The principle involved in the recent IRS scandal appears to be that every group with an interest in twisting the electoral process to its own advantage is exempted; only those groups that stand for disinterested good government are muzzled.
The IRS recently proposed rules to “provide guidance” to tax-exempt “social welfare” organizations concerning restrictions on their political activities. As Kimberly Strassel noted in the Wall Street Journal, this notice represents the IRS’s response to the revelations about its use of the tax laws to hamstring tea-party groups before the 2012 election.
The new rules are designed to eliminate the citizen groups before the 2014 election. They would have the effect of squelching tea-party communications with the public “referring to” a candidate or party, with especially tough restrictions during the run-up to an election. The blacklist applies to “direct or indirect candidate-related political activity.” Covered activities include direct funding, volunteer work, sponsorship of debates, preparation of voter guides, website maintenance, e-mail or social-media campaigns, and registration drives. If an unspecified, but too-large, portion of a group’s activities falls within the definitions, its tax-exempt status is jeopardized.
The proposal does not apply to political activities conducted by unions, business organizations, agricultural associations, or similar entities. Nor does it apply to charities, which are supposed to be more
stringently regulated than social-welfare organizations, but which frequently push the envelope. And as salt in the wound, the K Street lobbyists’ social-welfare groups, which serve as go-betweens and bagmen for lobbyists and government officials but do not communicate with the public, would also be untouched. Washington organizations with broad membership out in the nation at large would, however, be stifled along with the tea-party groups.
The IRS rules might not survive legal scrutiny, but this is irrelevant. Once final, the rules would be applied retroactively, so the IRS can leave them in the “proposed” stage until after November 2014, which makes them unreviewable by a court even as they paralyze the citizen groups. The IRS could also start applying the new standards immediately by requiring that organizations requesting tax-exempt status promise to abide by them.
To understand how this perverse state of affairs came about, and to develop a strategy of resistance, one must start with the core principle that the Internal Revenue Code is supposed to be about government revenue. Therefore, it focuses on moneymaking commercial activities. However, tax law must also deal with the reality that millions of entities in U.S. civil society are not commercial, and indeed it has done so since 1913, in Title 26, Subtitle A, Chapter 1, Subchapter F, “Exempt Organizations.”
The core of Subchapter F is section 501, which has dozens of subparts listing various types of non-commercial groups. The list is eye-glazing, but it’s necessary to an understanding of the context of the current dispute, because it shows the breadth of Congress’s view of exempt activities:
Government corporations; Foundation[s] organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition; Civic leagues or organizations; Local associations of employees; Labor, agricultural, or horticultural organizations; Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues; Fraternal beneficiary societies; Cemetery companies;
and so on through 29 subsections, plus numerous definitions and qualifications.
These entities are declared tax exempt in the sense that any excess of revenues over expenses, which is usually minimal or nonexistent, is not subjected to the income tax; and they file a special form designed for nonprofits instead of the standard corporate tax returns.
For the most part, individual taxpayers cannot deduct contributions to these groups from personal income taxes. That privilege is reserved for donations to the subset of organizations that qualify as charities or foundations under section 501(c)(3). These are more stringently regulated than other entities to prevent their being used as tax dodges, and 501(c)(3) contains explicit prohibitions on political activities by organizations claiming the benefits of the subsection.
This distinction between the 501(c)(3) charities and other exempt organizations is very important, but often ignored. None of the subsections describing other types of exempt groups contain anything like the prohibition on political activity that is found in 501(c)(3), except for a provision governing co-op health insurers that was added by Obamacare.