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.