list that Jay just offered very much.
I guess the one thing that I would say in conclusion is that when people hear that organizations with the name “tea party” in them have been targeted, it's hard to imagine an explanation for that that isn't rooted in political bias.
But there is an explanation, possibly, that is rooted in a legitimate effort to try to distinguish political organizations from social welfare organizations. And I think if you asked 100 people on the street what the tea party is about, I think most of them would say that it's a political organization. So this is at some level a legitimate inquiry, even though the IRS may have bungled it.
JUDY WOODRUFF: Well, gentlemen, we hear you both. And this story continues.
Professor Schmalbeck, Jay Sekulow, we thank you both.
RICHARD SCHMALBECK: My pleasure.
JAY SEKULOW: Thanks, Judy. Thank you.