On the Tuesday before Thanksgiving, a joint press release from the Treasury Department and the Internal Revenue Service revealed that they are proposing new standards for 501(c)4 organizations. This move comes after accusations in the spring of 2013 that the IRS was unfairly targeting Tea Party nonprofits for audits of their political activity.
The rules for 501(c)4 “social welfare” organizations have long been nebulous. It is clear that they can only retain their tax-exempt status under certain conditions, and that they are intended to work for the “common good,” not for specific political parties or candidates. The current Tax Code states, “To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).”
But the language of the rules — working primarily for social welfare — has never been adequately defined. Currently, it’s assumed that no more than 49% of a social welfare organization’s resources can be spent on political activity and still maintain its tax-exempt status. However, the proposed rules do not address this assumed limit.
Despite this, political activity by 501(c)4 groups could be sharply curtailed by the proposed rules. According to Accounting Today, “the proposed guidance defines the term ‘candidate-related political activity,’ and would amend the current regulations by indicating that the promotion of social welfare does not include this type of activity.”
“Candidate-related political activity” would include communications that expressly advocate for a clearly identified political candidate or candidates of a political party. They would also include communications that are made within 60 days of a general election (or 30 days of a primary) and clearly identify a candidate or political party. Communications that currently must be reported to the Federal Elections Commission (FEC) would be considered “candidate-related political activity.”
In addition, the proposed rules would stipulate that if the 501(c)4 was required to report political spending to the FEC, it must also report that same political spending to the IRS. Currently, not all groups do this. According to OpenSecrets.org, Americans for Tax Reform, for example, reported to the FEC that it spent $15.8 million in 2012 on independent expenditures, while it only reported independent expenditures of $9.8 million to the IRS. This is important because it could affect whether a group goes over the 49% threshold allowed for political activity.
Grants from 501(c)4s to other 501(c)4s, 527 groups and other tax-exempt entities that engage in”candidate-related political activity” would be included as political spending, unless the organization receiving the grant stipulates in writing that the grant would not be used for such activity.
The current proposal is only the first step in a process of developing regulations that involves extensive public comment; IRS and Treasury Dept. officials have pledged that they will carefully consider all comments before setting the final guidelines into place. The final guidelines are not expected to go into effect in time for the 2014 elections but could be in effect for the 2016 elections. For more details on the proposed regulations, click here.
The Center for Responsive Politics held a 5 member panel discussion on dark money groups at George Washington University on December 6, 2013. According to one of the panel members, Donald Tobin (a law professor who specializes in non-profit tax law), the proposed IRS rules will “establish some specific sets of boundaries.” However, Tobin went on to say that the proposed rules will not achieve the goal of preventing dark money from entering the political system, since political groups will find other ways to accomplish the same goal.
Attorney Jan Baran, another member of the dark money panel, agreed. Baran, who has represented the Republican party and conservative groups in campaign finance cases, stated, “Money migrates, and it migrates as a result of changes in the law.” Another panelist, Viveca Novak (editorial and communications director for the Center for Responsive Politics) was also in agreement. “Money in politics doesn’t ever go away,” she said, ” it just shows up in a new form.” She added, “There is a huge pool of money that’s available to be used in politics as long as the donors’ names aren’t disclosed.” For more information about the dark money panel discussion, click here.