All eyes are on the IRS and its regulation of 501(c)(4) organizations these days, with the agency’s mishandling of exemption applications, the release of the Treasury Inspector General’s report, and the lengthy hearings held by the House Ways and Means Committee, the Senate Finance Committee, and the House Oversight and Government Reform Committee examining the use by the IRS of inappropriate criteria in reviewing exemption applications.  But another story on the regulation of 501(c)(4) organizations is advancing this week as well.

As we’ve discussed (here and here), over the past few years various groups have urged the IRS to change the rules relating to 501(c)(4) organizations’ political activities.  Their complaints have essentially been that 26 U.S.C. § 501(c)(4) requires an organization to be “operated exclusively” for the promotion of social welfare, but that regulations finalized in 1959 wrongly hold that requirement to be satisfied if the organization is “primarily engaged” in such activity.  The IRS has made no indication that it plans to initiate a rulemaking to address the issue, and it has apparently taken no action on a petition for rulemaking filed by the Citizens for Responsibility and Ethics in Washington, also known as CREW, this past April.

In a further attempt to spur the agency to action, CREW on Tuesday filed a complaint in federal district court in Washington, D.C.  It alleges that the IRS’s refusal to proceed with a rulemaking in response to the petition is “arbitrary and capricious” under the Administrative Procedure Act, and asks the court to issue a writ of mandamus compelling the IRS to take action.

What is noteworthy about the suit is the way it is framed: CREW wants an order forcing the IRS to amend its regulation, rather than an order that strikes down the existing regulation as being inconsistent with the text of the Internal Revenue Code.  These are distinct issues because the former is a procedural challenge to IRS inaction, while the latter is a question about the substantive validity of the regulation.

A procedural challenge faces some high hurdles.  As stated by the U.S. Court of Appeals for the D.C. Circuit, whose rulings will govern the district court’s analysis here, “‘an agency’s refusal to institute rulemaking proceedings is at the high end of the range’ of levels of deference we give to agency action under our ‘arbitrary and capricious’ review.”  Yet, in that same opinion, there are examples of these “rarest and most compelling circumstances” where an agency is forced to act.  We’ll be sure to bring you news of how the court sorts it all out.