U.S. Tax Laws on Politics Go Unenforced

By Norris, Floyd | International Herald Tribune, May 17, 2013 | Go to article overview

U.S. Tax Laws on Politics Go Unenforced


Norris, Floyd, International Herald Tribune


Does anyone think the next head of the tax collection agency will have any appetite for trying to enforce the tax law's restrictions on political activities by so-called social welfare groups?

CORRECTION APPENDED

As Republican senators and President Barack Obama denounce the Internal Revenue Service for singling out Tea Party organizations for investigation, it is worth asking how it got to the point that the I.R.S., the U.S. government's tax collector, is supposed to investigate political activities. It is also worth asking whether the tax law is being widely flouted by political groups determined to avoid disclosure of their donors -- and whether successive administrations have failed to enforce the law.

As to how things got to this point, the answer involves such disparate elements as a provision of tax law adopted a century ago - - a provision that had nothing to do with political campaigns -- and a change in tax law adopted in 1954 at the behest of Lyndon B. Johnson, then the Senate Democratic leader, who was angry that some ministers in Texas were opposing his re-election.

But mostly it stems from legislation, passed in 2001, that required normal political committees to disclose their donors. Seeking a way around that law, organizations formed for the purpose of influencing elections began to claim they were really "social welfare" organizations, a group that has had its own special tax status ever since the modern income tax took effect in 1913.

What are "social welfare" organizations? The tax code defines them as being "civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare." Note the word "exclusively." Over the years, the I.R.S. has issued rules saying that such things as a retirement plan for volunteer firefighters or an organization devoted to providing free parking in a downtown business district could qualify.

That section of the law, by the way, is Section 501(c)(4). Normally, I would not burden you with such a number, but in this area it is hard to figure out what is going on without a scorecard. That section is next to, but very different from, Section 501(c)(3), which defines charitable organizations. Both groups of organizations are tax-exempt -- meaning that under normal circumstances, they do not owe income tax on profits from investments -- but only the 501(c)(3) organizations can receive tax-deductible contributions.

The law used to be silent on whether charities could have anything to do with politics. But that changed in 1954, when Johnson, facing a primary challenge from a very conservative Democrat with substantial Catholic support, inserted into a pending tax bill a provision "denying tax-exempt status to not only those people who influence legislation but also to those who intervene in any political campaign on behalf of any candidate for any public office," as he put it in a brief Senate speech. The provision was added without any real debate.

Six years later, in 1960, the I.R.S. adopted regulations extending the political prohibition to Section 501(c)(4) organizations, but with a caveat. Social welfare organizations could intervene in politics so long as the organization's "primary" purpose was social welfare. The idea was that it was perfectly acceptable for an organization supporting, say, renovation of a downtown to participate in a campaign for a referendum on imposing a tax for that purpose.

It was not clear what "primary" meant, but as Donald B. Tobin, an Ohio State University law professor, wrote in 2011, "it is certainly less than the statutory term 'exclusively."'

In practice, none of that made any real difference for decades. There was no need for a political group to maintain that it was something else. …

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