Fred Wertheimer for Huffington Post: “IRS Appears Headed Toward New Rules that Will Continue to License Secret Contributions in Federal Elections”

IRS Commissioner John Koskinen appears to be headed toward issuing new IRS regulations that will continue to license section 501(c)(4) groups to improperly launder massive amounts of secret contributions into federal elections.

In testimony before the Senate Judiciary Committee, Commissioner Koskinen reportedly stated that section 501(c)(4) groups can engage in political intervention so long as that constitutes less than half of their activities.

Koskinen reportedly said, “So if an organization wants to spend less than half its money on politics, they can choose to become a 501(c)(4).” Koskinen also reportedly said the IRS is not trying to significantly change the way nonprofits operate today.

If Commissioner Koskinen sticks to the position of allowing a section 501(c)(4) group to spend up to 49 percent of its total expenditures on campaign-related activities (or even 40 percent as some expect), he will simply lock in the status quo and continue the flow of huge, secret contributions into our elections.

This position directly conflicts with the statutory requirement in the Internal Revenue Code that a section 501(c)(4) group must make expenditures “exclusively” for “social welfare” purposes. Applicable court decisions that interpret this restriction allow a section 501(c)(4) group to spend only an “insubstantial” amount on non-social welfare activities, such as campaign-related expenditures.

There is no reasonable interpretation of the term “insubstantial” that would allow 40 or 49 percent of total expenditures to be spent on campaign-related activities. Spending no more than 5 or 10 percent of total expenditures on campaign activities more appropriately defines what constitutes an “insubstantial” amount.

Thus, Commissioner Koskinen’s current approach is contrary to the statutory provisions of the Internal Revenue Code and to applicable court decisions interpreting the Code. This approach will allow section 501(c)(4) groups to continue to misuse the tax laws to keep secret from citizens the identity of the donors who are financing their campaign activities.

This is illustrated by examining information about the top spending nonprofit groups in the 2012 presidential election cycle:

 

Nonprofit	FEC Reported Spending	IRS Reported Total Spending
Crossroads GPS	$71 million(37% of total spending)	$188 million
Americans for Prosperity	$36 million(29% of total spending)	$122 million
US Chamber of Commerce	$35 million(16% of total spending)	$207 million
American Future Fund	$25 million(37% of total spending)	$66 million

(These four top spenders include three section 501(c)(4) groups and one section 501(c)(6) group, the Chamber of Commerce. The IRS is considering applying new regulations to most section 501(c) groups, including (c)(4)s and (c)(6)s. While a new IRS regulation is expected to include a better definition of campaign-related expenditures, by itself that will not solve the problem of secret contributions. The key to addressing this problem is establishing a low limit on the total percentage of campaign spending that can be made by a nonprofit group.)

The top four campaign-spending nonprofit groups in the 2012 election reported total campaign expenditures of $167 million to the FEC. These groups did not publicly disclose a single contributor who financed these campaign expenditures.

Had a 40 or 49 percent limit on campaign expenditures been in effect for the 2012 election, the result would have been the same. Not a single contributor financing the campaign spending of these nonprofits would have been publicly disclosed.

But if campaign spending by section 501(c) groups had been limited to an “insubstantial” amount, such as 10 percent of total expenditures, then $109 million or 65 percent of the secret contributions spent by these groups in the 2012 elections would have been eliminated. If these groups had wished to make such expenditures, they would have been able to do so through a related section 527 entity that is subject to donor disclosure requirements.

If a 5 percent limit had been in effect, then $138 million or 82 percent of the secret contributions spent by these groups in the 2012 elections would have been eliminated. (These numbers will vary to the extent that a portion of the FEC reported spending occurred in 2011.)

While properly interpreting the tax laws would eliminate a large portion of the secret contributions being spent in federal elections by section 501(c) groups, a comprehensive new disclosure law is still required in order to fully address the secret money problem.

The Supreme Court decision in Citizens United in 2010 opened the door to the massive amounts of secret contributions that have been spent in federal elections by striking the prohibition on campaign spending by corporations and labor unions, including nonprofit corporations.

The reasoning of the Citizens United decision was based on an assumption by the Court that the campaign expenditures made by outside groups would be independent of candidates and would be subject to full disclosure, including disclosure of the donors financing the expenditures. The Court said that that disclosure would protect the interests of voters and shareholders. According to the Court’s opinion:

With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “‘in the pocket’ of so-called moneyed interests.” 540 U. S., at 259 (opinion of SCALIA, J.); see MCFL, supra, at 261.

But the Court was wrong in assuming that spending by corporations, including nonprofit corporations, would be subject to full disclosure. Since the 2010 decision, hundreds of millions of dollars in secret contributions have been spent in federal elections by section 501(c)(4) groups taking advantage of flawed IRS regulations and interpretations, as well as flawed FEC contribution disclosure regulations.

The rule making proceeding currently underway at the IRS provides the agency with an opportunity to correct its misinterpretation of the tax laws and thereby to dramatically reduce the massive amounts of secret contributions being laundered into federal elections.

However, if Commissioner Koskinen and the IRS fail to correct the agency’s erroneous interpretation of the tax laws, the dangerous problems caused by secret money in federal elections will only become far worse in the years ahead.

http://www.huffingtonpost.com/fred-wertheimer/irs-appears-headed-toward_b_8223144.html