Congressman Fights IRS Over ‘Social Welfare’

WASHINGTON (CN) - Joined by three nonprofits, a congressman sued the IRS to close the "social welfare organizations" tax loophole that lets "tens of millions" of dollars from anonymous donors into the political system.

Maryland Democrat Chris Van Hollen sued the Internal Revenue Service and the Department of the Treasury, in Federal Court. His co-plaintiffs are Democracy 21, Public Citizen and Campaign Legal Center.

They sued the RS for refusing to act on their petition for a rule change .

Van Hollen and others claim that the IRS' loose definition of "social welfare organizations" allows partisan political groups, such as Karl Rove's Crossroads organization, to drive money trucks through the tax code.

"Defendant Internal Revenue Service (IRS) has for many years violated the Internal Revenue Code (IRC) by allowing tax-exempt social welfare organizations to expend substantial sums on electoral activity," the new lawsuit states. "The IRC provides that tax-exempt social welfare organizations must be 'exclusively' engaged in 'promotion of social welfare.' The IRS' implementing regulation recognizes that electoral activity does not fall within the scope of activity promoting social welfare. But the IRS's regulation also purports to provide that an organization operates 'exclusively' to promote social welfare as long as it is operated 'primarily' for social welfare purposes. By redefining 'exclusively' as 'primarily' in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law and court decisions interpreting it." (Citations to tax code and Treasury regulations omitted.)

Van Hollen claims that the groups at issue - section 501(c)(4) groups - funneled more than $82.7 million into the 2008 presidential election. In the 2012 election, that number ballooned to $256 million. The 501(c)(4) groups' tax-exempt status allows donors to remain anonymous while pumping millions of dollars to candidates.

The complaint continues: "The IRS has continued to adhere to this unlawful construction of the law in the face of a petition filed by plaintiffs Democracy 21 and Campaign Legal Center in July 2011 requesting that it revise its regulation to conform to the statute's requirements. The IRS has not commenced any rulemaking or even provided a substantive response to the petition.

"The IRS's continued failure to amend its regulation to correspond with the clear and nondiscretionary requirements of the law harms the plaintiffs in this action in a number of ways. It denies them information about the funding of election expenditures by section 501(c)(4) groups, because it allows such groups to claim tax-exempt status while engaging in electoral campaign spending without disclosing the identities of their contributors - disclosures that political organizations that properly claim tax exemption under section 527 of the IRC are required to provide. The IRS's inaction also means that candidates, such as plaintiff Van Hollen, and section 527 political organizations, such as the political committees operated by plaintiff Van Hollen, must compete on unequal terms with tax-exempt groups that are permitted to raise funds for electoral purposes without complying with the disclosure requirements imposed on section 527 political organizations. To redress these injuries, plaintiffs request that the Court declare unlawful the IRS's inaction with respect to the petition that it amend its rules, and that the Court compel the IRS to commence proceedings to amend its rules to implement the statutory requirement that social welfare organizations operate exclusively for the advancement of social welfare.

"Instead of amending its rules to conform to the requirements of IRC section 501(c)(4), the IRS has recently taken action with precisely the opposite effect: It has issued a directive providing a 'safe harbor' for certain organizations seeking exemption under section 501(c)(4) if they spend no more than 40 percent of their time and expenditures on electoral campaign activities and stating that even organizations that expend more than this percentage on electoral campaign intervention may qualify for tax-exempt status under section 501(c)(4) because the

IRS may consider them to be 'primarily' engaged in social welfare activities. The IRS's new directive confirms that the IRS interprets its regulation to allow substantial electoral campaign intervention by section 501(c)(4) organizations - intervention up to and in some circumstances exceeding 40 percent of their activity - despite the statutory requirement that they be exclusively engaged in social welfare activities. The IRS's action thus makes the extent of the conflict between its regulation and the statute even more explicit and will injure the plaintiffs by fostering increased electoral campaign spending without donor disclosure by ostensible section 501(c)(4) organizations. The plaintiffs therefore request that the Court declare the IRS's new

'safe harbor' directive unlawful insofar as it permits section 501(c)(4) organizations to spend amounts up to and exceeding 40 percent of their time and money on electoral campaign intervention."

Van Hollen, a six-term congressman, claims the IRS' loose interpretation of the tax code puts him at a disadvantage in election campaigns.

"Representative Van Hollen's campaign committee must disclose its donors under FECA [the Federal Election Campaign Act], but any section 501(c)(4) organization spending money to oppose Representative Van Hollen's re-election can, notwithstanding substantial electoral campaign expenditures, receive both a tax exemption and an exemption from disclosure obligations as a result of the IRS' unlawful regulation and its recent directive interpreting the regulation to allow substantial electoral campaign spending by section 501(c)(4) organizations.

"Similarly, Representative Van Hollen's leadership PAC, the Victory Now PAC, is tax-exempt under section 527 but must disclose donors. Candidates that Representative Van Hollen supports through the efforts of the Victory Now PAC, however, face opposition from organizations that, as a result of the IRS's unlawful regulation, receive both tax exemption and exemption from disclosure obligations."

Political spending by 501(c)(4) groups is mushrooming, according to the complaint: "In the 2012 presidential elections, the number of section 501(c)(4) organizations with at least $1 million in election-related spending had risen to 25, with seven spending more than $10 million. One group alone spent over $71 million; another spent $36.4 million; and another spent $25.4 million.

"The increase in election campaign activity by section 501(c)(4) organizations is primarily responsible for a corresponding increase in electoral spending that is not accompanied by donor disclosure. Because section 501(c)(4) organizations, unlike political parties, political candidate committees, other FECA-regulated political committees (including PACs and 'Super PACs') and other section 527 tax-exempt political organizations, are not required to disclose their donors publicly, their electoral campaign expenditures are almost entirely unaccompanied by donor disclosure. Only when donors specifically earmark contributions for particular electoral campaign expenditures, which is extremely rare, do existing campaign finance regulations result in disclosures by section 501(c)(4) organizations."

Van Hollen claims the IRS' interpretation of the tax code is arbitrary and capricious, and violates the Administrative Procedures Act.

He asks the court to compel the IRS to begin proceedings to amend its rules "to implement the statutory requirement that social welfare organizations operate exclusively for the advancement of social welfare."

The plaintiffs are represented by Scott Nelson with the Public Citizen Litigation Group.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit