On May 21, 2013, Citizens for Responsibility and Ethics in Washington (CREW) filed a lawsuit against the Internal Revenue Service (IRS) in United States District Court for the District of Columbia to compel the agency to initiate a rulemaking procedure to address serious conflicts between the Tax Code’s requirements for section 501(c)(4) groups and implementing IRS regulations. Current IRS regulations grant tax-exempt status under section 501(c)(4) of the Tax Code to groups “primarily engaged” in promoting social welfare. The tax laws, however, require such groups to be “operated exclusively” for social welfare purposes.
Groups seeking or claiming 501(c)(4) status have interpreted the IRS regulation to mean they can spend up to 49 percent of their annual expenditures on electoral activities, while still maintaining tax-exempt status. During the 2012 election cycle, section 501(c)(4) groups spent nearly $255 million on elections. In April, following up on its earlier lawsuit against the IRS, CREW filed a rulemaking petition with the agency seeking a revision to this regulation to eliminate the glaring loophole that allows these tax-exempt groups to engage in substantial political activity while keeping the identities of their donors secret.
December 6, 2013 Update
Today in CREW v. Dep’t of the Treasury, et al. (D.D.C.), CREW filed an opposition to the IRS’s motion to dismiss this lawsuit on standing grounds. CREW is challenging the refusal of the IRS to grant CREW’s petition for a rulemaking to reconcile the IRS regulation granting tax-exempt status to § 501(c)(4) organizations that are “primarily engaged” in promoting social welfare with the statutory requirement of the tax code that such groups be operated “exclusively” for such purposes.
CREW’s motion explains the multiple injuries it has suffered as a direct result of the IRS’s “primarily engaged” regulation, including most significantly deprivation of information about the sources of the hundreds of millions of dollars that have flowed anonymously into our elections from § 501(c)(4) groups. If the IRS regulation mirrored the statutory requirement that such groups be operated “exclusively” for social welfare purposes – the ultimate relief CREW seeks – § 501(c)(4) groups wishing to continue to engage in significant political activities likely would form or associate with tax-exempt § 527 groups. Under the tax code, § 527 groups must disclose their donors, the precise information CREW has been deprived of here. This establishes CREW’s harm and right to maintain its lawsuit.
Although the IRS recently published a proposed notice of rulemaking that attempts to define more specifically those political activities that, if performed by § 501(c)(4) organizations, are not promoting social welfare, the IRS left undisturbed its “primarily engaged” regulation. Instead, the IRS indicated it would accept comments on whether it should, at some indeterminate time, change that regulation as well. As a result, the latest regulatory proposal does not affect CREW’s lawsuit, which calls for that precise regulatory change.