Congress in Quagmire over 501(c)(4) Guidelines

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June 17, 2013; Politico

If there was one thing that everyone from Democrat Max Baucus at the Senate Finance Committee to Republican Darrel Issa at the House Committee on Oversight & Government Reform might have agreed on after their hearings about the IRS scandal, it would have been the understanding that the IRS tax-exempt unit was in need of change. But the details are devilishly difficult for the two warring political parties.

One thing that members of both parties have called for is clearer guidance on the rules of 501(c)(4)s. What is, exactly, a 501(c)(4)? When are activities political and when are they social welfare programming? How should the IRS investigate potential 501(c)(4 applications and applicants to determine if they qualify? What questions are appropriate or inappropriate for IRS staff to ask? Under what circumstances should the IRS tell a (c)(4) applicant that it really ought to be a 527?

Is it likely that Baucus and Issa will come to a meeting of the minds on the rules? We’ll put our money on “no,” just like Urban Institute senior fellow Eugene Steuerle. He told Politico, “I don’t think, at the end of the day, Congress can…find a perfect set of rules for nonprofits. This is a very, very hard problem.”

Perhaps it is the recognition that IRS reform is, as Baucus says, “part of a more comprehensive package” that comprises tax reform. This notion doesn’t tickle the fancy of the senior Republican on the committee, Senator Orrin Hatch, who doesn’t think IRS reform is necessary, explaining, “everyone knows what the rules are.” In the House, Ways and Means chairman Dave Camp also sounded hesitant about the need for IRS reform.

We tend to agree with New York State attorney general Eric Schneiderman, who believes that the solution requires dealing with the Supreme Court’s Citizens United decision on election campaign financing. “It seems to be that the only reason in the post-Citizens United world to use a 501(c)(4) instead of a super PAC—which enables you to spend all the money you want in support of or opposition to a candidates—is to conceal your identity.” It may come down to how much transparency the nonprofit sector is willing to accept around its own 501(c)(4) donor lists. Rep. Richard Neal, a Democrat from Massachusetts, said that the lack of transparency in (c)(4)s’ financing statements is the real issue, and much bigger than the IRS scandal.

The nonprofit sector had better propose a new regime for donor disclosure, else state and federal agencies will act on their own.—Rick Cohen

  • Patrick Bell

    The real question is whether we want political donations to be funneled through a nonprofit at all – vs.a PAC or SuperPAC. The next question is whether we want transparency for such donations. Then Congress can decide whether or not to create a new 501(c) designation or alter in some way the existing (c)4 rules or guidelines. The former would be the lesser of two evils, since the general rule for nonprofits is not to have tax-exemption for purely political organizations. My personal belief is that the kind of activity that we have seen lately in no way qualifies as “education,” and should be properly relegated to 527 status. Nonprofits have legitimate rights to influence public policy through education or even limited direct lobbying. But the incentive to use the (c)4 designation to take advantage of the Citizens United ruling bends that legitimate use all out of shape, and represents the most cynical exploitation of an unintended loophole, smearing the sector’s reputation in the process.