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Wednesday, November 27, 2013

New IRS Regulations Target Nonprofits' Issue Advocacy

Must you be willing to be subject to reprisal, boycotts and social disapproval from political opponents as the price for political speech?

Yes, according to proposed new Internal Revenue Service regulations that would move us towards a regime where your right to political speech is conditioned on others being able to know who you are and where you live and work.

The ability to anonymously fund issue advocacy and political speech (even if not directly related to any campaign) without having your name publicly disclosed will become virtually impossible if these new regulations that will be formally published Friday are enacted.

(For those of you seeking legal guidance, bring your checkbook and form a line to the right.)

So-called Section 501(c)(4) organizations have been able to engage in certain political speech (not within proximity of an election) as "social welfare" groups and enjoy tax exempt status on their income.  The catch is that they must not be primarily engaged in political activity.  The new regulations would expand the definition of several terms in order to reach much more political activity. Organizations that evaluate judicial nominees might not be able to remain under the Section 501(c)(4) exemption, for example.  

This is moving towards content-based regulations targeting certain speech. That phrase has been used by federal courts when ruling certain laws, regulations and ordinances unconstitutional, usually as violations of the Equal Protection Clause. To flesh out my original thoughts, the new proposed regulations dramatically expand the definitions of "candidate" to include any government nominee or appointee -- so criticizing a judicial nomination or Cabinet nominee is verboten! The regulations would exclude political speech from "social welfare" (which is the permitted use for a (c)(4) org), but the danger is that relatively benign, nonpartisan issue advocacy -- such as criticism of a government policy -- can potentially run afoul of the IRS or any politically overzealous examiner. 

The new regulations are disappointing, because the IRS recently tried to solve the problem of uneven or inconsistent fact-based investigations and evaluations of (c)(4) groups with a new mid-2013 guideline of sorts that used a 60/40 rule.  Under special guidelines, a handful of groups applying for (c)(4) status were allowed to receive recognition under that section of the tax law if they certified that the group's time and monetary expenditures on political activity were less than 40% of the group's total time and money spent on all activities.  Why such a baseline (or even a lower threshold like 80/20) could not be used in the proposed rules now is a mystery, unless the unspoken bureaucratic intent is to really deter such activity at all. 

If the regulations are enacted (probably in early 2015 after the public comment period ends), the result will be that any organization that wishes to engage in anything but the blandest (and thus meaningless) issue advocacy will have its (c)(4) exemption status in jeopardy and may be treated under the tax code as a "527" or other organization.  This is like telling the cook of a five-star restaurant he can only cook oatmeal.  That way, the regulators can avoid being accused of shutting down the place, but by so restricting the choice of meals they will drive away customers and eventually shut it down by destroying its revenue stream.  The means are different, but the end -- shutting it down -- remains.  When the government has the ethos that the end justifies any means, this is what you can expect.

What else can we expect? Perhaps we will have inventive ways to obey the letter of these regulations, with the use of allegory.  Alas, only a sliver of the population is apt to "get it."  After all, how many people get the meaning of George Orwell's "Animal Farm"?

What's the relevance? Any other non-(c)(4) treatment means the organization must disclose its donors. You see, you can still engage in political speech and criticize government policies or the government itself.  That is the letter of the regulations -- i.e, the law.  But the spirit of the regulations is what is concerning.  The spirit -- and very much the catch -- is that under the new proposed regulations, you will have to disclose your name, address and occupation.  The better for your opponents to harass and boycott you.  

This is what's called a chilling effect on political speech.  And that is very much the point.

Eric Dixon is an attorney handling regulatory, corporate and select litigation matters for business, political and individual clients in New York and New Jersey.  Nothing here is intended as legal advice.  He can be reached at 

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