Organizing for Action: The plot thickens

Ed Hubbard

11 years ago

The same day that I was finalizing my last post about Organizing for Action (also known by its acronym, “OFA”), I had lunch with a friend of mine who also is a local lawyer and a Republican. As our conversation turned to the several scandals now swirling around the Obama Administration, I told him about what I had found about OFA, and we both shared our disgust with the audacity of the Obama team. One of the key facts addressed in my post, which angered both of us, was that, while 501(c)(4) applications for conservative groups had been delayed for years, the application to perpetuate Obama’s campaign apparatus as a 501(c)(4) “social welfare” organization had apparently sailed through the IRS’ approval process is no more than 73 days.

Then, a few days ago, after my post had been uploaded, my friend forwarded to me this link to an online story from US News & World Report that appeared on May 15, 2013, after the Treasury Audit report had been made public. In this story, the reporter quotes unnamed “officials” with OFA as saying, for the first time, that OFA had not yet filed its 501(c)(4) application, though it was organized and operating as if it had sought and obtained approval of as a tax-exempt organization. The reason the “officials” gave for not applying for the tax exemption was that OFA had only been operating for four months and the law allowed the application to be filed anytime within 2 years of the start of operation of the organization. To lend credibility to this assertion by the unnamed “officials,” the reporter quotes the unusually vague sentence at the end of OFA’s description of its status on its website (which I previously cited in another recent blog):

… OFA will operate as a “social welfare” organization within the meaning of section 501(c)(4) of the Internal Revenue Code.

I guess, in hindsight, the use of the future tense in this sentence was supposed to tell everyone that OFA had not yet even applied for a tax-exempt status.

To say the least, this revelation from these unnamed “officials” was inconsistent with everything I had read to date. So, with everything else that was being revealed, I was skeptical of its accuracy. Regardless of my skepticism, though, I began preparing an update to my last post to acknowledge that I may have made a mistake in stating that OFA had already received its IRS approval, based on what US News & World Report had reported. In the meantime, however, I also re-visited the available information trail about the formation and operation of OFA since mid-January. What I found convinced me that a confession of a mistake may be premature. Instead, I am now convinced that either the unnamed “officials’” assertion is wrong, or something much more troubling may be at work.

But rather than make any further accusations, what I want to do is present you with what I found over the last few days, and with the questions I now have, and then let you decide on your own what is going on.

First, some more background about the approval process for 501(c)(4) status. Although my friend and I are not tax lawyers (although I am licensed to practice before the U.S. Tax Court, I have only provided procedural and evidentiary advice over the years to help tax lawyers to prepare for and participate in hearings with their clients—I am not a tax lawyer), both of us have enough passing knowledge of tax laws to have been skeptical of what the unnamed “official” of OFA was saying, so we asked a local tax lawyer about the credibility of the “official’s” assertions. Interestingly, this tax lawyer said he had heard independently that OFA had filed an application, and that it had been approved very quickly.

In any event, what we learned about the process is that, in general, someone can start-up an organization and operate it as a tax-exempt 501(c)(4) organization before the exempt status is finally approved by the IRS. The reason this practice is allowed is due to the varying time it takes for each application to get approved. However, there is a risk to taking this approach—if the application eventually is denied, the entity will owe back taxes and interest (as well as possible penalties, if it is found that there was no basis for a good faith belief that the entity could be operated under 501(c)(4)). This is the same procedure used for other tax-exempt organizations recognized under the IRS code. Also, you apparently do have two years to submit the application, but—and here is the important caveat—because interest and penalties could be significant if the process is delayed and then denied, the standard practice is to get the paperwork filed immediately in order to minimize the costs related to that potential risk.

Again, this summary is not meant to be a legal opinion, but just a lay summary of how the process works. However, the insight as to the standard filing practice is consistent with what a noted legal scholar, Richard A. Epstein, recently observed as he discussed the present scandals involving the administration:

… few individuals or groups are foolhardy enough to jump the gun and set up shop without obtaining the necessary approvals first.

http://www.hoover.org/publications/defining-ideas/article/147511

So, based on this added insight about the filing process, but giving the unnamed “officials” the benefit of the doubt as to their veracity, I began to wonder why people as allegedly intelligent as those who are the leaders of OFA would not follow the standard, prudent practice and file their application for a tax-exempt status at or before they formed and started operating Organizing for Action. Remember, the officers and directors of OFA include the cream from Obama’s team: Jim Messina, Stephanie Cutter, Robert Gibbs, Jon Carson, Jennifer O’Malley-Dillon, Julianna Smoot, Erik Smith, and David Plouffe. And, that nagging question especially aroused my interest when the news reports over the last few months show the following:

Two days after the news broke about the formation of Organizing for Action amid the fanfare of the inaugural festivities last January, OFA held a fundraiser at which it was reported it raised over $500,000; and
OFA reported it raised $4.4 million during the first quarter of 2013.

With that much money raised, the potential back taxes, interest and penalties are significant; so, why would any reasonable person significantly increase the risk of being wrong by not at least filing a 501(c)(4) application, let alone by waiting to operate and raise money until you’ve gotten regulatory approval? The answer is, you wouldn’t, and they probably didn’t either. To reach that answer you could conclude that either the US News & World Report misunderstood the unnamed “official,” the unnamed “official” was wrong, or these smart people had other prudent reasons to delay filing the application while having a high degree of confidence that the eventual application would be approved.

With those three possible conclusions in mind, I challenge you to now do what I did—take another look at the following articles from various news sources since January 17th (including the video introduction by Michelle Obama contained in several of the articles and the video interview with Jim Messina contained in one of them), as well as a very informative chronology, and decide for yourself what is going on:

After reading these articles, it becomes very clear that, even though a couple of early articles use the future tense to describe OFA, no one in the media or affiliated with independent watchdog groups questioned the present existence of OFA’s tax-exempt status prior to the statement of unnamed “officials” in the May 15th story. Also, as I showed in my prior post, Democrats like Maxine Waters considered OFA to already be such a 501(c)(4) entity. Most importantly, no one from OFA denied it was such an entity until news of the Treasury Audit surfaced.

If OFA really had not followed the standard practice and filed these papers before it started operating and raising money, why not?

Why did OFA not disclose that it had not filed its application earlier, when it was clear that everyone was working under the impression that they had actually sought and received 501(c)(4) status?

Remember, the testimony is that Congress made over 130 inquiries about the treatment of applications from conservative groups by the IRS in 2011 and 2012, that by June, 2011 supervisors within the IRS knew of the practice, and that Treasury department leaders knew by the summer of 2012 that an audit of this practice was underway. Could it be that the Obama team was tipped-off about the investigation and told to delay filing the application until the dust settled?

If the Obama team was tipped-off but guaranteed a later approval, could this explain its confidence in taking the risk of incurring back taxes, interest and penalties for operating and fundraising as a tax-exempt non-profit that could result from a later denial of an application?

So, rather than feel that I need to confess a mistake in my last post, I now believe that the report in US News & World Report only raises more questions—and the plot thickens. I hope as our Congress investigates this matter, that it ask these questions to get to the bottom of what the Obama team in Washington and Chicago knew, when they knew it, and what happened after they learned of it, regarding the IRS tax-exemption scandal.

In the end, though, all of this begs the real scandal that I addressed in the last post: “If Obama’s campaign apparatus is a “social welfare” organization, then we have a more serious problem with the IRS, and this administration, than just a biased enforcement against conservative groups…” I still don’t see how a campaign operation whose primary asset is a database it plans to use to mobilize Democrats could ever be a “social welfare” organization as contemplated in our tax laws.