One theme in the narrative about the IRS is that it faces a special challenge in enforcing the (c)(4) rules in the wake of Citizens United. A (c)(4) organization, which is typically a corporation, can make independent expenditures, so long as this campaign activity and others do not make up its primary purpose. Two basic reform models have been advanced to protect against the misuse of these nonprofits to make these and other campaign-related expenditures. One is that the Service should generally employ more rigor in rooting out organizations that have exceeded their limit for political activity. Another is that the IRS should change its rules, switching the test from a “primary” social welfare purpose to an “exclusive one” without any campaign activity mixed in, and rid itself of the problem altogether: effectively, the no-tolerance option. In both cases, however, the proposed solutions may have to scale steep walls erected by Supreme Court precedent. These issues have to be taken into account in judging the role that IRS enforcement can play in campaign finance regulation.
If the organization engages in explicit campaign activity, such as independent expenditures, the Services faces the problem that the Supreme Court has held that such expenditures are constitutionally protected. Under Regan v. Taxation with Representation of Washington, 461 U.S. 540 (l983), the Court held that Congress can refuse to subsidize an organization’s constitutionally protected activity, such as lobbying, but it assumed and expected that other means would be available to that organization to pursue it. In particular, a 501(c)(3) charity can be denied charitable deductions when lobbying because it can lobby, if it chooses, through an affiliated (c)(4). The Court found that it was not too much to ask the organization to run its lobbying through a parallel structure. Under this principle, the Court would allow tax exemptions to be denied to (c) tax-exempts engaged in independent expenditures only if the organization could make them in some other fashion—perhaps also through an affiliate.
So the IRS would be forcing the independent expenditures out of one tax exempt vehicle, the (c)(4), into another—presumably, a “527” political organization under the tax code. 26 U.S. § 527. The advantage from a reform perspective might be, in theory, the application of disclosure requirements that 527s must satisfy under the tax laws. 26 U.S,C. §527(j). The question Court precedent poses is whether this is necessarily the result. It may be a challenge to persuade a majority of the Justices that, to preserve its tax exempt status, a corporation possessing the constitutional right to make independent expenditures must run them through a political organization subject to significant regulatory requirements—that is, reporting obligations in addition to the mere reporting of the independent expenditure itself. And if the affiliate only conducts this political activity, it stands to be treated as a “political committee” under the Federal Election Campaign Act and compelled to submit to still more regulation.
Full Article: IRS Enforcement and the Court.