Are 501(c)(4) nonprofits created merely to hide from public inspection?

The Associated Press reported on Thursday that many within the tea party, as well as  other conservative groups, are claiming that the Internal Revenue Service is taking too long to award them tax-exempt status.

I say good work IRS.  Take as long as you need and be very, very cautious and demanding before you award any more 501(c) (4) exemptions.

These most recent complaints are coming from  those who claim the IRS is “purposely frustrating” their efforts to gain 501(c)(4) status as “social welfare” groups whose “mission is to promote the common good.”  Lots of nonprofit organizations have a (c)(4) or operate as one and engage in some effort to influence political activity.  It’s the extent of that political activity and whether they are indeed political parties and not just occasional political advocates providing information that is at issue here.

I’m sure that part of the reason for the caution of the IRS is the rise of the Super PACS  that are exercising so much influence currently in the Republican primaries and are gearing up for the fall.  In the days before Citizens United, political action committees (PACs) were limited to $5,000 contributions and could pass the money directly to whatever party or candidate they chose.   The new Super PACS can raise unlimited amounts of money from corporations, individuals and labor unions, but they must be independent of the candidates, even though they’re usually run by friends or associates of the candidates.  Like the old PACS, Super PACS are required to make the names of their donors public – although it can sometimes be months after the donation has actually been made.  However, donors to 501(c)(4)s are not required to be made public.  Increasingly we’re starting to see donations flow from the (c)(4)s to the Super PACS, thereby avoiding disclosure.  After all, why disclose a donor’s name when you can avoid it by making the donation through a (c)(4)?

This is not a Republican or Democrat issue.  Both parties are getting into the Super PAC game full time.  I’m one of those who believe that all this money pouring into politics is not good for our fragile democracy.  It‘s going to take a while to figure out what can be done, if anything, to slow down the money train.  In the meantime, I would encourage the IRS to be rigorous in not only awarding new (c)(4)s but to keep a closer eye over existing (c)(4)s to make sure they are complying with IRS regulations.  Secondly, I’d like to see the IRS change the regulations and begin requiring full disclosure of all donors to (c)(4)s.  That seems to the bare minimum when it comes to showing transparency and accountability.

I realize these recommendations run the risk of getting thousands of small Rotary clubs, volunteer fire departments, veterans organizations, etc., caught in the net when new regulations  are imposed on (c)(4)s .  Absent a restructuring of what it even means to be a (c)(4), this may be the price we have to pay for closing this enormous loophole.

If you have responsibility for running a nonprofit organization, you should care about this issue.  All this political activity and money flow in the name of a “nonprofit organization” further confuses the public about just what it means to be a nonprofit organization.  Is it merely a designation for avoiding taxes and hiding from public inspection, or do we stand on principles about how we serve the public good?

One response to “Are 501(c)(4) nonprofits created merely to hide from public inspection?

  1. Dear Bob–
    Thank you for this column on 501(c)4 organizations. I wholehearted agree with what you say here. However, I am confused on one point: the 501(c)3 I belong to is not required to disclose its donors–and that is a source of great frustration to me. I am very interested in finding out who is giving money to the organization I’ve spent many years with.

    So what about disclosure of donors to 501(c)3s?

    Elaine Douglass

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