A Silver Bullet That Would End Secret Tax-Exempt Money in Elections

No doubt about it, large unlimited donations are flowing into SuperPACs from rich individuals and corporations aimed at influencing who is elected at all levels of government in 2012. With the SuperPACs and other forms of political committees regulated by the federal and state election agencies, or by the IRS under section 527, at least we know who the donors are.

But when political campaign expenditures are made by various forms of nonprofit, tax-exempt organizations, such as 501(c)(4) social welfare groups (like Crossroads GPS) or 501(c)(6) business associations (like the US Chamber of Commerce), there is no general law requiring their donors to be identified. So secret money in the millions, once again, flows in.

A number of Senators and members of the House of Representatives have proposed a new DISCLOSE 2012 Act to force public disclosure of secret donors in federal elections. A similar bill failed by one vote in 2010. If the new Act passes, will it solve the problem? It might help, but it wouldn’t be enough. In 29 pages, the Act is cumbersome at best.

You see, the underlying problem is that while 501(c)(3) charities are prohibited from any political campaign activity, the IRS has permitted, over decades, many of the other 501(c) categories to engage in a large amount of political intervention So long as the “primary” work of the organization serves an approved nonpartisan purpose, most of us in the nonprofit bar advise that it can make political expenditures of up to 49% annually and still qualify as tax-exempt.

The main problem that frustrates any disclosure regime is that the IRS allows these 501(c) groups to be tax-exempt despite their multiple purposes and multiple programs.

It is very difficult to create rules that accurately trace political spending back to original sources in a multi-purpose organization. How far back do you go? Do you count the dollars first-in first-out or last-in first-out? Do you allocate the spending proportionately over all the donors? Do you let the organization say that the money came from investments, T-shirt sales, and small donors, and not from any big donors?

The danger is that those who paid with no idea that their dues or gifts would be used for politics will get disclosed, losing their privacy, and others who gave with a wink will not.

Therefore, I believe Congress should put its foot down and amend the Internal Revenue Code so that an organization with a good, qualifying nonprofit purpose has a very tight limit on how much political activity the IRS will tolerate. This language would do it:

Proposed new Internal Revenue Code Section 501(t)

(t) LIMIT ON POLITICAL EXPENDITURES

(1) IN GENERAL.–No organization shall be exempt from tax under subsection (a) if its expenditures to participate in, or intervene in (including the publishing or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office, exceed the lesser of $100,000 or 10% of its total expenditures for any taxable year.

(2) PROHIBITED POLITICAL EXPENDITURES.–This section shall not be interpreted to sanction or permit any political expenditure described in subsection (1) above if the organization is otherwise prohibited from making such expenditures under section 501(c).

(3) EFFECTIVE DATE.–This section shall apply to all taxable years of an organization that begin after the date this section is enacted.

If the organization wants to spend more on politics, it must do so through a separate political committee that reports all donors over a certain threshold ($200 in the FEC and IRS 527 systems). That has been the goal of political campaign reform legislation for almost 40 years.

Although I propose a $100,000/10% limit, Congress could choose a higher or lower cap. It could be $1 million and 20% to follow the liberal pattern applied to 501(c)(3) public charity lobbying. Or it could be tighter, say $50,000 and 5%.

Whatever the level, there should be a small allowance for political spending by these 501(c) interest groups so that they can make their preferred candidates known to their members and the public, especially community groups that want to endorse candidates in local races.

I want to be open about the history of the idea I am proposing:

* In 2004, Miriam Galston and I co-chaired a task force within the American Bar Association Tax Section that proposed a 40% political safe harbor for 501(c)(4) entities to the IRS, with no response.

* Later, Miriam wrote a law review article arguing that the political limit should be lower, i.e. “insubstantial” to be consistent with the treatment of other non-qualifying activities (such as private benefit) under federal tax law, thereby requiring tax-exempt organizations to be “whole-heartedly” devoted to their approved purposes.

* Recently, the reform groups Democracy 21 and Campaign Legal Center have complained to the IRS that its interpretation of the Internal Revenue Code has been wrong all these years, allowing too much 501(c) electioneering. But the IRS has been consistent. It has never used “insubstantial” as the limit for 501(c) politics; it uses “less than primary,” letting us think we can go up to 49%.

In fairness to the many 501(c) organizations that have been operating under this system, they should be able to finish their current tax years before they are required to split off most of their political spending into separately-funded PACs. Those that refuse, that want to keep serving as vehicles for big, secret political donations should be edged out of the tax-exempt universe.

Congress can fire the silver bullet, and it should.

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