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Treasury, IRS Propose New Nonprofit Rules

Politically active tax-exempt groups, which spent tens of millions in the previous election without disclosing their donors, would face tighter restrictions under new guidelines proposed Tuesday by the Treasury Department and the IRS.

The initial guidance, outlined in a Tuesday release and slated to be published shortly in the Federal Register, spells out that “candidate-related political activity” may not be defined as promoting the social welfare. The guidance defines such activity to include messages that picture or name a candidate on the eve of an election, potentially restricting the widespread use of campaign-style ads that evade disclosure as so-called issue ads by 501(c)4 social welfare groups.

“The proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” Mark J. Mazur, assistant treasury secretary for tax policy, said in a release. “We are committed to getting this right before issuing additional proposed guidance or final rules.”

The IRS and the Treasury Department have been under growing pressure from Capitol Hill and from activists on the left and the right over controversies involving tax-exempt groups, which have poured big money into campaigns in the wake of the Supreme Court’s 2010 Citizens United v. Federal Election Commission ruling to deregulate political spending.

An IRS scandal involving the agency’s targeting of tea party and other groups seeking tax exemption led to the ouster of several top officials and is still under investigation on Capitol Hill. At the same time, groups promoting political money restrictions have sued the agency for allegedly failing to follow its own regulations governing social welfare groups, rules that the watchdogs argue are at odds with tax statutes and have cleared the way for tens of millions of dollars in undisclosed campaign spending.

The draft guidelines released by the IRS today fail to address the key question of whether social welfare groups should be permitted to spend any money at all on political activities, said Democracy 21 President Fred Wertheimer. His organization has sued the IRS along with the Campaign Legal Center. Tuesday’s Treasury release invites comments on “what proportion of a 501(c)4 organization’s activities must promote the social welfare,” but does not propose a specific percentage.

“There are two parts to solving this problem,” said Wertheimer. “One is getting a strong definition of what cannot be done, and that’s what most of this initial document seems to focus on. But the other that is absolutely essential is to basically prohibit this activity, as the statute does, and require groups to set up section 527 organizations if they want to do political activity.”

First Amendment advocates had mixed reactions. GOP election lawyer Dan Backer, one of the instigators of a recent Supreme Court challenge to the overall campaign contribution limits, in an email called the draft guidance “an astonishing — and from this feckless, hyper-partisan administration, unsurprising — effort to curtail the free speech of Americans who come together to better their community.”

But much of what Treasury and the IRS outlined Tuesday is similar to draft regulations that the pro-free speech Center for Competitive Politics is preparing to submit to the agencies, said center President David Keating. However, Keating objected to the section of the federal guidance that defines political activity to include communications made within 60 days of a general election and 30 days of a primary that “clearly identify a candidate or political party.”

“Much of that activity is clearly issue speech, and the IRS has no ground to be regulating or limiting that,” Keating said. He noted that the window before a primary or general election “is a time when Congress is at the peak of its session in an election year,” and that “these are times when groups need to be making communications about bills before Congress.”

In something of an understatement, Tuesday’s release notes: “Given the significant public interest in these and related issues, Treasury and the IRS expect to receive a large number of comments.”

Indeed, expect a flood of public comments and a protracted debate before the IRS issues final regulations in this thorny and long-disputed area of political and tax law.


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