The advocacy group Citizens for Responsibility and Ethics in Washington has filed a rulemaking petition asking the Internal Revenue Service to clarify the regulations for tax-exempt business trade groups organized under Section 501(c)6 of the Tax Code and rein in abuses by them, while also calling on the IRS to investigate one such group, Freedom Partners, which is supported by the conservative Koch brothers who own Koch Industries.

The petition follows up on a lawsuit in February by the group, known as CREW for short, in which it sued the IRS for failing to properly regulate tax-exempt social welfare organizations organized under Section 501(c)4 of the Tax Code, which were spending vast sums of money on political campaigns (see Group Sues IRS over Enforcement of Laws against Politicking by Tax-Exempt Organizations).

Section 501(c)(6) of the Tax Code provides tax-exempt status for organizations such as business leagues, chambers of commerce, and boards of trade. Recognizing “business league” to be an ambiguous phrase, in 1919, the IRS defined it as an “association of persons” with a “common business interest, whose purpose is to promote the common business interest.” 

Taking advantage of the fact that the IRS has never provided guidance as to what activities serve the common business interests, 501(c)(6)s increasingly are serving as vehicles for wealthy groups and individuals to funnel anonymous or “dark” money to other tax-exempt organizations to influence elections. Section 501(c)(6) groups reported spending more than $46 million on federal campaigns in 2010, and more than $55 million in 2012.

“If there’s a loophole in the tax code, it’s a sure thing that someone will take advantage of it,” said CREW executive director Melanie Sloan in a statement. “If the IRS fails to act, Americans should expect to see an increase in the number of so-called ‘business leagues’ created to funnel money into our elections while cloaking the identities of their donors.”

In addition to the rulemaking petition, CREW also filed a complaint with the IRS asking for an investigation into the activities of Freedom Partners Chamber of Commerce, Inc., a 501(c)(6) organization linked to the Koch brothers, Charles and David, who have funded a number of conservative groups. In its application to the IRS, Freedom Partners claimed it would be “promot[ing] the common business interests and conditions of its members, in order to improve their competitive standing and innovation in various lines of business, industries, etc. in which they are engaged.” But according to CREW, Freedom Partners has funneled anonymous money into other tax-exempt organizations.

During the 2011 reporting period, Freedom Partners’ activities allegedly consisted of providing more than $235 million in grants to 30 different tax-exempt groups, including organizations such as the Center to Protect Patient Rights, Americans for Prosperity and the National Rifle Association.  Because the grants were provided for “general support,” CREW argued, there is no guarantee the money was spent furthering the common business interests of Freedom Partners and its members, as the law requires. Freedom Partners did not immediately respond to a request for comment. CREW provided some supporting documents to buttress its complaint.

“How does operating as a pass-through for anonymous sources to influence our elections mesh with the concept of a business league?” said Sloan.  “Given all the problems surrounding 501(c)(4) organizations, and with the 2014 election cycle getting underway, it is imperative for the IRS to clarify its regulations and nip abuse of 501(c)(6) status before it gets out of hand.”

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