FOR IMMEDIATE RELEASE: March 12, 2012
SENATE DEMOCRATS URGE IRS TO IMPOSE STRICT CAP ON POLITICAL SPENDING BY NONPROFIT GROUPS—VOW LEGISLATION IF AGENCY DOESN’T ACT
Senators Seek To End Tax Code Abuse By Political Groups Masquerading As ‘Social Welfare Organizations’
In Letter to IRS, Lawmakers Say Firm Limit Should Be Set on Percentage of Nonprofits’ Spending That Can Be Devoted To Political Activities
Reforms Also Urged To Prevent Political Donors From Claiming Tax Deduction For Their Contributions
WASHINGTON, D.C. – A group of seven Senate Democrats urged the Internal Revenue Service on Monday to impose a strict cap on the amount of political spending by tax-exempt, nonprofit groups.
The senators said the lack of clarity in the IRS rules has allowed political groups to improperly claim 501(c)4 status and may even be allowing donors to these groups to wrongly claim tax deductions for their contributions. The senators promised legislation if the IRS failed to act to fix these problems.
“We urge the IRS to take these steps immediately to prevent abuse of the tax code by political groups focused on federal election activities. But if the IRS is unable to issue administrative guidance in this area then we plan to introduce legislation to accomplish these important changes,” the senators wrote.
The letter was signed by Senators Charles E. Schumer, Michael Bennet, Sheldon Whitehouse, Jeff Merkley, Tom Udall, Jeanne Shaheen and Al Franken. It follows an earlier letter, sent to the IRS by the same of group of senators last month, that also urged the IRS to better enforce rules pertaining to 501(c)4 organizations.
Federal law defines 501(c)4 groups as groups engaged exclusively in “social welfare” activities. The IRS, however, has allowed these 501(c)4 groups to venture into political activities as long as civic and charitable work remains their “primary purpose.” This loophole has caused a number of organizations heavily engaged in political work to organize themselves as 501(c)4 groups in order to gain tax-exempt status and shield their donors from the disclosure requirements that apply to more traditional political organizations.
The senators said the IRS should close this loophole by imposing a strict, percentage-based cap on the amount of a nonprofit group’s spending that can go towards political activities. Legal experts have proposed a cutoff of 49 percent to ensure that political activities never command more than half of a group’s total spending. But the senators said even this threshold would be too high and would permit more political work than any nonprofit group should be able to perform.
The senators also said that 501(c)4 groups should have to disclose upfront—on all written and online solicitations that get sent to potential donors—how much of their activities are political. The senators said this would make it clear to potential donors how much of a tax deduction, if any, they could claim on their tax returns. Currently, no such information is required to be disclosed and tax experts have expressed concern that many corporations contributing funds to these political groups may be counting those donations as a business expenses eligible for a full tax deduction.
A copy of the senators’ letter to IRS Commissioner Douglas H. Shulman appears below.
Hon. Douglas H. Shulman
Commissioner
Internal Revenue Service
Room 3000 IR
1111 Constitution Avenue, N.W.
Dear Commissioner Shulman:
We write to ask the Internal Revenue Service (“IRS”) to immediately change the administrative framework for enforcement of the tax code as it applies to groups designated as “social welfare” organizations. These groups receive tax and other advantages under section 501(c)(4) of the Internal Revenue Code (hereinafter, “IRC” or the “Code”), but some of them also are engaged in a substantial amount of political campaign activity. As you know, we sent a letter last month expressing concerns about the 501(c)(4) issue; an investigation this week by the New York Times has uncovered new, specific problems on how c)4)s conduct business. We wanted to address those new concerns in this letter.
IRS regulations have long maintained that political campaign activity by a 501(c)(4) entity must not be the “primary purpose” of the organization. These regulations are intended to implement the statute, which requires that such organizations be operated exclusively for the public welfare. But we think the existing IRS regulations run afoul of the law since they only require social welfare activities to be the 'primary purpose' of a nonprofit when the Code says this must be its 'exclusive' purpose. In recent years, this daylight between the law and the IRS regulations has been exploited by groups devoted chiefly to political election activities who operate behind a facade of charity work.
A related concern, raised in a March 7th New York Times article, concerns whether certain nonprofits may be soliciting corporate contributions that are then treated by the company as a business expense eligible for a tax deduction. The Times wrote: “Under current law, there is little to no way to tell whether contributions are being deducted, especially because many of the most political companies are privately held.” This potential abuse distorts the objectives of vital revenue mechanisms and undermines the faith that we ask citizens to place in their electoral system.
We propose that the IRS make three administrative changes to curtail these questionable practices and bring IRS tax regulations back into alignment with the letter and spirit intended by those who crafted the Code:
· First, we urge the IRS to adopt a bright line test in applying its “primary purpose” regulation that is consistent with the Code’s 501(c)(4) exclusivity language. The IRS currently only requires that the purpose of these non-profits be “primarily” related to social welfare activities, without defining what “primarily” means. This standard should be spelled out more fully by the IRS. Some have suggested 51 percent as an appropriate threshold for establishing that a nonprofit is adhering to its mission, but even this number would seem to allow for more political election activity than should be permitted under the law. In the absence of clarity in the administration of section 501(c)(4), organizations are tempted to abuse its vagueness, or worse, to organize under section 501(c)(4) so that they may avail themselves of its advantages even though they are not legitimate social welfare organizations. If the IRS does not adopt a bright line test, or if it adopts one that is inconsistent with the Code’s exclusivity language, then we plan to pursue legislation codifying such a test.
· Second, such organizations should be further obligated to document in their 990 IRS form the exact percentage of their undertakings dedicated to “social welfare.” Organizations should be required to “show their math” to demonstrate that political election activities and other statutorily limited or prohibited activities do not violate the “primary purpose” regulation.
· Third, 501(c)(4) organizations should be required to state forthrightly to potential donors what percentage of a donation, if any, may be taken as a business expense deduction. As the New York Times reported in its March 7tharticle, some of these organizations do not currently inform donors whether a contribution is tax deductible as a business expense at all.
The IRS should already possess the authority to issue immediate guidance on this matter. We urge the IRS to take these steps immediately to prevent abuse of the tax code by political groups focused on federal election activities. But if the IRS is unable to issue administrative guidance in this area then we plan to introduce legislation to accomplish these important changes.
Sincerely,
Senators Charles E. Schumer, Michael Bennet, Sheldon Whitehouse, Jeff Merkley, Tom Udall, Jeanne Shaheen and Al Franken