The IRS gave itself two black eyes by admitting that it has bungled processing the flood tide of applications for 501(c)(4) status in the 2010-2012 period. The bungling involved failing to treat all applications with the same rigor and apparently giving Tea Party affiliates a harder time than any other class of applicants.
This is tragic, in part, because we need the IRS to police the abuse of the tax code for secretive political purposes. And now the IRS is likely to be gun shy just when we need them to be rigorous. The result is likely to be a democratic process where more political actors are hidden — where democracy itself has turned into a masquerade.
Even if politics is not your cup of tea, the use of 501(c)(4)s to hide money in politics could hit something you do care about: your investments. The bigger context for the IRS scandal over 501(c)(4)s is a campaign finance system that allows for-profit business corporations to hide their participation in politics from voters and investors alike by routing their spending though secretive 501(c)s instead of transparent 527s.
In a nutshell, 527s are groups whose primary purpose is politics. They spend in federal and/or state elections, and they are required to report their donors publicly. If you want to see who has given to a 527 in the last election, you can find it at IRS.gov, www.opensecrets.org or www.followthemoney.org.
{mosads}By contrast, if the political spender is a 501(c)(4), good luck finding out anything about where the money came from. 501(c)s get to keep their donors secret from the public. And thus, if a corporation lacks the courage of its convictions, it can route its political spending through a secretive nonprofit. And hence the masquerade during election season when big political spenders refuse to say where the money came from.
One of the IRS’s jobs is trying to make sure 501(c)(4)s are really 501(c)(4)s and not 527s pretending to be 501(c)(4)s. This all comes down to facts and circumstances. And whatever test the IRS applies, they need to apply it with an even hand.
The Campaign Finance Institute picked up on the problem of secretive spending earlier than most. CFI noted that 501(c)s spent $60 million in 2004 and $196 million in 2008. In 2012, when the press focused on the issue, more than $300 million in the federal election was from a secretive nonprofit. One of the factors that could be pushing these numbers into the stratosphere is that in 2010, the Supreme Court’s Citizens United decision opened the doors of politically active 501(c)s to business corporations. Before 2010, this wasn’t a viable option under a Supreme Court case called MCFL, which kept for-profits from bankrolling ideological nonprofits that spent in federal elections. Citizens United undid MCFL.
So now what? First, the IRS is going to be pilloried. And rightly so. But after that is done, we need to have a serious policy discussion about 527s, 501(c)s and the transparency of money in politics. The courts are on the side of transparency. As Justice Antonin Scalia told CNN’s Piers Morgan, “Thomas Jefferson would have said the more speech, the better. That’s what the First Amendment is all about. So long as the people know where the speech is coming from.”
There are at least two ways to unmask where the money in politics is coming from. (1) Make the intermediary nonprofits that spend in politics more transparent. (2) Increase transparency on the supply side by requiring companies that spend in politics tell their investors. There’s a petition pending at the SEC (No. 4-637) to do the latter asking for across the board disclosure. The former would take an act of Congress, many of whose members owe their elections to the masquerade.
Torres-Spelliscy is an assistant professor of law at Stetson University College of Law, where she teaches courses in election law and corporate governance. She is the author of Safeguarding Markets from Pernicious Pay to Play: A Model Explaining Why the SEC Regulates Money in Politics.