An advocacy group and a former congressional candidate have filed suit against the Internal Revenue Service in an effort to force the IRS to enforce its laws prohibiting tax-exempt 501(c)4 groups from engaging in political activity.
Like what you see? Click here to sign up for Accounting Today's daily newsletter to get the latest news and behind the scenes commentary you won't find anywhere else.
The group, known as Citizens for Responsibility and Ethics in Washington, or CREW, joined with David Gill, an emergency room physician in Bloomington, Ill., who unsuccessfully ran as a Democrat for Congress last year, filed the lawsuit Tuesday in the U.S. District Court for the District of Columbia against the IRS. They argued that 501(c)4 organizations, which are supposed to be used for social welfare purposes, are instead flouting a federal law barring them from engaging in political activity, especially after the Supreme Court’s 2010 decision in the Citizens United case, which opened the door to nearly unlimited campaign spending. The lawsuit charges that the IRS is not taking action against such groups.
“It’s widely known that 501(c)4 organizations, such as the American Action Network, were created in the wake of Citizens United to accept large contributions from both individuals and corporate donors who want to influence our elections, but remain anonymous,” said CREW executive director Melanie Sloan in a conference call with reporters. “CREW and others have filed numerous complaints with the IRS to no avail. There is also a rule-making petition pending asking the IRS to amend its regs. Nevertheless, despite all the outcry and all of the complaints, the IRS has failed to act against the (c)4s, conceding only that the agency is aware of public concern over the issue. Perhaps this is because the truth is that by creating a regulation that conflicts with the Tax Code itself, the IRS actually has contributed to the current state of affairs. So far, efforts to persuade the IRS to deal with this problem have been unsuccessful. This lawsuit represents an effort to force the IRS to deal with the disastrous situation it helped create. The IRS will not be able to maintain its silence in court.”
The IRS did not immediately respond to a request for comment, although a spokesperson noted that it usually does not issue public statements about pending litigation.
The American Action Network dismissed the accusations. "This is a tired, long-since settled argument from a George Soros-tied left-wing front group and a failed candidate with an extreme ideology, looking to blame anyone but himself for losing his fourth-straight congressional election," said spokesman Dan Conston in an email. "The American Action Network’s significant advocacy efforts for center-right causes are well-established, and the Network continues to keep its primary focus on those non-electoral activities, as required by law. The courts and the IRS have rightfully concluded that a group like ours should have the right in a limited fashion to advocate for candidates that share our beliefs as well as the beliefs themselves."
Sloan pointed out that the statute governing 501(c)4 organizations says that they must be operated “exclusively” for social welfare purposes. “In contrast, the IRS regulation governing (c)4’s undermines the code by requiring that (c)4’s only be ‘primarily engaged’ in social welfare,” Sloan added. “Based on the clear conflicts between the words ‘exclusively’ and ‘primarily,’ the lawsuit alleges that the IRS regulation is arbitrary, capricious and contrary to law.”
Gill agreed to serve as a plaintiff in the lawsuit because of the harm he believes he suffered as a direct result of the IRS regulations. In 2012, the American Action Network poured nearly $1.5 million into the congressional race in which he ran, funding advertisements that falsely claimed he wanted to eliminate Medicare and depicting him as a mad scientist, Sloan pointed out. “The huge expenditures by American Action Network, especially in the last few weeks, required Dr. Gill’s campaign to divert money to respond to the false ads and injured his reputation,” she said. “As a direct result of those ads, Dr. Gill lost the race by 1.002 votes, or three-tenths of 1 percent of all votes cast.”
Last summer, because of a filing error by Aetna, CREW discovered that the insurance giant had contributed over $3.3 million to the American Action Network in 2011, and the pharmaceutical industry collectively gave the group $4.5 million, Sloan pointed out. “It’s not a coincidence that many of AAN’s ads focused on health care and criticized Democratic candidates for supporting ObamaCare,” Sloan added. “Dr. Gill likely was targeted because he supports a single-payer national health care plan, which Aetna and pharma and therefore American Action Network oppose.”
Through the lawsuit, CREW and Dr. Gill are asking the court to strike down the IRS regulation and enforce the Tax Code provision that 501(c)4 organizations operate exclusively for the promotion of social welfare.
“In response to the suit, the IRS likely will file a motion to dismiss, arguing that neither Dr. Gill, his campaign committee, nor CREW have standing to bring this suit, and that the regulations are within the agency’s discretion,” Sloan predicted. “A speedy resolution is unlikely as either side is likely to appeal. But if the lawsuit fails, wealthy individuals and corporations will continue contributing to 501(c)4 organizations to conduct stealth political campaigns against political candidates without having their roles revealed publicly and having the public understand the context of the negative ads.”
She argued that candidates like Gill would continue to suffer harm without the sources of funding of the political ads against them being revealed.
Gill said he had run for a seat last year in Illinois’s 13th congressional district because he believed in the democratic process and public service. “I am taking this action against the IRS in furtherance of those beliefs to ensure that anonymous dark money groups cannot continue to taint the political process,” he said. “I would rather be focusing on my family and medical practice than pursuing a lawsuit against the IRS, but I am uniquely situated to take this action and cannot sit on the bench hoping that someone else steps up to the plate. This issue is too important. Campaigns should be transparent. Voters should know who is funding political advertisements so that they have the information necessary to properly evaluate the claims contained therein. By its actions, the IRS has allowed shadowy groups to influence elections under a cloak of darkness. It is offensive that the IRS turns a blind eye to reality and allows partisan political groups to seek refuge in a provision of the IRS code that is meant to govern organizations such as volunteer fire companies and homeowners’ associations while enjoying the benefit of exemptions from federal income taxes and permitting them to hide the identity of donors.”
The IRS has come under pressure from both sides, however. Tea Party groups and some Republican lawmakers have blamed the IRS for delaying approval of 501(c)4 tax exemptions for some organizations and pressured the IRS to speed approvals of their tax-exempt status (see Senate Republicans Urge IRS to Hasten Approval of Tax-Exempt Political Groups and Senators Warm IRS Not to Change Rules for Ta-Exempt Political Groups). But Sloan disagreed that the IRS was being placed in a difficult position.
“I guess it depends on what is in the application and what these groups say,” she responded. “I will point out that one problem we’ve also seen is that many groups have not been forthcoming on their applications. The American Action Network, for example, said it was going to be involved in a very minor amount of political activity on its initial forms and then immediately turned around and started raising money for political ads. That is a common thing we’ve seen on the applications. They say one thing to get their approval and then immediately turn around and do another, although it would be our view that even on their applications saying that they are going to be doing some [political activity], that would not meet the statute because the statute says exclusively for social welfare, which would not include any political purposes.”