March 18, 2014

IRS Should Take the Middle Ground on Nonprofit Politicking

Dennis Brack/Newscom

Little the IRS has done in recent years has been as contentious as its efforts to reshape the regulations on political activity by nonprofits. The agency received a record of more than 140,000 comments in response to rules it proposed just before Thanksgiving.

While the comments span the ideological spectrum, nonprofits and foundations have suggested a much-needed path forward on an issue that is central to our nation’s commitment to open, participatory democracy.

Federal rules on political activity have always been muddy, but the problems got worse when the Supreme Court’s Citizens United decision in 2010 unleashed a remarkable flow of partisan political spending by social-welfare nonprofits—which are not required to disclose their donors.

When the IRS tried to ferret out potentially illegal political spending, the vague standards it had in place became even more problematic to apply; the agency became embroiled in an ugly controversy involving false accusations that it was trying to silence Tea Party groups, and several of top IRS officials were forced to step down.

This situation prompted the agency to step back and figure out a way to give clear guidance to nonprofits about what types of politics are acceptable and what are forbidden. While the IRS’s proposed rules would cover only social-welfare groups, nearly everyone wants to see clearer standards for all types of nonprofits.

The only groups that want to shut down the IRS rule-making process altogether are Tea Party conservatives. Sen. Ted Cruz and others have called for abolishing the IRS, while other members of Congress have introduced legislation to delay work on the politicking rules. More than 25,000 comments submitted to the IRS by individuals or organizations with Tea Party in their names decried the tax agency for seeking to take away their First Amendment rights.

Even so, many conservative groups, including the Tea Party Patriots and Center for Competitive Politics, recognize the need to overhaul vague tax laws and have offered concrete proposals. Nonprofit liberal groups also want to see an overhaul but are somewhat split between civil libertarians and government reformers—particularly over questions about just how much political activity is acceptable for nonprofits to pursue.

Meanwhile, Independent Sector, joined by more than 100 other mainstream charities and foundations, has emphasized the urgency of enacting changes so as to minimize the risk that some bad players will damage the reputation of all nonprofits. At the same time, it has asked the IRS to make clear to everyone that advocacy is an important role for charities and others to pursue, and wholly different from partisan politics.

While some of the people submitting comments view the issues involved in shaping the IRS regulations as pitting good government against the First Amendment, that simply is not the case. Both preventing abuse of tax-exempt status by partisan political operatives and encouraging nonprofits to spark voter participation are complementary and essential facets of our American constitutional democracy.

At issue as the IRS gets to work reshaping the rules based on the comments are two questions:

  • How is partisan election activity defined?
  • What share of time or money can organizations spend on this kind of activity?

My analysis of the comments suggests some widespread agreements on these issues:

  • Setting out clear rules about what constitutes political activity will make it easier for nonprofits to comply with the law and for government officials to ensure they do.
  • Efforts to register people, educate them about election issues, and urge them to go to the polls should not be considered political and should face no limits for any kind of organization. With nonprofits fighting to protect voting rights and to register more than 50 million citizens who haven’t yet signed up but are eligible to cast a ballot, this work is vital to making our democracy work.
  • The definition of political activity should apply universally to all tax-exempt 501(c) organizations, not just 501(c)(4) groups. Organizations like the American Conservative Union and Traditional Values Coalition, as well as the American Civil Liberties Union and Public Citizen, all agree on that point.

The disagreements stem largely from the question of how to draw clear rules that distinguish partisan from nonpartisan activity. The ACLU joins conservative organizations like Americans for Tax Reform and Tea Party Patriots in asking the IRS to draw very narrow lines that would restrict only a small number of partisan political attack ads and operations, those that use certain magic words like “elect” or “defeat.”

Government-reform groups like Democracy 21 propose a much broader definition so that if something looks like politicking and sounds like politicking, it would be treated that way.

But there is a middle course that provides the best approach by establishing clear rules that can prevent the worst partisan abuses of the current system while strongly protecting civic engagement. Called the Bright Lines Project and crafted by expert nonprofit lawyers, this approach would encompass partisan politicking beyond the use of magic words while creating a clear zone of legal activity for nonpartisan work with voters and other activities, such as defending a nonprofit’s self-interest when threatening laws are proposed.

Independent Sector has been a strong champion of the bright lines approach. The Funders’ Committee for Civic Participation also submitted comments from more than 50 foundations and funds urging “bright-line rules that rationally distinguish between partisan and nonpartisan forms of democratic participation.”

When it comes to how much partisan activity is permitted for each type of tax-exempt group, most everyone agrees that business trade associations and unions should face the same limits as social-welfare groups. Other than that, the disagreements are wide.

Government-reform groups like Citizens for Responsibility and Ethics in Washington make strong arguments that the law requires the IRS to ban partisan politics by social-welfare groups or allow just a tiny amount.

Nonprofit VOTE, one of the leading providers of nonpartisan voter-participation resources, doesn’t go quite that far but strongly endorses the need “to stop the rising abuse of 501(c) organizations, which have been used to channel large amounts of undisclosed money to influence political campaigns.”

Independent Sector calls on the IRS to establish a clear dollar or percentage limit for such activity but declines to specify how much.

Meanwhile, conservative organizations generally want to continue with what has become commonly accepted as the limit: that 49 percent or less of a group’s budget should be allowed to go to partisan work. On this issue, they are joined by a prominent liberal organization, the Alliance for Justice. In comments that were signed by 60 advocacy groups, the alliance argues that the IRS should not, and indeed may not, “further restrict the amount of political activity” that social-welfare organizations can undertake.

However, there may be room for compromise. One of the nation’s leading conservative election-law experts, Bradley A. Smith, has long suggested limiting such activity to 30 to 35 percent of a group’s budget. Mr. Smith is former chairman of the Federal Election Commission and founder and chairman of the Center for Competitive Politics, so his opinion, especially among conservative experts, is influential.

Mr. Smith also proposed a solution for concerns raised by good-government groups: Some stealth political operatives set up social-welfare nonprofits during the heat of a campaign and then shut them down right after, so nobody can catch legal violations until an election is long over, if ever. To prevent that, Mr. Smith suggested prohibiting social-welfare groups from spending money on partisan political activities until their tax-exempt status has been approved, or for at least a year after they apply. The IRS didn’t propose that idea in its rules, but it should have.

The IRS now needs to address the issue of how much political activity is allowable and should let social-welfare groups pursue a small amount of political activity, say 10 percent of a group’s budget or a low dollar limit.

When Congress created civic groups to “operate exclusively” to promote social welfare, it did not intend to approve significant tax subsidies for large-scale, partisan political attack ads and operations that shield the identity of major donors. The current situation will continue to tarnish the reputation of nonprofits, and the public won’t put up with it much longer.

The IRS’s final work will be judged not only by how well it follows the intent of Congress and devises a system it can enforce impartially but also by whether it promotes and protects the constitutional principles that undergird our democracy, including a broadly engaged and informed electorate.

It also can’t be considered done with its work until it applies consistent rules to every type of tax-exempt group that gets involved in politics and advocacy.

That so many nonprofits and foundations submitted formal comments is encouraging. That should show the IRS how much the nonprofit world cares about this issue. But it’s important that everyone keep involved. This is just the opening round of what promises to be a long but important debate.

Larry Ottinger is a civil-rights lawyer and co-chairman of the Ottinger Foundation.