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IRS Limits Political Activity in Post-Tea Party Flap Rule

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Nov. 26 (Bloomberg) -- The Internal Revenue Service created a new definition of political activity in its first attempt to reset the boundaries of permissible campaign involvement by tax-exempt groups.

The rules defining “candidate-related political activity” being released today would prohibit social welfare groups from counting certain communications that identify a candidate and voter registration drives as satisfying their nonprofit mission.

The “initial guidance” from the IRS and the Treasury Department doesn’t answer an important question: How much political activity can such groups conduct without jeopardizing their tax-exempt status?

“This is a very good sign that the IRS is expressing an appetite to do something here,” said Paul S. Ryan, senior counsel at the Campaign Legal Center, a Washington group that has criticized the proliferation of political groups that don’t disclose their donors.

The definition has ramifications for groups organized under section 501(c)(4) of the tax code such as Crossroads GPS, an organization founded with help from President George W. Bush’s political adviser Karl Rove, that have become involved in elections over the past few years.

2012 Election

Politically active nonprofit groups spent $336 million on federal campaigns in the 2012 election, including more than $256 million by 501(c)(4) groups led by Crossroads GPS and Americans for Prosperity, according to the Center for Responsive Politics. The latter figure from the nonpartisan research group in Washington that tracks campaign giving is about three times the $92 million that it says 501(c)(4) groups spent on federal campaigns in 2010.

Other 501(c)(4) groups active in the 2012 election included Priorities USA, which was founded by former Obama White House aides, and Patriot Majority USA, led by Democratic operative Craig Varoga.

The government proposed the definition for political activity six months after the IRS said it applied improper scrutiny to small-government Tea Party groups’ applications for tax-exempt status based solely on their names.

The revelations led to leadership changes at the agency and congressional investigations that are continuing. The inquiries found confusion and mismanagement at the IRS, determined that some Democratic-leaning groups received scrutiny and have shown no evidence of involvement of officials outside the IRS.

‘Critical Step’

“Any change should be carefully considered in a fair, equitable and non-partisan manner,” Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a statement. “Given the IRS’s recent track record, I pledge to thoroughly oversee this process to ensure politics aren’t brought to bear.”

Mark Mazur, assistant Treasury secretary for tax policy, said in a statement that the definition was a “first critical step” toward a “clear-cut” rule.

“We are committed to getting this right before issuing final guidance that may affect a broad group of organizations,” he said.

Political Activity

In addition to ads mentioning candidates and voter registration drives, political activity would include grants to political groups, events featuring candidates near elections and distribution of material on a candidate’s behalf.

The proposal would unnecessarily restrict First Amendment rights, said Jay Sekulow, chief counsel of the American Center for Law and Justice, which sued the IRS on behalf of Tea Party groups.

“Instead of holding those responsible for the unlawful targeting scheme accountable for their actions, the Obama administration is determined to further limit the free speech of Americans by attempting to change constitutional practices that are decades old,” he said. “With this move, the Obama administration opens a new front in its war against political dissent.”

With a number of steps needed before a decision, the IRS is unlikely to issue final regulations before the 2014 congressional elections, said a Treasury official who spoke on condition of anonymity to discuss the agency’s plans.

Social Welfare

In the U.S. tax code, groups organized under section 501(c)(4) must be operated “exclusively” for social welfare. Those groups don’t have to disclose donors and have become a popular structure for campaign involvement.

Treasury regulations say politics can’t be the groups’ primary purpose, and IRS officials monitor them now with a “facts and circumstances” test that looks at such groups’ activities rather than a specific definition.

“They really don’t have a definition right now,” Ryan said.

The IRS and Treasury will ask for comments on whether and how the definition should apply to nonprofit groups organized under other sections of the U.S. tax code, the official said. That could include charities and labor unions.

“I hope the administration understands that what’s good for the goose is good for the gander and looks at these union groups moving forward,” Hatch said.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net Greg Giroux in Washington at ggiroux@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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