Public Citizen Litigation Group, representing U.S. Rep. Chris Van Hollen, campaign finance reform organizations Democracy 21 and the Campaign Legal Center, and Public Citizen itself, filed suit against the Internal Revenue Service and the Department of the Treasury seeking an order requiring them to revise regulations that allow organizations that are exempt from tax under section 501(c)(4) of the Internal Revenue Code to make election campaign expenditures. Section 501(c)(4) allows organizations that promote “social welfare” (including through public policy advocacy) to be exempt from taxation, but requires that they devote themselves exclusively to promoting social welfare. IRS regulations make clear that electoral activity does not fall within the category or promoting social welfare, but nonetheless allow 501(c)(4) organizations to engage in electoral spending as long as social welfare is their “primary” activity. By redefining “exclusive” to mean “primary” the IRS has allowed such groups to spend as much as 49% of their budgets on campaign spending. Why does that matter? Social welfare organizations, unlike political committees, don’t have to disclose their donors. And in the wake of the Supreme Court’s Citizens United decision, such organizations now have the ability to spend many millions of dollars (including corporate contributions) on elections without telling voters where their money comes from. Thus, in recent elections 501(c)(4) organizations have become the vehicle of choice for dark money spending in elections. Such spending reached hundreds of millions of dollars in the 2012 election.
In 2011, Democracy 21 and the Campaign Legal Center petitioned the IRS to amend its regulations to prohibit 501(c)(4) organizations from engaging in substantial electoral spending, thus bringing the regulations into line with the requirements of the Internal Revenue Code. As of the summer of 2013, the IRS had taken no action in response to the petition, but had instead made clear that it would allow 501(c)(4)’s to spend up to half of their resources on election campaign advocacy. The lawsuit, filed in August 2013, sought to compel the agency to respond to the petition and amend its regulations to conform to the law.
In November 2013, the IRS issued a notice of proposed rulemaking indicating that it was reconsidering its regulation allowing 501(c)(4) organizations to spend up to 49% of their resources on campaign activities. In light of the IRS’s initiation of rulemaking activity involving reconsideration of its position that 501(c)(4) organizations may spend substantial resources on campaign activity, the plaintiffs voluntarily dismissed their complaint on December 6, 2013. The voluntary dismissal does not bar the plaintiffs from refiling the case if the IRS rulemaking does not result in a lawful regulation limiting 501(c)(4) organizations to social welfare activity.