Do campaign finance middle-men deserve tax-exempt status?

Newly-disclosed information shows that tax-exempt political organization are increasingly taking advantage of their status. Do they still deserve their tax-exempt status?

Kevork Djamsezian/Reuters/File
People walk out of the Federal Building, where the Internal Revenue Service (IRS) offices are located, in Los Angeles, California. Newly-disclosed information shows that tax-exempt political groups are taking advantage of their status.

Thanks to the campaign watchdog organization Center for Responsive Politics and National Public Radio, we’ve learned more about the tactics of some political organizations that enjoy tax-exempt status. The Center has unpacked the dealings of tax-exempt groups that exist merely to funnel political money from anonymous donors to 3rd  party non-profits that in turn buy millions of dollars in political advertising.

According to the Center, political non-profits spent more than $300 million on federal elections in the 2012 campaign cycle, three times what they spent in 2008. Increasingly, according to the report, money is being funneled through tax-exempt campaign money laundries.

Many of these groups are 501(c)(4)’s (named after the tax code section under which they are organized). To receive that status, they must serve the social welfare—a purpose subject to a very fuzzy IRS definition. But once they do, they can take advantage of a critical provision of the law: They are not required to disclose the names of their donors when they report to the IRS. This anonymity is key to their business model. 

But the activities disclosed today by the Center are an added twist. We’ve known about dark money political groups that use their tax-exempt status to hide their donors. But those groups are generally engaged in political activity themselves and could claim they are enhance the social welfare by educating the public.

The newly-disclosed activity is quite different. These groups do not participate directly in campaigns. They merely collect money from anonymous donors and distribute it to other groups, thus creating additional layers of anonymity for their big bucks contributors.

The treatment of tax-exempt organizations became a hot-button issue earlier this year when conservative groups complained they were being harassed by the IRS after applying for their tax exemption. This turned out to be more a matter of terrible management than a deliberate assault on political enemies. Nonetheless it shined a light on how clever campaign finance lawyers take advantage of an obscure corner of the tax law.

For much of the hundred years Section 501(c)(4) has been on the books, this form of tax-exempt status was used by community groups that did little more than hold bake sales for civic associations.

But after the Supreme Court opened the campaign finance spigot in its 2010 Citizens United decision, businesses, unions and other politically-active entities were looking for a way to contribute big campaign bucks without leaving any footprints. Sec. 501(c)(4) fit the bill perfectly.

That’s because the IRS has interpreted social welfare very loosely for the past half century. As a result, a group is allowed to engage in some political activity as long as it represents less than half of what it does. But no one really knows where to draw the line and the IRS does not seem inclined to enforce the standard in any event.  

It is hard to argue that these groups are anything but political. Most exist solely to influence elections. Yet instead of clarifying the law, the IRS engaged in a clumsy effort to screen for political groups as it attempted to sort out which were eligible for tax-exempt status.

Since last spring’s blow-up, neither the IRS nor Congress seems inclined to address this. Indeed, the reason activist groups made a huge fuss over the IRS ham-handedness was exactly to insulate themselves from scrutiny.

Yet, even under the current vague definition, it is hard to see how a group that does nothing other than move money from anonymous donors to 3rd  party advertisers serves a social welfare purpose that could pass the laugh test. Unless, of course, you believe that protecting those who seek to buy political influence from public disclosure somehow serves the social welfare.

In the 2012 campaign, conservative groups were by far the biggest proliferators of this technique. The Center estimates that of the 28 social welfare groups that spent $1 million or more on federal political campaigns, 20 were right wing.  

But liberal groups are already learning from their opponents and finding their own opportunities to game the system. Soon, no one will speak up against these abuses.  

As I’ve argued in the past, this activity is nothing short of a scandal. Yet, the IRS is the last agency that should be given the job of defining political activity. Congress needs to fix this mess.

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