The IRS has been taking flak for its treatment of right-leaning groups seeking recognition as tax-exempt “social welfare” organizations under clause 501(c)(4) of the Internal Revenue Code. As it happens, I have some personal experience with IRS scrutiny of 501(c)(4) applications. I was on the Board of the Free State Project (FSP) when the FSP applied for 501(c)(4) status in 2007-8. Our application was denied. We appealed, and the appeal was denied.
The reasoning the IRS gave us is that the FSP was simply a political action group trying to benefit the Libertarian Party. Nothing could be further from the truth. The FSP has never run or endorsed candidates or given money to any candidates. The FSP has never endorsed specific legislation or lobbied any elected or appointed official. More importantly, the FSP has never had any ties, formal or informal, with the Libertarian Party. Plenty of FSP participants reject electoral politics altogether. To my knowledge, the FSP has never received even a single donation from any foundation, government, party, or any other corporate entity whatsoever.
The FSP clearly qualifies as a social welfare organization, if not a public-benefit, charitable organization (“501(c)(3)”), according to the IRS’s own rules. The point of the FSP is to promote New Hampshire as a destination to people who are philosophically classical-liberal or libertarian. That’s it. The FSP spends money on advertising and promotion, maintaining a website, and holding two annual educational-social events in New Hampshire. The FSP believes that is an organization operated for the public benefit, especially with the educational programs held at its events. However, even if the IRS does not buy that interpretation, it is clearly an organization intended for the social and educational benefit of philosophic libertarians. It is clearly not a political action organization. Indeed, had the FSP applied for section 527 recognition, it probably would have been denied, leading to the absurd likelihood that the IRS would have considered the FSP a nonprofit fitting into no nonprofit category.
Since then, the FSP has operated just fine as a generic nonprofit corporation with no IRS tax status; since the organization’s expenditures always exceed its merchandise sales, it does not have any tax liability. However, 501(c)(4) status would have been a useful designation and signal to donors of the organization’s credibility.
Conservatives would like to find Obama’s fingerprints on the current IRS scandal, but they are unlikely to do so. Career bureaucrats at the federal agency that collects taxes from Americans are unlikely to be friendly to American antitax groups. The IRS’s hostility to antitax groups will manifest itself in a variety of ways, but that hostility is apparently nothing new or even particularly surprising. That doesn’t mean it isn’t wrong, of course.