IRS Tax Exemption Hullabaloo

Citizen Wealth Financial Justice

501c3 501c4London   A record number of comments, 23,000 and counting, have now been filed with the Internal Revenue Service, over proposed new rules affecting tax exempt nonprofits, particularly organizations with a c4 status, but even potentially c5’s which are labor unions and c6’s which are trade associations.  When you hear IRS and tax exemptions, the first thing that may come to your mind is the dust-up some months ago when it was revealed that applications from the Tea people and some progressive organizations both received an extra hairy eyeball review from the Service about whether they were really social welfare outfits or simply wolves in sheep’s clothing.  The real problems though are much deeper than that controversy and instead go squarely to the Supreme Court’s even wider opening of the floodgates for mass volumes of money coming into politics with the Citizen United decision and the quickness of Karl Rove, the Koch Brothers, and others to drive trucks through the new loopholes while disguising the drivers or donors at the same time.

            Now the IRS finally is coming to grips with the mess of fake c4’s and everyone seems to be yammering and whining about the proposals.   The heart of the problem is what defines “political campaign,” and where the IRS seems to have thrown the baby out with the bathwater is in broadly mashing traditional nonprofit civic engagement with hard core partisan campaigning.  The IRS rule seems to include voter registration drives, get-out-the-vote efforts, candidate debates and forums, voter guides, and a whole bunch of stuff that has been simple and straightforward for years from groups ranging from the League of Women Voters to neighborhood civic organizations.  Something this broad seems to be trying to fix a lot more than was broken.  Adding on restrictions to unions and even the Chamber of Commerce, just seems grasping, and I bet at least those items will die on the drawing board.

            Nonetheless, it’s hard to go to the barricades to defend c4’s in my view.   It’s always been a “partially pregnant” tax status.  It’s not a c3, which is the most favorable status for nonprofits and clearly lines such an organization with the angels in doing educational and charitable work, but somewhere betwixt and between.   In my years with ACORN for example, we never had any c4’s.   ACORN was a plain vanilla nonprofit, and didn’t need a special tax exemption to do the work we were doing or to embrace restrictions on our membership for limited and questionable advantages.  More recently c4’s have become the rage though and many of the former ACORN state affiliates seem to have reorganized as c4’s rather than simply as nonprofits.   I would have thought it tied hands, and now it seems the IRS is caught in this latest firestorm, because it is trying to do exactly what they probably should do, which is tie hands, especially given the abuse of the c4 status by the Koch Brothers and their imitators. 

            The head of the IRS says they are in no hurry to solve this problem, but the genie is out of the bottle and being a c4 is going to become a lot harder, more expensive, and immensely trickier.  Being either a c3 or a simple nonprofit may not be fancy or the fad for the lawyers, but for organizers, it’s still the way to go for my money.