Rep. Chris Van Hollen sued the IRS on Wednesday, seeking to stanch the flow of anonymous campaign cash by forcing the agency to rewrite decades-old regulations on tax-exempt charities.
The Maryland Democrat wants the Internal Revenue Service to tighten its rules on which groups qualify as "social welfare" organizations. The IRS currently allows such organizations — a tax-exempt class of power players known as 501(c)(4)s, whose ranks include Karl Rove's Crossroads GPS and the Obama-aligned Priorities USA — to dabble in political advocacy, so long as they keep such activities secondary to their general charitable work.
But Van Hollen says that such a "primarily charitable, secondarily political" arrangement leaves open a loophole for overtly political organizations to exploit benefits intended to be reserved for charities. Chief among those benefits is that 501(c)(4)s do not have to disclose their donors, and so corporations, unions, and other groups can pour money into advocacy efforts without fearing public backlash — or indeed any public scrutiny at all.
Hoping to lift the curtain on political spending, Van Hollen wants the IRS to rewrite its rules to require 501(c)(4)s to engage exclusively in social-welfare activities, and keep out of political spending entirely. If the groups want to get into politics, Van Hollen said, they should register under a different nonprofit category — known as 527s — that would protect the groups from taxation but require them to disclose all of their donors.
"You can spend the money, but the law does require, as Congress intended, that you [tell] the public where the money is coming from," said Van Hollen, who said his primary goal in the suit is campaign finance transparency.
For transparency advocates, the fight over political spending has taken on new urgency since 2010, when the Supreme Court's Citizens United decision struck down campaign finance laws that had previously required disclosure of outside groups' political spending.
Outside political spending has exploded since the decision, as have the number of groups seeking 501(c)(4) status. More than 3,200 groups sought the status in 2012, as opposed to 1,735 in 2010.
But the IRS's efforts to distinguish between charitable organizations and political groups landed the agency in hot water with Republicans earlier this year, when Obama administration officials admitted that some IRS employees had used criteria that targeted tea-party groups seeking 501(c)(4) status for closer scrutiny.
Republicans declared the revelations a scandal, accusing the administration of using the IRS to punish their political adversaries.
Van Hollen countered Republican claims that the IRS was engaged in politically motivated attacks with Democrats' assertions that liberal groups were also in the agency's crosshairs. But he said the issue could be rendered moot by removing the IRS's obligation to judge where groups stand along the blurred line between social welfare and political advocacy.
"The root of the problem is that the IRS is currently in the business of trying to determine whether an organization's "¦ primary purpose is social welfare or whether its purpose is political," Van Hollen said.
Van Hollen is suing in his official capacity as a House member, and he is joined in the suit by several groups advocating for additional government transparency. The suit is being filed in the U.S. District Court for the District of Columbia, and it also names the Treasury Department as a defendant.
Treasury and the IRS are currently engaged in an effort to bring more clarity to the boundary between social-welfare and political-advocacy groups, including looking at possible numerical thresholds on the percentage of an organization's funds that it would be allowed to spend for political purposes.
But while Treasury is involved in clarifying the rules, the department is steering clear of investigating the 501(c)(4)'s political activities.
"That's not within our purview," Deputy Treasury Secretary Neal Wolin told a House panel in May. "It is important I think just to reiterate that the Treasury not involve itself in matters that relate to the administration of the tax code and in particular ones that have these kinds of political overtones."
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