March 29, 2024

High & Low Finance: A Fine Line Between Social Welfare and Politics

As to how we got to this point, the answer involves disparate elements like a provision of tax law adopted a century ago — a provision that had nothing to do with political campaigns — and a change in tax law adopted in 1954 at the behest of Lyndon B. Johnson, then the Senate Democratic leader, who was angry that some ministers in Texas were opposing his re-election.

But mostly it stems from legislation, passed in 2001, that required normal political committees to disclose their donors. Seeking a way around that law, organizations formed for the purpose of influencing elections began to claim they were really “social welfare” organizations, which have had their own special tax status since the modern income tax took effect in 1913.

What are “social welfare” organizations? The tax code defines them as “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” Note the word “exclusively.” Over the years, the I.R.S. has issued rules saying that things like a retirement plan for voluntary firefighters, or an organization devoted to providing free parking in a downtown business district, could qualify.

That section of the law, by the way, is Section 501(c)(4). Normally, I would not burden you with such a number, but in this area it is hard to figure out what is going on without a scorecard. That section is next to, but distinctly different from, Section 501(c)(3), which defines charitable organizations. Both groups are tax exempt — meaning that under normal circumstances they do not owe income tax on profits from investments — but only the 501(c)(3) organizations can receive tax-deductible contributions.

The law used to be silent on whether charities could have anything to do with politics. But that changed in 1954, when Senator Johnson, facing a primary challenge from a conservative Democrat with substantial Catholic support, inserted into a pending tax bill a provision “denying tax-exempt status to not only those people who influence legislation but also to those who intervene in any political campaign on behalf of any candidate for any public office,” as he put it in a brief Senate speech. The provision was added without any real debate.

Six years later, in 1960, the I.R.S. adopted regulations extending the political prohibition to Section 501(c)(4) organizations, but with a caveat. Social welfare organizations could intervene in politics as long as the organization’s “primary” purpose was social welfare. The idea was that it was perfectly acceptable for a local organization supporting, say, renovation of a downtown to participate in a campaign for a referendum to impose a tax for that purpose.

It was not clear what “primary” meant, but as Donald B. Tobin, an Ohio State University law professor, wrote in 2011, “it is certainly less than the statutory term ‘exclusively.’ ”

In practice, none of that made any real difference for decades. There was no need for a political group to maintain it was something else. That changed after the 2001 law required normal political committees — covered under Section 527, which allows them to avoid paying taxes on contributions they receive — to disclose their donors. And it became more important when the Supreme Court, in the Citizens United case, cleared the way for corporations to spend unlimited amounts on elections.

By last year’s presidential election, dozens of such “social welfare” organizations were trying to influence elections. The way they saw it, advertising to promote issues was not political, and as long as an advertisement did not actually back a candidate, it could qualify as a nonpolitical issue advertisement.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/05/17/business/a-fine-line-between-social-welfare-and-politics.html?partner=rss&emc=rss

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