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REPOSTED: Anonymous Political Groups May Face Rude Post Election Awakening

By The Pullins Group LLC

Karl Rove and others that have set up 501c4 groups to obtain anonymous contributions for political ads may be in for an unwelcome and highly expensive post election surprise.  While tax exempt groups may fund some political ads under the Citizens United decision and new Federal Election Commission regulations, these groups and their leaders are forgetting that they still are subject to oversight from the Internal Revenue Service.  And regardless of the outcome of these midterm elections, President Obama will still oversee the Internal Revenue Service for at least the next two years.  Let me explain.

Many of these groups have been set up under Internal Revenue Code Section 501c4.  These groups are known as "social welfare" organizations and are formed to primarily engage in lobbying activities.  Think of groups such as the National Rifle Association or Handgun Control, or the National Right to Life Committee as longstanding examples of such groups.  The IRS has this to say about these groups:

To be tax-exempt as a social welfare organization described in Internal Revenue Code (IRC) section 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare.  Seeking legislation germane to the organization's programs is a permissible means of attaining social welfare purposes. Thus, a section 501(c)(4) social welfare organization may further its exempt purposes through lobbying as its primary activity without jeopardizing its exempt status.

But here's the problem:

The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f).

The groups being set up by Karl Rove and others are not permanent organizations like the ones mentioned above, but are organizations set up to engage in political activities and shield their donors from public scrutiny.  Unfortunately, they cannot have it both ways.  If they want to shield their donors from the public, then they cannot have their primary activity as intervention in political campaigns.  But if they want to engage in political campaigns, as organizations formed under IRC 527 do, then they must publicly reveal their donors.

My guess is that these groups will eventually be forced to pay a hefty excise tax, be reclassified as IRC 527 groups, and be forced to publicly reveal their donors.  Those donors that were promised anonymity by these leaders should consult competent legal counsel in this area sooner rather than later. 

Full post as published by The Pullins Report on October 28, 2010 (boomark / email).