Calls For Increased Scrutiny of 501(c)(4) Nonprofits

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April 16, 2013; Bloomberg Businessweek

Jonathan Salant’s reporting on the various Senate hearings and IRS inquiries into 501(c)(4) social welfare organizations that do a lot more political campaigning than they ever do in social welfare programming strikes us as noteworthy. It suggests that the hourglass may be running low on the ability of these political groups to spend secret money on electoral politics, flouting not only the public’s need for disclosure but also their own statements about their social welfare purposes.

Salant reports that Senator Carl Levin (D-MI) plans to hold hearings on how these groups can function as political entities without IRS investigation, and the IRS has asked 1,300 of these organizations to explain exactly how they justify their tax exempt (c)(4) status.

We have no expectation that the involvement of moneyed interests in trying to sway elections will cease. If Levin, the IRS, and even the Securities and Exchange Commission come up with new rules for (c)(4)s, we’re sure that wealthy donors and corporate entities will find other vehicles permitting them unlimited political activity. However, we do think that the march toward disclosure is inexorable. It’s just about inconceivable that anyone could think that it isn’t in the best interests of democracy to restrict how much more power moneyed interests get in the democratic process than ordinary, unmoneyed citizens, or that the moneyed players in politics shouldn’t be revealed to the public.

This past electoral cycle, where contributors to both Republicans and Democrats flooded elections with secret moneys, seems to have broken the logjam. Defenses of secret political funding and funders are wearing thin. Explanations of why society benefits from non-disclosure increasingly fail against the reasons for disclosure.

But part of the problem is in the governmental oversight, such as it is. The tax code says that 501(c)(4)s are supposed to be operated exclusively for social welfare activities, but the IRS regulations changed that to “primarily engaged,” which (c)(4)s have interpreted to mean just over 50 percent. The IRS is being sued by the Committee for Responsibility and Ethics in Washington (CREW) over the faulty reg, but presumably, if Levin pursues his hearings, he will have to examine why the IRS has been so weak-kneed over regulating (c)(4)s—even if it were to use the “primarily engaged” standard—and why the Federal Election Commission has been, for all practical purposes, Washington’s least functional federal agency.

501(c)(3) public charities have been wary of efforts to expand disclosure requirements on (c)(4)s out of fear that the disclosure standards might splash over from (c)(4)s to (c)(3)s. Some may also be wary about efforts to juice IRS oversight because the IRS might look at the political activities of public charities and religious groups, which are prohibited from partisan political engagement.

Democracy requires better of us. We hope that Senator Levin’s hearings come to pass and he takes no prisoners in asking the IRS, the FEC, and the SEC what they’ve been doing to protect American electoral democracy. We hope CREW’s litigation moves along, compelling the IRS to explain how it could issue a regulation so plainly at odds with the letter of the law. And we hope that disclosure of moneyed interests in electoral politics comes to pass—because the time is long overdue.—Rick Cohen