Two items in last week’s news highlight that federal tax law remains an important consideration in the lead up to the 2014 and 2016 elections.
First, the IRS released a letter that denied the application of the Arkansans for Common Sense, a now defunct liberal group, for classification as a 501(c)(4) social welfare organization. The facts made this an easy case for the IRS (between 50 and 85% of the organization’s expenditures, depending on how you define “political” spending, related to influencing elections). Nonetheless, the denial letter highlights the risk that the IRS, widely viewed currently as not willing or able to enforce the existing restrictions on political campaign intervention by social welfare groups, remains something of a wild card. This impression is underscored by the letter’s apparent reliance on a revenue ruling that does not address whether or to what extent social welfare organizations can engage in political activities without jeopardizing their exemption. That revenue ruling, based on a different definition of political activity, deals with whether a social welfare organization has made a taxable exempt function expenditure under section 527 of the Internal Revenue Code.
Second, IRS Commissioner Koskinen told reporters from the Center for Public Integrity that the IRS expects to release new proposed regulations on political spending by tax-exempt groups in early 2015. Perhaps significantly, the proposed new rules are to be broader in scope than last year’s withdrawn proposed regulations. In particular, they will address the definition of political activity, the organizations to which the definition will apply and how much political activity organizations can engage in without jeopardizing their income tax exemptions. While any new rules seem likely to draw an immediate legal challenge from one or possibly even both sides of the aisle (if the now withdrawn proposed regulations are any indication), it is clear that anyone planning political spending in 2014 and 2016 should anticipate that the rules may change in mid-course.