The Tea Party might have been right about the IRS improperly applying the law, just not in the way they think. As opposed to the discredited claim-that-will-not-die that the IRS targeted Tea Party groups, and only Tea Party groups, a new lawsuit alleges that the agency is not correctly applying the requirements of the Internal Revenue Code for “social welfare organizations,” known as 501(c)(4) groups. Van Hollen, et al v. Internal Revenue Service, et al, No. 1:13-cv-01276, complaint (D.D.C., Aug. 21, 2013) (I love using legal citation forms that probably aren’t quite right, on the off chance that someone on a law review reads this and gets all eye-twitchy.)

Here’s the actual statute defining a 501(c)(4) tax-exempt organization:

(4)(A) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

(B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

26 U.S.C. § 501(c)(4) (emphasis added).

The regulation that the IRS uses to interpret and enforce that statute specifically states that “direct or indirect participation or intervention in political campaigns” for or against a candidate does not constitute “the promotion of social welfare.” 26 C.F.R. § 1.501(c)(4)-1(a)(2)(ii).

Here’s how the regulation defines “promotion of social welfare”:

An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.

Id. (emphasis added).

See the difference? Somewhere along the way (specifically, in 1959), “exclusively” became “primarily.” The lawsuit, filed by U.S. Representative Chris Van Hollen (D-MD) and several nonprofit organizations, seeks a variety of remedies for the IRS’s “failure to enforce” and “disregard of” the statute’s “plain meaning.” Van Hollen, complaint at 7-8. The complaint alleges that:

The IRS’s replacement of the statutory requirement that section 501(c)(4) organizations operate exclusively to promote social welfare with a regulatory standard that allows them to engage in substantial election campaign activity has resulted in a flood of electoral spending by ostensible section 501(c)(4) organizations. Because these organizations do not report the sources of their contributions, as is required of political committees and other section 527 organizations, election-related spending by section 501(c)(4) organizations deprives other participants in the political process, including voters, candidates, and political organizations, as well as persons and organizations who desire to study the sources of influence on the political process, of critical information about the financial interests served by electoral campaign spending.

Id. Long story short, 501(c)(4) organizations are getting away with direct or indirect involvement in electoral politics in ways that violate the 501(c)(4) statute, but not the regulation upon which the statute is based. As a general rule, regulations must adhere to their statutes. The benefit to these groups is that the groups are not legally obligated to disclose the identities of their donors. Actually, that might be more of a benefit for the donors, depending on how you look at it.

The complaint alleges that the number of 501(c)(4) groups contributing more than $1 million to political campaigns more than doubled between the last two presidential election years, from twelve in 2008 to twenty-five in 2012. One group spent more than $71 million in the 2012 election cycle, according to the complaint. Id. at 10. It identified several groups who have specifically cited the lack of donor disclosure requirements as their reason for using section 501(c)(4). Id. at 11.

I don’t know enough about electoral law to know if the plaintiffs have pleaded sufficient injuries and damages to support their complaint. They say that the nonprofit plaintiffs, who both study and publish figures relating to the sources of campaign contributions, will be unable to perform their essential duties, and “interferes with the important interests of [their] members.” Id. at 17. Rep. Van Hollen says that he and his PAC are harmed by the “improper benefit” his political rivals gain from “tax exemption without the requirement of donor disclosure.” Id. at 18.

Their claims for relief include several agency actions under Title 5 of the U.S. Code, a declaratory judgment finding the IRS regulation “contrary to law,” and an injunction or writ of mandamus compelling the IRS to change the rule. Id. at 21-22. The case was just filed last week, so motions to dismiss and whatnot are sure to come relatively soon. It may or may not be interesting.

Photo credit: 501c4 by Hollywata [CC BY-ND 2.0], on Flickr.