Discussion of the IRS’ mishandling of the tax exempt applications process might include a fundamental question: what role do we want to assign the IRS in approving tax-exemptions for groups engaged in one form or another of political, legislative or policy activity? And to keep the discussion still simpler, stripped of an additional complicating factor, the focus might be mostly on 501(c)(4) “social welfare organizations,” which, unlike their (c)(3) kin, do not offer donors a tax deduction and raise the additional issue of tax subsidies.
With (c)(4)s, the issue is the relatively straightforward one of the intersection that we are prepared to allow, and the IRS is expected to administer, between tax law enforcement and politics. There seems no disagreement that the IRS must stay out of politics—eschewing political judgments and giving no cause to suspect political favoritism. Yet the law and rules as they now stand generate pressures the other way. In judging whether a 501(c)(4) has conducted an impermissible level of political activity, defined as “indirect or direct participation in political campaigns,” the IRS applies a wide-ranging, multi-factor “facts and circumstances” test, see, e.g. Rev. Rul. 68-45. The IRS has said the following, for example, about the breadth of that test, which is drawn from effectively the same standard that prohibits campaign “intervention” by 501(c)(3) charities:
Even if a statement does not expressly tell an audience to vote for or against a specific candidate, an organization delivering the statement is at risk of violating the political campaign intervention prohibition if there is any message favoring or opposing a candidate. A statement can identify a candidate not only by stating the candidate’s name but also by other means such as showing a picture of the candidate, referring to political party affiliations, or other distinctive features of a candidate’s platform or biography. All the facts and circumstances need to be considered to determine if the advocacy is political campaign intervention.
Rev. Rul. 2007-41, 2007-1 C.B.; see also Rev. Rul. 2004-6, 2004-1 C.B. (reiterating the application of the “facts and circumstance” test to the determination of (c)(4) political activity).
The IRS has referred to its responsibility under this free-floating test to scour communications, such as voter education materials, for evidence of “bias or preference in content or structure with respect to the views of a particular candidate.” In separating out legitimate issue advocacy from political campaign intervention, the communication under review “must…be considered in context.” Id. As one expert, Professor Ellen Aprill, has noted, the IRS’s facts and circumstances test “reaches broadly, gives discretion to the administrators, and leaves many organizations and their advisors with little certainty on how to conduct their activity day to day.” Ellen P. Aprill, Regulating the Speech of Noncharitable Exempt Organizations After Citizens United, 10 Election Law Journal 363 (2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1727565
Again: none of this is to say that the IRS should not enforce the law, or that in enforcing it, the agency can do as it pleases and distinguish among taxpayers on the basis of political viewpoint. Of course, it must enforce the law, and, yes, selective enforcement shaped by political preferences is indefensible. The larger point, worth considering in isolation from specific cases, is whether the best intentioned, best executed IRS enforcement activity should involve judgments about excessive partisanship, or political “bias,” cobbled together in individual cases out of multiple and general “factors” and necessarily calling on considerable administrative discretion. Under this regulatory framework, the IRS will have trouble “staying out of politics” or persuading all audiences that it has succeeded in that aim.
The concern over the IRS intrusion into politics does not belong to the left or the right. In the sphere of 501(c)(3)s, where the standard for determining improper political activity is roughly the same as it is for (c)(4)s, churches from different points along the theological spectrum have battled with the IRS over the freedom of the pulpit. It is frequently noted by critics that the source of this restriction was legislation introduced in 1954 by then-Senator Lyndon Johnson when running for re-election, to quell a perceived political threat from the activities of specific nonprofit advocacy groups. The anti-politics limitation on 501(c) groups was very political at birth. Patrick L. O’Daniel, More Honored in the Breach: A Historical Perspective of the Permeable IRS Prohibition on Campaigning by Churches, 42 B.C.L. Rev. 733 (2001).
Ezra Klein has expressed the view, shared by others, that various organizations presenting themselves as “social welfare organizations” are engaged in blatant electioneering, effectively disregarding any limits on political activity. He is worried that the IRS, now on the defensive, will overreact to the criticism and dispense with meaningful enforcement. These are reasonable concerns, but thinking about reform, he may be looking in the wrong direction for the answer. Having the IRS more active in policing the line between acceptable issue advocacy and the commentary disqualified by evident “bias” cannot quiet the fears now being expressed about the entanglement of tax law enforcement in politics.
There are three reform alternatives, one modest and the other two more consequential in the long run, that could help to limit this undesirable entanglement . One problem seized on by critics is the wide latitude afforded to (c)(4)s to engage in some political activity, up a line just short of being their “primary” activities. Within the existing statutory structure, 501(c)(4)s could be required to engage only in social welfare activity—not at all in campaign activity, not even up to a modest percentage within a safe harbor. “Primarily” would be replaced with “exclusively.” This change would at least address the case of organizations heavily involved in undisputed campaign activity: they might establish a 527 and finance the same communications but they could not proceed with those ads under the cover of a 501(c)(4) tax exemption. Alternatively, as Democracy 21 and the Campaign Legal Center have proposed, (c)(4)s could maintain a minimal or “insubstantial” level of campaign activity, in the range of 5-10%. The first alternative would expunge the problem more or less completely, at the admitted expense of any allowance for campaign activity, and the latter would at least lower the stakes in the IRS’s administration of the limitation on political activity.
More far-reaching would be a determination that the government should not be in the business of approving exemptions from tax for lobbying or issue advocacy funded with voluntary contributions. This reform would treat 501(c)(4) policy promotion and lobbying in the same way that it does electioneering by political organizations under IRC section 527; in refraining from taxation, the government would not distinguish among types of expenditures made to influence public policy. This course of action also keeps the IRS “out of politics.” Tax-exemptions would follow more or less automatically on the adoption of the exempt social welfare purpose—to bring about “civic betterment and social improvements”—and questions of “bias” etc. would be irrelevant.
This broadened class of tax exemptions could be coupled with disclosure requirements, which is another way that all such forms of political participation are brought within the same legal regime. The tax status of section 527s are not reviewed by the IRS other than in the course of audits, but they disclose their contributors and expenditures; this requirement could be applied as well to (c)(4)s across the board. If both section 527 and section 501(c)(4) organizations must disclose donors, the incentive to conduct political activity through a (c)(4) would be considerably reduced.
Last but not least, some organizations might engage in so much campaign activity that they are more properly classified as “political committees”; and then the Federal Election Campaign Act would come into play and limit the size and source of the funds they received. This is a contentious and very unresolved issue—the issue of when an organization passes from a social welfare function into out-and-out electioneering as its “major purpose.” The Supreme Court has not made the legislative task particularly easy. But if it is a campaign finance issue, than that is what it is—and only trouble can be expected when the failures of campaign finance enforcement become the responsibility of the Internal Revenue Service.