A leading campaign watchdog group is pushing back in the roiling debate over how the IRS treats a new class of tax-exempt "social welfare" groups that critics say are exploiting legal loopholes to engage in political activities.
Citizens for Responsibility and Ethics in Washington (CREW) released a white paper Wednesday responding to groups arguing against proposed reforms to IRS treatment of nonprofit 501(c)(4) groups. CREW officials contend the proposed reforms are needed to rein in abuses of groups winning tax-exempt status while campaigning and concealing their funding sources.
According to tax code, the 501(c)(4) nonprofit groups must be "operated exclusively" for social welfare purposes in order to maintain a tax status that does not oblige them to disclose their donors.
The issue was thrust into the political limelight when the IRS conceded its auditors wrongly targeted applications from certain would-be 501(c)(4) groups if they used the name "tea party" or other markers of conservative thought in their names.
Former Federal Election Commission Chairman Michael Toner said that the debate over the interpretation of the statute has created unusual alliances.
"Fighting additional IRS restrictions on 501(c)(4) entities is one area where advocacy groups on the far left and the far right agree; they are strange bedfellows on this issue," he said. "What's different about this campaign finance debate is that it's not just right-of-center organizations that are opposed to the imposition of additional restrictions on 501(c)(4) entities; both liberal and conservative groups are fighting this battle."
Groups fighting a stricter interpretation of the statute claim that the restrictions on their activity violate the First Amendment. These groups are usually on the far left or right and are more heavily involved in issue advocacy in Congress. But CREW's leader rejected that argument.
"Claiming the First Amendment allows tax-exempt groups to freely funnel secret money into our elections deliberately mischaracterizes legal precedents," said CREW Executive Director Melanie Sloan. "The law is clear: Political spending by charitable and social welfare organizations is prohibited by the tax code."
CREW argued that the restrictions for nonprofit groups are constitutional because the groups can engage in political activity through alternative channels.
The IRS is in the middle of a rulemaking on new proposed regulations. One of the new rules would label voter registration information mail-outs and "get-out-the-vote" events hosted by nonprofits as political activity. The new proposals are up for public comment until Feb. 27.
"I think it's going to be uphill legally to get the courts to invalidate the current IRS regulations governing 501(c)(4) entities, particularly given that the regulations have been on the books for more than 50 years and given that entities across the ideological spectrum would be adversely affected if the regulations were struck down," Mr. Toner said. "The real litigation action is going to take place if the IRS proceeds to issue new regulations concerning 501(c)(4) entities; if that happens, we can expect a flurry of lawsuits to be filed."
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