The Plot to Muzzle the IRS and Save Secret Campaign Cash

The tax agency wants to clarify rules that govern political committees operating as "social-welfare" groups. Dark money's backers aren't taking it sitting down.
Representative Darrell Issa is the House's top investigator. (Jonathan Ernst/Reuters)

The Internal Revenue Service’s regulatory process to define clear rules for political activity by nonprofit groups operating as 501(c)(4)s under the tax code has generated an almost unprecedented number of comments and requests to testify, just as the IRS “scandal” continues to generate outrage, much of it bogus, from Fox News, Darrell Issa, The Wall Street Journal editorial page, and others. I have written on the subject before, but its renewed focus demands a new column.

First, a little history and context. Tax law has many provisions for nonprofit organizations, including 29 under Section 501(c) in the Internal Revenue Code. Federal credit unions, for example, are under 501(c)(1), business trade associations are under 501(c)(6), mutual insurance companies are under 501(c)(15), black-lung benefit trusts are under 501(c)(21), and so on. Most of what we think of as nonprofits—religious, educational, scientific, and charitable organizations—are under Section 501(c)(3).

Section 501(c)(4) applies to “social-welfare organizations,” nonprofits that promote social welfare through public-education campaigns, including some lobbying. What about nonprofits that aim to influence elections and engage in campaigning as their primary activity? Those entities organize under Section 527 of the code. That includes political parties, PACs, and other related groups. The law clearly and unequivocally defines 501(c)(4)s as exclusively social-welfare organizations. Not “sort of” social-welfare organizations, not “kind of” social-welfare organizations, not even “primarily” social-welfare organizations. But for decades, in direct defiance of the clear language of the law, the IRS has used regulations that define 501(c)(4)s as primarily social-welfare organizations. Why did the IRS do this? Tax experts in this area tell me that this is a convention used at times by the agency to give it a tiny bit of flexibility to avoid rigid characterizations and applications of the law—meaning that if an organization accidentally or unknowingly used an insubstantial portion of its resources in ways that were not within the rubric of social-welfare organizations, the agents or auditors would not be forced to throw the book at it.

Groups classified as 501(c)(4)s do not have to disclose the identity of their donors. Before 2000, 527s did not have to disclose their donors either—outside organizations used 527s to run ads clearly designed to elect or defeat candidates, but they were called “issue ads” because they did not explicitly say “elect” or “defeat” Candidate X or Y. These outside groups gravitated to 527s to escape disclosure and run their campaigns in secret—and to avoid contribution limits. But after 2000, the new way to avoid disclosure became the 501(c)(4)s. Following the Citizens United decision in 2010—which opened the door to corporations, including nonprofit groups, to make direct expenditures in federal elections—enterprising and aggressive lawyers pushed the envelope. They used the IRS’s application of “primarily” in its regulatory approach to social-welfare organizations to mean 50.01 percent of the organizations’ activities, and encouraged the newly formed groups to spend a fortune on political ads during a campaign, and then afterward run so-called “issue ads”—many of which were in fact disguised campaign ads—to meet their 50.01 percent standard.

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Norm Ornstein is a contributing writer for The Atlantic, a contributing editor and columnist for National Journal, and a resident scholar at the American Enterprise Institute for Public Policy Research. More

Ornstein served as codirector of the AEI-Brookings Election Reform Project and participates in AEI's Election Watch series. He also serves as a senior counselor to the Continuity of Government Commission. Ornstein led a working group of scholars and practitioners that helped shape the law, known as McCain-Feingold, that reformed the campaign financing system. He was elected as a fellow of the American Academy of Arts and Sciences in 2004. His many books include The Permanent Campaign and Its Future; The Broken Branch: How Congress Is Failing America and How to Get It Back on Track, with Thomas E. Mann; and, most recently the New York Times bestseller, It's Even Worse Than It Looks: How the American Constitutional System Collided With the New Politics of Extremism, also with Tom Mann.

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