Proposed IRS Regulations Draw Fire From the Right and the Left

March 16, 2014 16:00 pm

by Charlie · 27 comments

This is a guest post from local attorney Stefan Passantino.

Last week, a bipartisan coalition of lawyers representing tax-exempt 501(c)(4) social welfare organizations joined the chorus of objections to the numerous infirmities in the proposed IRS regulations governing 501(c)(4) entities. A copy of those objections can be found here. As one who represents 501(c)(4) entities and has already registered my serious concerns with the IRS over its proposed rulemaking, I share the objections raised by so many others. In my opinion, the rules as proposed have a distinct “Ready, Fire, Aim” quality to them in that they do little to address ostensible concerns with the activities of these organizations but have the potential to do a great deal of harm to the basic freedoms of speech and association we almost take for granted in this country because of the way the proposed rules are drafted.

Want an example? The way the IRS has drafted it’s proposed rules, the IRS is reserving the right to BAN BOOKS. The proposed rules would prohibit a 501(c)(4) entity from distributing written materials prepared by “candidates” but then goes on to define “candidates” as anyone who “is proposed by another for . . . nomination . . . or appointment to any federal, state or local public office”. That could be anyone whose ideas are powerful enough to make others, anywhere in the country, say “You know, she outta run for office”.

Even activities that other tax-exempt groups (charities, unions, and trade associations) are allowed to engage in (like nonpartisan voter ID, voter registration, or issuance of nonpartisan voter guides) would be banned for 501(c)(4) organizations. It is because of examples like this that opposition to the proposed rulemaking is decidedly bipartisan; with groups like the ACLU joining in expressing serious concerns.

If you are interested in learning more about the nuts and bolts of the proposed rules, you can read McKenna Long & Aldridge LLP’s client alert here.

DavidTC March 16, 2014 at 7:25 pm

And, once again, it is up to me to point out that nothing whatsoever would stop any organizations from distributing whatever they want.

If they did that, they would simply be barred from filing taxes as a tax-exempt ‘Civic Leagues, Social Welfare Organizations, and Local Associations of Employees’.

They would, instead, have to file taxes as a tax-exempt 527.

And I must also point out the IRS *knows* the proposed regulations banning ‘nonpartisan voter ID, voter registration, or issuance of nonpartisan voter guides’ are bad, and hence have specifically asked for help in a better way to allow neutral versions of those. Seriously:

The Treasury Department and the IRS acknowledge that under the facts and circumstances analysis currently used for section 501(c)(4) organizations as well as for section 501(c)(3) organizations, these election-related activities may not be considered political campaign intervention if conducted in a non-partisan and unbiased manner. However, these determinations are highly fact-intensive. The Treasury Department and the IRS request comments on whether any particular activities conducted by section 501(c)(4) organizations should be excepted from the definition of candidate-related political activity as voter education activity and, if so, a description of how the proposed exception will both ensure that excepted activities are conducted in a non-partisan and unbiased manner and avoid a fact-intensive analysis

People, especially people who complained about the fictional IRS witchhunt (Where the IRS was actually doing its job by making sure non-political groups were non-political.), need to realize that the 501(c)(4) classification is being *extremely* misused at this point, and the rough guidelines don’t cut it anymore. We really do need *very specific* rules here.

If those rules mean that voter registration groups end up being classified as 527, well, there’s not actually much of a downside there. So it’s a political group? So what?

Alternately, we could get rid of the pointless 501(c)(4) classification at all, considering the sole advantage is to hide donors and skirt campaign finance law. *Actual* charities are under 501(c)(3), and *legit* political groups belong under 527, *both* of which are non-profits and pay no taxes. The groups in 501(c)(4) have deliberately decided to live in a lawless no-man’s land.

objective March 18, 2014 at 11:21 am

well said, but c4′s may remain valid classification for civic leagues, who have dues (not public donations) as their funding source, and whose purpose is to really benefit members, not the public. probly an original point of creating c4s but dunno for sure

DavidTC March 18, 2014 at 7:57 pm

I’m not entirely sure what the point was. I’ve seen some references to things like supporting gay rights in such an era when supporting them would get you blacklisted, and stuff like that. I really have no idea.

I’d really like someone to explain why they should be allowed anonymous donors. Because, frankly, if we just stop that, this entire problem goes away…that’s why they’re being abused.

Harry March 16, 2014 at 8:16 pm

we could get rid of the pointless 501(c)(4) classification at all, considering the sole advantage is to hide donors and skirt campaign finance law.
I also made this point on this board a couple of weeks ago. And “political education” activity of unions and 501(c)(3) orgs should be considered non-exempt activities, and an allocation of such made to contributors which limits the tax deduction in the case of 501(c)(3), or in the case of unions would remove employer expense deductions for allocated amounts of personnel dues used by unions for political activity. That’s what should happen if we all really want to remove tax favored treatment of political contributions, whether direct to the party or indirect.

Incidentally, it appears there are only about 97 501(c)(4) organizations and about 20 527 organizations. Is this correct, or am I looking at incomplete listings? (source: Wikipedia)

DavidTC March 17, 2014 at 11:35 pm

First of all, at some point, please LEARN TO REPLY CORRECTLY. It’s the link that says ‘Reply’ under the post, not ‘Add one’ up at the top.

Secondly, you’re talking nonsense. Unions *do not pay for ads out of tax-deductible dues*. They pay for ads by setting up a PAC, a 527, and taking contributions to it. Thus contributions to PACs *already* aren’t tax deductible. (They are, of course, still *non-profits*, but as 527 don’t actually make a profit, that’s entirely correct.)

You’re just *really* intent on trying to pretend unions are abusing the system somewhere, aren’t you?

Unions are a 501(c)(5), like they are supposed to be, and dues to them are tax exempt, like they are supposed to be. To influence politics, they set up a 527, like they are supposed to do, and donations to *that* are not tax exempt. All that is entirely correct under the law.

Incidentally, this is exactly the way that a lot of other political-ish non-profits are set up, except with the non-political part being a 501(c)(3). They are dual organizations.

For example, the Sierra Club is like this. The Sierra Club Foundation is a 501(c)(3), the Sierra Club Voter Education Fund is a 527. The SCF cleans roads and whatever, the SCVEF runs political ads. Different bank accounts and different rules about donations.

This is *entirely* correct as to how things are supposed to be set up, and worked perfectly fine. For decades. It’s a very well understood structure, and no one had the slightest problem with it. Unions do it, non-profits do it, even some *for-profit corporations* did it by making a PAC that employees could donate to. Non-politics over on one side, politics on the others.

It worked fine, that is, except for the bajillionaires that decided they didn’t want everyone to know who was funding things, so created a bunch of non-profits under the rarely-used 501(c)(4) section of the law (Because both a 501(c)(3) and a 527 have to disclose donors), and then had them do illegal electioneering.

Harry March 18, 2014 at 12:21 am

You don’t see what’s wrong with people contributing to a 501(c)(3) and getting a tax deduction, and the 501(c)(3) then donates the money to a 527 to engage in political activity?

DavidTC March 18, 2014 at 9:32 am

You don’t see what’s wrong with people contributing to a 501(c)(3) and getting a tax deduction, and the 501(c)(3) then donates the money to a 527 to engage in political activity?

I see everything wrong with it, which is why it is illegal, you twit.

You keep talking on this topic, and you don’t even have the slightest idea of what the existing law even is.

Harry March 18, 2014 at 9:51 am

So I’m a twit now? Way to deal with someone who is engaging in discussion with you.

DavidTC March 18, 2014 at 9:59 am

If you want to engage in discussion about something, try actually *learning* something about it first, instead of just making up nonsense.

Harry March 18, 2014 at 10:00 am

If you think I’m making nonsense then just try to educate me without casting aspersions.

Lea Thrace March 18, 2014 at 11:49 am

HE HAS!!!!! You are essentially refusing to read the information he has put out there. SHEESH

Harry March 18, 2014 at 2:07 pm

It’s not the lie, it’s the cover up.

Harry March 18, 2014 at 12:28 am

And since 501(c)(4) contributions are not tax deductible and not profit-making enterprises, why then should the IRS put a priority on auditing selectively the conservative ones, on who contributes to them and how they spend their money, and how are 501(c)(4) orgs any different from 527s? And why should unions be given preferential treatment when they spend money on political parties?

DavidTC March 18, 2014 at 9:58 am

And since 501(c)(4) contributions are not tax deductible and not profit-making enterprises, why then should the IRS put a priority on auditing selectively the conservative ones,

They didn’t. As has been completely proven at this time, the IRS spent their time ‘auditing’ political groups on both sides, because those political groups *asked to be pre-cleared* as a 501(c)(4). (Because they knew they were skirting very close to the edge of the IRS’s rather vague rules, which are about two miles past what the law actually says they’re allowed to do.) The IRS used rather silly sounding rules of thumb to try to filter those groups, words like ‘conservative’ and ‘blue’ and other political-ish words, which was admitted a mistake, but a mistake that didn’t target either political side.

The Republicans in Congress then decided to make the IRS produce a report talking about their auditing of conservative (and only talking about the conservative) groups, so the IRS produced that report, and the Republicans continued to wave that around like idiots even after it was clear what had happened.

That is what actually happened. That is extremely well documented as to what happened. Feel free to mock or even demand an investigation into the IRS’s silly rules to try to filter which groups they need to look into, and the IRS has itself said that was a bad system. But if you keep pretending that it was aimed at selectively conservative groups, this conversation is over. You are already low-information enough, and I can’t keep dealing with your dumbness.

on who contributes to them and how they spend their money, and how are 501(c)(4) orgs any different from 527s?

Because they have different rules they operate under.

Your question is as idiotic as wondering why the IRS is auditing someone who tried to claim a home mortgage deduction while not owning a home. It doesn’t *matter* if there was something else they could have claimed the deduction under. You file the wrong thing with taxes, you get ‘audited’.

Which, I must point out again, was not an ‘audit’, it was an newly-created organization sending a request to the IRS saying ‘This is what we intend to do, are we going to be eligible to file under 501(4)(c)?’ and the IRS replying ‘We can’t tell, you seem too political, send us some more data.’

The question *you* need to answer, and the question *everyone* needs to answer who is even slightly defending these 501(c)(4)s, is *why* they felt like just trampling over the law where there was a perfectly fine place for those organizations to be operating as a 527.

In fact, the rules about 527s were just *loosened*…you’ve heard of a SuperPAC? That’s 527, a ‘PAC’, that has managed to escape various campaign finance rules because it doesn’t directly coordinate with a candidate. Yes, 527s just got *less* regulation thanks to a court ruling.

There is literally no reason for these political groups to be a 501(c)(4) except to be funded by dark money.

And why should unions be given preferential treatment when they spend money on political parties?

And, again, you have no idea how any of this works, and can’t even read my simple explanation.

Unions, like 501(c)(3)s and corporations (Or, at least, how corporations used to act), do not spend money on political parties. There is no ‘preferential treatment’ of them, because they do not interaction with the political system directly.

Sometimes, unions, like 501(c)(3)s and corporations, sometimes wish to interact with the political system indirectly. So they either find an existing 527, or make their own. Then they *solicit donations* to that 527. They do not donate themselves. They *cannot* donate themselves. They instead ask their members or their employees or whoever to donate.

This is called a ‘PAC’, a ‘political action committee’. A 527. That is how groups *used* to influence politics, and how most of the legitimate ones still do.

Any such 527 created by a union is treated exactly the same as one created by a corporation, or one created by a 501(c)(3), or one that just exists by itself and was create by a bunch of people off the street.

Harry March 18, 2014 at 10:05 am

So why do we see unions rather than union political action committees being listed as direct contributors to political organizations?

DavidTC March 18, 2014 at 10:50 am

Because people often say dumb things. Unions ‘donate’ to PACs in the sense that they collect money that *other* people have donated, and hand that money over.

They cannot use union dues for this, and the donations are not tax deductible. (Or, at least, Federal law says they can’t do that for PACs that support candidates for Federal office. State laws tend to say the same thing about PACs supporting candidates for state office, but state laws obviously vary.)

The way that union-linked PACs work is that you have the option of, on top of union dues, donating a pay of your paycheck to the union, and unions have the ability to take that out of the paycheck when taking union dues. (And corporate-linked PACs also work like this, except it’s the business taking money out of worker paychecks and giving it to their PAC.)

They can’t do this by default, you have to opt-in to it. Also, only *union dues* are tax deductible. Sometimes the extra amount taken out is specifically earmarked for a PAC, sometimes it’s not. Sometimes there are multiple PACs that people can choose to have money taken out for.

Unions that have PAC basically have to keep (at least) three distinct sets of monies:
1) There’s the PAC money, which is a completely separate legal entity, although it’s usually completely controlled by the union.
2) There’s the union dues money, which cannot go anywhere near the PAC or political spending.
3) And then there’s the ‘extra’ money that people have chosen to give to the union, either out of their paycheck, or, heck, just random people donating to them. All the money that *isn’t* from the dues. The union can do with this money whatever it wishes, including donating it to the PAC. (Erm, whatever it wishes within things generally allowed by the law. And of course if it’s earmarked for their PAC they have to give it to the PAC.)

What unions cannot do is take union dues and either donate them to a PAC, their own or someone else’s. (And they can’t use the money directly for political ads themselves, but that would be a weird thing for a union to do.)

This, is, of course, how all that works *legally*. I’m not going to claim it always *does* operate legally. Unions have indeed sometimes been caught taking non-dues out without permission, which have nearly bankrupted a few unions when they had to pay them back. I have no problem with enforcing the law…but there’s no indication we really need to change it.

The only advantage ‘union PACs’ have over other PACs is that unions can directly take donations from worker’s checks each month. But a) corporate PACs also have exactly the same advantage, and b) is not really that important an advantage *nowadays*. In the 1960s, that that made donations a lot easier…but at this point there’s not a lot of difference between that and the reoccurring debit transaction other PACs can do.

In fact, I’d be completely okay with getting rid of that advantage for unions and corporations and having unions PACs do that for donations instead. Making them a separate transaction instead of people mistaking them for union dues or lower paychecks is a good thing.

DavidTC March 18, 2014 at 11:12 am

tl;dr – Basically, every organization that touches both tax exempt money *and* political money, which can’t be tax exempt, are *supposed* to keep the tax exempt money away from it. This includes unions, 501(c)(3)s, and corporations. (And even 501(c)(4)s, pretending they were ever used. 501(c)(4) do not have tax-exempt money, but they have anonymous money, which is treated basically the same under campaign finance law.)

Which the organization usually does by creating a 527, aka, a PAC, to handle that money instead, and just give all that money *to* the PAC. They solicit and collect that money separately.

In addition, PACs can just be created on their own, and do stuff.

That is how it is supposed to work, and that is how everyone did it until the super-rich decided to sponsor political groups and didn’t want anyone to find out. So they created 501(c)(4)s and then didn’t bother to create a PAC (Because anonymous donations can’t be transferred from a 501(c)(4) to a PAC, and anonymous donations are the entire point here.)

Instead they just used confusing and *wrong* IRS rules that they had manipulated to try to pretend they weren’t doing political things in their 501(c)(4)s. (And then absurdly tried to claim ‘political bias’ in IRS oversight…for their group that is *legally required* to be non-political.)

Harry March 18, 2014 at 10:09 am

The IRS used rather silly sounding rules of thumb to try to filter those groups, words like ‘conservative’ and ‘blue’ and other political-ish words, which was admitted a mistake, but a mistake that didn’t target either political side.

DavidTC March 18, 2014 at 11:41 am

Yes, really. Here are the facts:

Groups that flirt at the very edge of the IRS rules about 501(c)(4) about how political they can be start being created enmass a few years ago. (And, again, I must point out the IRS rules are way past what the *law* actually allows. Remember, this post is, right now, talking about *new* IRS rules, making things much stricter…and the law has changed not a bit. This is because the law is *incredible* strict.) Because those groups were so close to the edge, those groups asked the IRS if they were going to be able to file under 501(c)(4).

The IRS was overwhelmed by having to make judgments about details of groups of the sort they’re not really good at. They do not have enough people staffed in the ‘pre-clear 501(c)(4)’ area, and can only really deal with a small amount of these guys. And remember, they’re working off *hypothetical* information these groups have given them…the groups have not actually filed taxes yet.

They then make the incredibly dumb decision of looking at the group *names*, and pre-filtering by that. This is group is called ‘Tea Party Heros’? Let’s take a second look. This group is ‘Feeding Africa’? We don’t have time for that, let them through. This group is ‘Southern Progressives’? Take a second look. ‘Clothes for the homeless’? Let them through.

The important things to note here is:
a) the IRS was actually *asked* to pre-clear those groups, *by those groups*. They applied for that, and the IRS is perfectly within their rights to ask for more information. You don’t want to play along, you take your chances at tax time.
b) the IRS was actually supposed to look at *everyone* that asked, so the scandal here is actually that they just started ignoring groups that didn’t ‘sound political’. OTOH, they were completely understaffed. (And I suspect a lot of the ‘crazy levels of questions’ was just *stalling*.)
c) there is absolutely no evidence that the IRS focused solely on conservative sounding groups. There are plenty of left-ish keywords they also focused on, and a lot of neutral political ones. Yes, the filter was stupid, but it was bipartisanly stupid.

Ah, but why do we have a government report talking about them investigating conservative groups? Because *The Republicans in Congress asked for a report about their investigation of conservative groups*. They didn’t want a report on all groups the IRS had looked at, just conservative ones.

This is such patently dishonest way to abuse the investigatory power of congress that the people who did so should be impeached. But, then again, ‘patently dishonest ways to abuse the investigatory power of congress’ is Darrell Issa’s middle name.

As it has since emerged, there were plenty of left groups that were looked at, also. In fact, the only groups the IRS eventually *rejected* were on the left.

No one is saying the IRS didn’t screw up. But it is was a ‘Our department was underfunded and got a bunch of work dumped on us, so we took lazy and stupid shortcuts’ screwup.

DavidTC March 18, 2014 at 10:11 am

In fact, the rules about 527s were just *loosened*…you’ve heard of a SuperPAC? That’s 527, a ‘PAC’, that has managed to escape various campaign finance rules because it doesn’t directly coordinate with a candidate. Yes, 527s just got *less* regulation thanks to a court ruling.

Oh, and it’s worth mentioning that none of the 501(c)(4) do directly interact with a campaign (The IRS rules for 501(c)(4)s are stupid, but *that* is a pretty bright line they can’t cross.) so every single one of these organizations would be eligible to be a SuperPAC, able to ignore campaign finance law in a single bound.

Instead, they decided to be an organizational type tied up in all sorts of red tape, including rules that a good portion of their limited cash *not* go towards political spending. These groups are sitting there having to figure out some sort of ‘educational’ or ‘charity’ use of more than half their funds, and there are all sorts of things they can’t do, like directly endorse candidates, that they wouldn’t have to worry about if they were a SuperPAC, or even a normal PAC!

They deliberately operated under rules that cripple and beggar their own organization, that limit their actions and their resources. For what purpose?

*Anonymity*. That’s it. That’s what this entire thing is about. They want to run untraceable ads on TV without anyone even knowing their name. The entire system is being abused towards that sole end.

Will Durant March 18, 2014 at 12:27 pm

Thank you for explaining the Real Deal with these organizations.

seenbetrdayz March 16, 2014 at 11:04 pm

Maybe it sounds cynical, but I think someone ought to do a study on how much knowing a candidate’s contribution sources actually plays into voter decision on election day. I mean, we’ve had candidates who might as well have been directly funded by the KGB and the average voter doesn’t seem to give a ****. The vast majority of voters seem to only care about one thing on election day and that is: ‘well, at least it isn’t the guy from that other party.’

Don’t get me wrong, lots of people sift through a candidate’s funding sources and occasionally stumble upon a source they think is some sort of ‘smoking gun’ which will totally sink a candidate’s campaign, but it rarely affects anything. Believe me, I tried with Romney to point out time and time again the links to Goldman Sachs and the Wall Street Bailouts, but 99% of Republicans didn’t care and 100% of democrats weren’t gonna vote for the guy over Obama anyway. I don’t even see much point in keeping a database of donors if no one ever takes it seriously.

I guess the IRS just needs something to do outside of tax season.

Harry March 16, 2014 at 11:39 pm

Uh, Obama got 10x more from Wall Street than did either Romney or McCain. Ask yourself why.

I’m not informed well enough to know how much foreign money was received by the respective parties, passed through 501(c)(4) and 527 orgs or even direct contributions for that matter. You may recall that China financed the Clinton campaign in 1996.

greencracker March 17, 2014 at 10:19 am

Hey! Cherokee County cares where the money comes from!

The day after the Sam Moore beat-down on the House floor, there appeared in the press hall packets with a prepared statement that he delivered later that morning, plus a printout of his opponent’s donors, with David Ralston’s name highlighted.


gcp March 17, 2014 at 10:32 am

C3, c4, 527 are just tax avoidance schemes. Eliminate them all and have them pay taxes like the rest of us.

Harry March 18, 2014 at 9:49 am

Yeah, but forget it – there are too many interests vested in the status quo.

Harry March 18, 2014 at 2:10 pm

Issa is preparing the landscape for possible contempt charges. (Last)Tuesday he filed a 141-page report laying out a case against Lerner. – CNN

House report traces IRS scandal to Obama

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