Nov. 27 (Bloomberg) -- The Internal Revenue Service proposed limits on tax-exempt groups’ involvement in politics with rules that may transform campaign financing by restricting advertisements and voter registration drives.
The tax agency yesterday included campaign ads, events featuring candidates and website postings in a new definition of “candidate-related political activity.” The proposed regulations would apply to social welfare groups that have become involved in campaigns without disclosing donors and mean that such activity could jeopardize their tax-exempt status.
The rules, which won’t take effect until after the 2014 elections, don’t resolve an important question: How much political activity can such groups conduct without potentially losing their status?
The answer could redefine the rapidly changing world of campaign finance and help shape the 2016 elections. Outside groups including nonprofit organizations have wielded more influence in federal elections, operating alongside the parties and candidates in a shift that has altered the dynamics of political power.
The groups gained prominence and funding after a series of regulatory rulings and court decisions, including the Supreme Court’s 2010 Citizens United decision that removed limits on independent political spending by corporations and labor unions.
Democrats welcomed the IRS proposal, calling it an overdue attempt to rein in what they see as abuses by groups who hide their donors’ identities.
“The public has a right to know who is spending millions to influence the outcome of our elections and we must put an end to this flow of secret money,” said Representative Chris Van Hollen, a Maryland Democrat who is suing the IRS to require it to prohibit political activity by social welfare groups. “While we welcome this action, we need a definitive and bright line ruling from the court.”
Sal Russo, chief strategist of the Sacramento, California-based Tea Party Express, said he had a “grave concern” that federal regulation would discourage political participation.
“The more you regulate, the more you drive people away,” he said in a phone interview. “I don’t like the idea of making it more difficult for citizens to operate in the public square.”
The definition has ramifications for social welfare 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 former political adviser Karl Rove, and Americans for Prosperity, financed by billionaire businessmen Charles and David Koch.
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 center, a nonpartisan 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 the League of Conservation Voters and Patriot Majority USA, led by Democratic operative Craig Varoga.
The U.S. government proposed the definition for political activity six months after the IRS said it applied improper scrutiny to the applications by small-government Tea Party groups for tax-exempt status based solely on their names.
The Tea Party revelations led to leadership changes at the IRS and congressional investigations that are continuing. The inquiries found confusion and mismanagement at the IRS, determined that some Democratic-leaning groups received scrutiny and so far have shown no evidence of involvement of officials outside the agency.
“Before rushing forward with new rules, especially ones that appear to make it harder to engage in public debate, I would hope Treasury would let all the facts come out first,” Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee, said in a statement.
“This smacks of the administration trying to shut down potential critics,” Camp said.
In addition to ads mentioning candidates and voter registration drives, political activity under the new definition would include grants to political groups, events featuring candidates near elections and distribution of material on a candidate’s behalf.
The limits on advertising would apply within 60 days of a general election and 30 days of a primary.
That may not be restrictive enough, said Paul S. Ryan, senior counsel at the Campaign Legal Center in Washington, which has criticized groups that don’t disclose donors. The time between presidential primaries early in 2016 and the general election in November would leave a significant gap where groups could run ads without disclosing donors.
The proposal would unnecessarily restrict First Amendment rights, said Jay Sekulow, chief counsel of the American Center for Law and Justice, which has 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.”
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. That approach contributed to the scrutiny that put the IRS in the spotlight, because agency workers didn’t have a clear sense of how to assess groups’ actions.
“They really don’t have a definition right now,” Ryan said.
Jan Witold Baran, a former Republican National Committee lawyer and specialist on campaign and election law, said the IRS is “taking a step in the right direction” by issuing rules that will bring clarity to an area that is too murky and subjective.
The “facts and circumstances” test now being used is “a very vague, capricious and unenforceable standard that’s basically a standard of, ‘You’re engaged in political activity when I see it and say so,’” said Baran, a partner at Washington-based Wiley Rein LLP.
The IRS hasn’t quantified what would constitute an organization whose “primary purpose” is social welfare rather than political activity, he said, although there was discussion during congressional hearings earlier this year of setting a numerical threshold, such as 40 percent of activities.
“That would be very helpful -- it would clear things up and provide guidance so everyone would operate knowing what the rules are,” Baran said.
The IRS and Treasury are asking for comments on whether and how the definition should apply to nonprofit groups organized under other sections of the U.S. tax code, including charities, labor unions and business trade groups such as the U.S. Chamber of Commerce. Comments and requests for a public hearing are due by Feb. 27.
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