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Long-awaited Internal Revenue Service guidance intended to define the boundaries of political activity by nonprofit groups in an election year may open a new loophole that would allow millions of dollars in unregulated money to fund television and print ads in heavily contested battleground electoral contests, several well-respected tax attorneys are warning.

The IRS guidance, in the form of an official tax agency ruling, is scheduled to take effect today when it is formally published. It is intended to clarify circumstances where advertising or messages about policy issues by nonprofit organizations would be considered political activity.

The revenue ruling also for the first time explicitly states that exempt organizations must comply with both applicable tax and election laws. In the past, the IRS has more or less ignored provisions of the campaign-finance law in its own regulation of the tens of thousands of tax-exempt and nonprofit groups.

Nonprofit organizations such as social welfare groups under section 501(c)(4) of the tax code, as well as unions and trade associations, are explicitly covered by the new IRS ruling.

Tax law experts believe that the guidance also extends to charities under section 501(c)(3) of the code, which, while generally prohibited from engaging in direct political activity, are allowed to advocate on such hot-button policy matters as abortion, the environment or gun ownership.

The guidance from the IRS lists a series of factors the agency will consider in evaluating whether a communication by a nonprofit group about an issue is a benign advocacy message or crosses the line into the political arena. Crossing that line would subject the nonprofit to taxes, and presumably could jeopardize the group’s nonprofit status.

One of the factors the IRS said it will consider is whether the communication is targeted at voters in a particular electoral contest. The IRS guidance holds that such targeting, a well-defined tactic of political operatives, does not necessarily make the communication a political activity.

Among the other factors that the IRS would consider is whether the communication is about an issue currently before Congress and whether the candidates in the race are divided on the issue.

For example, a business association that favors increased trade could finance newspaper ads in a state holding a Senate election where the incumbent senator opposes free trade. The ad could run right before the election and name the candidate and point out the Senator’s opposition to a pending trade bill.

As long as the issue of trade is not one that sharply defines the candidate, the IRS said it would not consider such an advertisement to be political or an attempt to influence the election.

That scenario, though, has set off alarm bells among some tax attorneys who specialize in advising exempt organizations about what they can and cannot do politically.

“We are concerned that the IRS may have inadvertently handed campaign strategists an enormous loophole,” warned Gregory Colvin, a San Francisco-based tax lawyer whose firm specializes in advising many nonprofit groups.

“We believe there is a very real possibility that, unless the IRS clarifies this example promptly, massive amounts of soft money will be used to pay for TV and radio ads in battleground states that meet” the IRS criteria, Colvin wrote in a Dec. 30, letter to the tax agency.

Colvin has written extensively on the intersection of tax-exempt groups and politics and is co-author of “Seize the Initiative and The Rules of the Game: An Election-Year Legal Guide for Nonprofit Organizations.” He is co-chairman of the American Bar Association’s panel on tax-exempt political and lobbying organizations.

In his letter, Colvin and his law partner, Rosemary Fei, laid out how political strategists — hungry to find cracks and loopholes in the recently upheld campaign finance law — could exploit the IRS ruling and legally run so-called sham issue ads on television right before an election financed with unlimited and anonymous sources of money. This was the very activity that the Bipartisan Campaign Reform Act was supposed to prohibit.

The IRS did not return phone calls seeking comment on the guidance.

Even though BCRA bans union or corporate-financed broadcast ads that name a candidate 60 days before a general election or 30 days before a primary, charitable groups are not covered under the ban.

In a controversial move, the Federal Election Commission, at the urging of the liberal group Alliance for Justice, issued a blanket exemption for 501(c)(3) groups from complying with the electioneering communication provisions. Nonprofits, unions and trade associates are covered by the restrictions and can’t run such ads if they are financed with labor or business money.

Colvin said that the new IRS interpretation could very well make 501(c)(3) charities “the ideal vehicle for interventionist advertising.”

“All a charity needs to do is find a bill [related to its exempt purposes] that is coming up for a vote in Congress before the election, where the candidates have not been publicly known to be divided on the issue, and where the incumbent is believed to be vulnerable. The charity can drop into a specific state or district, run TV, radio or newspaper ads attacking the incumbent’s positions and calling on the audience to contact him or her to ‘vote right’ on the bill,” Colvin said.

The charity would be using tax-deductible contributions to pay for the ads and under strict confidentiality rules would be free to hide the names of contributors.

The charity, which is ostensibly prohibited from playing any direct role in an election, would nonetheless be able to claim it was simply communicating about an important topic even though it specifically targeted a battleground contest.

Under the new guidance, the IRS apparently does not mind if the organization selects only those states or districts where incumbents are facing hotly contested elections, so long as it appears the organization is “lobbying” them on issues.

Colvin noted that even 501(c)(4) groups could take advantage of the loophole and would be able to make political advertising in an election a primary activity of the group.

In a telephone interview, Colvin stressed that he believes the apparent loophole was inadvertently created by the IRS and that he is overall pleased with the guidance, which provides some much sought-after direction for tax-exempt organizations.

But he said that his law firm has always advised its clients that targeting ads criticizing or praising public officials solely to areas where they face close elections is political and not charitable.

“If the IRS does not clarify this ruling soon, and especially if our clients’ adversaries engage in targeted advertising as described [by the IRS scenario] we will feel obliged to advise them that the IRS appears to condone such advertising,” Colvin said in his letter.

University of Miami law professor Frances Hill, an expert on the political activity of nonprofits, agreed that Colvin has accurately identified a very real and likely loophole.

“It is going to happen,” said Hill. “If I was representing clients, I would regard it as my duty to walk my clients through the lawful loopholes. I mean, what is a private lawyer for? You are not there to restrain your client from lawful activity.”

John Pomeranz, director of nonprofit advocacy for the Alliance for Justice, praised the new IRS guidance and said the concerns raised by Colvin were unnecessarily alarmist.

“He’s right to think that people could misinterpret it that way,” he said. “But I just think it is a little bit overwrought to think people would begin doing this.

“Overall, this guidance is extremely helpful,” Pomeranz added.

The potential abuse could be prevented if the IRS clarified the provisions dealing with the targeting of voters in electoral contests. Colvin and Fei recommended that the IRS should make clear that the ruling does not permit an organization to treat as nonpolitical those mass-media ads run only in states or districts selected based on electoral criteria.

The nonprofit should be required to do more to demonstrate that these ads are nonpolitical. For instance, the IRS could state either that the organization has a history of running such ads outside of election campaign periods, or that it has a substantial program of similar advertising directed at incumbents in other states or districts who are not up for re-election or are not in a close election contest, the lawyers suggested.

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