Obama Will Try to Clarify the Role of Tax-Exempt Groups in Politics

By :: November 26th, 2013

The Obama Administration is trying to untangle the controversy over the growing role of 501(c)(4) social welfare organizations in politics by creating a new category of banned candidate-related activity. I wish it all the luck in the world.

Treasury and the IRS will propose regulations that aim to clarify what these groups may and may not do. The agencies are asking for public reaction and say, with remarkable bureaucratic understatement, “The Treasury and IRS expect to receive a large number of comments.”

The proposal would prohibit an organization from qualifying for tax-exempt 501(c)(4) status if it engages in several activities, including:

•Advocating for a candidate.

•Engaging in communications within 60 days of a general election or 30 days of a primary that identify a candidate or political party.

•Spending that must be reported to the Federal Election Commission.

•Making contributions that must be reported under campaign finance law.

•Giving grants to other tax-exempt organizations that conduct candidate-related political activities.

•Participating in voter registration and "get-out-the-vote" drives.

•Distributing material that supports a candidate or a Section 527 political organization.

•Preparing or distributing voter guides that refer to candidates or political parties.

•Holding an event within 60 days of a general election or 30 days of a primary election where a candidate appears.

Treasury seems to be trying to coordinate its rules with federal election law. This seems sensible but its proposal leaves many questions unanswered. For instance, Treasury will have to decide what proportion of an organization’s activity must be to promote social welfare. Would some limited political activity still be permissible? Could a citizen’s association participate in a non-partisan voter registration drive?

By now, most TaxVox readers are aware of the backstory. The century-old law that created tax-exempt organizations granted 501(c)(4) status to social welfare organizations such as neighborhood associations as long as they avoided political activity. But decades ago, the IRS began to blur the lines by allowing groups to engage in politics as long as this was not their primary purpose.

What did that mean? Nobody really knew and the IRS began relying on a facts-and-circumstance test to sort it out. In effect, the agency said, “we know it when we see it.”

Everyone muddled through until the Supreme Court opened the door to political mega-giving in its 2010 Citizens United decision. In the wake of that decision, (c)(4) status became a popular mechanism for bankrolling 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. By contrast, 501(c)(4)s can collect massive amounts of money anonymously.

Recently, we’ve learned that some (c)(4)s are acting as nothing more than money laundries by collecting millions of dollars in anonymous gifts, then redistributing them to  3rd party non-profits that buy millions of dollars in political advertising.

The IRS tried to get a handle on all this but instead ended up in a nasty political morass. Conservatives accused it of bias last year after several Tea Party groups claimed the agency harassed them when they applied for tax-exempt status. It turned out that the flap was more a matter of tin-ear bungling than a political hatchet job. Still, the episode showed how flawed the current system is.

Now, the Treasury and IRS are trying to clean up the mess. As I have written before, the IRS is the last agency that should be defining political speech. This should be Congress’ job, though, like everything else these days, Congress is unlikely to do it.

Give the IRS and Treasury credit for trying, but I can just imagine the firestorm that’s coming.

2Comments

  1. Michael Bindner  ::  3:42 am on November 27th, 2013:

    I expect there will be a lawsuit. Whether it succeeds depends on whether it gets to the Supreme Court or not. Still, the opponents cannot claim that the new restrictions are afoul of the law – indeed the current regulations most certainly are. Of course, the Congress could change the law if tthere is bipartisan donor support to keep cash flowing – although any attempt to do so could raise one heck of a stink – more so than the new regs will. As for the Anonymous problem – I suspect that the identity of the big donors usually comes out – because money is speech – just ask the friends of Newt Gingrich who kept his campaign alive. It is also no great secret that the Koch brothers are underwriting the Tea Party and the latest effort to try to put an end to Obamacare. Large donations are never anonymous for long – especially if the donors have a policy agenda that they are trying to buy.

  2. IRS Gets Hammered in the 2014 Budget AgreementOlympic Accounting | Olympic Accounting  ::  8:38 pm on January 19th, 2014:

    […] the spending bill could end up hamstringing IRS efforts to sort out the mess through a package of proposed regulations.  It could also open the door to political groups further stretching 501(c)(4) status to avoid […]