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Proposed IRS campaign rules may create strange tax-exempt allies

By Gabriel Debenedetti and Patrick Temple-West

WASHINGTON (Reuters) - The Obama administration's push to limit campaign activity by partisan tax-exempt groups has set up an unusual situation that could unite political enemies in battle against the Internal Revenue Service.

Nonpartisan groups are complaining that voter education and mobilization efforts could be endangered by the IRS tax proposals unveiled last month.

At issue are IRS proposals aimed at clarifying - and restricting - political activity sponsored by nonprofit "social welfare" groups. Organized under section 501(c)(4) of the U.S. tax code, such groups are tax-exempt and do not have to disclose their donors.

Most 501(c)(4) groups have long been nonpartisan community and civic organizations focused on a specific cause.

But in recent years, political activists - particularly conservatives - have created tax-exempt groups under the social-welfare banner to secretly raise and spend millions of dollars to promote their election agendas. For example, Crossroads GPS, a nonprofit co-founded by Republican strategist Karl Rove, poured tens of millions of dollars into the 2012 elections.

The rise of such groups has put increasing pressure on the IRS, which has had to determine whether more than 50 percent of a group's activities were political, thus allowing it to claim tax-exempt status. In May, the IRS apologized for what it called "inappropriate" targeting of Tea Party and other conservative political groups for extra scrutiny.

The Obama administration proposals are designed in part to help the IRS avoid such sticky political situations. But it's become clear that nonprofit groups of all stripes plan to fight parts of the administration's proposal.

Legal analysts do not expect final IRS rules before the 2014 elections, when control of Congress will be up for grabs.

However, the proposals - which create a new definition of "candidate-related political activity" for social welfare groups - could discourage campaign donations, said veteran Washington lawyer Joseph Sandler, who works with 501(c)(4) groups.

"It will have an impact on the 2014 election cycle because donors are going to be nervous, as are some of the people that run the groups," Sandler said.

'SCREAMING AND YELLING'

The IRS rule-writing battle could create some unusual alliances, tax and election lawyers said.

Traditionally nonpartisan groups such as the League of Women Voters, which sponsors candidate debates and produces voters' guides, object to proposals that would appear to ban such activities during the 60 days before an election.

Meanwhile, both conservative and liberal organizations are likely to argue that the new rules should not restrict their advertising and campaigning tactics.

The groups typically avoid direct candidate endorsements, but focus on issues. A revised definition of political activity could force them to register under different parts of the tax code, perhaps as political action committees. This would imperil their tax-exempt status and force them to disclose their donors.

The League of Conservation Voters, a liberal-aligned 501(c)4 group that focuses on environmental issues, said it is uncertain whether it will file a comment on the IRS proposals.

Still, "this is just the first step" in moving to monitor political money in the groups, said David Willett, vice president for communications at the League of Conservation Voters.

"The devil is in the details," Willett said. "We want to make sure that any final rules do the right job of curtailing shadowy 'c4s' and don't end up hurting legitimate groups who represent large public constituencies."

Many involved in social welfare nonprofits "are screaming and yelling, saying this is a pretty broad brush," said Ofer Lion, a Los Angeles lawyer who specializes in tax-exempt groups.

The IRS has set February 24 as the deadline for public comment on the proposed rules, and then it will schedule a hearing. Eventually, the IRS will issue final rules to take effect in the coming years.

Mark Mazur, assistant secretary of tax policy at the U.S. Treasury Department, acknowledged that the issues are complex.

"We are committed to getting this right. We welcome and expect a large number of comments and will carefully and comprehensively consider all feedback before issuing final rules," he said.

A 60-DAY MUZZLE

The IRS can expect to hear from people like Marita Green, who organizes League of Women Voters' debates for local candidates in Delaware County, Pennsylvania.

Green objects to the IRS proposals because they could ban such candidate forums in the weeks preceding an election. She said the proposals blur distinctions between groups such as hers, and clearly partisan organizations.

"They lumped everybody together," Green told Reuters. If the rules are finalized without an exception for nonpartisan activity, "then the 60-day thing is a problem."

"For a November election, you could only do things in September, (when) people are barely back to work from the summer," Green said. "They're not paying attention to elections yet."

Elisabeth MacNamara, national president of the League of Women Voters, which has more than 800 state and local affiliates, agreed that the IRS "needs a definition of what's truly nonpartisan."

"We intend to be heavily involved in this process," she said.

(Editing by David Lindsey and Jan Paschal)

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