The tax law requires 501(c)(4) organizations to operate exclusively to promote the "public welfare." In 1959 the IRS edited their tax codes to only require that they mostly promote the public welfare.
This loophole has allowed political activists to assume that they can spend up to 49% of their budgets on political ads, while still maintaining tax-exempt status that allows them to keep their donors secret.
This massive loophole was never authorized by Congress!
The current version of the Revenue Act of 1913 provides a tax exemption for:
Civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
26 U.S.C. § 501(c)(4)(A)(emphasis added)
Then in 1959 the IRS redefined the term "promotion of social welfare" to depart radically from the statute:
[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.
Treas. Reg. § 1.501(c)(4)-1(a)(2)(i)(emphasis added)
The source for this information is the watchdog group, Citizens for Responsibility and Ethics in Washington. Here is a link to CREW's rulemaking petition to the IRS.
If you have legal questions, please refer to the CREW pdf file. I am just playing stenographer here.
More below the fold.
These issues were discussed in this short clip from Lawrence O'Donnell on MSNBC:
Now, I would like to shift the discussion to how well the IRS is enforcing the current, albeit weakened, Treasure Regulations.
According to CREW, the American Action Network (AAN), headed by former Republican Sen. Norm Coleman (MN) claimed on their application for 501(c)(4) status that they would spend no more than 20% of their resources for political activity. Yet, the group’s tax returns show that 66.8 percent of AAN’s total spending from July 2009 through June 2011 was used for political activity. By any definition, this is clearly over the percentage permitted by the tax code.
The group, Propublica, submitted a Freedom of Information request to the IRS concerning these 501(c)(4) organizations. The IRS responded with a wealth of information including the applications of organizations that were not yet approved. Once the applications are approved, they become public domain, but they are confidential while they are still pending. The IRS instructed Probublica to destroy the confidential information. They did not. (You gotta love the 1st Amendment!)
One of these applications was from Karl Rove's Crossroads GPS. Question 15 asks. "Has the organization spent or does it plan to spend any money attempting to influence the selection of any person to any federal, state, or local public office or to an office in a political organization?" Rove answered, "yes," cited the Citizen's United decision and then stated, "Any such activity will be limited in amount and will not constitute the organization's primary purpose."
Worse than that, at least five organizations answered, "no," to question 15, and then went on to spend millions of dollars on political campaigns. There names are: Americans for Responsible Leadership, Freedom Path, Rightchange.com II, America Is Not Stupid and A Better America Now.
Conservative groups accounted for about 84 percent of the dark money flowing through nonprofits — mainly through Crossroads GPS, Americans for Prosperity and the U.S. Chamber of Commerce. Liberal groups spent 12 percent of the dark money. Nonpartisan groups made up the rest.
I would encourage everyone to visit the Propublica web site. They have a wealth of information on abuse of the 501(c)(4) designation.
I would like to ask one final question.
Is the I.R.S. really the correct agency to investigate political misbehavior? They don't seem to have much interest in doing so. Maybe this is due to their culture. When the IRS investigates somebody, it is usually in the hope of getting a cash settlement at the end. How much revenue are they going to get from denying tax exempt status for a political organization?