The Plot to Muzzle the IRS and Keep Secret Money Secret

Those going after the agency want to keep secret hundreds of millions in dark, undisclosed money to run political attack ads and muddy the waters.

Committee Chairman Darrell Issa (R-CA) arrives for a House Oversight Committee hearing on Capitol Hill, September 19, 2013.
National Journal
Norm Ornstein
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Norm Ornstein
March 5, 2014, 4:27 p.m.

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.

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