The Internal Revenue Service can put an end to "dark money" in federal elections.
The IRS can do so by itself by adopting new regulations to govern section 501(c)(4) "social welfare" groups in time for the 2016 national elections
The agency's existing regulations -- adopted more than a half century ago -- are in conflict with the tax laws and court decisions interpreting these laws and are directly responsible for the secret contributions flowing into federal elections.
The current regulations are being used by political groups to claim tax status as section 501(c)(4) "social welfare" groups in order to hide the donors financing their campaign activities. Section 501(c)(4) groups are not required to disclose their donors.
As a result of this, more than $250 million in secret contributions were laundered into the 2012 federal elections through groups claiming tax status as section 501(c)(4) organizations.
This problem is only going to get worse.
According to the Center for Responsive Politics, groups claiming 501(c)(4) tax status already have reported spending $50 million in "dark money" contributions during the 2014 election cycle, more than seven times the amount spent by these type of groups at the same point in 2012.
Meanwhile, voters are being denied basic information that they have a right to know and influence-seeking donors are operating in secret.
History shows this is a formula for corruption.
An IRS rule-making proceeding currently underway to revise the section 501(c)(4) regulations could change all of this. To solve the problem, new IRS regulations must address two major issues.
First, new regulations must establish a clearly defined, restrictive limit on how much campaign activity a group can engage in and still be eligible for 501(c)(4) tax status. The tax laws and court decisions interpreting the laws require such a limit, which is central to solving the "dark money" problem.
Second, the IRS rule must effectively define the campaign activities that are subject to the limit. This includes requiring "sham" issue ads run to influence elections to be treated as campaign ads.
The tax laws plainly state that an organization must be operated "exclusively" for "social welfare" purposes in order to be eligible for 501(c)(4) tax status. Campaign activities do not qualify as "social welfare" activities.
Any normal, common sense interpretation of "exclusively" would mean that a 501(c)(4) group cannot engage in any campaign activities. The Merriam-Webster On-Line Dictionary, for example, defines "exclusively" to mean "single, sole," and "whole, undivided."
The current IRS regulations, however, take a different path. They define "exclusively" to mean "primarily."
To compound the problem, the IRS administratively treats a group as being "primarily" engaged in social welfare activities even if 49 percent of its spending is devoted to campaign activities.
The current IRS position makes no sense, as it flatly contradicts the tax laws and court interpretations of the laws.
The IRS approach means that a section 501(c)(4) group can devote 49 percent of its resources to campaign activity and still be treated as engaged "exclusively" in social welfare activity.
Court decisions interpreting "exclusively," however, make clear that the statutory requirement of engaging "exclusively" in "social welfare" activities does not permit 49 percent of a group's activities, or anything close to that, to be campaign activities.
In Better Business Bureau v. United States (1945), the Supreme Court construed the meaning of "exclusively" in the case of an earlier tax exemption provided to organizations "operated exclusively for religious, charitable, scientific, literary or educational purposes." (Emphasis added.)
The Court held: [I]n order to fall within the claimed exemption, an organization must be devoted to educational purposes exclusively. This plainly means that the presence of a single non-educational purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly educational purposes. (Emphasis added.)
The Better Business Bureau decision allowed an organization to engage in an insubstantial amount of non-permitted activities and still be deemed to be "exclusively" engaged in the permitted activities. But the Supreme Court's opinion also makes clear that the IRS's "49 percent" rule allowing substantial campaign activity to be treated as "exclusively" social welfare activity does not comply with the tax laws.
Following the Better Business Bureau decision, other federal courts reached similar conclusions.
One federal circuit court of appeals held that "the presence of a substantial non-exempt purpose [such as campaign activity] precludes exemption under section 501(c)(4)." American Ass'n of Christian Sch. Vol. Emp. v. U.S., (11th Cir. 1988).
Another federal circuit court held "that the presence of a single substantial non-exempt purpose [such as campaign activity] precludes tax-exempt status regardless of the number or importance of the exempt purposes." Contracting Plumbers Coop. Restor. Corp. v. U.S. (2d. Cir. 1973).
Thus, as interpreted by the courts, the statute requirement for "exclusively" social welfare activities means quite simply that an organization cannot engage in more than an "insubstantial" amount of campaign activity and be eligible for section 501(c)(4) tax status.
New IRS regulations need to limit campaign activity to no more than an "insubstantial" amount of a 501(c)(4) group's activities - such as no more than 10 percent of the group's activities.
Even if the IRS chooses a somewhat higher percentage limit to cover all non-social welfare activities, the agency should limit to no more than 10 percent any single area of such activity.
New regulations also need to clearly define the campaign activities that are subject to the limit on campaign activity by 501(c)(4) groups.
The current IRS approach of using a "facts and circumstances" test to determine campaign-related political activity is too vague and extremely difficult to administer. A new regulation should define the following communications as campaign-related political activity:
• Express advocacy public communications;
• Public communications that refer to candidates and are run within 60 days of a general election or 30 days of a primary; and
• Public communications that "promote, attack, support or oppose" (PASO) a candidate outside the 60/30 days window.
Regulations that only cover campaign ads run close to an election and express advocacy ads would leave room for widespread abuse of the tax laws in the form of campaign ads run to promote and attack candidates that do not contain "express advocacy."
The Supreme Court upheld the constitutionality of the PASO test in McConnell v. FEC (2003) and found that "any public communication that promotes or attacks a clearly identified Federal candidate directly affects the election in which he is participating."
The Court also found in McConnell that the PASO words "provide explicit standards for those who apply them" and "give the person of ordinary intelligence a reasonable opportunity to know what is prohibited."
New regulations, furthermore, should apply to all section 501(c) groups - not just section 501(c)(4) organizations. This is necessary to provide fair and equitable treatment for all groups and to prevent groups in other 501(c) categories from being used as vehicles to circumvent new regulations for 501(c)(4) groups.
Congress never intended 501(c) tax-exempt groups to become vehicles for campaign activities.
If such groups want to engage in campaign activities, they can create affiliated section 527 groups. This section of the tax laws was enacted explicitly to provide tax-exempt status for groups that engage in campaign activities and requires disclosure by these groups of their campaign contributions and expenditures.
The bottom line is clear: to stop widespread abuses of the tax laws and to end the "dark money' scandal, it is essential that the IRS adopt new regulations to limit campaign activity by section 501(c)(4) groups to an insubstantial amount of their activities.
New proper regulations will prevent 501(c)(4) groups from continuing to launder hundreds of millions of dollars in "dark money" contributions into federal elections.
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