The IRS Was Wrong to Single Out Tea Parties, But Many Political Groups Should Not be Tax-Exempt

By :: May 13th, 2013

Let’s start with the obvious. Those IRS employees who singled out conservative groups for scrutiny over their tax-exempt status were wrong, wrong, wrong.  Any whiff of politics at the agency is unacceptable, and this is far more than a whiff. In time, we shall see how far up the agency food chain the scandal goes.

But this unsavory episode should also shine a light on the law that gives tax-exempt status to political groups of all ideological stripes, often described by the code section that grants their exemption—501(c)(4)s.  That is especially true since one outcome of this scandal will be to give these partisan groups even more freedom to operate outside of at least the spirit of the law.

The only way to stop the proliferation what are often-secret campaign money laundries is for Congress to change the law that grants these groups this form of tax-exempt status.

As I wrote in a blog post back in 2010, the tax law is relatively clear about what a (c)(4) can and cannot do. The IRS defines these groups as “civic leagues, social welfare organizations, and local associations of employees.” Their net earnings are supposed to be used for charitable, educational, or recreational purposes. They may lobby and participate in political activities but their primary purpose must not be campaigning.

Thanks to smart lawyers who have exploited an outdated law, the tax-exempt status of many groups may be perfectly legal. But others simply do not pass the smell test.  Does anybody really claim the primary activity of these organizations is anything other than getting their favorite candidates elected to political office, or defeating those they disagree with?

If you have doubts, here is what one group, teaparty.org, says about itself on its website:

We are going to build on the foundation of success we used to elect more governors, grab more seats in the House of Representatives and force the Washington establishment to respect the demands of “We The People.”

In contrast to public charities organized as 501(c)(3)s, contributions to (c)(4)s are not tax-deductible. So why would they want (c)(4) status? One reason: It allows them to hide the names of their donors.

In the past, these groups would have claimed tax-exempt status as Sec. 527 organizations. There are no contribution limits, no restrictions on who may give, and no limits on how they spend their money (except they cannot advocate for a specific candidate). But 527s must disclose the names of the fat cats who use them to finance political campaigns.  And groups that thrive on political dark money will do almost anything to avoid transparency. So they walked through the (c)(4) door opened by the Supreme Court's 2010 Citizens United decision.

Because the law is so ambiguous and because IRS scrutiny of these groups is so fraught with political landmines (as the recent unpleasantness proves), the IRS had been reluctant to review this issue all.  Now it seems, the agency took a much-needed hard look at some groups, but did so in a clumsy and seemingly partisan way.

Regrettably, by apparently focusing only on conservative (c)(4)s, the IRS has only succeeded in making all these groups—on the political right and the left-- even more immune from investigation.

The solution, then, is for Congress to change the law. Many of these groups are not social welfare organizations by any reasonable standard. They clearly exist for political purposes. Many are unabashedly partisan—supporting only Democrats or only Republicans.

Last month, Sen. Tom Coburn (R-OK) introduced a bill to eliminate the tax-exempt status of professional sports leagues, such as the NFL (yes, Virginia, the NFL is tax-exempt).  That’s an excellent idea, but maybe he ought to expand it to include practitioners of America’s other favorite sport—politics.

Homepage image of the IRS building in Washington, DC courtesy of Flickr user dctim1 (CC BY-SA 2.0)

 

 

 

11Comments

  1. Rich  ::  5:11 pm on May 13th, 2013:

    In early 2010, I looked at 501(c)(4) for a new nationwide nonprofit that seemed not to fit into charity, business league, etc. In addition to inurement issues, the IRS rulings focused on a relationship to a locality, and it looked like no area of intended benefit larger than a metropolitan statistical area was likely to be approved.

    A few months later, I felt like an idiot when the New York Times reported on the rise of 501(c)(4) orgs in politics. Why so pointlessly cautious? Still, the political 501(c)(4)s seem to have no local connections.

    As to the use of 501(c)(4) for politics, there aren’t too many rulings: PLR 2012-221029 revokes exempt status for an assistance fund for potential women candidates in one of the political parties. A quick read suggests the revocation is sound there; I hope it wasn’t politically motivated. 2011-42027 clearly deals with republicans. 2012-24034 isn’t really related to national politics.

    There just isn’t good authority for the primarily political 501(c)(4), and these large orgs look more like scofflaws than like well counseled parties. The apparent absence of ruling requests initiated in the determination letter process suggests that the determination letter process was broken, and consistently did not check for consistency with law and rulings related to locality or to private interest. There’s probably no revenue loss, since these aren’t (c)(3)s and probably spend their money as fast as they can, but this needs to be fixed badly, I agree.

  2. Tax Roundup, 5/14/2013: Worst Acting Commissioner Ever? « Roth & Company, P.C  ::  9:54 am on May 14th, 2013:

    […] Gleckman,  The IRS Was Wrong to Single Out Tea Parties, But Many Political Groups Should Not be Tax-Exempt.  Yes, let’s change the […]

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    […] –Tax Exempt: Howard Gleckman uses the IRS scandal to look at tax-exempt status. “Let’s start with the obvious. Those IRS employees who singled out conservative groups for scrutiny over their tax-exempt status were wrong, wrong, wrong. Any whiff of politics at the agency is unacceptable, and this is far more than a whiff. In time, we shall see how far up the agency food chain the scandal goes. But this unsavory episode should also shine a light on the law that gives tax-exempt status to political groups of all ideological stripes, often described by the code section that grants their exemption — 501(c)(4)s. That is especially true since one outcome of this scandal will be to give these partisan groups even more freedom to operate outside of at least the spirit of the law. The only way to stop the proliferation what are often-secret campaign money laundries is for Congress to change the law that grants these groups this form of tax-exempt status.” […]

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