The IRS has been criticized — quite fairly — for spending the last two elections sitting on its hands while dark money groups, organized under section 501(c)(4) of the tax code, spent millions of dollars contributed by anonymous donors to run vituperative, deceptive political ads. Last week, at the advent of the Thanksgiving holiday, the Service finally offered some new proposals allegedly aimed at reining in abuse of section 501(c)(4) tax status. Unfortunately, they fall far short of the much-needed reforms my organization, Citizens for Responsibility and Ethics in Washington (CREW), and other good government groups have been advocating.
Special 501(c)(4) status was created for groups promoting social welfare; it was never intended to apply to political groups. As enacted by Congress, the statute provides that 501(c)(4) groups must operate “exclusively for the promotion of social welfare.” Nevertheless, the IRS promulgated regulations allowing groups “primarily” engaged in social welfare activities to take advantage of tax-exempt status. Based on this misreading of the law, many 501(c)(4) groups have interpreted this to allow them to spend up to 49 percent of their funds on political activities. But even this line has proven meaningless as some social welfare organizations have blatantly violated this standard without suffering any consequences. As a result, some members of Congress have offered legislation, and earlier this year, CREW sued the IRS after the agency failed to act on our request for a rules change to harmonize IRS regulations with the tax code.
The IRS acknowledged the conflict between the law and the regulation internally in 1959, when it first drafted its primary activities regulation. In 1963, the agency initiated a “regulations project” to address the conflict, but it went nowhere. Internal IRS documents reveal the agency continued to recognize and wrestle with the discrepancy between its regulations and the statute for the next several decades, but never acted. More recently, in response to rulemaking petitions from CREW and other non-profit organizations, the IRS promised to “consider proposed changes in this area.” But, as the latest regulatory proposals make clear, the IRS still is not prepared to square its regulation with the congressional mandate. Once again, the IRS merely is pushing the problem down the road — well into a new administration, or perhaps a new decade.
Of course, portions of the new proposal do have merit. For example, treating contributions by section 501(c)(4) groups to other organizations engaged in politics as “candidate-related political activity” that does not promote social welfare would help prevent the sort of money laundering that has become routine. Dark money groups, like the Koch brothers’ Freedom Partners, increasingly are using grants to like-minded organizations to hide their role in funding political activities, and the IRS’s proposal should put an end to this. Similarly, the proposal makes clear that advertisements run close to an election mentioning a candidate by name count as political activity, effectively ending the fiction offered by some dark money groups that they are not.
Still, the crux of the 501(c)(4) problem long has been the exclusively/primarily dichotomy. As the 2014 election cycle gets underway, while the IRS continues to offer up tepid proposals that may or may not ever be enacted, the super-rich and corporations with deep coffers will continue to influence our elections anonymously. The IRS appears intent on ignoring the simplest and most effective solution — repealing the regulation that allows 501(c)(4) organizations to engage primarily in social welfare activities, and requiring them, as Congress intended, to engage exclusively in such activities. This change wouldn’t prevent anyone from participating in electoral politics, it would merely prevent them from using 501(c)(4)s to do so anonymously.
While at least the IRS has stopped pretending to have no role in curbing the abuse of social welfare organizations, the proposed regulations offer too little, too late. Unless and until the IRS fixes the problem it created, CREW will advance its argument in court and Congress should move legislation. One thing is clear: after 50 years of dithering, the IRS can no longer be trusted to get this right on its own.
Sloan is executive director of Citizens for Responsibility and Ethics in Washington.