Rep. Christopher Van Hollen Jr. has joined with political watchdog groups to challenge in federal court a tax loophole that allows nonprofits to make undisclosed political contributions in federal elections.
Van Hollen (D-Dist. 8) of Kensington, together with Democracy 21, the Campaign Legal Center and Public Citizen, filed suit Wednesday in U.S. District Court for the District of Columbia challenging the IRS regulations that govern eligibility for tax-exempt status as a section 501(c)(4) “social welfare” organization.
The IRS declined to comment.
Van Hollen said in a telephone press conference that the long-standing regulations allow organizations to hide behind 501(c)(4) status and anonymously launder big money into elections.
“The public has a right to know who is bankrolling these election campaigns and ads running on TV,” he said.
Tax law clearly requires those organizations engage “exclusively” in social welfare activities, Van Hollen said. Yet under the agency’s regulations, organizations could get tax-exempt status as long as social welfare was a primary focus, but it did not need to be the exclusive focus, he said.
The case filed today asks the court to order the IRS and the U.S. Department of Treasury to comply with the “plain meaning of the law,” Van Hollen said.
The case does not seek to tax spending in elections, he said. Organizations seeking to directly engage in election activity can apply for tax-exempt status under section 527 of the law, but those organizations must disclose donors, he said.
Recent controversy about the agency’s investigations into political groups that were after tax-exempt status as a social welfare organization has embroiled the IRS.
Democracy 21 is a nonpartisan nonprofit aimed at making democracy work for all Americans. Its founder and president, Fred Wertheimer, said his organization filed a petition two years ago with the IRS asking it to change its rules and close the loophole. The IRS did nothing, he said.
The lawsuit filed today would not only force the IRS to take the action Democracy 21 sought, but would require the agency to issue new regulations that would end huge sums of money being spent in federal elections by 501(c)(4) groups, he said.
In 2008, 501(c)(4) nonprofits spent $82.2 million on political activity, according to Federal Election Commission filing data analyzed by the Center for Responsive Politics.
In 2012, that number jumped to more than $256 million, the center reported.
However, center spokeswoman Viveca Novak noted that the data published by her group is only what the nonprofits must to provide the FEC and probably does not include all spending on political activities by 501(c)(4) organizations.
“Until this problem is addressed and solved, the big losers here are voters,” Wertheimer said.
Scott Nelson of Public Citizen, lead plaintiff attorney in the case, said the complaint seeks to stop future undisclosed political spending by the organizations, but it would not punish any groups retroactively.
As a congressman, Van Hollen has the standing necessary to bring the case to federal court, Nelson said.