Social Welfare and Political Organizations: Ending the Plague of Inconsistency

Abstract

Since the Supreme Court’s decision in Citizens United v. FEC, tax-exempt social welfare groups (also known as 501(c)(4) organizations) increasingly are used in political campaigns, often instead of political organizations (also known as PACs, SuperPACs, or 527s). This Article first compares the tax law treatment of social welfare organizations to that of political organizations. Although section 501(c)(4) organizations have several key advantages, including anonymity for donors and tax preferred financing, unlike 527s, 501(c)(4)s face a limit on their political activities (the “primarily” test). IRS efforts to police the primarily test caused a political firestorm, sometimes referred to as the “Tea Party” targeting controversy. The Article explains that the root cause of the controversy is inconsistent federal disclosure law, which was largely a byproduct of Citizens United. The Article argues that so long as 501(c)(4) offers preferred treatment for campaign activity, political operatives will have strong incentives to organize as 501(c)(4) organizations and exploit ambiguities in the law and weak IRS enforcement. The result is and will continue to be a gradual erosion of the rule of law, destabilization of the tax exemption system, and damage to the reputation of the IRS as an essential government agency. The Article discusses possible solutions to the controversy. Most importantly, Congress should end the ability to engage in statutory arbitrage and provide for consistent treatment of campaign activity between 501(c)(4) and political organizations. Consistent rules would also pave the way to reconsider the current limits on political activity that apply to 501(c)(4) organizations. Overall, consistent rules and fewer limits would simplify tax administration, improve compliance, and embrace free speech.

Keywords: 501(c)(4), 527, Social Welfare Groups, Dark Money, Tea Party Targeting, PACs, Disclosure

JEL Classification: H2, H20, H26