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Should 501s Be 527s?
The Democrats loved 501(c)(4)s — until they started hurting Democrats.


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The Internal Revenue Code is, as critics have long contended and the recent targeting scandal has demonstrated, a tortuous affair of regulations and sub-regulations, of loopholes more mysterious than wormholes and criteria so nebulous that everything tends to be left to that almighty adjudicator, the IRS agent — who, if he received any quantum of public respect before, is now veritable Public Enemy No. 1.

That is good cover for Democrat Chris Van Hollen of Maryland, the ranking member of the House Budget Committee, who plans to join with two campaign-finance watchdog groups, the Campaign Legal Center and Democracy 21, in a forthcoming lawsuit challenging the IRS’s 501(c)(4) regulations. The six-term congressman says he has exhausted administrative options and is suing to clarify 501(c)(4) criteria and reduce the discretionary power that facilitated the IRS’s political targeting.

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Prima facie that seems like a challenge that could appeal across the aisle. But reform may not be the main thing on Representative Van Hollen’s mind, and his solutions are not likely to win friends on the right.

There is a case to be made that the regulations in question are vague. According to the Internal Revenue Code, 501(c)(4) organizations must operate “exclusively to promote social welfare.” But even the IRS admits that this “is inherently an abstruse concept that continues to defy precise definition,” and that “section 501(c)(4) remains in some degree a catch-all.”

The IRS tackles the problem this way: “Exclusive” attention to social welfare means operating “primarily to further the common good and general welfare of the people of the community.” And while “promoting social welfare does not include direct or indirect participation or intervention in political campaigns,” a group “organized exclusively to promote social welfare” may be tax-exempt as long as political activities are not the organization’s “primary activities.”

Van Hollen argues, fairly, that attempting to quantify “primary” is problematic. “The IRS should not be in the business of trying to determine whether an organization is engaged in 49 percent or 50 percent political activity,” he tells National Review Online. So how is one to determine that balance? “That is the fundamental question: What constitutes political activity?” He proposes defining social welfare “fairly broadly,” but political activity “very narrowly”: “when organizations are involved directly in efforts to elect or defeat candidates.”

Currently the IRS evaluates tax-exempt status using the “commensurate test” (which is derived from a revenue ruling, the IRS’s in-house judicial process), along with the “primary-purpose test.” The former examines whether organizations are conducting exempt activities at a level commensurate with their resources; the latter asks whether organizations are pursuing their stated purpose. The primary-purpose test supposedly relies on a careful examination of all “facts and circumstances,” though it has often been reduced to an examination of the organization’s financial expenditures: If more than half are going toward its stated nonprofit purpose, then its tax-exempt status is secure.

Van Hollen says that “you don’t have to be an English teacher” to interpret the statute correctly — but you may need to be a tax lawyer. And even they are often unsure. A team of nine nonprofit-tax-law experts have formed The Bright Lines Project, which proposes a set of six rules for determining political activity. The Drafting Committee Explanation runs 32 pages.

So the regulations may be unclear — but here’s the catch: This is the first time this lack of clarity has been considered a problem. “Social welfare” organizations were first exempted from federal income tax by the Revenue Act of 1913, and it has taken a full century for Democrats to disagree with that wording. At an IRS-related hearing in May, Senate Finance Committee Chairman Max Baucus (D., Mont.) called the “vague” criteria “the root of this issue.” Baucus was saying: It wasn’t targeting, it was confusion.

Senator Ron Wyden (D., Ore.) fingered what he claims is the real culprit: The Supreme Court’s 2010 Citizens United ruling, he said, has created a situation in which “groups that ought to be [classified as political organizations] are applying for 501(c)(4) status to hide their donors.”



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