New IRS rules foster debate

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WASHINGTON — For the first time since 1959, nonprofit advocacy groups face new Internal Revenue Service rules governing their political activities, an area of the tax code that has been crying out for greater clarity.

A proposed regulation unveiled Tuesday by the Treasury Department draws the boundaries more clearly — but instantly kicked off intense debate about whether the lines are in the right place.

One phrase in the official notice summed up the imperfect nature of the exercise.

The new rules, the department said, “may be both more restrictive and more permissive than the current approach.”

That seemingly contradictory statement reflects the muddy zone now occupied by “social welfare” organizations set up under section 501(c)(4) of the tax code.

Originally a designation used by civic leagues and homeowner associations, social welfare groups emerged in the past decade as the go-to vehicles for political operatives seeking to influence campaigns without revealing their donors.

Little governs their activities except a 54-year-old regulation that states that a group can qualify as a social welfare organization “if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.”

Tax lawyers have interpreted that to mean that advocacy groups need to spend at least 51 percent of their resources on social welfare efforts to maintain their tax status.

Until now, defining what falls outside of that has been left to a subjective “facts and circumstances” test by the IRS.

The result: Social welfare groups such as Crossroads GPS and Americans for Prosperity on the right and the League of Conservation Voters and Patriot Majority on the left have pumped untold hundreds of millions of dollars into election-related activities in recent years while avoiding the donor disclosure required of more tightly regulated political committees.

The explosion of politically active nonprofit groups — and the vague standards the IRS uses to assess them — led to the searing crisis that engulfed the agency this year, when an inspector general’s report revealed that employees had been selecting groups with names that included words such as “tea party” or “patriot” for extra scrutiny.

In the aftermath, everyone agreed the system was broken.

The new regulation defines “campaign-related political activity” that does not count towards a group’s social welfare purpose, a category that would include many routine functions of advocacy groups, such as voter registration.

Treasury officials said the aim is to lay down a specific, neutral definition for political intervention, an effort cheered by many Democratic lawmakers and advocates for tighter campaign finance restrictions.

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