Senator calls for IRS investigation of political nonprofits

All those stories about tax-exempt organizations skirting election law seem to be finally getting some attention up on Capitol Hill. Senate Finance Committee Chairman Max Baucus, D-Mont., announced Wednesday that he has sent a letter to the IRS Commissioner Doug Shulman asking for a thorough investigation into the use of tax-exempt groups — like “issue advocacy” organizations and business leagues or associations — for political activity.

Under federal tax law, these groups can’t be engaged in political activity as their primary purpose, nor can they be used by individuals to advance their own private political interests. But recent media reports, Baucus notes, have indicated that such laws are being flaunted.

“Political campaigns and powerful individuals should not be able to use tax-exempt organizations as political pawns to serve their own special interests.  The tax exemption given to non-profit organizations comes with a responsibility to serve the public interest and Congress has an obligation to exercise the vigorous oversight necessary to ensure they do,” said Baucus.  “When political campaigns and individuals manipulate tax-exempt organizations to advance their own political agenda, they are able to raise and spend money without disclosing a dime, deceive the public and manipulate the entire political system.  Special interests hiding behind the cloak of independent non-profits threatens the transparency our democracy deserves and does a disservice to fair, honest and open elections.”

In his letter (below), Baucus asks Shulman to review all major 501(c)4, (c)5 and (c)6 organizations engaged in political campaign activity and make sure that they are operating within the guidelines of their declared tax-exempt purpose. He goes on to ask Shulman to draw up a report for the Finance Committee on the IRS’s findings as soon as possible.

In Iowa, the nonprofit group American Future Fund (AFF) has received the lion’s share of media attention, especially after it announced it would spend nearly $1 million attacking Democratic U.S. Rep. Bruce Braley in the 1st Congressional District. The group says it will spend $25 million this fall around the country in competitive Congressional races. AFF’s sister organization, The Progress Project, is also a nonprofit but focuses on Iowa politics.

Revoking an organization’s tax exempt status is a notoriously tricky and rare occasion. For one, such groups are often incorporated with impossibly vague mandates like putting forth a “pro-growth, pro-jobs message” (Americans for Job Security), “educating citizens about economic policy and mobilizing those citizens as advocates in the public policy process” (Americans for Prosperity), or “promote conservative free market principles to the citizens of America” (American Future Fund).

Second, the IRS as an agency is not currently staffed, equipped, or particularly motivated to enforce federal election law and, on the occasions that it has acted against groups, the decisions tend to get mired in lengthy court proceedings. But maybe Baucus’s request will light the necessary fire beneath the agency before midterms.

Here’s a copy of the letter:

September 28, 2010

The Honorable Douglas H. Shulman

Commissioner

Internal Revenue Service

1111 Constitution Avenue, N.W.

Washington, DC  20224

Via Electronic Transmission

Dear Commissioner Shulman:

The Senate Finance Committee has jurisdiction over revenue matters, and the Committee is responsible for conducting oversight of the administration of the federal tax system, including matters involving tax-exempt organizations.   The Committee has focused extensively over the past decade on whether tax–exempt groups have been used for lobbying or other financial or political gain.

The central question examined by the Committee has been whether certain charitable or social welfare organizations qualify for the tax-exempt status provided under the Internal Revenue Code.

Recent media reports on various 501(c)(4) organizations engaged in political activity have raised serious questions about whether such organizations are operating in compliance with the Internal Revenue Code.

The law requires that political campaign activity by a 501(c)(4), (c)(5) or (c)(6) entity must not be the primary purpose of the organization.

If it is determined the primary purpose of the 501(c)(4), (c)(5) and (c)(6) organization is political campaign activity the tax exemption for that nonprofit can be terminated.

Even if political campaign activity is not the primary purpose of a 501(c)(4), (c)(5), and (c)(6) organization, it must notify its members of the portion of dues paid due to political activity or pay a proxy tax under Section 6033(e).

Also, tax-exempt organizations and their donors must not engage in private inurement or excess benefit transactions.  These rules prevent private individuals or groups from using tax-exempt organizations to benefit their private interests or to profit from the tax-exempt organization’s activities.

A September 23 New York Times article entitled “Hidden Under a Tax-Exempt Cloak, Private Dollars Flow” described the activities of the organization Americans for Job Security.  An Alaska Public Office Commission investigation revealed that AJS, organized as an entity to promote social welfare under 501(c)(6), fought development in Alaska at the behest of a “local financier who paid for most of the referendum campaign.”   The Commission report said that “Americans for Job Security has no other purpose other than to cover money trails all over the country.”  The article also noted that “membership dues and assessments … plunged to zero before rising to $12.2 million for the presidential race.”

A September 16 Time Magazine article examined the activities of Washington D.C. based 501(c)(4) groups planning a “$300 million … spending blitz” in the 2010 elections.  The article describes a group transforming itself into a nonprofit under 501(c)(4) of the tax code, ensuring that they would not have to “publically disclose any information about its donors.”

These media reports raise a basic question: Is the tax code being used to eliminate transparency in the funding of our elections – elections that are the constitutional bedrock of our democracy? They also raise concerns about whether the tax benefits of nonprofits are being used to advance private interests.

With hundreds of millions of dollars being spent in election contests by tax-exempt entities, it is time to take a fresh look at current practices and how they comport with the Internal Revenue Code’s rules for nonprofits.

I request that you and your agency survey major 501(c)(4), (c)(5) and (c)(6) organizations involved in political campaign activity to examine whether they are operated for the organization’s intended tax exempt purpose and to ensure that political campaign activity is not the organization’s primary activity. Specifically you should examine if these political activities reach a primary purpose level – the standard imposed by the federal tax code – and if they do not, whether the organization is complying with the notice or proxy tax requirements of Section 6033(e).  I also request that you or your agency survey major 501(c)(4), (c)(5), and (c)(6) organizations to determine whether they are acting as conduits for major donors advancing their own private interests regarding legislation or political campaigns, or are providing major donors with excess benefits.

Possible violation of tax laws should be identified as you conduct this study.

Please report back to the Finance Committee as soon as possible with your findings and recommended actions regarding this matter.

Based on your report I plan to ask the Committee to open its own investigation and/or to take appropriate legislative action.

Sincerely,

Max Baucus

Chairman