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Wednesday, Aug 27, 2014
Commentary

‘Social welfare’ rules fall way short


Published:

Last week the Internal Revenue Service and the Treasury Department published draft regulations for tax-exempt “social welfare” organizations that increasingly have become banks for anonymous political donations. But the regulations stop short of addressing the biggest problem with political spending by these tax-exempt organizations: that it exists at all.

Tax-exempt nonprofits created under Section 501(c)(4) of the tax code are supposed to be “operated exclusively for the promotion of social welfare.” Examples offered in an IRS publication include groups that build housing for the poor or provide financial planning. That is a defensible trade-off: In exchange for the benefit of tax-exempt status, these groups agree to concentrate on nonpolitical good works.

Unfortunately, the IRS has complicated matters by defining “exclusively” as “primarily,” meaning that 501(c)(4)s may engage in some election-related activity, though exactly how much of their spending can be political is unclear.

This was a loophole waiting to be abused, and it has been, by social welfare groups that have spent hundreds of millions of dollars on television commercials to support candidates and political causes. Both liberals and conservatives have been attracted to the 501(c)(4) vehicle. And here’s the clincher: Unlike other fundraising groups, including so-called super PACs, 501(c) (4)s don’t have to reveal their donors.

The best way to deal with the politicization of 501(c)(4)s would be to return to the letter of the law and require that they be “exclusively” dedicated to the promotion of the public welfare in ways that have nothing to do with candidates or elections. Alas, the proposed rules, far from requiring that 501(c)(4)s avoid politics altogether, don’t even clarify how much election-related activity such groups can engage in. Instead, their focus is on the definition of “political activity.” Under the proposal, it would include not just supporting or opposing candidates but any mention of a candidate in a “public communication” close to an election.

That utterly fails to address the question of how much election-related advocacy of any kind is consistent with being a tax-exempt social welfare organization that can keep the identities of its donors secret. To us the answer is clear: 100 percent.

The final regulations should come as close to that ideal as possible.

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