The Influence Industry: IRS says it will consider changes to nonprofit politics rules

July 25, 2012

Campaign watchdog groups see a glimmer of hope in a new letter from the Internal Revenue Service, which suggests that the agency might consider changes to the rules governing tax exemptions for politically active groups.

Some tax experts, however, aren’t so sure that any reforms are in the offing.

Deputy editor, National politics View Archive

Good-government types have complained for years that many nonprofit groups are gaming the system by posing as “social welfare” organizations while, in fact, acting more like political committees focused on influencing elections.

The distinction, which means the groups do not have to disclose their donors, has gained particular prominence since the Supreme Court ruled in Citizens United v. Federal Election Commission that corporations and unions could spend unlimited money on elections.

The 2010 decision has contributed to a flood of money for groups such as the conservative Crossroads GPS and liberal Priorities USA that fund political ads and activities but do not have to disclose their donors. The key distinction for the IRS is whether politics is a group’s “primary purpose,” which has come to be sketchily defined as 50 percent or more of a group’s budget.

In July last year, the Campaign Legal Center and Democracy 21 watchdog groups submitted a petition challenging the IRS regulations, calling them overbroad and in defiance of congressional intent and court rulings. Nearly a year later, on July 17, the IRS responded with a three-paragraph letter suggesting that the agency might consider reviewing its rules.

“The IRS is aware of the current public interest in this issue,” wrote Lois G. Lerner, director of exempt organizations at the IRS. “These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department’s Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.”

Watchdog groups view the letter as an important step forward in the push for greater disclosure of political contributions.

“This could be a major breakthrough in the effort to close down massive amounts of secret money that is flowing into federal elections through groups claiming to be” nonprofits, said Democracy 21 President Fred Wertheimer.

But lawyer Marcus S. Owens of Caplin & Drysdale, who served for a decade as head of the IRS’s tax exemptions unit, said he thinks the letter “stands for a lot less” than the watchdog groups hope, in part because the IRS is not the final arbiter.

“The Treasury Department is the driver with regard to regulations and similar formal guidance, so any statement that is actually intended to reflect a real regulations project would more likely come from Treasury, not the IRS,” Owens said.

The IRS, which stays mum on internal deliberations, has appeared reticent to take action on nonprofit groups for fear of being accused of political motives. Senate Minority Leader Mitch McConnell (R-Ky.) has accused the Obama administration of “intimidation” of conservative groups, alleging among other things that the IRS was targeting tea party organizations.

The disclosure issue has become a central part of the 2012 elections, with President Obama and other Democrats loudly complaining about the extent to which secret money is funding many political ads. Senate Democrats were blocked by Republicans this month in their attempt to impose disclosure requirements on many politically active nonprofit groups.

Donations by text

Political contributions by text message are not happening as quickly as boosters hoped.

Last month, the FEC unanimously decided that Obama, Republican challenger Mitt Romney and other federal candidates could immediately begin collecting contributions through text-messaging services. The decision would allow candidates to solicit small-dollar donations in much the same way that charities collect money for disaster relief.

But now several major wireless carriers are balking at the idea, worried that they might be held liable if an illegal donation slipped through from a foreign citizen or otherwise improper donor. CTIA-The Wireless Association, which represents major carriers such as Verizon and AT&T, has asked the FEC for clarification — a request that could push any final resolution close to or past the election.

The two political consulting firms that initiated the texting idea, Democratic-aligned Armour Media and GOP firm m-Qube, say the carriers should have nothing to worry about. The companies, joined by Rep. Jim Cooper (D-Tenn.), are asking for their own clarification from the FEC by mid-August in a bid to speed things along.

So it’s still possible that campaign supporters might be hit up for donations-by-text before the November election. Stay tuned.

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