The IRS controversy isn’t about taxes. It’s about disclosure.

May 21, 2013

The Tea Party is here to stay, even if groups lose 501(c)4 status. (Julie Jacobson/Associated Press)

At some level, the scandal around the IRS's targeting of conservative 501(c)4 groups has nothing to do with taxes. That may sound weird - 501(c)4 is a section of the Internal Revenue Code, the entire 501(c) section exists to list groups that are exempt from some federal taxes, the IRS is the tax man, etc.

But there's no universe in which the groups in question are going to pay taxes. Think about it. Let's say they instead register as 527 groups, enabling them to make unlimited independent expenditures. Those organizations don't have to pay taxes on contributions they receive either. Or maybe they want to be super-PACs (which are 527s, technically, for tax purposes), which can spend unlimited amounts to openly support candidates. They don't pay taxes on contributions either.

What's more, neither super-PACs nor other 527s have to tell their donors that they may be required to pay gift tax on some of their donations. 501(c)4s, on the other hand, have to make that disclosure according to the Congressional Research Service. Even if, for some crazy reason, they filed as a for-profit C corporations, they'd have to spend less than they take in to be eligible for any taxes. And political groups generally like to spend whatever they can get their hands on.

So why are these groups so eager to keep their 501(c)4 status if it, if anything, puts them at a disadvantage tax-wise? It's simple: disclosure. 501(c)4s can accept unlimited donations and don't have to tell a soul from whence they came. 527s, including super-PACs, have to file quarterly reports disclosing donors. That's why so many super-PACs have attached 501(c)4s, which can collect unlimited donations and then donate them in turn to the super-PAC, as Fred Wertheimer explained to me last week.

The key question, then, in considering what should come next for 501(c)4s, is not "should groups like this have to pay taxes." They're never going to have to pay taxes. It's whether they should have to disclose their donors.

A lot of people think they should. Notre Dame's Lloyd Hitoshi Mayer supports requiring 501(c)4s to disclose their donors, and the University of Illinois's John Columbo wants to eliminate the category altogether. Let the political ones become 527s and the charitable ones become 501(c)3s, Columbo figures. And when you think of the examples of groups that the 501(c)4 section was actually designed to help — volunteer fire departments, town beautification efforts, etc. — there isn't much reason to believe donors to those groups would be embarrassed. Who doesn't want people to know they helped out the fire department?


Should Karl Rove's 501(c)4 have to disclose its donors? (Justin Sullivan/Getty Images)

But there's a decent case to be made on the other side. As Neil Irwin explained last week, there's a long history of IRS persecution of LGBT-oriented charity groups, including denying one group tax-exempt status and making another demonstrate that it would not "encourage or facilitate homosexual practices or encourage the development of homosexual attitudes and propensities by minor individuals." Making all charitable groups 501(c)3s could open them to that kind of scrutiny, particularly for any that deal with controversial topics, which could be far worse than anything that's happened in the current scandal.

Or the groups could become 527s. But that's not ideal either. It's easy to imagine that, in a climate of intolerance, people would be afraid to donate money to civil rights groups if it was clear those donations would become public, and their neighbors would know. Or, more generally, people could be deterred from donating to causes they believe in but which are unpopular in their area. A Berkeley, Calif. resident who joins the NRA may have a good reason to want to keep that private for fear of being socially shunned by neighbors. Maybe they even have a right to keep that private.

Then again, maybe that's not good enough a reason. Maybe groups like the NRA or the Human Rights Campaign are powerful enough that the people have a right to know who's funding them, regardless of the effect on that donor's privacy.

But that's a values judgment about the importance of disclosure in a democracy, rather than a technical question of who pays what in taxes. Some of the last week's headlines might have led you to believe that there's some controversy over whether tea party groups should have to pay taxes. There isn't. No one thinks they should. The dispute is over whether they should have to disclose their donors, as a legal matter and as a moral one.

Update: Professor Mayer writes in to clarify his position: "While the piece was titled “Require Disclosure of Their Donors” (I did not choose the title), what I said in the piece was 'Congress needs to revise the disclosure rules to target the political activity for which it believes disclosure is required and apply those rules to all groups, regardless of tax classification.'"

"I therefore left open the question of what political activity should be subject to disclosure, including disclosure of donors’ identities.  I therefore agree with you that in designing such disclosure rules consideration needs to be given to the fact that political activity sometimes has to be anonymous to protect its supporters from harassment and retaliation, as not only evidenced by the LGBT rights movement but also by the civil rights movement."

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Timothy B. Lee · May 21, 2013