Domestic Taxes

Top Dem sues IRS over tax exemptions

Rep. Chris Van Hollen (D-Md.) and campaign finance advocates on Wednesday sued the IRS in an attempt to roll back the use of “dark money” in politics.
Their lawsuit is closely tied to the targeting controversy that has engulfed the IRS this year, with employees at the agency coming under fire for singling out applications for tax-exempt status that contain terms like “Tea Party.”
{mosads}The IRS says the reviews are meant to ensure that the primary purpose of a group pursuing 501(c)(4) status is promoting the social welfare, but Republicans say the scrutiny has been tinged with an anti-conservative bias.
But the real problem with the IRS reviews, according to Van Hollen, is that agents shouldn’t be trying to judge a group’s level of political activity at all.
The law governing 501(c)(4) groups, now a century old, says that those organizations must exclusively concentrate on social improvement. But current IRS regulations, adopted in 1959, suggest that a group that devotes less than half its resources to politics can also qualify.
“The point here is that the law is clear,” Van Hollen said. “What do you want us to do — put an exclamation point after exclusively?”
The number of 501(c)(4) groups in politics has exploded in recent years. Unlike other outside groups, they are not required to disclose their donors, creating pools of “dark money” that are often spent influencing elections.
Though Van Hollen and other Democrats say the IRS has given extra scrutiny to liberal groups as well as conservative ones, they argue the controversy over the tax exemptions is a byproduct of the agency’s refusal to follow the law.
“These were underlying issues that were a ticking time bomb ready to go off,” Van Hollen said. “The IRS was never intended to be in that business.”
The Campaign Legal Center, Democracy 21 and Public Citizen are also on the suit, which was filed Wednesday in U.S. District Court in Washington. Public Citizen’s Scott Nelson will be the lead counsel for the plaintiffs.
The plaintiffs are not seeking any penalties against 501(c)(4) political groups currently engaged in politics.
But if they succeed in forcing the IRS to use a strict standard, it could dramatically scale back the use of undisclosed donations in politics.
Republicans have dismissed the idea that the rules governing tax exemptions played a role in the IRS targeting, as well as the Democratic statements that liberal groups and Tea Party organizations received the same treatment.
The IRS, which declined to comment on the lawsuit, and the Treasury Department have been discussing possible ways to update the guidance on how to judge whether a 501(c)(4)’s primary activity is social welfare, and about how to define campaign intervention.
Neal Wolin, then the deputy Treasury secretary, told lawmakers in May that the department and the IRS were working “to see what additional guidance we can provide so that we can bring better clarity to this area and help avoid the kinds of things that we’ve just learned were happening.”
Van Hollen and campaign finance advocates said Wednesday that, even though the IRS had been wrongly enforcing the law for decades, the real problems began after the Supreme Court’s Citizens United decision in 2010.

Since that decision — where the high court ruled that corporations and organized labor could spend from their general treasury funds on elections — the amount of groups seeking the 501(c)(4) exemption have almost doubled, Van Hollen said. The amount of money those groups have spent either for or against a political candidate have also skyrocketed.

The lawsuit appears to give Van Hollen another avenue for forcing more disclosure of political donors, after he and other Democrats have unsuccessfully pressed for legislative solutions like the DISCLOSE Act.

If 501(c)(4) organizations had to exclusively work on social welfare issues, political groups could still organize as 527s, Van Hollen said. Those groups can directly influence elections, but also have to make their donors public.

“The great majority of the American people believe the public has the right to know who’s bankrolling these election campaigns,” Van Hollen said.

“If you want to pump money into campaigns,” he added, “the legal way to do it is as a 527.”

But Van Hollen, Nelson, Paul Ryan of the Campaign Legal Center and Fred Wertheimer of Democracy 21 all acknowledged that their lawsuit also sets up other tough questions about how a 501(c)(4) group can stay within the law.

Policymakers, for instance, would still have to make calls about what specifically constitutes political activity if 501(c)(4) groups could only engage in social welfare work. Nelson told reporters Wednesday that lobbying was already considered a social welfare activity for those organizations.

Van Hollen, meanwhile, said he was happy to have that conversation after 501(c)(4) groups were barred from directly taking part in elections.

“Then we can have a discussion under the law about what other things may or may not qualify,” he said.

This story was updated at 3 p.m.

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