Rewriting the rules for 501(c)(4)s

Last November, the Internal Revenue Service asked for public comments on proposed rules to rein in political activity by tax-exempt “social welfare” groups that don’t disclose their donors. The agency has gotten an earful of negative reaction, not only from conservatives who long have accused the IRS of political bias, but also from some liberal and civil-liberties groups. (The Republican-controlled House has voted to delay the rules for a year.)

A few of the criticisms are justified and easily addressed. The danger is that the controversy will prevent the IRS from closing a loophole that has allowed wealthy political donors to conceal their identities.

Even as it ruled in the Citizens United case that corporations had a 1st Amendment right to engage in political spending, the Supreme Court emphasized the importance of disclosure. Justice Anthony M. Kennedy wrote that transparency about the sources of political spending “enables the electorate to make informed decisions and give proper weight to different speakers and messages.” But so-called 501(c)(4) groups — named after a provision in the tax code — can disguise the identity of their donors.

That these groups are serving as laundries for anonymous political contributions makes a mockery of federal law. According to the tax code, 501(c)(4)s are supposed to operate “exclusively” to promote social welfare. And what is a social welfare organization? Examples offered in an IRS publication include groups that build housing for the poor or provide financial planning.

Unfortunately, since 1959 the IRS has undermined the law by redefining “exclusively” to mean “primarily,” allowing

501(c)(4)s to engage in limited political activity. (Some lawyers believe such groups can spend as much as 49% of their resources on independent political activity.)

As it prepares final rules, the IRS should return to the original intent of Congress and insist that these tax-exempt organizations refrain completely from election-related advocacy. If they and their donors want to influence voters, there are other mechanisms in the tax code that allow them to do so — but those arrangements require the disclosure of who is writing the checks.

Another pillar of effective regulation of these groups is a definition of political activity broad enough to deal with the sometimes devious means used by special-interest groups to influence elections — such as the familiar TV ad that tells viewers to call Sen. So-and-So and complain about his or her outrageous voting record.

The draft rules would replace the current definition of political activity — “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office” — with this language: “direct or indirect candidate-related political activity.” That term is further defined to include “any public communication that is made within 60 days before a general election or 30 days before a primary election and that clearly identifies a candidate for public office (or, in the case of a general election, refers to a political party represented in that election).” This language is similar to that in federal law governing “electioneering communications” about federal candidates, but it also would include candidates for state and local office.

Final rules should make it clear that ads that praise or criticize political candidates — even if they don’t expressly advocate a candidate’s election or defeat — constitute political activity that is off limits for 501(c)(4)s.

In some respects, the proposed rules go too far. They would include in the definition of “election-related activities” nonpartisan voters’ guides, get-out-the-vote campaigns and candidate debates sponsored by social welfare groups. This blanket ban would spare IRS officials from engaging in the subjective and time-consuming task of determining whether a particular activity by a 501(c)(4) was really nonpartisan. But given the bipartisan backlash, the agency should establish criteria that would allow a social-welfare group to engage in what everyone would consider innocuous activities.

Even as it modifies its rules, the IRS must not lose sight of the point of this exercise: to prevent secrecy-minded political operators and special interests from using the tax code as a smoke screen.