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Proposed IRS 'Dark Money' Rules Spur Congressman To Drop Lawsuit

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Rep. Chris Van Hollen and three campaign finance watchdog groups dropped a lawsuit over the IRS' nonprofit rules after the agency proposed new rules shortly before Thanksgiving. | NBC NewsWire via Getty Images

WASHINGTON -- Rep. Chris Van Hollen (D-Md.) and three campaign finance watchdog groups dropped their lawsuit against the Internal Revenue Service over its rules for nonprofit political activity on Friday, after the agency began a rulemaking process last week.

The lawsuit brought by Van Hollen, Democracy 21, the Campaign Legal Center and Public Citizen was intended to force the IRS to begin crafting new rules governing the political activity of so-called social welfare nonprofits organized under section 501(c)(4) of the tax code.

Political activity by these tax-exempt groups soared following the Supreme Court's 2010 Citizens United decision as donors sought to use the nonprofit vehicle to shield their identity. In the 2012 election, nonprofits that were not legally required to disclose their donors, commonly known as "dark money" groups, reported in excess of $300 million in political spending to the Federal Election Commission.

The IRS regulations regarding the permissible amount of political activity by a social welfare nonprofit were at the heart of the lawsuit. The statute governing these nonprofits states that they must be "exclusively" focused on their main social welfare purpose, while the regulation opens the door to some political activity by saying they must work "primarily" on that purpose.

"The law as it was written by Congress could not be more plain," Van Hollen said upon announcing the lawsuit in August. "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."

Beyond challenging the difference between "exclusively" and "primarily," the lawsuit sought to pressure the IRS into defining what percentage of a nonprofit's activity had to be focused on social welfare for it to maintain its tax exemption.

In the proposed rulemaking issued on Nov. 26, the IRS asked for recommendations from the public on defining the amount of permissible political activity by these groups. The rulemaking also lays out a number of proposed rules defining political activity.

Van Hollen and the watchdog groups warned in a press release that they "will closely monitor the IRS proceedings" and if "the agency fails to adopt new regulations to properly implement the tax laws and prevent groups from misusing the laws to obtain 501(c)(4) tax-exempt status, the lawsuit will be filed again."

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