Get IRS Out of the Business of Regulating Political Speech

By :: May 16th, 2013

A final thought, I hope, on the IRS/tea party scandal: Why do we want the IRS  regulating political speech?  It seems crazy on its face, yet that is exactly the system we have created.

True, the agency bungled its scrutiny of conservative political groups seeking tax-exemptions. But should it even be deciding which political organizations should get favored tax treatment and which should not? Why is a tax collection agency regulating political speech at all?

That this is happening at all is an accident of history. The section of the law political organizations are using to win tax-exempt status was never intended for this purpose.  Section 501(c)(4) has been around for a hundred years, but its purpose was to grant tax-exempt status to social welfare organizations such as community groups and citizens associations.

In the wake of the Supreme Court’s 2010 Citizens United decision, (c)(4) status became a popular mechanism for bankrolling political campaigns. Citizen’s United made it possible for unions and businesses to spend unlimited amounts of money on politics, but the vehicle they used for funneling cash to campaigns, Sec. 527 organizations, required public disclosure of their gifts.

501(c)(4)s are different. They can collect massive amounts of money anonymously.

But they have one restriction. Their primary purpose must be social welfare, not financing political campaigns.

And this has thrown the IRS into a cesspool. What does primary purpose mean? And what does campaigning mean? Where do you draw the line between social welfare and politicking? The law demands that the IRS make those distinctions. It must, in other words, define political speech—a role for which is seems particularly ill-suited.

IRS agents don’t have much help. The statute is murky. Case law is vague. The agency’s own guidelines require that these applications be decided on a case-by-case “facts and circumstances” basis.

So the IRS is put in an untenable position. On one hand, it has been under pressure to crack down on what some see as abuses (I wrote a Tax Vox blog urging the agency to act back in 2010). Yet, when it tried, it was rightly accused of political partisanship. True, it could have avoided much of the current mess if it was more even-handed in its investigation of these groups. But can the IRS ever define what is a permissible political activity and what is not? Should it even try?

Worse, no politician will ever defend the agency from criticism. Whatever the IRS does, elected officials of both parties will throw it under the bus at the first hint of criticism.  Just watch President Obama.

What’s the answer? Alan Viard at AEI urges Congress to write rules that better delineate political activity by tax-exempts. The New York Times has called on Congress to retain (c)(4) status but only for groups that have no political activity.

I’d get the IRS out of the political speech business entirely.  If Congress wants to regulate campaign finance, it ought to do so explicitly rather than through an ad hoc structure built around an obscure section of the tax law governing citizens associations. Congress could, for instance, simply pass a law requiring public disclosure of all campaign gifts, no matter how they are delivered. That one step would largely dry up requests for (c)(4) status.

Congress could reserve tax-exempt status for those organizations that completely eschew politics. We’d all be free to say what we want and give money to whom we want. But this activity would be entirely disconnected from tax-exempt status.  Fellow blogger Peter J. Reilly made a similar argument yesterday. So has Bloomberg's Josh Barro.

I know, you’re going to ask what agency would regulate this, the Federal Elections Commission? Well, you’re right, the FEC is a punchline today.  But Congress could fix that. Besides, the FEC’s failures don’t justify dumping this mess into the lap of the IRS. Honestly, I’d rather have the Transportation Dept. regulating political speech than the IRS.

In effect, Congress and the Supreme Court have thrown the IRS into a lose-lose situation. And the agency has lost. Why are we surprised?


  1. Vivian Darkbloom  ::  2:45 pm on May 16th, 2013:

    This is disingenuous.

    Of course, the IRS is in the “untenable position” of regulating “political speech”, which is not clearly defined and probably can’t be clearly defined.

    But, in this respect, section 501(c)(4) is not really any different than section 501(c) organizations generally. The key difference does not rest on whether the activity is “political”; but, with respect to section 501(c)(4) organizations, whether that activity is its *primary* activity.

    Gleckman writes:

    “But can the IRS ever define what is a permissible political activity and what is not? Should it even try?”

    The answer is, no it can’t define it. But, given the hand given it by Congress (not the Supreme Court), it has to try.

    Gleckman is walking a thin and very self-serving line here. Of course, the IRS must also determine if the TPC, the Urban Intitute and the Brookings institution are engaging in *any* “political activity”. Howard seems to see no problem with the IRS making *that* determination. But, when it comes to someone else’s organization, it suddenly becomes an impossible task.

    Having watched this space for some time now, I’ve concluded that the TPC and, in particular, Howard Gleckman, are engaging in “political activity”. But, they’re certainly not alone. Many other exempt organizations are engaged in similar political activity. The IRS may disagree, but the fact is they are not even trying because it’s a hopeless endeavor. Nevertheless, the law says they’re supposed to draw that distinction.

    Howard’s conclusion is that the IRS should reserve exempt status for organizations that “completely eschew politics” (presumably his own). Again, how will that be defined? This kind of reminds me of the self-serving carve out that so-called news organizations want to carve out for themselves with respect to the Citizens United decision.

    I’ll do Gleckman one better: let’s end this charade for all organizations under section 501, including his employer. That will really solve a lot of the dilemmas currently faced by the IRS. That won’t solve any “political speech” issues; however, it will get the IRS out of the game completely.

  2. Vivian Darkbloom  ::  2:50 pm on May 16th, 2013:

    I would be remiss by not adding that the case for ending section 501(c) exempt status generally is even stronger than ending it for section 501(c)(4) organizations. Donations to the latter type of organization are not subject to gift tax; however, they are also not deductible. Donations to other “exempt organizations” generally are deductible.

  3. AMTbuff  ::  7:20 pm on May 16th, 2013:

    Vivian, the problem with your idea is that the tax exemption for churches would also have to end. Otherwise ideologues would simply start the Church of Progressive Enlightenment or the Church of Christ, Conservative. Maybe that degree of change is warranted, but it’s not as simple as some people think.

    A final related thought: Why do we want the IRS regulating health insurance cost on a per-taxpayer basis? It seems crazy on its face.

  4. Rich  ::  10:13 pm on May 16th, 2013:

    Right, only in a (c)(3) are payments deductible under section 170. Contributions to a business league, voluntary employees benefit association, or other exempt org may be deductible under 162, 105, or otherwise. The funding for a 501(c)(4) is extraordinary in that contributions likely won’t be deductible. So (c)(4) doesn’t cost as much revenue as other exempt orgs.

    On the other hand, most of the other exempt org categories haven’t been used (apparently) to circumvent reporting requirements of the Federal Election Campaign Act.

    On “political activity,” Congress took a stab at a definition in 527(e)(2). I don’t work with it myself, but that definition seems to separate electioneering from policy advocacy and lobbying. IRS’s own regs for (c)(4) say “[t]he promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.”

    Under these definitions, for example, I don’t think the various “think-tank” evaluations of tax proposals in the 2012 presidential campaign were obviously interventions in political campaigns: for example, there were no ad buys.

    In the current scandal, the IRS was looking for impermissible electioneering among the (c)(4)s in a way that was inconsistent and unfair. The problem isn’t really that the IRS was looking for something elusive and hard to find, it was looking for something more-or-less easily identifiable, but in a party-discriminatory, or ideologically discriminatory, fashion.

    The enforcement of an electioneering ban will never be perceived as fair by those to whom it applies. But such a ban might be implemented consistent with due process. It seems doubtful that there’s a road from “here” to “due process,” though, based on headcount (with or without sequester) and possibly institutional insufficiency.

  5. Vivian Darkbloom  ::  2:01 am on May 17th, 2013:

    “Vivian, the problem with your idea is that the tax exemption for churches would also have to end.”


    This is not a “problem”; it is an additional advantage. Why should taxpayers, many of whom don’t subscribe to any organized “religion”, subsidize contributions to “religious organizations”, the recognition of which is even more subjective than “political” ones. (This is also, by the way, a definitional responsibility thrust onto the IRS. Howard would be rightly upset).

    The SCt was likely mistaken in allowing this in the first place. Subsidizing religious organizations through the tax system strikes me as much more a violation of the separation of church and state than putting a cross on public land.

  6. Vivian Darkbloom  ::  2:14 am on May 17th, 2013:


    I think you are mistaken as to the political nature of “think tanks” and how they affect the outcomes of political campaigns. One would be naive, and indeed very wrong, to think that the only way a campaign is helped or hindered is through ads paid for through “political donations”.

    Far more effective than an advertisement are partisan commentary appearing in news organizations and especially “think tanks”. These are mostly folks waiting in the wings hoping for a(n (additional) share in the action once government control is obtained. Their political arguments masked as non-partisan and objective commentary are far more effective than direct political advertisement.

    Even if you don’t share my jaded, but unfortunately legitimate view on this, I’ve yet to hear a persuasive argument that the taxpayers should subsidize this sort of activity. Presumably, the argument is that this sort of activity benefits the “social welfare” (different terms, but same concept). Somehow, the IRS is supposed to be able to define that for 501(c) organizations generally. Those are much more numerous and powerful than the 501(c)(4) organizations and yet only the latter are selected for outrage because, according to the rest of the 501 crowd, the IRS can’t do an adequate job of defining what they are supposed to do (or not) and they don’t have the resources to police them. The remaining subsections of 501 are much more troublesome in this respect.

  7. Vivian Darkbloom  ::  1:29 pm on May 17th, 2013:

    I just watched most of the Congressional hearing on the IRS “scandal”.

    As it turns out, several examples were given of outrageous IRS behavior with respect to various section 501(c) applications and not merely those involving section 501(c)(4). This is as I suspected: the entire issue is hopelessly political. The problem is the entire section and not merely (c)(4).

    Per the IRS website, there are approximately 1.6 million EO’s outstanding and the IRS processes about 200,000 applications each year. The (c)(4)’s are a very small percentage of the total. Not only is this hopelessly political, but the entire section is out of control.

    As I’ve stated here earlier, the only rational response is to eliminate *all* tax exempts. There will be no unnecessary delays, no political targeting, no partisan IRS hearings and no understaffed IRS EO department. Our budget will be improved and intrusion into our personal liberties diminished. Let folks spend their money on causes they see fit without taxpayer subsidies and IRS interference or harassment. What could be more simple?

    Alas, the main argument against this will be because it is “politically unfeasible”. That’s perhaps true, but it is only because we’ve allowed these interests to spiral so out of control that they’ve captured government. It will only get worse, even though the vested interests will also argue that we simply need to improve our government regulations and oversight.

  8. Michael Bindner  ::  12:53 am on June 26th, 2013:

    This is another example of why we need something like a VAT-like Net Business Receipts Tax and a VAT. Committees such as these would pay VAT on any products they sell and the NBRT on their staff costs. Their purchases, such as advertising production and time buys would be deductible, however the ad creators and TV and radio stations would make a VAT payment as part of the purchase price. There should be no exemptions not available to other employers (like health insurance, education costs, etc.).

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  10. USMC Freemind  ::  2:34 am on June 28th, 2014:

    Just remove it for political organizations. It says 501c cannot make politics their primary objective. What other objective to any liberal or conservative organizations such as the Tea Party have that is bigger than their political objectives? None of them should have tax breaks. Just like McCutcheon and Citizens united, money isnt free speech.