By Sam Brunson
On November 5—two days after the presidential election—James O’Keefe posted an interview with a postal worker claiming that he and his colleagues were instructed to backdate ballots that they received after election day. The next day he filed an affidavit swearing that he and his colleagues had been instructed to continue picking up ballots after the November 3 deadline.
After an interview with U.S. Postal Service investigators, Richard Hopkins, the postal worker, recanted his statements. He also told investigators that his affidavit had been written by Project Veritas, the organization O’Keefe founded and with which he is associated.
Project Veritas, it turns out, is a tax-exemption organization. And its association with Hopkins may have put its exemption at risk. By signing an untrue affidavit, Hopkins almost certainly broke the law. And several attorneys interview in the Salon story say that Project Veritas may also have broken the law as a result of its involvement in the false affidavit.
And why does that matter? If the requirements for tax exemption were limited to the statute and regulations, it probably wouldn’t. To qualify as tax-exempt, an organization must be “both organized and operated exclusively for” an exempt purpose. That is, they must meet both an organizational test and an operational test. An exempt organization meets the organizational test if its articles of incorporation limit its purpose to one of the Code’s enumerated exempt purposes, while it meets the operational test if it primarily engages in activities that accomplish its exempt purposes.
Based on its Form 990, Project Veritas’s exempt purpose seems to be educational. (The summary of its mission starts, “TRAINING, EDUCATION AND INVESTIGATIONS UNDER MISSION STATEMENT[.]”) Whether it meets the regulations’ requirements to qualify as a tax-exempt educational organization is a factual question, one I’m not looking at in the blog post. (If you’re interested in what an organization must do to qualify as educational for tax purposes, Ellen Aprill and I have written a little about it for Tax Notes. You can find our article here.)
But the Supreme Court has recognized non-statutory requirements for tax exemption. As a result, even assuming that Project Veritas meets the educational and operational tests, its exemption may not survive Bob Jones.
In Bob Jones the Supreme Court held that to qualify as exempt and organization not only had to meet the statutory and regulatory requirements under section 501(c)(3), it also had to meet a certain criteria from the common law of charitable trusts. Specifically the Supreme Court held that an organization did not qualify as exempt if its purpose was illegal or violated established public policy.
Even assuming that Project Veritas broke the law, Bob Jones wouldn’t obviously disqualify it from being exempt. After all, on its face, Bob Jones seems to go to the question of the organizational test. And Project Veritas is not organized with the purpose of breaking the law.
But the IRS and the Tax Court have imported the illegality standard from the organizational to the operational test. In Mysteryboy Incorporation, the Tax Court reviewed the IRS’s denial of exemption to Mysteryboy. Mysteryboy’s purpose was largely to change laws prohibiting sex between minors and adults and laws prohibiting child pornography. The IRS denied its exemption both because it failed the organizational and the operational tests. With respect to the operational test, the Tax Court held that it failed because, among other things, it proposed to promote activities that violated federal and state law and that promoted illegal activities.
The IRS takes the same stand. In a 1975 revenue ruling, the IRS explained that an antiwar organization did not qualify as tax-exempt because it sponsored protests where it encouraged protestors to violate local ordinances. Because it encouraged illegal activities, it did not meet the operational test.
In various private letter rulings, the IRS has reiterated this idea the illegal activities disqualify would-be exempt organizations from a federal income tax exemption. In 2013 (in PLR 201325015, which I can’t find in a linkable online source), the IRS denied exemption to a religious organization that practiced polygamy on the basis that polygamy violated state law and state and federal policy. In 2011, the IRS denied a nonprofit organization formed to dispense medical marijuana because selling marijuana violates federal law.
And what does this mean for Project Veritas? It means that, if Project Veritas in fact broke the law as it helped and encouraged Hopkins’s perjury, it does not meet the common law requirements for tax exemption. It means that the IRS has the ability to revoke Project Veritas’s tax exemption. That means that donors would not be able to deduct their donations to Project Veritas and Project Veritas would owe taxes on at least some of its revenue. (In 2018, the most recent year for which Guidestar has a 990, Project Veritas received about $8.7 million in donations that would no longer be deductible and it earned a little over $100,000 in book sales and speaking engagements that it would likely have to pay taxes on.)
At the very least, Project Veritas should keep this risk in mind next time it decides to act in a manner that may be illegal.