Are you confused as to why certain organizations are, under current IRS rulings, considered social welfare groups and eligible for tax exemptions? They apply for these exemptions under 501(c)4 under which they are allowed to engage in lobbying and advocacy as long as their main purpose is social welfare. These groups include both conservative (Tea Party) and liberal groups and the big guns of American politics — Patriot Majority USA (liberal); Crossroads GPS (Karl Rove’s); Americans for Prosperity (Koch brothers, conservative); Priorities USA (former Obama campaign aides.)
In contrast under IRS regulations, a 501(c)3 is a nonprofit for religious, charitable or educational purposes. These nonprofits typically conduct research and only engage in a limited amount of lobbying, advocacy or political activity. Donations to these groups are tax-deductible. Not so for most 501(c)4s.
Recent U.S. Supreme Court rulings allow businesses and unions to donate unlimited money to 501(c)4 groups. What’s worse, they can be tied to so-called “super PACS” which raised and spent millions on political ads during the 2012 election. Why wasn’t the IRS monitoring these groups to see if they really qualified for tax exemptions, instead of the innocuous small fry?
According to a New York Times editorial, recent action by the IRS in singling out small Tea Party groups was inexcusable, “because social-welfare groups of all political stripes ... had for years abused their tax exemptions through excessive political activity, and the IRS should have cracked down on them without regard to ideology.” The reason there hasn’t been a crackdown (other than politics) is two-fold. There are no clear standards for how much political activity a 501(c)4 group can undertake. While the tax code says these groups must engage only in social welfare work, the IRS began allowing them to engage in politics, working for or against candidates, as long as that was not their primary activity.
According to the Times and campaign finance gurus, some groups carefully spend only 49 percent of their money on politics, while others, including Karl Rove’s, do nothing but politics while claiming they are engaged in social welfare. The fix, says the Times, is to return to the original language of the statute and require these groups to operate “exclusively for the promotion of social welfare” and not engage in politics. And most important, require that these groups disclose their donors. Most sought the 501(c)4 designation to provide secrecy. Bloomberg Businessweek agrees. “The irony is that the IRS is going to get punished ... for its heavy-handed tactics with the Tea Party committees, but the larger problem is that the IRS does nothing to enforce the law against the groups that are abusing a broken system on a much bigger scale.” Don’t expect the current Republican congress to do anything about this soon.
According to IRS regulations, 501(c)3s and 501(c)4s are very similar in many respects but there are important differences. Both must be run as a nonprofit. Neither organization’s earnings may benefit a private individual or shareholder. Both types of organizations are exempt from paying federal income tax. State tax-exemption status varies by state.
501(c)3s are limited in the amount of time and/or money they can put into lobbying. 501(c)4s can do an unlimited amount of lobbying but then become ineligible to receive federal grants. 501(c)3s cannot support or oppose anyone running for public office but they may be involved in political campaigns by way of non-partisan public forums, voter registrations drives, etc.
501(c)4s can engage in political campaign activity, so long as this is consistent with the organization’s purpose and is not the organization’s primary activity. Some organizations like the National Rifle Association set up two affiliated organizations, one primarily for charitable work, the other for lobbying.
The best way, says the Times, “to prevent abuse is to reform the vague statute and eliminate the agency’s discretion. Republicans and Democrats should be joining forces in taking this important step.” But will Republicans be seeking solutions as well as casting blame? There was supposed to be bipartisan action to reform the tax code as part of any new budget deal. If this were to occur, section 501(c)4s needs to be reexamined.
With the increase of secret money into political campaigns, we need assurance that the IRS is capable and has enough staff to enforce the law in a nonpartisan and more effective way. And that the really big spenders do not use their political influence to prevent this. We need transparency — names of the big donors — and confidence that the IRS is examining politically active groups, regardless of their size, influence and ideology to see that they are meeting the letter of the law.
Sue Lempert is the former mayor of San Mateo. Her column runs every Monday. She can be reached at email@example.com.