The real IRS Scandal: Legal challenge to 1959 IRS regulation re: 501(c)(4) tax exempt status

Posted by AzBlueMeanie:

It looks as if MSNBC host of the The Last Word, Lawrence O'Donnell, tax analyst David Cay Johnston (and I) finally have the attention of someone in Congress about The real IRS scandal: the ease with which political organizations have been abusing the 501(c)(4) tax exempt status.

Paul Blumenthal writes at the Huffington Post, Chris Van Hollen: IRS Rules To Be Challenged In Court:

Rep. Chris Van Hollen (D-Md.) said Tuesday that he and two campaign
finance watchdog groups would sue the IRS, challenging regulations that
allow nonprofit groups to be involved in politics if they're "primarily"
devoted to a social welfare purpose.

Van Hollen said he and watchdog groups Campaign Legal Center and
Democracy 21 would sue to clarify an IRS regulation that he said was at
odds with the law, which requires certain groups to "exclusively" engage
in social welfare to earn nonprofit status
. The IRS regulation
permitting groups “primarily” engaged in social welfare allows the
organizations to participate in an undefined amount of political
activity, said the congressman, a leading advocate of campaign finance
reform and ranking member of the House Budget Committee.

The 1959 IRS regulation has become an issue since the Supreme Court's 2010 Citizens United decision opened the door for nonprofit groups organized under section 501(c)(4) and 501(c)(6) of the tax code to raise and spend corporate and union money on elections without disclosing donors. The scandal involving the agency's singling out conservative groups applying for nonprofit status has increased attention to the regulation, especially among Democratic lawmakers.

"The statute is very clear," Van Hollen said during the keynote address
at a conference on money and politics held by the Brennan Center for
Justice. "It says that a 501(c)(4) organization is reserved for entities
that are engaged 'exclusively' in social welfare activities
, and it's
not clear to me what part of 'exclusive' the writers of the regulation
didn't get when it came to this particular provision of the law."

* * *

Van Hollen noted that the Campaign Legal Center and Democracy 21 have
petitioned the IRS, seeking a review of the regulations for allowable
political activity for nonprofits, and a definition of how much of the
groups' budget or time meets the definition of "primarily." The IRS did
not respond to those petitions.

"We have now exhausted the administrative remedies and we do now plan
to move forward," Van Hollen said. "I plan to move forward with these
groups to file a lawsuit against the IRS to enforce the plain meaning of
the law
, and frankly get the IRS out of the business of trying to draw
these fine distinctions between whether something is 49 percent or 48
percent, or whatever it may be, political activity."

* * *

Nearly every Democratic member of the Senate Finance Committee blasted the IRS' regulation
during a hearing on IRS scandal. Sen. Michael Bennet (D-Colo.) asked
then-acting IRS Commissioner Steve Miller to defend the regulation.
Miller responded, "I'm not going to defend it or attack it. It is what
the regulation is."

The finance committee later suggested changes to the nonprofit tax laws as part of a package of reforms. These included alterations to the "exclusively" versus "primarily" regulatory debate.

Neither Van Hollen nor the two groups said when they would file the lawsuit.

0 responses to “The real IRS Scandal: Legal challenge to 1959 IRS regulation re: 501(c)(4) tax exempt status

  1. It’s not unheard of for Treasury (it’s generally Treasury, not the IRS, that issues regulations) to botch a regulation like this. But in the typical case they do so in a way unfair to the taxpayer. In that situation, the regulation can be challenged when the IRS seeks to enforce it.

    If you think about it, what Treasury did with the regulation was wrong, but not crazy. The drafters probably were concerned that a group could lose 501c status by engaging incidentally in activities that were not to promote social welfare. But the use of “primarily” as the litmus test was ill conceived, because it set up the 51% threshold, which obviously contradicts the statute. They should have gone with an objective test based on expenditures, and required 90 or 95% of expenditures to be for social welfare.