The IRS has turned down the long-running effort by the Democratic convention's Philadelphia host committee to win a tax exemption.
Word of the decision, a setback for efforts to raise the last of the $60 million needed to help pay for the July 25 to 28 convention, came Friday from its adviser, David L. Cohen.
When the decision came - and why - is less clear. Cohen would say only that the IRS "recently" turned down the application for tax-exempt status under section 501(c)3 of the tax code, which the committee had sought for more than a year.
Cohen, senior executive vice president of Comcast Corp., said the IRS viewed some of the committee's work as too much like political activity to win 501(c)3 status. He declined to release the IRS letter notifying the committee, focusing instead on efforts to appeal the decision.
"Right now the host committee is a c3 in waiting," Cohen said Friday. "We are continuing to pursue the c3 but we cannot afford to continue to wait."
The committee has come up with a Plan B that involves the Philadelphia Convention and Visitors Bureau Foundation.
Without the IRS exemption, individual donors cannot claim a tax deduction for their donations. Cohen said earlier Friday that two donors wanted their money back because they could not count on a deduction.
He declined to reveal the donors or amounts. That was in keeping with the committee's insistence on keeping donor names and amounts private until after the convention, a stance that has drawn criticism from watchdog groups.
Although the committee is appealing the decision and could still get a tax exemption retroactive to its May 2015 application, Cohen said the two donors didn't want to take that risk.
The Philadelphia 2016 Host Committee is responsible for raising at least $60 million to help put on the Democratic convention at the Wells Fargo Center.
Spokeswoman Anna Adams-Sarthou said Friday that $55 million had been raised in "cash and commitments," along with $14.5 million worth of equipment and other "in-kind" donations. An additional $3 million must be raised to cover some of the committee's costs, she said.
"We are where we need to be," she said.
Cohen said 25 individual donors had contributed a combined $4 million. The majority of donors, though, are corporations, which can claim tax deductions if the committee ends up becoming a 501(c)6 organization, as officials have contemplated. That type of tax exemption is for business leagues and chambers of commerce that promote common business interests.
To address the lack of 501(c)3 status, the committee signed an agreement with the Convention and Visitors Bureau Foundation, a 501(c)3 fund-raising arm of the bureau, to essentially trade donations for grants.
Individual donors who want a tax deduction will be asked to donate to that foundation. The foundation in turn will issue grants to the host committee to help pay for events that fall under the foundation's mission of promoting the city.
Some of those events include the host committee's welcome party, a media reception, and an interactive political museum and fair, known as PoliticalFest, being staged at the Convention Center.
Since that agreement was signed June 22, the committee has directed 19 donors to the foundation for a total of more than $2 million, Cohen said.
"Clearly, there's a pocket of people who would like the [tax] deduction," he said.
The foundation has in turn given the host committee $1.98 million, said Khaila Burke-Green, spokeswoman for the Convention and Visitors Bureau.
The bureau's foundation "has awarded grants to support providing important nonpartisan, welcoming and hospitality functions and services for convention attendees and guests," Burke-Green said in an email. "It is these kinds of events that promote the capabilities of the City of Philadelphia as a top-tier convention destination, which aligns with the mission of the foundation."
Unlike Philadelphia's host committee, the Republican convention's host committee in Cleveland received its 501(c)3 designation from the IRS just 12 days after it applied. Cohen said he has looked at Cleveland's application and found it "almost identical" to Philadelphia's.
Lawyer Jon J. Pinney, who advised the Cleveland 2016 Host Committee, said he had not seen Philadelphia's application.
"Our application was several hundred pages long," Pinney said, adding that it was tailored to what the committee expected would be the IRS's concerns. "It was an extremely thorough process."
Among the items requested in the application, Pinney said, were full biographies of all committee officers, any potential conflicts of interest, and the bipartisan nature of the fund-raising.
Told that the IRS had turned down Philadelphia's application, Pinney said, "Wow. OK." He said he could not speculate on reasons for the denial.
Marcus Owens, a Washington tax lawyer who ran the IRS tax-exempt organizations division for a decade, has said the agency mainly looks at how an applicant plans to spend its money. He said a political convention's host committee would have to show that funds would mostly be used for city infrastructure projects, such as filling potholes and fixing streetlights.
As far as the reasons for the rejection, Cohen said Friday, "It's fair to say that there is skepticism of the people in the IRS that this is for political activity."
He said the committee is hoping for a successful appeal, given that Cleveland and previous convention host committees have received 501(c)3 designations. If not, he said donors will still wind up getting a tax deduction by donating to the convention and visitors bureau foundation.
"We found a solution," he said.