The Good, Bad, and Ugly of Proposed IRS “Dark Money” Regulations


How invested are America’s nonprofits in the task of cleaning American politics of the pernicious effects of secret money and, alternatively, in the protection of the nonprofit sector’s role in mobilizing the electorate to register and vote? These two very different issues are addressed by the draft guidelines on the control of 501(c)(4) social welfare organizations that the Obama administration’s Treasury Department is circulating for public comment. Reactions have ranged from tempered support to strident opposition, with the latter from the right as expected, but also from the left.

In the politically polarized Beltway environment, virulent statements on the dark money issue from right-wingers are easily anticipated. Jay Sekulow, the chief counsel for the conservative American Center for Law and Justice, declared, “These proposed new regulations put the 1st Amendment rights of Americans at even greater risk.” Charles Spies, the founder of the pro-Romney Restore Our Future Super PAC, characterized the proposed rules as “Obama’s revenge against people who have been participating in the process on the other side from him.”

Some conservative critics imagine that the proposed guidance is really part of a nefarious Obama administration plot to silence the Tea Party movement in the wake of the IRS’s mishandling the 501(c)(4) applications from Tea Party-affiliated organizations. According to Rep. Dave Camp, chair of the House Ways and Means Committee, “This smacks of the administration trying to shut down potential critics.” Congressman Darrell Issa (R-CA), who has been leading congressional investigations of the Tea Party imbroglio at IRS, called the regulations “a crass political effort by the administration to get what political advantage they can, when they can.” The ubiquitous Grover Norquist, himself the president of a dark money group, Americans for Tax Reform,told the Washington Post that “This proposal appears to be motivated by politics, as was this administration’s earlier war on the tea-party-sponsored nonprofits”.But the Tea Party and its supporters can’t really claim credit for the proposed new IRS regs. The call for reining in 501(c)(4)s has been cresting for some time, particularly with the 2010 and 2012 elections, in which (c)(4)s raised and spent millions with impunity for use in political campaigns. 

The official Treasury statement of the proposed regulations characterizes them as “both more restrictive and more permissive than the current approach.” As they stand—prior to the IRS’s having received, collated, and interpreted public comment after their publication in the Federal Register—the proposed regulations contain some good points and some bad points, and perhaps a little bit of the ugly for adding problems and confusion for 501(c)(3) public charities.

The draft guidelines could potentially be the first step towards straightening out the nation’s dark money mess, but also hamstring the ability of nonprofits to register potentially eligible voters and mobilize voters to exercise their franchise.  The latter, components of promoting and protecting civic engagement, is a core function of nonprofits regardless of their 501(c) status. That makes the IRS draft regulations a high priority topic for nonprofit attention and advocacy.


The Good

The good is obvious. After decades of confusion, some of it abetted by the actions of partisans from both parties, the Obama administration is at last taking a much-needed step to explore tighter restrictions on the use of tax-exempt entities for political purposes. The target appears to be to remove 501(c)(4)s from engaging in candidate-related political activity where the (c)(4)s are increasingly hard to distinguish from the instruments of political parties and the candidates themselves.

The proposed regulations define candidate-related political activity for the purposes of excluding them from the social welfare functions of (c)(4)s—and for requiring that donations that support those political activities be disclosed. That is crucial. It is difficult to think of political activities of 501(c)(4)s that couldn’t be conducted by PACs, except that PACs disclose their donors. As the regulations currently stand, donors can make secret donations to (c)(4)s, which can then make organizational donations to Super PACs in the names of those (c)(4)s, not the underlying individual or corporate donors. The regulations wouldn’t eliminate money distributed by “independent” organizations, but they would reduce the influence of secret money in campaigns.

What constitutes candidate-related political activity? National Public Radio summarizes the proposed definitions of candidate-related political activity, some with problematic dimensions as articulated by Treasury, but at least all with definition and specificity:

   “Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.”

   “Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.”

   “Communications expenditures that must be reported to the Federal Election Commission.”

   “Any contribution that is recognized under campaign finance law as a reportable contribution.”

   “Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities (note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).”

   “Voter registration drives and ‘get-out-the-vote’ drives.”

   “Distribution of any material prepared by or on behalf of a candidate or by a section 527 political organization.”

   “Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties).”

   “Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program.”

The details of this list of candidate-related political activities will be refined in the coming weeks and months, a timeframe that will likely make the definitions too little and too late for the 2014 electoral cycle, but potentially with sufficient lead time for application in the 2016 elections. Leaving a big hole in the debate is the question of how much political activity is too much for (c)(4)s. The IRS has interpreted the law to mean that 501(c)(4)s should be “primarily” engaged in social welfare activities. What does “primarily” mean? How would the IRS spot and measure too much candidate-related political activity? The IRS will be looking for public input.


The Bad

One of the biggest shortcomings is the IRS’s failure to tackle the core of the 501(c)(4) problem: what constitutes social welfare programming. For all that the IRS might do, regardless of the weaknesses of defining political expenditures, its failure to define social welfare is going to cause difficulties. Groups will undoubtedly argue that their seemingly political activities are more social welfare than political.

Probably equally as troubling is that the regulations apply to 501(c)(4) social welfare organizations, but not to 501(c)(6) business leagues, trade associations, or chambers of commerce, a concern of the liberal-left nor to 501(c)(5) labor organizations, which conservatives would add to the list of politically-involved entities in need of restraint. While the definition of 501(c)(5) labor unions is relatively precise, presumably smart (c)(4)s operators will figure out how to run money through artificially created (c)(6)s, unless more precise regulations and definitions are added for that tax-exempt category. The Koch brothers-linked Freedom Partners 501(c)(6), which Citizens for Responsibility and Ethics in Washington recently called on the IRS to investigate, can be seen as a harbinger of the problem of potential dubious business leagues.

The inclusion of nonpartisan voter registration and get-out-the-vote efforts as candidate-related political activity may be the most significant and troubling change contained in the proposed IRS guidelines. Voter registration and GOTV activities—even voter guides, which mention political candidates—are seen by many entities as crucial elements of civic engagement, a core cross-cutting mission of tax-exempt entities. If mobilizing Americans to register to vote (51 million eligible Americans were not registered to vote as of 2012) and helping registered voters to exercise their franchise (only 58.7 percent of eligible voters turned out to vote in 2012) are deemed to be politically partisan activities, it would be a significant change in the long-accepted legitimate roles of nonprofits. Until this point, while some observers have complained vociferously about the partisanship of specific organizations’ voter registration and GOTV efforts, there hasn’t been a significant challenge to the legitimacy of the activity per se until these guidelines.

Is the Obama administration suggesting that voter registration and GOTV efforts have become so politically tainted that nonpartisan voter activities simply don’t really exist? Is it saying that the abuse of VR and GOTV by certain partisan entities has done enough damage to undermine the probity of the entire activity? Or is it saying that state and federal authorities are unable to sufficiently police VR and GOTV efforts to weed out the entities (or individuals within sponsoring entities) trying to make civic engagement a politically partisan effort? If the answer is yes to any of the three, Treasury needs to explain and justify these recommendations with compelling evidence. It is hard to imagine data that could be convincing enough to lead to reclassifying activities that increase the strength of American democracy—by creating avenues for more people who could and should vote to do so—as out of bounds for nonpartisan nonprofit activity.


The Ugly

Alliance for Justice president Nan Aron highlights what is wrong with a political system in which money really equates to power and influence, not speech: “The big players,” Aron notes, “will hire lawyers and accountants to help them avoid the rules.” That has been the history of campaign finance regulation in recent decades, especially as big money carved loopholes, exceptions, and new mechanisms to make a hash out of the McCain-Feingold campaign finance law (formally, the Bipartisan Campaign Reform Act of 2002).

Some donors who don’t really care about how much their political financing is disclosed might simply switch to Super PACs that do disclose their donors if thre are restrictions on how much candidate-related political activity 501(c)(4)s can undertake. Other donors could continue to choose 501(c)(4)s as their vehicles of choice in order to keep their involvement secret. Marketplace’s Mark Garrison echoes Aron’s point when he quotes Skadden, Arps, Slate, Meagher & Flom partner (and former Federal Election Commission associate general counsel) Kenneth Gross, who says, “Money will find its way into the system one way or the other.” That might even explain how social welfare organizations morphed into mechanisms for campaign financing by secretive donors, a function probably not originally intended, but found as a loophole by the inexorable power of big money.

The reality of the involvement of tax-exempt entities in politics is that they are often 501(c)(4)s or 501(c)(6)s that have linkages with 527s and, notably, 501(c)(3)s. A controversial study by the Campaign Finance Institute published in 2006 described the failure of campaign finance regulation “to incorporate a real world understanding of the specific ways in which various nonprofit interest groups—and their large donors—engage in elections and relate to campaigns.” The authors wrote that,

“These organizations often appear as commonly-managed entities within a single interest group’s public policy network. They work together to accomplish the group’s overarching objectives, including its election ones. As a result, it is unrealistic to assess the impact of a single entity’s (and its donors’) conduct, how it may be perceived by a candidate or party, and how it might be affected by different campaign policies, without reference to the behavior of the group as a whole.”

The implication was that the ostensibly separately-incorporated entities within these tax-exempt networks had somewhat porous boundaries, making the flow of capital among the organizations troubling for regulatory oversight and control. For example, on the 2011 U.S. Chamber of Commerce Form 990, the most recent available on GuideStar,  the “related organizations” to the 501(c)(6) Chamber are as follows:

  • The U.S. Chamber Institute for Legal Reform – 501(c)(6)
  • National Chamber Litigation Center – 501(c)(6)
  • National Chamber Foundation – 501(c)(3)
  • Business Civic Leadership Center – 501(c)(3)
  • Institute for a Competitive Workforce – 501(c)(3)
  • Policy Forum Endowment Fund – 501(c)(3)

In addition, there is a U.S. Chamber of Commerce PAC and, sharing the address of the U.S. Chamber, a 501(c)(6) called the Coalition for Reform, ostensibly existing to promote chambers of commerce. The Center for Responsive Politics notes that the networks extend to relationships among dark money groups, with funding flowing among them. Aron’s point about well-financed lawyers circumventing whatever rules might be devised applies to networks of nested tax-exempts.


For a Few Dollars More

Ultimately, these new proposed regulations are suffused with enough ambiguity to be all but ineffectual against the likes of Karl Rove and, to be fair, his less evocative counterparts on the other side of the political spectrum. Moreover, the historic inability of the IRS to shut down nearly anyone for violating the partisan political boundaries of 501(c) organizations isn’t going to be helped by the meltdown in the tax-exempt division of the IRS concerning its review of the tax exemption applications of Tea Party groups. Consistent year-to-year underfunding of the tax-exempt unit promises to make the IRS’s ability to enforce the best of regulations problematic. Just imagine what happens in the circumstance of congressional starvation of the tax exempt unit, likely only to worsen as Republicans punish the Service for the mismanagement of the Tea Party imbroglio.

Even with a bolstered IRS, the direction of these regulations is troubling. That voter registration and get-out-the-vote would be given a classification as a suspect, candidate-related activity for 501(c) organizations should give pause to all kinds of nonprofits. The right to vote is at the heart of democracy, here or anywhere. In the past year, state after state has tried to enact restrictions on voting with clearly unjustifiable explanations of voter fraud. The impacts take their toll mostly on people of color and the poor, the exact opposite of the moneyed interests behind politically involved 501(c)(4)s. Unless the IRS has somehow found a widespread cabal behind nonpartisan voter registration and GOTV efforts that demonstrates that “nonpartisan” doesn’t really apply to these activities, this is a serious problem for nonprofits.

Ohio State professor Donald Tobin describes the IRS approach as “entity-based regulation,” which means that if the government clamps down on the behavior of one kind of entity, moneyed interests will slither into other entities or create new one. In Gross’s words, “If 501(c)(4)s become an inconvenient vehicle, I have no doubt that funders will find a different vessel and 501(c)(6)s and LLCs would be likely suspects.” These proposed 501(c)(4) guidelines continue the entity-based regulato ry approach, addressing the behavior of specific kinds of tax-exempt organizations,but the real underlying problem is money in politics, not just the vehicles created to receive and spend money. With or without these draft regulations, money will continue to metastasize in campaigns. As the voting rights laws demonstrate, money isn’t the same as free speech. All people have a voice. Not all people have the money of Sheldon Adelson or George Soros. Money as speech is an artificial construct that beggars belief. Until money is removed from playing a pernicious role political campaigns, regulations such as these will be toying at the margins of the problem of American democracy.

Nonprofits of all kinds have to be actively engaged in monitoring, reacting to, and where necessary opposing possible changes in the regulation and oversight of 501(c) tax exempt organizations, but there’s a need for more than that. The campaign finance debate is often conducted at an arcane level that all but excludes most nonprofits. The amount of money devoted to political campaigns—not only the official campaigns of the candidates, but the purportedly independent expenditures of 501(c)(4)s and others that are not supposed to coordinate with candidates or the parties—is beyond excessive. In 2012, federal campaigns cost the nation roughly $6 billion, of which nearly $1 billion came from ostensibly independent organizations. That doesn’t cover the untold millions, even billions, spent for non-political issue advocacy that is all but overtly partisan and electoral.

The problem of money in political campaigns festers in the American polity. Nonprofits’ very existence as fundamental instruments in the American democracy gives them a major stake in this issue. They must speak up, lest they allow this debate to be determined by the likes of the Koch brothers and Karl Rove and people who have little or no interest in transparency in political donations or grassroots political democracy.

Between now and February 14, 2014, the IRS will be receiving comments on the proposed rules. Breaking out of the “inside baseball” debates over 501(c) organizations, a wide range of nonprofits should weigh in with the following:

  • Explanations of how they actually run voter registration and GOTV efforts and how they believe VR and GOTV programs should be regulated and monitored
  • Clarifications of potential definitions of candidate-related political activity
  • Distinctions between candidate-related political activity and nonprofit public policy advocacy
  • Clarifications of what should be meant by “social welfare,” as opposed to assuming that it is anything other than candidate-related political activity
  • Approaches for the IRS to determine what would constitute “primarily” when it comes to the social welfare programming of 501(c)(4)s
  • Rationales for expanding regulations on candidate-related political activity from (c)(4)s to other 501(c) entities
  • Proposals for regulating networks of 501(c)(4), (c)(3), (c)(6), and 527s with the ability to move funding from entity to entity within the networks

All of that responds to the specifics of these proposed guidelines, but it would behoove all nonprofits to focus their attention not only on the regulation of 501(c)(4)s, but on what should be directions for fixing the problem of money in American elections.