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.

For a group intent on influencing the outcome of elections, there was only one reason to create a 501(c)(4) instead of turning to a 527 or simply forming an independent super PAC—secrecy. For many groups, that was explicit: When Karl Rove and his colleagues formed Crossroads GPS to operate alongside his super PAC, American Crossroads, the communications to potential donors made it clear that if they wanted to remain anonymous, the GPS route would enable them to do so.

For a federal revenue service that is understaffed and deeply sensitive about getting in the middle of a political dispute, the easiest way out was the passive one: Accept the standard that flew directly in the face of the law but was insisted upon by aggressive political consultants and their consiglieri to inject huge amounts of dark money into federal races. When the IRS publicly announced that it would consider applying gift taxes to donors to these groups that went over the line, the organized and concerted campaign of intimidation by the pols forced the agency to back off.

After Citizens United and another related appeals-court decision, SpeechNow, we saw an explosion of super PACs and of outside money flooding into campaigns, and an explosion in groups trying to get 501(c)(4) status. Many clearly did not deserve it—if you are a “Tea Party” group, with a direct goal of influencing elections, you clearly belong as a 527. The same is true of many organizations aimed at influencing elections with the word “party” in the name, or even of others using words like “progressive” or “occupy.” Faced with a flood of applications, and recognizing, thanks in part to efforts by reform groups and lawmakers, that their handy interpretation of “primarily” in the regs had exploded into a gaping loophole, the IRS began its ham-handed and overreaching efforts to screen groups.

Now, appropriately and commendably, the IRS is trying to write new and clear regulations that meet the test of complying with the explicit language of the law, as the Supreme Court itself, in decisions like Better Business Bureau v. the United States, has said means exactly what it says: Exclusively means exclusively. A very modest amount of political activity can fit under the rubric of social-welfare organizations, and the IRS is trying to make it easy for organizations by defining both what those political activities are and what proportion of the organization’s budget can be applied.

Not surprisingly, opponents are going to DEFCON 1—for one reason, and one reason only: They want to keep secret the hundreds of millions in dark, undisclosed money to run attack ads and muddy the waters. This attack on the IRS, by lawmakers like Mitch McConnell, Issa, and Dave Camp, and by their outside political hacks and counselors, is all about muzzling the IRS to maintain secrecy and avoid the disclosure that the Supreme Court wholeheartedly and almost unanimously endorsed in decisions including Citizens United.