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Friday, July 12, 2024 | Back issues
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Opponents of IRS Tax Loophole Lose Suit

WASHINGTON (CN) - A federal judge dismissed claims over a tax loophole that allegedly let tens of millions of dollars from anonymous donors fuel the political system.

Citizens for Responsibility and Ethics in Washington (CREW) had sued the Internal Revenue Service and the U.S. Department of the Treasury last year, claiming the IRS failed to act on its petition for a rule change.

It claimed that the IRS' loose definition of "social welfare organizations" allows partisan political groups to funnel money through the tax code with anonymity, but U.S. District Judge John Bates dismissed the case Thursday for lack of standing.

"Here, CREW has not suffered a programmatic injury because the challenged conduct - defendants' refusal to engage in rulemaking - is not in direct conflict with CREW's organization mission to 'examin[e] and expos[e] special interests that have influenced our elections and elected officials,'" Bates wrote. "CREW asserts that defendants' refusal to initiate rulemaking impeded CREW's organizational activities because it 'made it more difficult and frequently impossible' for CREW to access the donor information it desires. But ... CREW's inability to access that donor information is not fairly traceable to defendants' refusal to engage in rulemaking."

Rep. Chris Van Hollen, D-Md., and his co-plaintiffs from a similar lawsuit were initially consolidated in CREW's action, but Bates noted that they all voluntarily dismissed their complaint.

The lawsuit had challenged section 501(c)(4) of the Internal Revenue Code, which allows tax-exempt social welfare organizations to spend substantial amounts of money on electoral activity. Supporters of a rule change say the code provides that tax-exempt social welfare groups must be exclusively engaged in promotion of social welfare, but IRS regulation redefines these groups has just having to be "primarily" engaged in social welfare.

Van Hollen had said that these section 501(c)(4) groups funneled more than $82.7 million into the 2008 presidential election. The number ballooned to $256 million in the 2012 election, he said, adding that the groups' tax-exempt status allowed donors to remain anonymous while pumping millions of dollars into the system.

"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," Van Hollen's complaint stated.

CREW had also detailed how millions of dollars were funneled into the 2012 election cycle. It claimed that the tax loophole resulted in a "significant increase in the amount of 'dark' or anonymous money that is poured into ou[r] political system."

Bates found, however, that the IRS had responded to CREW's petition, acknowledging the public interests in issue, but took no action.

The group lacks standing because "CREW's alleged programmatic injury is similarly not fairly traceable to defendants' refusal to initiate rulemaking, and not redressable by the relief requested."

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