Campaign reformers target IRS treatment of nonprofits

Republicans have been blistering the Internal Revenue Service for months over its notorious targeting of tea party groups applying for tax-exempt status. Now a leading House Democrat and three campaign reform advocacy groups are suing the IRS for not taking a tough enough line against politicized nonprofits.

Rep. Chris Van Hollen (D-Md.), Democracy 21, the Campaign Legal Center and Public Citizen asked a federal judge in the District of Columbia on Wednesday to force the tax agency to amend its rules on “social welfare” organizations. Section 501(c)(4) of the tax code exempts such groups from taxation provided they are “exclusively” engaged in the “promotion of social welfare,” the complaint states. But since 1959, the IRS has interpreted “exclusively” to mean “primarily,” the plaintiffs assert. Worse, they say, a directive in June from the agency offered a safe harbor to any group that devotes no more than 40% of its activities and resources to political campaigns.

The directive “allow[s] substantial electoral campaign intervention by 501(c)(4) organizations ... despite the statutory requirement that they be exclusively engaged in social welfare activities,” the lawsuit contends. Those groups can thus collect unlimited, anonymous donations, giving them an unfair advantage over political action committees that have to disclose their donors and, in some cases, limit contributions, the plaintiffs argue.

Most charities operate as 501(c)(3) organizations, which allows them to accept tax-deductible contributions but bars them from engaging in campaigns or doing substantial lobbying. Congress created the 501(c)(4) designation, which is tax exempt but whose donors do not receive a tax deduction, for community groups and other special interests that want to lobby and engage in a limited amount of political activity.

Not surprisingly, clever attorneys eventually exploited the 501(c)(4) provision to create groups such as Crossroads GPS (which backs conservative candidates) and Priorities USA (which supported President Obama in his reelection campaign), gathering huge amounts of cash from anonymous donors to run independent campaigns or influence public opinion between elections.

Some top Democrats have been objecting to this practice -- and Crossroads GPS in particular -- at least since the fall of 2010, and Democracy 21 and the Campaign Legal Center petitioned the IRS to take a harder line on 501(c)(4)s in mid-2011. The agency’s targeting of tea party groups appears to have begun before that, in March 2010, the inspector general that oversees the IRS reported.

Plenty of conservatives take a very different view of campaign finance, arguing that federal rules are too restrictive. There’s no dispute, however, that campaign spending by 501(c)(4)s has exploded in recent years, in the wake of Supreme Court rulings that opened the door to direct, unlimited corporate and union spending on independent campaigns. Such groups reported spending $7.6 million on political activities in the 2004 presidential election cycle; in 2012, that amount rose to $256 million, the complaint states. Twenty-five 501(c)(4) organizations each spent $1 million to $71 million that go-around.

“If the IRS were instead to enforce the requirement that Section 501(c)(4) organizations engage exclusively in activity to promote social welfare, and thus refrain from engaging in substantial amounts of election campaign activity and expenditures, much of the electoral campaign spending currently carried out by Section 501(c)(4) organizations would shift to other types of organizations ... that are subject to donor disclosure requirements,” the lawsuit contends. It adds, quoting the Supreme Court’s ruling in Citizens United vs. FEC, that “the resulting disclosures would materially advance the public’s ‘interest in knowing who is speaking about a candidate shortly before an election.’ ”

Maybe, or maybe the exceedingly creative legal minds at work in U.S. politics would find another way to keep huge amounts of money flowing into campaigns without any of the pesky disclosures required by federal election law. Nevertheless, it would be a big step in the right direction.

And yet it wouldn’t go far enough. Even if Van Hollen prevails, the IRS will still be left to judge what constitutes political campaign activity, and exactly how much of it 501(c)(4)s are allowed to do. Both of those decisions are perilous. If the tea party-targeting scandal has demonstrated anything, it’s that the IRS shouldn’t make any judgment calls about politics.

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