Uneven I.R.S. Scrutiny Seen in Political Spending by Big Tax-Exempt Groups
By NICHOLAS CONFESSORE Published: May 13, 2013 281 Comments
Over the last two years, government watchdog groups filed more than a dozen complaints with the Internal Revenue Servic .. http://topics.nytimes.com/top/reference/timestopics/organizations/i/internal_revenue_service/index.html?inline=nyt-org .. seeking inquiries into whether large nonprofit organizations like those founded by the Republican political operative Karl Rove and former Obama administration aides had violated their tax-exempt status by spending tens of millions of dollars on political advertising.
The I.R.S. never responded.
During the same period, the agency singled out dozens of Tea Party .. http://topics.nytimes.com/top/reference/timestopics/subjects/t/tea_party_movement/index.html?inline=nyt-classifier -inspired groups that had applied for I.R.S. recognition, officials acknowledged on Friday, subjecting them to rounds of detailed questioning about their political activities. None of those groups were big spenders on political advertising; most were local Tea Party organizations with shoestring budgets.
For the I.R.S.’s bipartisan legion of critics, the agency’s record has underscored its contradictory and seemingly confused response to the fastest-growing corner in the world of unlimited political spending: tax-exempt groups that have paid for at least half a billion dollars in campaign ads during the last two election cycles.
The I.R.S. has done little to regulate a flood of political spending by larger groups — like Crossroads Grassroots Policy Strategies .. http://www.crossroadsgps.org/ , co-founded by Mr. Rove, and Priorities USA, with close ties to President Obama — as well as Republican leaders in Congress and other elected officials. And an agency that is supposed to stay as far away from partisan politics as possible has been left in charge — almost by accident — of regulating a huge amount of election spending.
“We’ve complained about a few big fish and we’ve heard nothing from the I.R.S.,” said Paul S. Ryan, senior counsel at the Campaign Legal Center, which filed many of the complaints with the agency. “We would far rather see scrutiny of these big fish — the groups that spent hundreds of millions of dollars to influence elections — than to see the resources spent on hundreds of small groups that appeared to spend very little on elections.”
Almost all of the groups in question are organized under 501(c)(4) of the tax code, which regulates nonprofit groups engaged in promoting “social welfare.” At least 16 such organizations spent a million dollars or more on campaign advertising in the 2012 elections. (Crossroads GPS and Priorities USA also run “super PACs .. http://topics.nytimes.com/top/reference/timestopics/subjects/c/campaign_finance/index.html?inline=nyt-classifier ” with similar names that spent millions more.)
But because they purport to be engaged primarily in issue advocacy, not election advocacy, tax-exempt groups are not closely regulated by the Federal Election Commission. That task falls, instead, to the I.R.S., which can take years to investigate problems and is required to do so in strict secrecy.
Some groups, like Crossroads, filed applications for I.R.S. tax-exempt status, claiming that they would be engaged primarily on research and educational activities but spending the bulk of their money on what appears to be political advertising. Others, like the American Tradition Partnership, operate for years at a stretch without filing federal tax returns, in seeming violation of the law. Many boast of their impact on political campaigns.
But while a few of the big groups have faced delays in having their tax exemptions recognized by the I.R.S., none appear to have received the intense scrutiny given the Tea Party groups, which were asked dozens of questions about spending on political advertising and other election activities. Of 15 such groups represented by Jay Sekulow, a lawyer with the American Center for Law and Justice, none spent a dollar on broadcast advertising from 2009 through 2012, according to the Campaign Media Analysis Group.
I.R.S. officials said they had also submitted as many as 200 other groups’ applications to closer examination, but have declined to characterize those groups’ political affiliation.
Chris Ashby, a lawyer who advises conservative groups, said the I.R.S. might have focused on smaller groups because they seemed less likely to contest the reviews. “The big groups are generally well-advised, lawyered up. Their tax forms are artfully drawn,” Mr. Ashby said. Smaller groups, he suggested, made a better target for the I.R.S.
“Many of them don’t have counsel,” he said. “They probably aren’t well advised.”
Unlike candidates and super PACs, which must register quickly with the Federal Election Commission and regularly file financial disclosures, 501(c)(4) groups can operate for years while waiting for the I.R.S. to recognize their tax status. Nor are they required to disclose their donors — one reason they appear to be the preferred vehicle for large, publicly traded corporations that seek to influence elections without identifying themselves.
The I.R.S. recognizes at least 44,000 organizations as 501(c)(4) “social welfare” groups, according to public agency data. They include homeowners’ associations, car shows and sports clubs, as well as grass-roots groups like the Sierra Club or the National Rifle Association, which register voters, lobby Congress and run campaign ads.
But it is not clear exactly how much such groups can spend on elections, thanks to decades worth of vague and sometimes contradictory laws, regulations and court decisions.
The tax code states that 501(c)(4)’s must operate “exclusively” to promote social welfare, a category that excludes political spending. Some court decisions have interpreted that language to mean that a minimal amount of political spending would be permissible. But the I.R.S. has for years maintained that groups meet that rule as long as they are not “primarily engaged” in election work, a substantially different threshold.
Nowhere do the rules specify what “primarily engaged” means, though there are indications that the agency has begun to re-examine the question. In March, the I.R.S. began sending out questionnaires to roughly 1,300 tax-exempt organizations, including some 501(c)(4)s, regarding their political lobbying and other activities. The agency has said it is merely seeking a clearer picture of how tax-exempt groups operate to ensure better compliance.
But the ambiguity of existing rules has left a loophole, critics argue, and hundreds of millions of dollars worth of thinly disguised election spending have passed through. In 2011, the Campaign Legal Center and Democracy 21, another watchdog group, filed a petition with the I.R.S. asking it to issue clearer regulations on political activity by tax-exempt groups and to sharply restrict their election spending.
Others echoed those calls on Monday, saying clearer standards would stem violations — while limiting the danger of capricious investigations. “I think if there were clear standards that limited the political activities that (c)(4)s could engage in, it would really make it easier for the I.R.S. to enforce the law without having to resort to things like the name that an organization chooses,” said Lisa Rosenberg, a lobbyist for the Sunlight Foundation, which advocates government transparency.
Derek Willis contributed reporting.
A version of this article appeared in print on May 14, 2013, on page A14 of the New York edition with the headline: Uneven I.R.S. Scrutiny Seen in Political Spending by Big Tax-Exempt Groups.
As to how we got to this point, the answer involves disparate elements like a provision of tax law adopted a century ago — a provision that had nothing to do with political campaigns — and a change in tax law adopted in 1954 at the behest of Lyndon B. Johnson, then the Senate Democratic leader, who was angry that some ministers in Texas were opposing his re-election.
But mostly it stems from legislation, passed in 2001, that required normal political committees to disclose their donors. Seeking a way around that law, organizations formed for the purpose of influencing elections began to claim they were really “social welfare” organizations, which have had their own special tax status since the modern income tax took effect in 1913.
What are “social welfare” organizations? The tax code defines them as “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” Note the word “exclusively.” Over the years, the I.R.S. has issued rules saying that things like a retirement plan for voluntary firefighters, or an organization devoted to providing free parking in a downtown business district, could qualify.
That section of the law, by the way, is Section 501(c)(4). Normally, I would not burden you with such a number, but in this area it is hard to figure out what is going on without a scorecard. That section is next to, but distinctly different from, Section 501(c)(3), which defines charitable organizations. Both groups are tax exempt — meaning that under normal circumstances they do not owe income tax on profits from investments — but only the 501(c)(3) organizations can receive tax-deductible contributions.
The law used to be silent on whether charities could have anything to do with politics. But that changed in 1954, when Senator Johnson, facing a primary challenge from a conservative Democrat with substantial Catholic support, inserted into a pending tax bill a provision “denying tax-exempt status to not only those people who influence legislation but also to those who intervene in any political campaign on behalf of any candidate for any public office,” as he put it in a brief Senate speech. The provision was added without any real debate.
Six years later, in 1960, the I.R.S. adopted regulations extending the political prohibition to Section 501(c)(4) organizations, but with a caveat. Social welfare organizations could intervene in politics as long as the organization’s “primary” purpose was social welfare. The idea was that it was perfectly acceptable for a local organization supporting, say, renovation of a downtown to participate in a campaign for a referendum to impose a tax for that purpose.
It was not clear what “primary” meant, but as Donald B. Tobin, an Ohio State University law professor, wrote in 2011 .. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1920269 , “it is certainly less than the statutory term ‘exclusively.’”
In practice, none of that made any real difference for decades. There was no need for a political group to maintain it was something else. That changed after the 2001 law required normal political committees — covered under Section 527, which allows them to avoid paying taxes on contributions they receive — to disclose their donors. And it became more important when the Supreme Court, in the Citizens United case, cleared the way for corporations to spend unlimited amounts on elections.
By last year’s presidential election, dozens of such “social welfare” organizations were trying to influence elections. The way they saw it, advertising to promote issues was not political, and as long as an advertisement did not actually back a candidate, it could qualify as a nonpolitical issue advertisement.
Consider one ad placed by ..
.. Crossroads Grassroots Policy Strategies, the “social welfare” organization founded by Karl Rove, a former aide to President George W. Bush. The ad, which was shown in swing states last year, consisted of headlines plucked from publications painting President Obama’s economic policies as failures. It ended with the exhortation to “Tell President Obama, for real job growth cut the debt.”
If that ad is not defined as political, then the “primary” purpose of all these groups is not political. And of course there were equally political “nonpolitical” ads placed by groups backing President Obama.
There are precedents in election law for such a narrow definition of political, but Professor Tobin argues that the tax law actually defines political advocacy much more broadly, “using a facts and circumstances” test that such ads would fail.
He also notes that while the tax law exempts Section 501(c)(3) charities and Section 527 political committees from gift tax rules, it offers no such exemption to Section 501(c)(4) social welfare organizations. If the I.R.S. took the position gift tax was owed, that would mean every contributor who gave more than $13,000 to such an organization would owe additional taxes, and the days of social welfare organizations as political organizations would come to an end.
In spring 2011, there were reports that the I.R.S. was examining some taxpayers’ returns for failure to pay the gift tax on such contributions. A group of Republican senators cried foul and the service soon said it was dropping such audits.
There is one other potential tax issue involved here. While donations to Section 501(c)(4) social welfare organizations are not charitable contributions, and thus not deductible, it is not nearly as clear that companies seeking to influence elections cannot deduct such contributions as ordinary and necessary business expenses. Are any doing that? Is the I.R.S. challenging them? We do not know. Tax returns, and audits, are not public information.
As the political furor grew this week, President Obama forced out the acting commissioner of the I.R.S. Does anyone think his successor, or his successor’s successor, will have any appetite for trying to enforce the tax law’s restrictions on political activities by so-called social welfare groups? After all, any political group can contend that an audit reflects partisan politics.
It would be much better if someone other than the tax collection agency had to decide whether to start investigations, but that is not what the law now says.
At the beginning of this column, I asked whether political groups were flouting the law. The answer is, probably yes. But with the I.R.S. afraid to even try to enforce the law, the chances seem slim that any such case will ever go to court.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
This article has been revised to reflect the following correction:
Correction: May 18, 2013
The High & Low column on Friday, about the line between political advocacy groups and tax-exempt social welfare organizations, paraphrased incorrectly from an article by Donald B. Tobin, a law professor at Ohio State University, about the legal status of tax-exempt entities that engage in political activity. Comparing different definitions of political advocacy, Professor Tobin argued that tax law defines it much more broadly, not much more narrowly, than election law does.
A version of this article appeared in print on May 17, 2013, on page B1 of the New York edition with the headline: A Fine Line Between Social And Political.
The IRS is facing criticism after news broke that a Cincinnati branch targeted Tea Party-related groups with unequal scrutiny–but according to MSNBC’s Lawrence O’Donnell, the real scandal happened long ago.
Section 501(c)(4) of the Internal Revenue Code defines tax-exempt social welfare groups like this:
------ Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. ------
In 1959, under the administration of Dwight Eisenhower, the meaning of this section was changed dramatically when the IRS decided the word “exclusively” could, in effect, be read as “primarily.”
“For 54 years, the IRS has gotten away with the crime of changing the word ‘exclusively’ to ‘primarily,” said Lawrence O’Donnell on The Last Word Monday. “The IRS took a hard, clear word like ‘exclusively’ and changed it into a soft word ’primarily’ and then left it to the IRS agents to determine if your organization was primarily concerned with the promotion of social welfare.”
As Klein says, the IRS “must act in ways above reproach.” O’Donnell agrees with a balanced approach, but “if in 2010, there was a flood of Tea Party applications for tax exempt status and many fewer applications for tax exempt status from liberal political groups, then it only makes mathematical sense that more questions would be directed at Tea Party applications.”
O’Donnell argues that the “test” Klein speaks of is made harder to enforce precisely because of the squishiness of the language. It was that change from “exclusively” to “primarily,” he argues, that “allowed political organizations to buy political advertising in support of candidates or as an attack on candidates and do so under a tax-exempt provision in the law that was never intended for them to hide behind.”
.. why don't they just go back to what the tax law states? .. from now .. too hard? .. if the tax law still states "exclusively", (assuming it does) how could they get away with what seems to me an illegal change .. exclusively means solely/alone/purely/entirely .. nothing to do with "primarily" .. has O’Donnell's point been discussed at all? .. or is that both sides of pollie's-got-a-cracker are happy with a ridiculously false interpretation of a tax law .. a boat without oars on this one .. lol .. confused ..
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