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IRS Sued Over Rule That Lets Dark Money Flood Elections

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Rep. Chris Van Hollen is bringing a lawsuit over IRS rules governing the political activity of tax-exempt nonprofits. (AP Photo/Jacqueline Martin, File) | AP

WASHINGTON -- Rep. Chris Van Hollen (D-Md.) announced on Wednesday a lawsuit challenging the Internal Revenue Service's rules for certain tax-exempt nonprofit groups that have become major vehicles for political spending in the last few years.

Van Hollen, a leading advocate for campaign finance reform and the ranking Democrat on the House Budget Committee, is bringing the case with the help of watchdog groups Democracy 21, Campaign Legal Center and Public Citizen. Van Hollen v. IRS is being filed in the U.S. District Court for the District of Columbia.

The lawsuit challenges one specific IRS regulation covering tax-exempt nonprofits organized under section 501(c)(4) of the U.S. Tax Code. The tax code requires that these nonprofits be "exclusively" engaged in social welfare activity. But the IRS' 1959 interpretation states that 501(c)(4) nonprofits need only be "primarily" engaged in their stated social welfare activity -- a looser rule that has opened the door to significant political activity by some of these groups. The lawsuit gives as examples in the last election Crossroads GPS, founded by GOP operative Karl Rove, and Priorities USA, a 501(c)(4) affiliated with the pro-Obama super PAC Priorities USA Action.

"The law as it was written by Congress could not be more plain," Van Hollen said at a press briefing on the lawsuit. "It says that 501(c)(4) tax-exempt status is reserved for groups that are exclusively, and that's a quote, exclusively engaged in social welfare activity -- not partially, not a little bit, exclusively."

"The IRS for some 54 years has had a regulation that contradicts the plain language of the Internal Revenue Service code," added Scott Nelson of Public Citizen, who is the lead lawyer on the suit.

The lack of clear IRS guidelines setting limits on these nonprofits' political activity -- beyond the warning that it cannot be their "primary" activity -- has been interpreted by many 501(c)(4)s to mean that they can spend as much as 49 percent of their budget and time on politics. Confusion over the limits lies at the center of the recent IRS "targeting" controversy, in which IRS agents were asked to be on the lookout for groups registering with certain names like "tea party" and "progressive" that might be more political than allowed under the vague regulations.

"The root of the problem is that the IRS is currently in the business of trying to determine whether the primary purpose of an organization seeking 501(c)(4) status is social welfare or whether their primary purpose is political," Van Hollen said.

Mega-donors like 501(c)(4) nonprofits because not only are they tax-exempt, but they are not required to disclose the sources of their funding. Since the Supreme Court's Citizens United decision in 2010 lifted some campaign finance restrictions, the amount of political activity by these nonprofits has exploded. According to a previous Huffington Post review, nondisclosing nonprofits spent in excess of $400 million on direct campaign and campaign-related issue advertising in the 2012 election.

"It's time for the District Court to order the IRS to close this 'dark money' loophole," Campaign Legal Center attorney Paul S. Ryan said.

Democracy 21 and the Campaign Legal Center had previously petitioned the IRS to review this and related regulations following the surge in campaign spending by 501(c)(4) nonprofits and 501(c)(6) trade associations.

"The IRS never acted on our petition," Democracy 21 President Fred Wertheimer said.

In 2012, Van Hollen challenged a Federal Election Commission regulation that gutted one disclosure requirement for politically active nonprofits enacted in the 2002 McCain-Feingold law. After the U.S. District Court sided with the congressman, an appeals court overturned that victory and sent the case back to the FEC to state whether it intended to answer issues raised by the court rulings. The FEC, hamstrung by ideological division, refused to revise the rule or address the issues.

Van Hollen earlier announced his intention to file this lawsuit against the IRS at a June conference on money and politics held by the Brennan Center for Justice.

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