Views on the 501(c)(4) Mess – Part II (my thoughts)

Having read most of the news coverage of the current situation and written about at least some of the issues at the heart of it, here is my two cents (including, with self-promotion apologies, links to my relevant articles):

Contrary to John Colombo’s proposal posted earlier on this blog, I believe that tax exemption (but not deductibility ofcontributions) for what are now classified as 501(c)(4)s isappropriate, and that exemption is also appropriate for what are now classified as 527s.  With respect to exemption, without a specific provision addressingthe tax status of these groups a lot of uncertainty about their tax treatmentwould exist.  The uncertainty arises because of issues such as whether thecontributions and dues they receive are “gifts” under IRC § 102 and so notincludible in gross income, especially since their lobbying and politicalcampaign intervention expenditures are generally not deducible under IRC §162(e).  I also believe that most of these groups are formed (andcontributed to) not for profit-making purposes but to pursue other goals, suchas advancing a particular vision of the public good or to elect one or morecandidates, and so exempting them from the corporate income tax isappropriate.  Donations to such groups should not be deductible, both because of concerns regarding the influence of special interest groups (discussed in a recent article by Brian Galle and to some extent in my previous lobbyingarticle) and because allowing deductiblity would permit easy avoidance of IRC § 162(e).

As a matter of cleaning up the tax laws, I like Ellen Aprill’s ideaof creating a new tax-exemption category for organizations that primarily lobby and expanding the 527 category to include any organizationthat engages in political campaign activities.  I have not thought this idea all theway through yet, however.  I have thought more about thepossible constitutional issues raised by such a change (most recently flagged by Bob Bauer) and my conclusion isthat the Supreme Court’s Taxation with Representation decision is still relatively secure and would permitthis kind of line drawing (for moredetails, see my post-CitizensUnited lobbying articlea recent article by Ellen Aprill also reaches this conclusion).  Bauer is right to flag this issue, however, since itis a live one, especially if the Supreme Court’s Citizens United decision turns out to be only away station to an even stronger reading of the First Amendment in this contextas opposed to a high water mark.

Finally, with respect to requiring disclosure of politicalactivities, including of donors whose funds support such activities, I favornot placing such requirements in the tax laws to be administered by the IRS butinstead in the election laws to be administered by the admittedly far from perfectFEC for the institutional choice reasons described in my 527 regulationarticle.  As to what political activities should trigger disclosure(e.g., direct lobbying and grassroots lobbying as well as election-relatedpolitical activity?) and what should have to be disclosed (e.g., donors abovewhat dollar threshold?), I have written a couple of articles (here and here)that touch on these topics and am working on another article focusingspecifically on what political activities, particular political activities suchas grassroots lobbying and bundling that involve private-private interactions,should trigger disclosure (watch this space!).

LHM