While Congress was preoccupied by partisan feuding over the meaning of this year’s Internal Revenue Service scandal, a House Democrat on Wednesday filed a lawsuit joined by three campaign finance reform groups to force the Treasury Department and IRS to rescind an ambiguous regulation that tasks tax-agency mid-level employees with judging the extent to which nonprofit groups seeking tax-exempt status are political.
Rep. Chris Van Hollen, D-Md., ranking member of the House Budget Committee, said in a conference call with reporters that he was filing the suit in his official, not candidate, capacity, because “the IRS investigations have gotten a lot of attention and substantial notoriety for the wrong reasons. The facts clearly demonstrate that the IRS was not engaged in some kind of partisan political witch hunt orchestrated out of the White House. But the IRS is currently in the business of trying to determine whether the primary purpose of an organization is social welfare or whether its primary purpose is political. The seeds of this issue were planted long ago.”
As numerous lawmakers have pointed out since May, when the IRS scandal over mishandling of applications by mostly conservative groups erupted, the IRS unit in Cincinnati charged with processing applications for tax-exempt status relied on a 1959 Treasury regulation that critics say substantially rewrote a statute.
“The IRS has not enforced section 501(c)4’s requirement that a tax-exempt organization be operated ‘exclusively,’ to promote social welfare,” reads the suit filed in federal district court by Van Hollen and the nonprofit Democracy 21, Public Citizen and the Campaign Legal Center. “Instead, contrary to the plain meaning of the statute, the IRS has permitted section 501(c)(4) organizations to engage in substantial activity that does not qualify as promotion of social welfare, including election campaign intervention. In 1959, the IRS promulgated TR § 1.501(c)(4)-1(a)(2)(i), which provides that ‘[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community’ (emphasis added). As the IRS explained in an Aug. 24, 2012, letter to U.S. Sen. Carl Levin [D-Mich.], the IRS has interpreted ‘exclusively’ …. to mean primarily.”
That regulation, Van Hollen said, “sat dormant for many years” before the Supreme Court’s 2010 decision in Citizens United ruled that “corporations are people, too. So suddenly anyone can use this form of organization to get directly involved in trying to influence the outcome of elections.”
The Democrat and the campaign finance reform advocates said the IRS workload jumped from 1,735 applications seeking 501(c)4 status in 2010 to 3,257 in 2012. And they linked the high court ruling to the rise in undisclosed outside spending on candidates by nonprofits, which grew from $82.7 million in 2008 to $256 million in 2012, they said. The suit asks the court to “order IRS and Treasury to comply with the plain meaning of the law,” Van Hollen said. “The IRS was never intended to be in that business.”
Asked for comment, a Treasury spokesman said the agency would not comment on “pending litigation.” But the spokesman noted that on Aug. 9, Treasury and the IRS -- responding to recommendations made in May by the Treasury Inspector General for Tax Administration -- released their priority guidance plan for the years 2013-2014. It includes “guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention.”
Statements to Congress in May by Deputy Treasury Secretary Neal Wolin acknowledged that “the existing guidance as you know is -- is very old. It's a very complicated area. So we will work with the new acting commissioner, [Danny] Werfel, to see what additional guidance we can provide so that we can bring better clarity to this area and help avoid the kinds of things that we've just learned were happening.” Wolin also assured a lawmaker that Treasury does “not involve itself in matters that relate to the administration of the tax code and in particular ones that have these kinds of political overtones.”
Fred Wertheimer, president of Democracy 21, said he and his allies as far back as 2010 had petitioned the IRS to investigate the electioneering activities of 501(c)4 groups such as Karl Rove’s American Crossroads and the pro-President Obama Priorities USA Action. “To my knowledge, the IRS never acted on our petitions,” he said. “If the IRS had acted, it could have shut down the massive abuse of our tax laws, the massive $250 million spent in federal elections, and also would have avoided the issues that have arisen” in the IRS targeting scandal.
Public Citizen attorney Scott Nelson said the suit relies on “the Administrative Procedure Act, which allows citizens to come in and get relief against an agency when it takes action that is unlawful or fails or delays to act.”
Van Hollen stressed that a change in the IRS regulation would not “amount to a tax on political activity” since groups wishing to participate in politics are free to organize under Section 527 of the code and disclose their donors to the public.
He said he planned to reach out to Republicans and agreed with a suggestion that Republicans have echoed that the IRS may not belong in role of determining who is playing politics. “Those who would oppose it are saying, ‘Let’s keep this IRS investigation,’ ” he said. “The only reason to oppose it is if you believe these organizations should continue to be available to secretly finance campaigns.”
Requests for comment from the Republican chairmen of the House Ways and Means and Oversight and Government Reform committees were not answered.