There’s more to the 501(c) controversy

There certainly is a legitimate issue about how many entities we should afford tax exemption


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On May 22, the New Hampshire House defeated a very defective gambling expansion/casino bill by a decisive vote of 199-164. If the action holds -- and “It ain’t over ‘til it’s over,” as that great American philosopher Yogi Berra said -- the House will have performed an historic service to the state.

The concept, the bill and the implementation, all were flawed. The coffin for this proposal should be nailed and then locked shut once and for all. A bill designed for one vendor, mistaken estimates of revenue, much of it one-time, and the lack of ability to develop a comprehensive regulatory scheme in any sort of time, all argued against this bill.

However, a “good” casino bill cannot be crafted, as a New Hampshire casino never can be good for this state. Hang in there, House members! And thank you.

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There has been a great controversy about the Internal Revenue Service having held up applications for not-for-profit 501(c)(4) status by conservative organizations associated with the tea party.

While certainly the IRS should not discriminate against one political philosophy as opposed to another -- and this allegation is a black eye for that agency of government -- a number of more important issues are raised by this controversy.

As an attorney who spends about 70 percent of his time representing not-for-profits, I am a strong advocate for the rights of legitimate not-for-profits. Concerns about the practices of the IRS in regard to such organizations, however, are not properly aimed exclusively at the present controversy.

Readers should understand that section 501(c) of the Internal Revenue Code has over 20 sections, the most common one being 501(c)(3), that for religious, charitable and educational institutions that not only escape taxation on their operational income, but which also afford donors a deduction for contributions. That is the only category for which deductions are deductible.

All other not-for-profit entities merely exempt their operational income from taxation. “Merely,” however, is a misnomer, as not-for-profit institutions account for a huge percentage of the American economy, and every taxpayer should be concerned about what organizations do not pay taxes, while the rest of us do. Chambers of commerce, agricultural fairs, labor unions, real estate holding entities, homeowners’ associations, supporting organizations, civic organizations and a host of other categories of organizations escape taxation under the various 501(c) subparts.

The 501(c)(4) social welfare organizations are the focus of the recent controversy, since they can engage in large-scale lobbying “educational” activity in which charities cannot.

Recently, corporations and others wishing to protect their identities have discovered the 501(c)(4) organizations as a means to funnel huge amounts of money into “public education” efforts, generally associated with political campaigns. The recent controversy is related to right-wing organizations, but liberal, labor and all manner of groups have joined in. As a result, the funding sources for political efforts have become anonymous.

The question Congress should be asking is whether not-for-profit organizations should be able to participate in such activity at all, and whether the law should be changed so we all know what entities are trying to influence our votes and attitudes.

When added to the holding in the Supreme Court’s Citizens United case, which eliminated restrictions on corporate contributions, the effects on political campaigns are ominous to many.

But for those of us in this business, there are even larger issues at stake.

A few years ago, Congress funded more agents to do a better job of examining applications for tax exemption under all sections of the code. The result, for a while, was more expedited treatment of applications and more thoughtful examination of the forms submitted for approval. This seemed encouraging, until a trend emerged in which it was obvious that this had become a piecework process in which the luck of the draw in what agent was selected to examine a particular application determined the fate of the application.

Time periods for approval of such applications can now take a couple of years. Sometimes it appears the applications have been lost completely. When the application for a new not-for-profit is submitted, it means that the entity can inform donors that their contributions can be deducted on the donors’ tax returns, something like the designation on a product of “patent pending.” That is helpful, but institutional entities often are seeking grants from foundations and similarly sophisticated funders, and those funders require a copy of the “determination letter” approving the tax-exempt status. Applicants in such IRS “purgatory” do not have such a document. The delay is inexcusable.

There certainly is a legitimate issue about how many entities we should afford tax exemption, and how many not-for-profit entities we need. But those existing legitimately and in accordance with the law should expect efficient and fair consideration by their government.

It is clear that, at present, they are not getting it in many cases, and not only in the case of tea party entities trying to use the system.

Congress should look at ALL of this.

Brad Cook, a shareholder in the Manchester law firm of Sheehan Phinney Bass + Green, heads its government relations and estate planning groups. He also serves as secretary of the Business and Industry Association of New Hampshire.

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