On Tuesday, the Internal Revenue Service released a notice of proposed rulemaking that aims to provide guidance to section 501(c)(4) social welfare organizations regarding what activities count as “political” and therefore not considered to promote social welfare. The IRS and the Treasury Department are responding to criticisms that the guidance now available is inadequate and, in particular, that the current “facts and circumstances” test is unworkable and undesirable. The IRS’s request for feedback on this rule, and on other issues surrounding the intersection of political speech and tax-exempt organizations, is a welcome opportunity to engage the regulated community and others on these issues. However, it is to be hoped that the final rule will be both broader in scope, to address not only section 501(c)(4) organizations but the entire section 501(c) community, and that it focus attention more sharply on the activities some section 501(c)(4) organizations currently engage in to influence elections while avoiding classification as section 527 political organizations.
In brief, the proposed rule defines political activity to include:
- Communications containing express advocacy;
- Public communications (including material on an Internet web site) disseminated 30 days before a primary or 60 days before an election that references clearly identified candidates or parties;
- Any voter registration or get-out-the-vote drive, even if conducted in a nonpartisan manner;
- Any voter guide, even if it is of a sort that section 501(c)(3) organizations may distribute;
- A candidate’s appearance at a forum, debate, or other event within 30 days of a primary or 60 days of their general election; and
- Any grant to another section 501(c) organization that conducts political activity, even if the funds are restricted from such use.
The IRS has asked for comments regarding, among other things, whether to include section 501(c)(3) (educational or charitable), 501(c)(5) (labor), 501(c)(6) (business league), or 527 (political) organizations in this or a parallel proposed rule. The answer is a resounding yes. Modern tax-exempt organizations often operate in a network of affiliated entities; indeed, without the ability of tax-exempt organizations that are restricted from some forms of speech to affiliate with related entities that may engage freely in such speech, the restrictions on lobbying and political activity would be unconstitutional. See Regan v. Taxation with Representation, 461 U.S. 540 (1983).
A rule that restricts section 501(c)(4)s from engaging in certain types of activity while permitting other, similar types of organizations (such as labor unions or business leagues) will only encourage funds to be spent by other means. Moreover, a rule that bars a section 501(c)(4) from engaging in activity as its primary purpose that is clearly outside the bounds of section 527 exempt purpose activity (such as nonpartisan voter registration) leaves organizations that may engage in such activity as their primary purpose without a tax-exempt tax classification in the Internal Revenue Code at all. Only a more comprehensive regulation that defines political activity equally across the board will allow affiliated organizations to structure their activity properly, and avoid tax arbitrage by moving regulated activity out of section 501(c)(4) organizations and into other forms.
The IRS’s proposed rule, as currently drafted, is also extraordinarily restrictive of some activities, while being quite permissive of others, by section 501(c)(4) organizations. For instance, the proposed rule deems any voter registration, get-out-the-vote drive, or voter guide to be political activity, even if it is identical in operation to programs conducted by section 501(c)(3) organizations. Similarly, the rule considers all grants to other 501(c) organizations to be political in nature if those organizations conduct political activity, even if the grant is restricted from being used for such activity. At the same time, the rule would exclude any advertisement not containing express advocacy from being considered to be political activity if it was distributed outside of the 30-day/60-day windows. This is an odd result, since it is precisely those kinds of communications – ads outside those time windows that do not expressly advocate the election or defeat of a candidate, but whose motivation to affect an election is clear – that has driven the calls for reform in this area.
The questions the IRS asks are good ones. The tentative answers it has provided tend to be more blunderbuss than scalpel, but that will surely change as the IRS receives the feedback from the public it has asked for. A more nuanced and comprehensive approach, such as the Bright Lines Project (www.brightlinesproject.org), would better serve to keep tax-deductible contributions from being used to influence the electoral process, and require organizations primarily interested in influencing elections to register as political organizations, while protecting the speech and petition rights of tax-exempt organizations.