Friday, February 28, 2014

Watchdog Organization Can't Challenge IRS Rule Granting Nonprofit Status to Political Orgs

Judge John D. Bates (D.D.C.) yesterday dismissed a case brought by Citizens for Responsibility and Ethics in Washington, or CREW, challenging the IRS rule that allows donors to certain political organizations to remain under the radar. 

The ruling means that CREW's effort in this court to get the IRS to rewrite its rule on 501(c)(4) organizations fails, and that unless and until the IRS rewrites its rule, 501(c)(4) organizations can continue engaging up to 49% of their activity in political spending while keeping their donors hidden from public view.

The case, Citizens for Responsibility and Ethics in Washington v. IRS, challenged the IRS rule implementing Section 501(c)(4) of the tax code.  That provision grants a tax exemption for organizations "not organized for profit but operated exclusively for the promotion of social welfare."  (Emphasis added.)  But the IRS rule implementing that provision applies to organizations that are "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."

In short: The statutory "operated exclusively" became a regulatory "primarily engaged," giving 501(c)(4)s considerably more latitude to engage in electioneering.

That matters, because 501(c)(4) status allows organizations to spend money in politics while at the same time shielding the names of donors.  Some 501(c)(4)s have taken the position, based on the IRS rule, that they qualify for tax exemption if they engage 49% of less in political donations.  That's a lot of political donations--and a lot of shielding of donors--especially when the statute requires them to be "operated exclusively" for social welfare purposes.

So CREW sued, arguing that the IRS regulation let 501(c)(4)s get away with way more political spending, and shielding, than the Internal Revenue Code allowed.

But Judge Bates dismissed the case for lack of standing.  He ruled that CREW could not establish informational injury, because its injury--lack of information on donors--was hypohetical and speculative.  In particular, Judge Bates wrote that it wasn't the IRS regulation that prevented CREW from getting information on donors, but instead the organizations' decision on how to organize.  In other words, if the IRS rewrote its regulation to conform to the Internal Revenue Code, 501(c)(4)s might drop their tax-exempt status or reorganize under another tax-exempt provision to maintain donor confidentiality; but they wouldn't necessarily reorganize as 527s (which would require donor disclosure).  Judge Bates wrote that this also prevented CREW from showing causation and redressability.

Judge Bates also ruled that CREW did not have standing based on programmatic injury--the injury to its ability to collect donor information and fulfill its watchdog mission.  That's because CREW's injury isn't "fairly traceable" to the IRS decision not to rewrite its rule--there are other intervening causes of CREW's injury.

http://lawprofessors.typepad.com/conlaw/2014/02/watchdog-organization-cant-challenge-irs-rule-granting-nonprofit-status-to-political-orgs.html

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