Political Activity — Let Them Do As Much As They Want, if Disclosure Rules are Uniform

This recent article in the New York Times: “IRS Expected to Stand Aside as Nonprofits Increase Role in 2016 Race” should come as no surprise. The gist of the article is that the IRS is a damaged agency in the wake of the Tea Party scandal, and will delay taking any action to curb abuse until after the 2016 election.

Truthfully, there is little the IRS can do at this point. The remedy to the problem lies in the hands of Congress. My views are set out at length in an article “Political Activity Limits and Tax Exemption: A Gordian’s Knot.”

In a nutshell, and setting aside any IRS management failures, the issue at bottom is not about taxes but about the disclosure of donors (aka, “dark money”). Until Congress provides for uniform donor disclosure rules (which could be to require disclosure, or not), there will be incentives for political speakers to play arbitrage with the tax exemption system – i.e., to plan into a tax classification based on donor tolerance for disclosure.

So the first critical step is to treat political contributions and expenditures alike for disclosure purposes, irrespective of the type of entity that engages in the political activity. Once this is done, the importance of political activity for tax status purposes will greatly diminish, and the IRS will have less reason to care how much political activity noncharitable groups engage in.

The second step is to admit that after the Citizens United decision the tax regulations that define political activity as not furthering noncharitable exempt purposes make no sense. Citizens United, for better or worse, removed the constitutional limit on independent corporate (and labor union) speech, and noncharitable exempts should be allowed to engage in as much political activity as seems fit to further their purposes. The fact is that from a tax perspective, we simply do not care how much political activity a noncharitable exempt engages in. There is no tax “penalty” for losing 501(c)(4) status because of “too much” political activity – the group would simply be reclassified as a political organization, which gets broadly the same tax treatment with respect to political activity. (There are technicalities involved, but the general point is right.)

If there are any lessons from the Tea Party scandal, one is that, as a guiding principle, the IRS should not be tasked with regulating limits on political activity absent significant tax policy goals. In the case of 501(c)(3) organizations, there are important tax policies at stake that require IRS involvement. But for noncharitable exempts such as 501(c)(4)s and others, the extent of the organization’s political activity should not matter and we should not ask the IRS to police this border. Thus, the solution is uniform donor disclosure rules on the one hand, and no definitional limits on political activity by noncharitable exempts on the other.

Roger Colinvaux