The IRS may be trying to block the tax exemption of one of the largest politically active nonprofit groups, Crossroads Grassroots Policy Strategies, an organization founded by Republican strategist Karl Rove.
The oblique disclosure can be found between the lines of an inspector general’s report released on Thursday, which said that 149 of 160 stalled applications from nonprofits with potential ties to politics have been resolved. Of the other 11, six are in litigation with the IRS -- which Crossroads isn’t -- and five have received proposed denial letters or are appealing.
That suggests that the Internal Revenue Service has sent Crossroads a denial letter. Crossroads is one of the most politically involved nonprofit groups, and its bid for tax exemption is being closely watched by campaign-finance lawyers.
Federal taxpayer privacy laws prevent the IRS and the inspector general from disclosing information about Crossroads’ case. The report doesn’t directly say that Crossroads is one of the five cases.
“I haven’t seen the report, but it’s been our practice not to respond regarding where things stand in the process,” Steven Law, president of Crossroads GPS, said in an e-mail. “It’s a matter of public record that Lois Lerner targeted a number of groups including ours; we are still awaiting our certification but we feel confident that at the end of the process we will be certified.”
Lerner is the former IRS director of exempt organizations,
If Crossroads is denied a tax exemption, it would be treated as a taxable corporation subject to a top rate of 35 percent, said Marcus Owens, a partner at Loeb & Loeb LLP in Washington and former director of exempt organizations at the IRS.
Its donations would be taxable income and its political spending wouldn’t be deductible, which isn’t an efficient structure for turning donors’ money into political ads.
The IRS can impose those taxes retroactively -- though only for three years, which means the early years of Crossroads GPS could escape taxation.
“Depending on how the IRS approached the facts in the case, it might illustrate how the IRS is going to generally handle politically active c4s,” Owens said. “Or it may be that there’s something about Crossroads that’s unique.”
Documents previously released by the House Ways and Means Committee showed that the IRS was drafting a denial letter to Crossroads in 2013, just before news broke of the controversy of the agency’s treatment of conservative groups.
Those documents list Crossroads among Tea Party groups that were being held up by the IRS and show that Lerner was directly involved in asking about the group’s application.
Federal laws impose limits on how much political activity nonprofits can engage in. Groups such as Crossroads, organized under section 501(c)(4) of the tax code, don’t have to disclose their donors. The group applied for its tax exemption in September 2010.
The law says such groups must operate exclusively for social welfare purposes. The IRS has interpreted that to mean that they can’t have politics as their primary purpose. The tax agency is considering revising those rules.
Crossroads spent at least $34.3 million during the 2014 election cycle, according to the Center for Responsive Politics. The money helped Republicans oust Democratic incumbents from Senate seats in Colorado, Alaska, North Carolina, Arkansas and Louisiana.
The broader report released by the Treasury Inspector General for Tax Administration said the IRS has taken “significant actions” to prevent a recurrence of the 2013 controversy in which Tea Party groups received extra scrutiny from the IRS based solely on their names.