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Senators Ask IRS to Cap Political Spending by Nonprofits

March 13, 2012

Seven Democratic senators have written a letter to IRS Commissioner Doug Shulman urging the agency to impose a strict cap on political spending by tax-exempt nonprofit groups, the latest volley in a war over 501(c)4 groups associated with so-called SuperPACs.

In the letter, the Senate Democrats said a firm limit should be placed on the percentage of spending by nonprofit tax-exempt groups that could be devoted to political activities. The senators promised legislation if the IRS failed to act to fix these problems. The letter was signed by Senators Charles Schumer of New York, Michael Bennet of Colorado, Sheldon Whitehouse of Rhode Island, Jeff Merkley of Oregon, Tom Udall of New Mexico, Jeanne Shaheen of New Hampshire and Al Franken of Minnesota. It follows an earlier letter the same group sent to the IRS last month, also urging the IRS to better enforce rules pertaining to 501(c)4 organizations.

The senators also urged reforms to stop political donors from claiming tax deductions for their contributions to the tax-exempt groups. The senators said the lack of clarity in the IRS rules has allowed political groups to improperly claim 501(c)4 status and could even be allowing donors to the groups to wrongly claim tax deductions for their contributions.

“We urge the IRS to take these steps immediately to prevent abuse of the tax code by political groups focused on federal election activities,” the senators wrote in their latest missive. “But if the IRS is unable to issue administrative guidance in this area then we plan to introduce legislation to accomplish these important changes.”

The battle over the use of tax-exempt groups associated with political activity is bound to heat up this election season, with Republicans prodding the IRS in the opposite direction to curtail its questioning of Tea Party-associated groups applying for tax-exempt status (see IRS Probe of Tax-Exempt Political Groups Questioned). In the wake of the Supreme Court’s Citizens United decision, spending by SuperPACs is expected to reach an all-time high this year in the run-up to the November election, with many of them getting help from closely allied nonprofit arms, such as Karl Rove’s Crossroads GPS group.

The Senate Democrats pointed out that federal law defines 501(c)4 groups as groups engaged exclusively in “social welfare” activities. The IRS, however, has allowed 501(c)4 groups to venture into political activities as long as civic and charitable work remains their “primary purpose.”

Democrats contend the loophole has caused a number of organizations heavily engaged in political work to organize themselves as 501(c)4 groups in order to gain tax-exempt status and shield their donors from the disclosure requirements that apply to more traditional political organizations.

The senators said the IRS should close the loophole by imposing a strict, percentage-based cap on the amount of a nonprofit group’s spending that can go towards political activities. Legal experts have proposed a cutoff of 49 percent to ensure that political activities never command more than half of a group’s total spending. But the senators said even this threshold would be too high and would permit more political work than any nonprofit group should be able to perform.

The Senate Democrats also contended that 501(c)4 groups should have to disclose upfront—on all of their written and online solicitations that get sent to potential donors—how much of their activities are political. The senators said this would make it clear to potential donors how much of a tax deduction, if any, they could claim on their tax returns. Currently, no such information is required to be disclosed and tax experts have expressed concern that many corporations contributing funds to these political groups may be counting those donations as a business expenses eligible for a full tax deduction.

The IRS can expect to receive many more such letters on both sides of the issue in the year ahead.

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