Now that the IRS has drafted new rules to rein in politically active tax-exempt groups, Rep. Chris Van Hollen and three allied watchdog groups have withdrawn their lawsuit challenging the tax agency to take action.
“The major relief we asked for in the lawsuit was for the IRS to conduct a rulemaking,” said the Maryland Democrat, who filed the suit in August with Democracy 21, Public Citizen and the Campaign Legal Center. Last week, the Treasury Department and the IRS initiated that process, inviting public comment on proposed rules to define “candidate-related political activity” for 501(c)(4) social welfare groups.
The lawsuit’s instigators “will closely monitor the IRS proceedings,” according to a statement released by organizers behind the suit, and will go to court again “if the agency fails to adopt new regulations and prevent groups from misusing the laws to obtain 501(c)(4)” status.
The lawsuit alleged that IRS regulations are at odds with the tax code, which states that groups exempt from taxes under section 501(c)(4) must operate “exclusively” for the social welfare. Some court rulings have interpreted that to mean that political activity by social welfare groups must be “insubstantial,” but IRS regulations say only that such organizations must have social welfare as their “primary purpose.”
That’s made for considerable subjectivity in IRS enforcement, because the agency fails to define “primary purpose,” and bases decisions only on “all the facts and circumstances.” Political players have typically interpreted “primary purpose” to mean that no more than half, or about 49 percent, of a social welfare group’s activities may be political in nature.
“Look, ‘insubstantial’ doesn’t mean 49 percent,” said Paul Ryan, senior counsel at the Campaign Legal Center. “It means something like 10 or 15 percent.”
In its Notice of Proposed Rulemaking, Treasury and IRS officials invited public comment on exactly what proportion of a 501(c)(4) group’s activities should be permitted to focus on politics. Public comments have already started rolling in, and many more are expected before the administration’s Feb. 27 deadline.
“There is some activity that is indisputably political,” said Van Hollen. “And where we draw the line is something the rulemaking process will have to decide.”