There is a Serious Tax Problem with the Santos Indictment
If “you’re in deep kimchi” were a person.
So here it is in a nutshell. According to the indictment, Santos solicited donations to “Company 1,” his cute lil (c)(4) he told donors. Company 1 is wholly owned by Santos’ LLC, headquartered about 50 miles east of here in Merritt Island, where you can catch a mess of blue crabs if you know the right spots. Like my wife. She’s a blue crabbing nut and drags me there at zero dark thirty often. Anyway, Santos solicited donations to Company 1, telling donors that donations would be used to help him get elected, social welfare organizations not being prohibited from doing that sort of thing you understand.
Well, the indictment alleges and relies almost entirely on the fact that Company 1 never applied for (c)(4) status and, on top of that, Santos used all the money for private inurement and excess benefit, essentially. From that, the indictment asserts, Santos fraudulently claimed (c)(4) status.
Now look, I don’t like the guy anymore than say, Kevin McCarthy but . . . well . . . even a scoundrel is entitled to legal advice. Not that I am offering that to him by this post. Nope, I am just making a few comments so that whoever is advising him and the U.S. Attorney might stop and think about this thing here before its too late. The indictment is premised on the assumption that a (c)(4) cannot be a (c)(4) unless it makes application to the Service. Now that is true for (c)(3)’s because IRC 508 says an organization “shall not be treated” as a (c)(3) until it gives notice to the Service. We all know (c)(3) notice is given by the Form 1023. But that ain’t exactly what the law says about a 501(c)(4). Oh sure enough, 506 requires (c)(4)s to give notice just like 508 requires (c)(3)s to give notice, but 506 does not say the organization “shall not be treated” as such until notice is given. IRC 506 is less than ten years old, by the way, enacted in 2015. The preamble to Treas. Reg. 1.506-1 (2019) pretty much confirms this:
Although an organization may apply to the IRS for recognition that the organization qualifies for tax-exempt status under section 501(c)(4), there is no requirement to do so (except as provided in section 6033(j)(2), which requires organizations that lose tax-exempt status for failure to file required annual information returns or notices and want to regain tax-exempt status to apply to obtain reinstatement of such status).
Granted IRC 506(a) mandates a (c)(4) “notify” the Service, but notification is not a condition precedent to (c)(4) status (as with (c)(3), did I mention that?), that’s why the Service need only acknowledge notification and the regs say notification is not determination: “This acknowledgment [of notice] is not a determination by the Commissioner that the organization qualifies for exemption under section 501(a) as an organization described in section 501(c)(4). As a matter of fact, here is what 506(f) says:
506(f)Request for Determination.—
Upon request by an organization to be treated as an organization described in section 501(c)(4), the Secretary may issue a determination with respect to such treatment. Such request shall be treated for purposes of section 6104 as an application for exemption from taxation under section 501(a).
It all seems pretty optional to me for both parties, organization doesn’t have to apply and Service doesn’t have to determine. I’m just saying. All that must be done is file an 8976. But 8976 has nothing to do with whether an organization qualifies or is a (c)(4). And Notice 2019-06 confirms that a (c)(4) never has to file a 1024.
Section 506(c) requires the IRS to acknowledge receipt of a section 506 notification. This acknowledgment is not a determination by the IRS that the organization qualifies for section 501(c)(4) tax-exempt status. Rather, section 506(f) provides that an organization seeking IRS recognition of its tax-exempt status may separately request such a determination. Section 506(f) provides that such a request will be treated as an application for exemption from taxation under section 501(a) and therefore will be subject to public inspection under section 6104. Until further guidance is issued, organizations requesting IRS recognition of exempt status under section 501(c)(4) should continue to use the Form 1024. The filing of Form 1024 is optional and will not relieve an organization of the requirement to file the section 506 notification.
(my emphasis). And what of the mandate in 506(a) that (c)(4)’s shall notify the Service? Well, failure to do so results in a $20 a day penalty up to $5000 separately on the organization and the manager. Hardly an expression of how important it is to notify, whatever the case. So look, the failure to file is nothing like prima facie evidence that an organization is not a (c)(4). Filing or not is not relevant to whether the organization is a (c)(4), ladies and gents (y’all know who I am talking to).
The indictment is premised entirely on fraudulent intent, insofar as tax law is concerned (there is also election law, covid-19 relief fund fraud, and lying your butt off to the House of Representatives in required post campaign filings). And proof is mostly that Santos never filed a 1024. But the failure to file is a dog that just ain’t gone hunt. Yesterday’s DOJ press release brags and thanks everybody:
This indictment is the result of a lengthy collaboration between law enforcement agencies, and I thank our partners at the U.S. Attorney’s Office, the Department of Justice and the Federal Bureau of Investigation for their dedication to rooting out public corruption.” Mr. Peace also thanked the U.S. Department of Labor, Office of Inspector General, the New York State Department of Labor (NYS DOL), and the Queens County District Attorney’s Office for their assistance.
Guess who is missing. Didn’t these folks consult TE/GE, DOJ Tax, or anybody who’s ever had her knuckles rapped with a ruler for not reading and comprehending every single word of a tax statute or regulation (“aloud, damn you!”)? Because popular indignation ain’t gonna be enough to actually prove the tax law that needs proving. The only facts asserted in the complaint that might preclude exempt status, and thereby suggest the requisite intent, is some pretty obvious private inurement and excess benefit. And I am not even sure if those facts preclude tax exemption, ab initio, as opposed to just triggering tax under IRC 4958.
One last thing. I am convinced that Santos could have set up an organization, paid himself a reasonable salary even from donations and from which he could have paid rent and bought all the dumb personal items he spent some of the donations on; he could have spent the rest on campaign advertising. I imagine most of us have shown grifter characteristics every now and again. Thinking we were so much smarter than everybody else so nobody will know. Whenever I think I am that smart, I too end up in deep kimchi.
darryll jones