The last political loophole is found in non-profits

The role of the (c)(4)s in politics is a hot-button issue that everybody knows about

The national political system is a cauldron boiling with millions of dollars in new money, much of it coming from newly established, non-profit, tax-exempt organizations. Nearly every campaign for federal office is affected by the combined effect of the so-called Super PACs, authorized by Section 527 of the Tax Code, and the Supreme Court’s Citizens United ruling, which opened the spigots of corporate coffers to spend on behalf of candidates, overturning a century-old statute banning such spending. 

When political operatives decided they wanted to raise corporate money without having to disclose where it came from, they looked to another type of non-profit and tax-exempt entity called the “social welfare” organization, which gets its exemption under Section 501(c)(4) of the Code. Both parties set up these entities to collect and spend political money because, unlike 527s, which are political organizations, the (c)(4)s as charities do not have to report the names of their donors.

The editorial pages, news reports, blogosphere and other outlets (including this column recently), have been awash with high-volume and high-pitched commentary criticizing, critiquing, condemning, defending, opposing, endorsing and analyzing this situation. One significant focus is that social welfare organizations may not engage “primarily” in political activity and still keep their tax exemption. Yet, they clearly are doing political things, and so far the Internal Revenue Service (IRS), according to its critics, isn’t paying attention. Also, according to its critics, it is harassing social welfare organizations that are trying hard to follow the law.

The point is that the role of the (c)(4)s in politics is a hot-button issue that everybody in the political and tax worlds is talking about, or at least knows about.

So you might imagine my surprise upon hearing key actors in the sector express befuddlement about this in a recent Ways and Means subcommittee hearing called to discuss non-profit tax issues. Congressman Kenny Marchant, R-Texas, told well-known tax lawyer Bruce Hopkins about constituent complaints he’s getting about the IRS singling out social welfare organizations “for audit,” and subjecting them to “an incredible paperwork burden to prove” they qualify as (c)(4)s, rather than as 527s. Hopkins agreed this was happening, then noted that “for some reason the IRS does seem to be asking for a lot more detail in this context” than in the past. Rep. Marchant then said he hoped the subcommittee could get the IRS to testify about “why there is this sudden new focus on these groups.” The chairman quickly said, “I share your concern,” then dropped the gavel.

My jaw dropped upon hearing this exchange. Aren’t these people paying attention? The so-called Tea Party groups have been complaining for months about what they characterize as political harassment by the IRS on this issue. A GOP senator has accused the Democrats of a “politically motivated witch hunt” in supporting IRS scrutiny of the newer (c)(4)s. The New York Times has editorialized in favor of the IRS for questioning the Tea Party (March 7) and has lambasted the agency for “looking the other way” (June 3) on undisclosed donations to (c)(4)s.

Clearly, the IRS has been trying to do something in response to what has been called “the last loophole”—the ability to make undisclosed political contributions using (c)(4)s in this cynical way. But the IRS is in a no-win situation no matter what it does here. It also is clear that a congressional oversight hearing will not be the forum to close the loophole. A lot of us were looking forward to this hearing because it signaled Congress was finally paying attention to some of the many open issues in the sector. I suppose the subcommittee should get credit for acknowledging the 800- pound gorilla in the room, but I wish they hadn’t been so easily flummoxed by it.

Bruce D. Collins is corporate vice president and general counsel of C-Span, based in Washington, D.C. Email him at collins@c-span.org.

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