In the wake of the Internal Revenue Service scandal, in which several organizations seeking code section 501(c)(4) distinction were discriminated against based on the groups’ political identity, the Obama administration has moved to tighten the IRS’s social-welfare definition to exclude political candidate campaigning.
Under new guidelines proposed by the Treasury Department Tuesday, the department defined the new term “candidate-related political activity” to help the IRS make definitive determinations of which organizations fail to meet 501(c)(4) status. Under the proposed guidelines, “candidate-related political activity” include communications that explicitly advocate for a clearly identified candidate or candidate slate for a political party that are made within 60 days of a general election or 30 days of a primary that identifies a candidate or political party that spending must be reported to the Federal Election Commission.
In regards to finances, “candidate-related political activity” includes any contributions recognized under campaign finance law as reportable, or contributions offered to tax-exempt organizations that conduct candidate-related political activities. Voter registration and “get out the vote” drives, events within 60 days of a general election or 30 days of a primary that host an active candidate for office, distribute materials on behalf of a candidate, or a political organization and preparation of voter guides that refer to a candidate or a political party are all “candidate-related political activities,” as well.
This rule change is meant to limit the need for front-office staff to make inquiries into the nature of the applying organization’s activities. During the IRS scandal, which resulted in the firing or resignation of many senior officials at the IRS, such as the acting commissioner, application processors at the Determinations Unit with the IRS’s Exempt Organizations Function, Rulings and Agreements Office used keywords to segregate applications that were felt to need closer investigation. While organizations associated with the Tea Party were flagged, so were applications associated with Occupy, progressive groups, pro-Israel associations, Constitution advocacy and challenges to the Patient Protection and Affordable Care Act. The IRS suspected that the sudden increase in 501(c)(4) applications came as an attempt by campaign organizations to hide campaign donor lists and to camouflage the sources of the “dark money” that dominated the 2012 elections.
“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur in the Treasury Department announcement introducing the proposal. “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”
Clearing loopholes
The proposed rules change represents the first solution proposed from suggestions offered by the Treasury Inspector General for Tax Administration in his May analysis of the IRS crisis. According to the report, TIGTA recommended the IRS finalize the interim actions taken, better document the reasons why applications potentially involving political campaign intervention are chosen for review, develop a process to track requests for assistance, finalize and publish guidance, develop and provide training to employees before each election cycle, expeditiously resolve remaining political campaign intervention cases (some of which have been in process for three years), and request that social welfare activity guidance be developed by the Department of the Treasury.
Section 501(c)(4) distinction recognizes a not-for-profit as a “social welfare” organization, an organization that as its primary role educates the public on social and political concerns that play a direct role on the public health. Despite the fact that Internal Revenue Code does not require an organization to apply for official section 501(c)(4) with the IRS to engage in “social welfare” or to be a “social welfare” organization, a formal application process is available. Section 501(c)(4) organizations, while being limited in the amount of political campaign activity they can engage in, have the benefit of not having to publicly disclose their donors. This rule was implemented to protect the backers of controversial public agendas, such as abortion education and gay rights advocacy.
When the IRS noticed a jump in the number of 501(c)(4) applications, from 1,751 in 2009 to 3,357 in 2012, the IRS correctly suspected that political organizations, such as Karl Rove’s Crossroads GPS, were seeking 501(c)(4) coverage to hide the origins of the money that was flooding into the Republicans’ presidential and state campaigns. As reported by the Sunlight Foundation, $300 million in independent expenditures was reported by “dark money” groups. Of the 50 groups that spent the most of this money, 15 were 501(c)(4) nonprofits, including Crossroads GPS, which spent more than $70 million, and Americans for Prosperity, which spent $33.5 million.
Since the Supreme Court’s decision on Citizens United v. Federal Elections Commission, in which money was recognized as a means of free speech and the federal government was stripped of its ability to to limit or ban political contributions from corporations, there has been a “shell game” in the concealment of large corporate donations that may ultimately hurt the company’s public image and individual donations, which are still regulated by the FEC.
But due to the fact that the IRS used broad definitive terms to target entire classes of applications, the organization’s actions, even though it was intended to stop suspected tax fraud, constituted a discriminatory action, which the Right immediately and viciously attacked the administration on.
“Tony Soprano didn’t own the pork store for the sandwiches,” Josh Orton, the political director of Progressives United, told Politico. The group has long advocated curtailing the role of big money in politics. “The abuse of social welfare groups for political activity has been an embarrassment to our democratic system. Too often, 501s have simply become a front for corporate political mobsters to anonymously exert their power over our elections.”
Lisa Gilbert, director of Public Citizen’s Congress Watch program, said what this will do is establish a clearer regime, adding that other 501(c) classifications, such as 501(c)(6), chambers of commerce and business leagues, should also have their roles in politics examined.
The proposal will be open for public inspection and review as of November 29. For the most part, the super PACs have been quiet or low-key in response to this news, although there have been noteworthy grumblings from the Right.
“By proposing a rule change, the administration appears to be conceding that they can’t get 501(c)(4) groups to change their behavior without changing the rules,” one source close to several conservative nonprofit groups told Slate. “So while they may be able to change some behavior moving forward, it’s also a tacit validation that many of these groups have been acting properly since Citizens United.”
Conservative attorney Dan Backer wrote in Politico: “This is an astonishing — and from this feckless, hyperpartisan administration, unsurprising — effort to curtail the free speech of Americans who come together to better their community. The government is clearly seeking to condition recognition of one category of non-taxable status on groups of citizens sacrificing their constitutional rights to an astonishing degree through curbs on speech and on association — activities which themselves are exempt from taxation in any event.”
But many feel this rule change only presents a temporary fix. Those who wish to funnel money into politics will find another way to do it, whether through limited liability corporations or through attempts to have the personal donation limit overturned.
“People have been shopping for the right vehicle for years, so this might just force people to go back to the shopping cart to see what you can find,” Bob Biersack, a longtime FEC official and now-associate with the Center for Responsive Politics told the Wall Street Journal.