Proposed IRS Rules on C4s a Mixed Bag Likely to See Lobbying from Right and Left

4730557336_taxes_irs_building_xlargeNew Orleans   The IRS announced that it is proposing clearer rules to regulate the “social welfare” practices of C4 tax exempt nonprofits.   I should start with a disclaimer.   I’ve never operated a c4 organization, though I recognize the fact that they have recently become the rage, largely among lawyers and CPAs I would argue, but the mayhem that mass volumes of anonymous political money has brought to tax exempt nonprofits, largely from the Koch Brothers and Karl Rove, has muddled the mess past rational discussion.   The craziness may have infected the IRS as well.

The early blurbs say that the IRS wants to claim that voter registration and voter guides are “political” activity which besides being yet another example of voter suppression efforts and the politicization which has dramatically chilled nonpartisan voter registration efforts, have long been classified as tax exempt as long as they are demonstratively nonpartisan.   501c3 tax exempt organizations have long been permitted to do voter guides as long as they are nonpartisan and objectively present all candidate responses.   Additionally multi-state nonpartisan voter registration efforts have long tax exempt under a special section of the code, so why this slap down on the mildest of activities both of which have long proven civic value?

The heart of the rule making seems based on establishing a bright line test for the percentage of overall expenditures that would define an organization as not existing for a “social welfare purpose.”   Reports indicate that lawyers have been using a rough rule of thumb that organizations need to spend less than 50% on arguably political expenditures and that the IRS might be talking about as little as 10 to 15% in the new rules.  Hmmm.  The IRS has never definitively established a bright line test for c3’s which are much more numerous and instead has allowed lawyers and tax exempt managers to guess whether it might be 7 or 8% or whatever.   The notion that somehow the IRS is suddenly going to beef up its severely depleted exempt organizations branch to really police a number is somewhere between a fabrication and a fantasy.  It won’t happen and it can’t happen, if not no other reason that it’s a lead pipe cinch that Congress is not going to budget for an expansion of IRS capacity especially in this area.

Much of this seems to be more about the headlines and firing a warning shot at donors, both right and left, than about real guidelines and real enforcement.   There are huge loopholes, and they need to be closed, but the best way to close them may not be more toothless rules, but straightforward taxation.   If donations are disallowed for social welfare and simply taxed as political, then money will run like crazy away from c4’s even faster than the IRS can make the rules.   It’s probably running right now! This has never been about the freedom of speech for the rich, but only about tax evasion for such speech.

The wave of progressive community organizations that have also succumbed to c4 fever will be impacted as well.   Sadly, as I said earlier, there will be more curtailment of voter registration and voter education work, if the IRS tries to misclassify such work as political.   Lawyers and accountants will suck even more resources from desperately depleted nonprofits trying to hold onto c4 tax status.   The only silver lining in their cloud is the fact that most of their work is so clearly in pursuit of “social welfare” that they may become temporarily more popular while big money looks for new vehicles.

I think I’ll just stick with the plain vanilla nonprofit structure without worrying about the IRS, which has served us so well for so long, fads and fashions notwithstanding.

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