Statement of Democracy 21, Public Citizen and the Campaign Legal Center on Withdrawal of Lawsuit Calling for New IRS Regulations on 501(c)(4) Groups and their Campaign Activities

Based on the IRS’s announcement last week that it is undertaking a rulemaking proceeding to address the problems arising from campaign activities by 501(c)(4) groups, U.S. Representative Chris Van Hollen, Democracy 21, Public Citizen and the Campaign Legal Center today dismissed without prejudice the lawsuit they filed in federal court to obtain such a rulemaking proceeding.

The lawsuit, filed on August 21, 2013, challenged the failure of the IRS to conduct a rulemaking proceeding to adopt new rules to properly implement the tax law’s eligibility requirements for tax-exempt status as a 501(c)(4) “social welfare” organization.

Under the existing rules, 501(c) organizations spent more than $300 million in the 2012 federal elections, with the great bulk of those campaign expenditures made by 501(c)(4) organizations that kept secret the identity of the donors funding their campaign spending.

Van Hollen and the three organizations will closely monitor the IRS proceedings announced last week. If the agency fails to adopt new regulations to properly implement the tax laws and prevent groups from misusing the laws to obtain 501(c)(4) tax-exempt status, the lawsuit will be filed again.

The lawsuit built on a petition filed with the IRS in July 2011 by Democracy 21 and the Campaign Legal Center urging the agency to undertake a rulemaking proceeding to bring its regulations into compliance with a provision of the Internal Revenue Code requiring 501(c)(4) groups to be devoted “exclusively” to social welfare activities, which do not include campaign activities.

By regulation, the IRS has said that social welfare groups need only be “primarily” operated for social welfare purposes, a standard that has been interpreted to allow such groups to spend up to 49 percent of their funds on campaign activities.  Because 501(c)(4) groups are  not required to disclose their donors, the IRS regulations have permitted such groups to serve as vehicles to inject hundreds of millions of dollars from secret contributors into federal elections.

In its announcement last week, the IRS said that its rulemaking proceeding will consider specific changes to the definition of what constitutes “campaign-related activity” by a 501(c)(4) group.  Currently, the IRS uses a “facts and circumstances” test to determine the spending that constitutes campaign activity.

The IRS also said it would consider whether to revoke the regulation challenged in the lawsuit and adopt new regulations to limit how much campaign activity a social welfare organization is permitted to engage in under the tax laws, however campaign activity is defined.

If the IRS rulemaking fails to make clear that a 501(c)(4) group must engage exclusively in “social welfare” activities and thus may not engage in any campaign activity, or, at most, in any more than an insubstantial amount of campaign activity, the rules will not properly implement the statute.

Retaining the current understanding that groups can spend up to 49 percent of their annual expenditures on campaign activity would unlawfully license 501(c)(4) groups to continue to spend huge amounts on campaign activities without disclosure of the donors funding the expenditures.

The Internal Revenue Code did not envision that 501(c)(4) groups would engage in campaign activities. Groups that want the benefit of tax exemption for campaign activities should create organizations under section 527 of the tax laws, which provides tax-exempt status for groups engaging in campaign activities and requires such groups to disclose their campaign expenditures and the donors financing the spending.