That's what some academics, nonprofit attorneys, watchdog groups, and other observers perceive in the wake of three recent developments affecting groups claiming tax exemptions under section 501(c)(4):
- The February 9 disclosure by the Center for Responsive Politics that in November the IRS quietly approved the exemption application for Crossroads GPS, widely considered the nation's most prominent politically oriented 501(c)(4), founded in 2010 by Republican operatives Karl Rove and Ed Gillespie. The approval of the five-year-old application means the IRS now considers Crossroads a social welfare group.
- Congress in December approving language that forbids the IRS from further work in fiscal 2016 on new rules to regulate political activity by 501(c)(4) organizations. That provision was enacted as part of the omnibus spending and tax extenders bill (P.L. 114-113 ).
- Congress, in the same bill, including language making it clearer than ever that a group wanting to operate as a 501(c)(4) need no longer "apply" for that designation. It can simply start operating and, within 60 days, send in a simple registration form telling the IRS that it claims such status. However, it still must file a Form 990, "Return of Organization Exempt From Income Tax," and could be asked to provide supporting documentation.
But IRS audits of 501(c)(4)s are extremely rare, the Center for Public Integrity found in a 2015 review (http://www.publicintegrity.org/2015/01/22/16640/irs-rarely-audits-nonprofits-politicking).
As for Crossroads, "regardless of the actual merits of [its] application, the granting of the application will be perceived by many as removing whatever barriers remained to the use of 501(c)(4)s as vehicles for supporting some candidates," Lloyd Hitoshi Mayer, Notre Dame law professor, told Tax Analysts.
Advocates of campaign finance reform who have been searching for ways to contain what they see as abuse of social welfare groups for political purposes are stunned.
The Forms 990 filed by Crossroads, they contend, show an organization that takes in hundreds of millions of dollars per election cycle and regularly spends right up to or more than 50 percent of its funds on trying to influence elections. They say that couldn't have been what Congress had in mind when it established tax-exempt categories more than 100 years ago. Federal law says 501(c)(4)s are to be engaged in social welfare purposes exclusively, but IRS guidelines require that only 51 percent of their budgets be spent on social welfare.
Now, not only is the barn door open for more political activity by social welfare groups, "this [Crossroads] decision took the door off the barn," said Fred Wertheimer, head of Democracy 21.
"It [Crossroads GPS] is a ridiculous and unfortunate decision," added Paul S. Ryan of the Campaign Legal Center.
And Craig Holman of Public Citizen said the IRS made a "grave mistake."
"We have always taken compliance very seriously, so we're not surprised by the final result," Steven Law, president of Crossroads, told The Washington Post about getting IRS approval. "What we were surprised by was how long it took and how people outside the IRS improperly tried to influence and politicize the process, not just against us but against many other law-abiding advocacy groups."
And those who have long argued the IRS has no business interpreting when a group is involved in political speech and when it isn't couldn't be happier. They also celebrate Congress bringing to a halt the agency's work on new rules on campaign intervention for nonprofits, which began in November 2013.
"Those expressing outrage are many of the same groups that helped create the IRS targeting scandal in the first place," said David Keating, president of the Center for Competitive Politics. "They put enormous pressure on the agency to 'do something,' and that led to disaster."
He added, "The recent move into political regulation has embroiled the IRS in political fights the Service should avoid."
Mayer said the application scandal involving Tea Party and other groups demonstrated that "the tax law and the IRS are poorly equipped to regulate political activity and it is disastrous when they are forced to do so."
"Those who are outraged are professionally and perennially outraged at the notion that conservative voices might be heard on issues, causes, or candidates. They hate that," added Cleta Mitchell of Foley & Lardner LLP, who represents several conservative groups involved in the exempt organizations controversy.
Mitchell says the new registration option for 501(c)(4)s to begin operating more easily was added good news. "It was never intended that the application process at the front end would be some sort of advance program review. That is what the IRS did to the Tea Party groups, which had never been done before," Mitchell said.
She added that the change was a little-noticed aspect of the omnibus spending bill. "Now it is clear that because of this provision," Form 1024, "Application for Recognition of Exemption," is not necessary, Mitchell said. "It was not so clear previously unless you really knew what was going on. In the future, people would be nuts to file one."
Even though a self-declare option existed before, many groups still wanted to go through the approval process to reassure their donors of their status.
The new process will also help groups meet the requirements of state agencies that track nonprofits, Mitchell says. Often, she says, those agencies will ask for a copy of the IRS approval letter or its Form 1024, and for a self-declared group "that gets to be dicey." But now, she says, "a group can just send a copy of its registration form."
But others don't see the new registration process as that big a deal. "The new process doesn't change anything except to require early registration with the IRS," said Elizabeth J. Kingsley of Harmon, Curran, Spielberg + Eisenberg LLP. "So a group that forms for a single election period would still owe 990s for that year, even if dissolved before the next fiscal year -- just as in the past. It's just that now, there is at least some record of their existence and claim to 501(c)(4) status that's public long before the first 990 is filed."
Long before the IRS ruling on Crossroads, watchdog groups were predicting an inordinate impact on the 2016 elections from 501(c)(4)s, knowing how political strategists prized their ability to protect donors' identities.
By mid-2015, eight of the original 17 Republicans launching presidential campaigns were linked to 501(c)(4) groups that paid for messages providing favorable publicity for them. In doing so, they attempted to walk the tightrope separating "issue advocacy," discussing a candidate's actions on a particular issue, from "express advocacy," explicitly urging the candidate's election or defeat.
Also in 2015, watchdog groups complained to the IRS about the Conservative Solutions Project, a 501(c)(4) linked to Florida Republican Sen. Marco Rubio, and Carolina Rising, a 501(c)(4) linked to North Carolina Republican Sen. Thom Tillis's 2014 election. Both had spent so much on campaign-related advertising that violations of tax law were undeniable, it charged. In the case of Carolina Rising, political activity was 97 percent of its budget, the Center for Responsive Politics reported. Meanwhile, the Rubio-related group, operating during his presidential campaign, spent more than $8 million on ads favorable to the Florida senator, at one point making it the second largest buyer of political ads in the 2016 presidential race, according to Kantar Media. Still another 501(c)(4), Heartland Principles, "candidly admitted that it engaged almost exclusively in political activity," Mayer said of the group's most recent Form 990.
And now there is a 501(c)(4) called Every Citizen Counts supporting Democratic presidential contender Hillary Clinton's campaign, despite her calls to remove anonymous funding -- or "dark money" -- from U.S. politics. The Clinton campaign declined requests for comment.
For the rest of the 2016 elections, many observers fear, all of the relevant federal agencies -- the IRS, the Federal Election Commission, the SEC, and the Federal Communications Commission -- will remain feckless in the face of continued 501(c)(4) spending on behalf of 2016 candidates at all levels.
Observers also note that after it launches, a 501(c)(4) doesn't have to file a Form 990 for 16-1/2 months, not counting easily obtainable extensions. As a result, groups could form to influence 2016 races and disband before ever having to file their returns.
And that is exactly what Robert Maguire, lead nonprofits investigator for the Center for Responsive Politics, expects to happen. Maguire told Tax Analysts that he expects some of the larger organizations to form "satellite groups" that target particular races, which would then "fade away."
"Carolina Rising is the perfect example of that," he said, adding that records show it got almost all of its funding from Crossroads. While groups like Crossroads do not have to disclose who donates to them, they do have to show where they donated their funds.
Another concern is that an absence of 501(c)(4) regulation provides an opening for foreign money to influence U.S. elections. Keating agreed that is something for the FEC to worry about. "However, I'm pretty sure that if any such money is received, as long as it is put in a separate segregated account and not used for any independent [election] expenditures, that is probably fine," he said.
After what they regard as gloomy news of late, campaign reform advocates ponder where to go from here. "It's not clear," Wertheimer said, but he added, "No one is walking away from this fight."
One possibility is a court decision that would force the FEC to examine 501(c)(4)s and require those that spend heavily on politics to register as political committees under section 527 of the tax code, which would also require them to disclose donors. Public Citizen has a pending lawsuit against the FEC in the U.S. District Court for the District of Columbia, accusing the commission of neglecting its oversight duties in December 2013 by not requiring Crossroads to disclose its donors. The FEC ignored the recommendations of its staff that Crossroads be treated as a "political committee," requiring those disclosures.
"What I'm counting on is that a number of Crossroads and IRS records used in the application [for 501(c)(4) status] are about to be made public," Holman said. "We may find some useful information for the lawsuit."
Another possibility, warns Gregory L. Colvin of Adler & Colvin, is that a section 527 group, calling its activities similar to those of a political 501(c)(4), will go to court claiming that since it has to disclose donors it is a victim of disparate treatment under tax laws. If it is successful, he said, the "big money, no transparency character of our campaign finance system will spin even further out of control."
Reformers had hoped President Obama would have acted by now. They have pleaded with him to issue an executive order requiring federal contractors to disclose their political contributions, including those made to 501(c)(4)s. They had also hoped that the SEC would require companies to make those disclosures to shareholders and that the FCC would have required broadcast stations to disclose the true funders behind political ads.
Watchdog groups have also tried to interest the Justice Department in investigating 501(c)(4)s. "The Department of Justice is one agency with authority to prosecute criminal violations of our tax and campaign finance laws," said Stephen Spaulding, attorney for Common Cause. But the Justice Department has repeatedly declined to get involved, saying such cases are IRS matters.
Obama is "good at giving speeches but hasn't given us any action," Ryan said.
At any time, Congress could outlaw nonprofits' involvement in politics by rewriting federal campaign laws, reform advocates say. But they don't expect that to happen as long as Congress remains under Republican control. Dark money has overwhelmingly favored conservative candidates and causes since the Supreme Court's 2010 decision in Citizens United v. FEC, the Center for Responsive Politics says.
"Ultimately, it's going to take comprehensive action on the part of Congress, the president, and agencies like the IRS, FEC, FCC, and SEC to fully shine a light on secret money in our elections," Spaulding said. "There is no single solution."
On the other hand, groups favoring the involvement of 501(c)(4)s in politics are hoping Congress will cement campaign law in their favor. A group calling itself the Tax Revolution Institute wants lawmakers to make permanent the freeze they put on the IRS rulemaking.
"If Supreme Court rulings clearly defining political activity have not been enough for the IRS, then we agree the law should be explicit," said Dan Johnson, executive director of the group. "However, this clarity must follow Supreme Court jurisprudence on the issue instead of limiting constitutionally protected speech. Neither Congress nor the IRS should excuse severe limits on free speech as simple 'clarifications' to nonprofit rules."
Meanwhile, those involved in the Bright Lines Project, a collaboration between Public Citizen and interest groups nationwide to clarify the rules on nonprofits, say their work should still go forward.
"Absolutely, the Bright Lines Project is pursuing a pivotal reform," Colvin said. "The ability of the IRS to articulate and enforce a universal definition of political intervention, applicable to all the organizations and taxpayers covered by the Internal Revenue Code, whether they operate at the federal, state, or local level, turns upon finishing the work started in November 2013."
He added, "That work product should be released as soon as possible, so that the public can comment upon it, testify at public hearings, and make it the best it can be."
About Tax Analysts
Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.
For reprint permission or other information, contact email@example.com