WASHINGTON (AP) — The uproar over the Internal RevenueService’s heavy-handed treatment of
conservative groups seekingtax-exempt status can be traced partly to when New York University LawSchool
went into the noodle business.The 1947 episode — more onthat later — helped produce conflicting laws
covering the kinds ofactivities tax-exempt organizations may conduct. The IRS’ attempt toenforce those
contradictory laws with vague regulations has sown evenmore confusion, tax lawyers, former agency
officials and others agree."It’shard for groups to understand what the standards are, and
differentlawyers have different definitions of where to draw the line," said AbbyLevine, who
dispenses advice on nonprofit status to scores of groups aslegal director of the liberal Alliance for
Justice.While no oneinterviewed by The Associated Press for this story defended the IRS’targeting of tea
party and other conservative groups, no one disputedthat the rules governing political activities by
tax-exemptorganizations are hard for everyone to follow, including the IRS. Withone law saying some
tax-exempt groups must engage "exclusively" insocial welfare work, while a regulation changes
the threshold to"primarily," President Barack Obama said last month that the result is"a
bunch of ambiguity."In the spotlight is a section of the taxcode that has become increasingly
attractive to many organizations inrecent years, 501(c)(4), which grants tax-exempt status to
so-calledsocial welfare groups. Over the years, such groups have been allowedparticipate in overt
political activity as long as they focus mostly onsocial welfare work. While many of them engage in
little or no politicalactivity, for those involved in politics the designation offers avaluable feature:
It lets donors remain anonymous.After theSupreme Court in its 2010 Citizens United decision allowed
unfetteredpolitical spending by companies and unions, campaign spending by socialwelfare groups
exploded. Between the 2008 and 2012 elections it tripled,to $254 million, according to the nonpartisan
Center for ResponsivePolitics, which tracks political expenditures.The IRS received3,357 applications
for Section 501(c)(4) status last year, nearly doublethe number in 2010, according to the Treasury
Department.Thestory behind the confusion began a century ago, when Congress enactedlegislation laying
the groundwork for the modern income tax.Exemptedfrom the corporate income tax were nonprofits,
including those"operated exclusively for the promotion of social welfare" — thedesignation
that many conservative groups have sought in the currentcontroversy. An IRS history of tax-exempt
organizations says it isassumed that provision in the 1913 law was requested by the U.S. Chamberof
Commerce.Fast forward to 1947, when wealthy graduates donatedthe C.F. Mueller Co., a pasta maker, to the
NYU law school. Thattransaction, and a court ruling letting NYU keep its Mueller profitstax-free, helped
call attention to the tax treatment of nonprofits.NYUand other nonprofits had been fattening their
coffers through ownershipof factories, department store chains, cattle ranches, the
EncyclopediaBritannica and other profitable businesses on which they were notpaying taxes. One
congressional estimate put the lost tax revenue at$173 million a year, a large amount at the time.Urged
on byPresident Harry Truman, Congress passed a law in 1950 allowing somenonprofits to keep unrelated
businesses if they paid income tax on them.Butthat left federal laws stating two things: a 1913 statute
saying groupsmust operate "exclusively" for social welfare purposes and the 1950 lawsaying
they could do unrelated things after all, as long as they paidtaxes on the profits."So
‘exclusively’ couldn’t mean’exclusively,’ because later law acknowledged these organizations couldengage
in other activities" if you tax them, said Ellen Aprill, a taxlaw professor and expert on
tax-exempt organizations at Loyola LawSchool in Los Angeles.The government soon faced another issue —
a1954 revamping of the entire federal tax code. Feeling a need tooverhaul tax regulations, the Treasury
Department issued new ones in1959, producing even more ambiguity.The new regulations addressedthe two
laws defining nonprofits by, for the first time, saying groupsneed only be "primarily engaged in
promoting in some way the common goodand general welfare." The rules permit "direct or
indirectparticipation or intervention in political campaigns" for or againstcandidates, as long as
that isn’t the group’s principal activity."Congressmade no effort to harmonize those
statutes," said Marcus S. Owens, aWashington tax attorney who spent the last decade of his 25-year
IRScareer heading its tax-exempt organizations division. So the governmentadopted the
"primarily" approach "as the only methodology they couldthink of to harmonize the
statutes," Owens said.Despite decadesof IRS rulings and court cases refining the rules, definitions
remainhazy for terms like "primarily," ”social welfare" and "intervention
inpolitical campaigns." Many lawyers, for example, say "primarily" meanssuch groups can
devote up to 49 percent of their resources to campaignactivity, while others are more cautious.While
groups aresupposed to devote most of their effort to "social welfare," that caninclude
political issues if the work doesn’t clearly support or oppose acandidate. That is a blurry distinction
in an age when sophisticatedpolitical advertising writers tie politicians to specific viewpointswithout
explicitly calling for their defeat or re-election.Suchopaqueness can serve a purpose, such as letting
tax-exempt groups holdfundraisers that are indirectly related to their main mission, expertssay."I
don’t think the IRS would ever have wanted as a practicalmatter to be so severe that organizations are
constantly disqualified ona foot fault on some tiny thing," said Richard Schmalbeck, who teachestax
law at Duke University Law School.The vagueness has persistedfor other reasons too, such as making it
easier for such groups to wadeinto politics, benefiting Democrats and Republicans alike,
analystssay.Owens, the former IRS official, said he’s unaware of anycongressional efforts to clarify the
rules over the decades. Though theIRS has removed tax-exempt status of groups supporting each
majorpolitical party — including the conservative Christian Coalition and theDemocratic Leadership
Council — the vagueness of the regulations makesit hard to do."Congress was pretty happy leaving it
up to the IRSto enforce this case by case, rather than stepping in and trying tofind a clear, bright
line," Owens said. Because the IRS had dealt withgroups that clearly overstep the boundaries,
"there’s been no incentivefor Congress to dabble there" with additional fine-tuning, Owens
added.Tothis day the IRS investigates each group to see whether it is engagingin political activity,
using tests such as whether an election isapproaching or whether the group gives opposing candidates
equalopportunities to participate in events. If it is, the agency determineswhether politics is the
group’s primary activity — a difficult judgmentthat can involve measuring money, time spent by workers
and otherfactors."Congress put the IRS in the position of being thegatekeeper," said Gregory
Colvin, a San Francisco attorney who hashelped advise numerous nonprofit groups. He said that forces the
agencyto do "a huge job with an inadequate staff."Colvin has led agroup of tax law experts who
have proposed tighter IRS regulations onpolitical activity by tax-exempt groups. He said he would prefer
to seepolitical activity restricted to an "insubstantial" part of their work,such as about 15
percent.Copyright 2013 The Associated Press.