Tag Archives: First Amendment

The Battle Over 501(c)4s Continue…..

Many people are at least vaguely aware of the 2012 IRS scandal that caught Lois Lerner, Director of the IRS Exempt Organizations Division, disclosing to a room full of D.C. legal minds that the IRS had been systematically slowing down applications from groups that “sounded” Tea Party in nature.  While that surely has gotten media attention, what is playing out behind closed doors in Texas may have a much more immediate impact here at home.

Many 501(c)3s organizations individuals are familiar with also have a 501(c)4 arm, especially those who deal with broad social issues, such as abortion (both Planned Parenthood and Texas Right to Life operate under both entities),  criminal justice reform and ministering to inmates, etc. The current popular term for 501(c)4 operations has been dubbed “dark money.”

Generally, if John Smith donates $1500 to a 501(c)3 organization,  John can deduct the amount of his donation on his income tax returns. If John instead donates $1500 to a 501(c)4 organization, he cannot deduct that amount.  What is the difference between the two? The difference comes down to the theory behind both options: the government is okay with subsidizing (by not collecting income taxes from donors on donated amounts) organizations who engage in charitable actions, i.e. scientific research, religious entities, helping children in the foster care system. These organizations are classified as 501(c)3s.  The government is not okay with subsidizing political advocacy.  Thus, 501(c)3s cannot engage in much political work.  Note, 501(c)3s can perform a minimal amount of lobbying government for reform, but how much lobbying a group wants to do usually distinguishes between forming a (c)4 versus a (c)3.  Also note, lobbying does not equal “campaigns” for elected office.  In the discussion, there must be a caveat recognizing there is some newly-revived tension between the definition of a (c)4 given in the United States Code versus how the IRS by rule defines such entities.  Such a battle is very much outside the scope of this post!

Lobbying is necessary to an informed decision-making body (see future post on “Why lobbyists aren’t really that bad.”).  A group who wants to do a substantial amount of lobbying on any issue (from abortion, physician-assisted suicide, saving the animals, to stricter gun laws) cannot be a 501(c)3.  They can however, become a 501(c)4.  These federal IRS designations only cover tax-related issues; hence, states can still pass legislation that affects the practical workings of these entities.  Some in the Texas Legislature are attempting just that.

In the most recent legislative session (ending Summer 2013), both the Senate and the Texas House passed SB 346, a bill that would require Texas entities  to disclose the names of their donors who contributed more than $1000 once the organization spent $25,000 in a calendar year.  While not specifically defining 501(c)4s, these entities would be covered under the new law.  Due to the lack of a definition, interests on both sides of the aisle were hesitant about the bill’s applicability, leading to a failed recall attempt in the Senate.  Despite passage in both chambers, the bill was vetoed by Governor Perry.  However, today the House State Affairs will hold an interim hearing on “studying the Election Code…what types of groups are exempt from reporting requirements…how to make the political process more transparent.” 

Making government more transparent sounds like a laudable effort, right?  However, is “government transparency” a euphemism for “finding out who is funding efforts to unseat me?” The success of certain grass-roots groups (ahem, NETTP) and the line-up of those opposing anonymity suggest the latter.  Lois aside, the IRS made a policy decision – individuals have a choice: get a tax deduction with no politics or be politically active through your finances, and receive no government subsidies.  To many donors, anonymity in supporting their beliefs is worthwhile over obtaining a tax deduction.  If we take away that selling point, funding of Constitutionally-protected free political speech initiatives will likely yield to supporting only 501(c)3s.  Both are needed. 


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