Don't Buy the 'Social Welfare' Defense of the IRS

You don't have to do a lot for the social welfare to legally qualify as a 'social welfare organization.'

(Corrected to remove reference to Club for Growth in fourth paragraph)

A lot of the calls for the Internal Revenue Service to crack down on political 501(c)(4) organizations -- which is what the IRS was trying to do when it touched off the scandal over Tea Party groups -- focus on the claim that ideological, political groups are obviously not "social welfare" organizations as required under the law. Not so fast.

"Social welfare" is a term of art that doesn't mean exactly what it sounds like. To qualify, a group must have the aim of producing benefits that accrue to the community as a whole, not just its members. "Benefit" and "community" are construed broadly; organizations do not have to demonstrate that the policies they promote are good or that they benefit everyone.

You can see this in the IRS regulations governing 501(c)(4) groups. These groups may engage in unlimited lobbying related to their social welfare missions. The IRS offers these specific examples of acceptable activity: "promotion of legislation on animal rights," "advocacy of anti-abortion legislation," "legalization of currently illegal activity" and "advocacy of changes in the tax law."

The groups can also engage in electioneering, even endorsing candidates. Here's the IRS: "An exempt IRC 501(c)(4) organization may intervene in political campaigns as long as its primary activity is the promotion of social welfare."

So when Jeffrey Toobin writes in the New Yorker today that what the IRS did was OK in part because "501(c)(4) organizations must refrain from traditional partisan political activity, like endorsing candidates," he's wrong.

There are limits: 501(c)(4)'s can't have electioneering as a primary purpose (such organizations must incorporate as 527s, which have to disclose their donors) and they cannot coordinate directly with political parties. They can't have a narrow focus of advancing their funders' financial interests; for example, utility companies can't form a 501(c)4 to lobby for higher utility rates. That doesn't likely implicate groups with broad goals like shrinking the government.

Some groups are probably running afoul of those regulations, though one reason the rules aren't enforced well is that "primary" and "electioneering" are difficult to define. But it's not correct to say that any group that looks nakedly political must be abusing its 501(c)4 status. There is a lot of room to be very political and still be promoting "social welfare" under the law.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.