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The IRS recently proposed rules designed to hogtie the electoral activities of the Tea Party movement, while leaving untouched the politicking of unions and business groups.
The right reacted with fury, and more than 140,000 comments were filed, mostly outraged. The IRS should back down out of a sense of self-preservation, but it is not clear that maintaining the legitimacy of the agency is anywhere on the administration’s priority list. The rule looks to be the product of a deliberate Progressive offensive, and in this calculus a bit of collateral damage, such as delegitimizing the IRS, is small beer.
Republicans have introduced a bill to stall the action for at least a year. The bill might well pass the House, but the effort is Washington theater. Nothing can pass the Senate, and the Office of Management and Budget recently said that a veto would be in order if something did slip through.
The OMB statement drips faux reasonableness:
The relevant Treasury and IRS rules have been in place since 1959 and are broadly recognized as unclear … The lack of clarity of these standards has resulted in confusion and difficulty administering the Code, as well as delays in the processing of applications for tax exempt status…. The notice and comment process allows for all concerned parties to provide input and comments … and the IRS will carefully consider any and all such comments.
The part about the 54 years of confusion is true, and one might believe in benign motives, were it not for news reports about Democratic politicians pressuring the IRS to target citizens groups, deliberate IRS delays, and White House visits by IRS staff. That the proposal would limit citizens groups while leaving unions and business leagues untouched also produces a certain skepticism.
The current proposal represents the triumph of the wipe-out-the-Tea-Party philosophy.
Nonetheless, the OMB statement deserves attention, because it highlights an interesting question that receives too little attention: How did the IRS gain the authority to regulate political speech in the first place?
The answer is, the agency simply took it, without explanation or statutory warrant, and it has never been challenged on the point. The IRS has been acting beyond its authority for over 50 years, and the “confusion and difficulty” bemoaned by OMB is the product of these decades of hubris and error.
The History of the IRS’s Power Grab
The idea that nonprofit organizations should not be subject to the income tax is as old as the tax code itself, right from its aborted origin in 1894 (the income tax was declared unconstitutional) and the beginnings of the modern system in 1913 (after the 16th Amendment).
Two rationales exist. First, the practical side: nonprofits do not usually have income as that term is commonly understood, since most subsist on donations, nor do they produce profits. So how can they be subjected to a tax based on economic activity? Second, nonprofits are the heart of civil society — indeed, the government is supposed to exist to foster civil society rather than vice versa — so their activities should not be discouraged.
As a result, section 501 of the Internal Revenue Code exempts nonprofits, and the current version of that section is much the same as it was in 1919. Section 501(a) declares nonprofits tax-exempt; 501(c) contains 29 subsections listing dozens of types of nonprofit organizations, sometimes decreeing minor differences in their treatment.
The proposal would count as electioneering any mention of candidates close to an election, in blatant transgress of the Citizens United decision.
The crucial distinction is between 501(c)(3), which covers charities, foundations, religions, education, and similar organizations, and groups covered by other subsections. Of particular interest for the current controversy are (c)(4), which are social welfare organizations and civic leagues, plus some employee organizations; (c)(5) labor and agricultural organizations; and (c)(6) businesses. Progressive propaganda deliberately blurs the distinction, referring generically to “tax-exempt,” But only the (c)(3)s should be of serious concern to a revenue-collecting agency.
For a (c)(3), contributions are deductible from the income of the donor. This makes them of great interest to the IRS as a revenue matter, because the possibilities for tax avoidance are obvious, and very well-explored. As of 2012, the IRS counted 1,081,891 (c)(3)s in existence.
Donations to (c)(4)s, (c)(5)s, and (c)(6)s are not deductible by the donor. This makes them of little importance from a revenue standpoint. It would be possible to endow a (c)(4) and then have money accumulate tax free, but that issue is easily addressed by a tax on business and investment income, and is trivial. The numbers of affected organizations here: (c)(4)s: 93,142; (c)(5)s: 50,046; and (c)(6)s: 69,198.
Early on, a question arose about political activity by (c)(3)s. The position of the IRS was that a tax deduction by the donor amounted to a government subsidy for political activity, and should not be allowed. The courts mostly agreed, but they also had a hard time drawing the line between public educational activity (okay) and political activity (ungood).
Cases during the 1920s struggled with the distinction, and the revenue code of 1934 banned “substantial” political activity by (c)(3s, a definition which did not clarify the issues.
Then, in 1954, the revenue code received an overhaul. During the debates, Minority Leader Lyndon Johnson introduced a floor amendment that limited (c)(3) status to organizations:
no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of [(or in opposition to)] any candidate for public office. [Bracketed language added later]
The backstory is that LBJ was irate over activities by foundations linked to his political enemies, and wanted to cripple them. His colleagues in both parties also liked the idea of silencing opponents, and the amendment passed without debate or legislative history.
That the proposal would limit citizens groups while leaving unions and business leagues untouched also produces a certain skepticism.
The amendment applied only to (c)(3)s, and not to (c)(4)s, (c)(5)s, or (c)(6)s. Thus, by hallowed canons of statutory interpretation, Congress intended to limit its scope to (c)(3)s alone. (A further illustration of the tighter leash on (c)(3)s is that they must apply for and be granted tax exempt status by the IRS, using Form 1023. A (c)(4), (c)(5), or (c)(6) can file an application (Form 1024) and have tax-exempt status confirmed, but this is not mandatory. Such groups can “self-declare,” in IRS terms, and the exemption exists automatically if they meet the criteria, though they must be careful to file the annual reports required of all nonprofits.)
IRS mulled over the implementation of the 1954 law for five years, until it issued regulations in 1959. These still stand, with little change. The regulations drew a line between (c)(3) charities/foundations/education/religious groups and “action organizations.” The latter come in three varieties:
1) One that devotes a substantial part of its activities to influencing legislation;
2) One that “participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office”;
3) One with primary objective(s) that can be attained only via legislation and that engages in advocacy of such legislation rather than nonpartisan analysis.
All three action activities are forbidden to (c)(3)s, except to the extent that another subsection gives a limited lobbying dispensation to some (c)(3)s. Of course, the line between these activities and permissible public education remains as elusive as ever, and is the subject of 50 years-worth of rulings and learned articles. Mostly, it depends on the “facts and circumstances.”
Nonprofits are the heart of civil society, so their activities should not be discouraged.
The 1959 regulation also addressed (c)(4)s, which are “Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” Judicial interpretations of “social welfare” emphasize the good of the community or the common good, terms which provide little specific guidance. And, as noted in the regulations, if a social welfare organization promotes the good of the community, then why would it not be (c)(3)? So, the1959 regulations identified the key distinction as political activity. A (c)(4) can count as “social welfare” activist activities of the types forbidden to the (c)(3)s. However, the regulations provided that a (c)(4) could be an activist organization only in sense of engaging in Type 1 or Type 3 activities. A (c)(4) cannot count as “social welfare” any type 2 activity, electioneering for or against candidates. (Similar rules apply to (c)(5)s and (c)(6)s, by 1969 fiat of the IRS General Counsel.)
This interpretation is certainly not an obvious one, what with us being a democracy and all that, with electoral activity being crucial to the public weal. Nor is it logical to allow lobbying and grassroots mobilization while disallowing electoral actions. How does one separate legislation from the candidates who support or oppose it? The rationale for depriving (c)(3)s of the right to politick rests on the idea that the government should not subsidize political activity, but (c)(4)s use after-tax dollars, so the anti-subsidy rationale falls apart.
Not in 1959 and not since has the IRS provided any reason for the exclusion of electoral activity from the definition of “social welfare.” It was and remains an ipse dixit.
The (c)(4) regulations created problems because it quickly became clear that in fact one cannot separate electoral activities by a (c)(4) from its overall efforts. A social welfare organization created to promote or oppose public policy X will inevitably get involved in elections. But, given the statutory language that a (c)(4) must be “exclusively” promoting social welfare, any scintilla of politicking would remove its tax exemption.
How does one separate legislation from the candidates who support or oppose it?
Not to worry — the IRS rewrote the statute. It decided that “exclusively” in the phrase “operated exclusively for the promotion of social welfare” actually means “primarily,” so a (c)(4) can engage in some politicking, as long as it is related to its main mission. How much is allowed without jeopardizing tax-exempt status has never been clarified, and tax experts differ wildly. Some say up to half of all activity is okay, some say less, and none would allow more.
Of course, there are also numerous questions about what counts as electoral activity. If a good government league prints a voters’ guide to the candidates, it is not politicking and is thus social welfare, as long as it does not say anything substantive about the candidates. But if it points out, for example, that Candidate Y spent five years in jail for embezzlement, this might be taking a position against him, and would no longer qualify. But, the league could still issue the guide if doing so did not constitute more than half of its activities.
The artificial divorce of electoral activity from social welfare muddied things further in the 1970s, when the IRS examined the status of heavy-duty political organizations, those set up by candidates and parties specifically to collect and spend political money. It ruled that they were not covered by any part of 501(c), and thus were not tax exempt. The IRS drew the sting by declaring that contributions did not constitute income, but neither could these organizations deduct their campaign-related expenses because corporations cannot deduct political expenses.
Congress acted quickly to ward off this threat to the political class by passing a new section of the code, 527, to declare that political organizations created to collect and spend campaign money damn well are tax exempt, but it imposed numerous reporting and disclosure requirements on them. So, to the existing brew of 501(c) organizations, 527 added a new category of political organizations.
The (c)(4) regulations created problems because it quickly became clear that in fact one cannot separate electoral activities by a (c)(4) from its overall efforts.
This whole messy system produced much grousing, but for Washington insiders it is workable. A big player sets up a (c)(3) to collect tax deductible contributions and to produce “public education” materials, and a (c)(4) to use the materials for lobbying and grassroots mobilization and a carefully controlled dollop of electoral politics. The (c)(4) must operate on after-tax dollars, but most of the expenses can be shoved onto the (c)(3) so the lobbying budget can be kept lean. Then, for electoral politics, a 527 is set up, also with after-tax money. It can draw on the efforts of the upstream siblings, which lets it be all teeth and little tail, and the combination is effective.
The big players and the IRS itself could live with this modus vivendi. One needs lawyers and lots of them, but that matters little, because it helps keep the political game concentrated in the political class. One would not want the citizenry to worry their pretty little heads about deep things, like governing the country. If, out in the hinterlands, some of the nation’s 93,000+ social welfare organizations were politicking, their activity was not big enough to get on anyone’s radar.
The Tea Party Stirs Up the IRS
About five years ago, two things changed.
The year 2009 saw the birth of the Tea Party movement, citizens’ groups with the social welfare mission of restoring constitutional government and the free-market economy. The groups are divorced from the political power structure and the Washington insiders, and skeptical of both parties.
With the Citizens United decision in 2010, the Supreme Court held unconstitutional campaign finance regulations that forbade electioneering by (c)(4)s.
There are also numerous questions about what counts as electoral activity.
Before Citizens United, the IRS restriction on electoral activity had been rendered largely redundant by the Federal Election Commission. After Citizens United, the door was open, and the IRS began getting Form 1024 applications that left no doubt that the mission of the applicants was political.
From the IRS professionals’ viewpoint, these presented a big problem. The 1959 definition of social welfare was based on a view of a benign and honest political process that could be influenced by decorous groups promoting one cause or another, engaging in lobbying and grassroots organizing, and sometimes getting involved in elections. The concept had no room for groups that based their raison d’etre on the view that the political process itself has become corrupted and that their social welfare mission is purgation of the system.
The result of applying the logic of the 1959 IRS rules and its crabbed definition of social welfare would have been mass rejection of these applicants. This would have resulted in squawks from the right, so the agency delayed and temporized. But at the same time, it was getting heavy pressure from the Democrats to apply the rules and wipe out the Tea Party movement.
The current proposal represents the triumph of the wipe-out-the-Tea-Party philosophy. Because the Tea Parties are explicitly political organizations, even though they are nonpartisan, they will have difficulty meeting the requirement that half their activities be non-electoral, a requirement codified in the proposal. But this requirement has long been regarded by tax experts as implicit under the 1959 rules, so congressional proposals to roll the standards back to 2010 are pointless.
One needs lawyers and lots of them, but that matters little, because it helps keep the political game concentrated in the political class.
The proposed rules go way beyond the prior standards by classifying as verboten a number of election-related activities that have long been regarded as legitimate even for charities. The proposal would count as electioneering any mention of candidates close to an election, in blatant transgress of the Citizens United decision.
The bottom line is that the current proposal has outrages all its own, but the fundamental problem goes back to 1959 and the IRS grab of authority to regulate the actions of social welfare groups — despite the explicit language of the statute applying the no-electoral-activity standard only to (c)(3)s — without any explanation of its decision, and with no discernible logic.
The goal should be to overturn the original regulation, not just the additions proposed last Fall. Independent (c)(4)s, not controlled by parties and candidates, are, under the statute, entitled to engage in as much political and electoral activity as they wish, without IRS approval or paperwork. For 50 years, the IRS has been exceeding its authority, so if OMB really wants to eliminate “confusion and difficulty,” the best path is to get the agency out of the business of regulating political activity.
As a thought experiment, imagine an application for (c)(4) status that says:
Our organization believes that the political system and the Constitution have been undermined by interest groups and cronyism, that the size of the government is too large, and that the free market is hamstrung by excessive regulation.
Our mission is to deliver this message to the public, and to seek out and support candidates of all parties who agree with us.
As a matter of the English language, what possible argument exists that the activities of this group, including the electoral activities, are not designed to better the community and support the common good? So how can it possibly be excluded from the definition of social welfare?
It is time to go back to 1959 and take a mulligan.
James V. DeLong lives in Red Lodge, Montana. His formal comment on the IRS proposal is here. He is the author of Ending ‘Big SIS’ (The Special Interest State) & Renewing the American Republic.
Image by Dianna Ingram / Bergman Group
For 50 years, the IRS has been exceeding its authority. The agency should get out of the business of regulating political speech.
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