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The Black Hole

The New York Times ran a front-page story in July about the Institute for One-World Health, a non-profit drug company formed to get governmental approvals for pharmaceuticals known to be effective in treating neglected diseases. The non-profit had identified paromomycin as a cure for black fever (visceral leishmaniasis), a disease that kills about a half million people annually, and was seeking tax-exempt status to help raise money for the effort. Its mission was to fill the gap created by for-profit drug companies, which do not invest in drugs that are unlikely to generate profits. Paromomycin has not received government approval because no drug companies have sought it--as most black fever sufferers are poor and could be cured by a $10 course of the drug.

One-World Health's founder, Dr. Victoria Hale, faced many obstacles, one of which was the IRS. The agency refused to approve her application for tax-exempt status three times. According to Dr. Hale, the IRS was suspicious her charity was really just an attempt by the drug industry to shelter profits. In its third refusal, the IRS staff told her One-World's activities were no different from those of for-profit drug companies (and, in truth, they are not), and that they wouldn't recognize it as tax-exempt unless she could think of an example of an existing charity that mirrored a for-profit business.

Dr. Hale told The New York Times that after only a few days she realized that what she wanted to do in the drug industry was exactly the same thing the Public Broadcasting Service and National Public Radio do in the broadcasting industry--serve a different audience with programs the for-profits won't touch. Voila! She got her tax exemption.

My first thought upon reading this story was that it couldn't be completely true. Even a novice IRS employee whose job it is to review applications for tax exemptions would know, for example, that non-profit hospitals and colleges operate alongside their for-profit counterparts.

And what about the widely known non-profit National Geographic magazine? It has plenty of for-profit competitors. Then there's C?SPAN, which operates as a non-profit but has the same business model as CNN, the Discovery Network and Comedy Central.

Surely, any employee in the IRS's tax-exempt section would be able to easily tick off such examples. And if not, would the IRS really abdicate its responsibility to carefully consider applications by putting the burden on the applicant to come up with an analogous precedent? I didn't think so.

But alas, it appears I was wrong. According to one lawyer I talked to, "the story rings true." He said the IRS just can't seem to keep up with all the applications for tax exemption. The result is a huge backlog and frequent questionable treatment of cases. He said lawyers for applicants bemoan the process and have been trying to work around it.

Lois Lerner, the person in charge of tax-exempt organizations at the IRS, admits that applications sometimes seem "to have fallen into a big black hole." But, she offers, her department has to process about 60,000 applications each year, and the Cincinnati-based applications staff has a "horrible" attrition rate. She says, "oftentimes the people that areleaving are the more experienced people, and the ones that we just hired are the ones that can't handle the more complex cases."

A former IRS staffer who used to review applications for exempt status told me the job can be deadly boring, and he is not surprised at the high turnover in the applications office.

So, I guess I'm not surprised Dr. Hale had her application for tax-exemption turned down three times. Maybe if Congress had funded the IRS with sufficient resources, the cure for black fever might be a bit closer to saving lives than it is today.

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Contributor

Bruce D. Collins

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