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April 19, 2014

Blame the IRS or Fix It? | Rules of the Game

When Rep. Darrell Issa, R-Calif., launched his hearings into improper IRS targeting of tea party groups, some voiced hope that the probe would shed light not just on what went wrong at the IRS but on how to fix it.

So far, things haven’t turned out that way. Issa’s Oversight and Government Reform panel has largely overlooked the problem at the root of the targeting scandal: convoluted and subjective regulations governing politically active tax-exempt groups.

Instead, Issa and his GOP colleagues have focused almost exclusively on identifying how far up the Obama administration the scandal might reach. His panel’s latest finding is that the office of the IRS chief counsel, an Obama appointee, demanded information on the 2010 election activity of tea party groups seeking tax-exempt status.

Democrats, too, have spent less time talking about how to clear up muddled IRS rules than they have pointing fingers at Issa and others. They have accused J. Russell George, the Treasury inspector general for tax administration, of misleading them by failing to note in his report that progressive groups were also singled out for special scrutiny.

Lost in all this is the question of how to clear up the muddled IRS regulations that have rendered the agency all but incapable of enforcing tax laws on social welfare and other nonprofit groups that spend millions on elections. Expenditures by such groups, which are not publicly reported, have soared in the wake of the Supreme Court’s 2010 ruling to deregulate independent political spending.

“It’s quite clear that the blurry standards are what led to the potential misconduct,” said Lisa Gilbert, director of Public Citizen’s Congress Watch. “The hearings so far have focused on that potential misconduct, and we haven’t seen a shift to discussing solutions.”

Gilbert’s group has set out to bring about that shift with the Bright Lines Project, which last week released a draft report that attempts to clearly define what constitutes campaign activity by tax-exempt groups. Four years in the making, the project is led by tax lawyers Gregory Colvin and Elizabeth Kingsley and spells out a half-dozen rules delineating political speech.

The report blames ambiguous and long-disputed IRS rules for the agency’s mistreatment of tea party and other groups applying for tax exemption. As it stands, the law leaves it up to the IRS to determine what constitutes political activity, and the agency uses a multipart “facts and circumstances” test that most agree is innately subjective. Project organizers say the solution is to define political activity to include all messages that support or oppose a candidate, regardless of whether they contain trigger words such as “vote for” and “vote against.”

“The federal tax definition of political speech, aimed at conditioning tax-exempt organizations on the special disclosure rules applicable to 527 organizations, should reach beyond express advocacy and cover all speech that supports or opposes a candidate for elective public office,” states a memo circulated with the Bright Lines Project report and made available to CQ Roll Call.

It’s an approach that is sure to generate plenty of questions. Leading tax lawyer Marcus Owens argues that the Bright Lines Project rules create new ambiguities and fail to acknowledge that tax laws bar exemption for any group created for the specific benefit of a candidate or party. He also warns that such “bright lines” might drive political activity into the charitable sector, since some of what the group defines as nonpolitical could be done by 501(c)(3) charities.

“There’s a real risk of the Bright Lines Project permitting the aggressive campaign activity that we saw in the last cycle to actually move into the charitable context,” Owens warned. “And it would have a significant corrosive effect on the charitable sector.”

Still, the Bright Lines Project provides grist for the Treasury Department, which is examining whether and how new IRS regulations for tax-exempt groups might be written, and for the Senate Homeland Security and Governmental Affairs Subcommittee on Investigations, which is engaged in a broad probe of IRS political enforcement.

Bright Lines Project organizers are also talking to members of the House Ways and Means and Senate Finance committees about including their ideas in tax overhaul discussions. It may be a long shot — but at least someone’s talking about where the IRS might go from here.

Eliza Newlin Carney is a senior staff writer covering political money and election law for CQ Roll Call.

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