IRS denials a worry for political tax-exempt groups: attorneys

WASHINGTON Fri Jul 13, 2012 7:10pm EDT

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WASHINGTON (Reuters) - The Internal Revenue Service's denial of tax-exempt status to two small U.S. political groups is prompting concern among other tax-exempt organizations raising millions of campaign dollars that they could lose the ability to collect anonymous donations, tax attorneys say.

The IRS announced in May and June that it took the actions against two groups defined as tax-exempt under the 501(c)(4) section of the tax code. The IRS on Thursday declined comment on its tax-exempt final rulings.

Tax-exempt groups raising money for both major political parties ahead of the November 6 election walk a fine line between promoting "social welfare" for tax-exempt purposes and purely political interests.

A 501(c)(4) group denied tax-exempt status by the IRS would run afoul of Federal Election Commission rules and could be required to disclose its donors.

Emerge America, a group which helps Democratic women seeking elected office, said it lost it tax-exempt status last October. The IRS invoked the "private benefit doctrine" barring 501(c)(4) status for any group promoting a candidate or political party. The IRS announced its final decision in May.

In June the IRS said it denied 501(c)(4) tax-exemption for an unnamed political group also under the private benefit doctrine. The IRS is barred by law from disclosing the group's name and the group has not publicly identified itself.

The group had one objective: to serve the political goals of its founder, the IRS said. A 501(c)(4) group can spend some funds on political advocacy, but electioneering cannot be its sole reason for existence or comprise a majority of its spending.

'A NEW APPROACH'

"The ruling does represent what looks to be a new approach for the IRS in trying to deal with politically active (groups) like Crossroads GPS and Priorities USA," said Ofer Lion, an attorney with Hunton and Williams LLP.

The two groups are advocating for Republicans and for Democratic President Barack Obama respectively.

It is unknown how much 501(c)(4) groups are raising because of a lag in reporting deadlines to the IRS. Ahead of the 2010 general election, more than 100 of these groups spent about $95 million on political expenditures, according to a June study by the Center for Public Integrity and the Center for Responsive Politics.

The stakes are higher ahead of November's general elections. Republican-backed Crossroads, along with its "Super PAC" sister organization required to disclose donors to the FEC, plans to spend up to $300 million.

Senate Democrats on Thursday challenged the IRS to be more assertive in enforcing the 501(c)(4) law. Democrats contend the agency is gun shy and bullied by Republicans.

"They have been very timid, perhaps even intimidated, about getting into this question" of tax-exempt enforcement, Democrat Senator Sheldon Whitehouse said on Thursday.

Republican Senator Jim DeMint accused Democrats of acting out of political desperation.

"Democrats have had free rein on free speech to union funding for years. Now they are just trying to shut up corporations and other groups," DeMint said on Thursday.

Republicans had argued the IRS was biased in its enforcement against conservative Tea Party-backed groups.

(Reporting By Patrick Temple-West. Additional reporting Thomas Ferraro and Alina Selyukh; Editing by Eric Walsh)

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