I wrote recently about how “creative accounting shenanigans” can enable people to get rich while avoiding taxes using 501(c)(3) not-for-profit organizations in ways outside of their intended purpose. Now we learn that the IRS has decided to reduce regulations on a related form of not-for-profit entity called a 501(c)(4), making it much easier to hide millions of dollars of “dark money” in a politically-powerful interest groups funded by very rich people with the intent of subverting democracy. [1] This is very bad news for anyone who cares about preserving the concept of a “one person, one vote” political philosophy over the “one dollar, one vote” reality that dominates much of American politics.

Specifically, the IRS ruling was to stop requiring 501(c)(4) not-for-profit organizations to publicly disclose their largest donors. Unlike most donations to 501(c)(3) charitable organizations, these large donations are usually not tax-deductible to the donor (it gets complicated, of course), so the IRS logic is that this disclosure is irrelevant to the law regulating these organizations, and a burdensome process for both the organizations and the IRS. I disagree with this assessment, but first we need to know a bit more about this type of not-for-profit organization.

As in my prior post, I must note here that I have worked with, and continue to work with, several very fine non-for-profit organizations who have made every effort to live up to the social contract under which they were formed, and above all to maintain transparency with their supporting publics. Transparency is the key to keeping not-for-profits honest, and this recent action by the IRS will kill transparency for many of the worst actors in this part of society.

What is a 501(c)(4) organization?

Both “c3’s” and “c4’s” are creatures of Section 501 of the U.S. Tax Code relating to organizations that are not intended to make a profit. As noted in my earlier article, these are commonly called “non-profits,” but “not-for-profit” is the more accurate term. In reality most of the successful organizations actually do make a profit; they just don’t call it that. These entities typically plow “excess of revenue over expenses” (the euphemism for “profit” in these organizations) back into the operations or investments of the entity, which is usually a good thing for the long-term stability of the organization (although this can be abused).

In either of these entities, there is no group of “owners” per se, instead the Board of Directors is responsible for making sure the organization is operated according to its purpose. Most c3’s have a religious or charitable purpose. The purpose for a c4, on the other hand, is to act as either (most commonly) a “social welfare organization” or (less commonly), a “local association of employees.” The latter may be, for instance, something like a community volunteer fire company.

“Social welfare organizations” have been defined much more broadly, and even more so in recent years, stretching that term to the edge of credulity and deep into political advocacy. These entities might be as benign as a community recreation league. On the other end of the scale, the National Rifle Association is organized as a 501(c)(4), as well as the Koch brothers’ powerful political organization Americans for Prosperity, and there’s the rub.

Technically, 501(c)(4) entities are not supposed to spend more than 50% of their resources and efforts on political activities. In practice, this requirement has become moot. It is not enforced, and many of these organizations either blatantly flaunt this restriction or stretch the definition of “non-political” to its limit.

This lack of enforcement is partially due to the fallout of Congressional investigations into a poorly designed audit of the worst offenders during the Obama administration. Even though the media and Congress characterized this audit as specifically targeting right-wing organizations, the “search terms” used to select c4’s for audit were actually quite broad across the political spectrum. For instance, as well as looking for the term “Tea Party,” they also targeted c4’s using the terms “progressive” and “medical marijuana” in their Form 990 filings. [2]

As a result, the audit of c4’s has become a politically-toxic undertaking, and now c4’s can basically operate completely in the sphere political advocacy with impunity. Large contributions clearly intended for advancing political advocacy began to pour into these organizations shortly thereafter, and they had an out-sized role in leveraging their issues into the 2016 presidential campaigns.

So why is this bad?

Before we talk about the abuse of the not-for-profit corporate structure, I need to say a few words about the corporate form of governance in general as it has evolved in the United States. I have taken issue in past posts about the way the limited liability rights granted under corporate charters have been abused. In short, this critical aspect of corporate regulation has turned into an expensive taxpayer “socialization of business failure costs” for many grossly mismanaged businesses.

In addition, numerous tax preferences, greatly broadened in the 2017 tax code revisions, amount to further taxpayer subsidies to the benefit of the wealthiest corporate stockholders. We need to ask ourselves whether the “commonweal” for ordinary citizens is helped or harmed by excesses of corporate power and profits. Corporations are, after all, “legal fictions” created by the State, and “we the people” are the State.

Section 501 not-for-profit entities are an even “more special” case of state-granted corporate rights. Even though these organizations often look and act very much like a “business,” we exempt them from many obligations of ordinary business, most importantly the contribution of part of their economic activity, and their advantages from property holdings, in the form of taxes for the benefit of the larger citizenry. In effect, we the citizens subsidize with our taxes all not-for-profit entities who don’t pay taxes. It follows that the citizenry then has a managing political right over those entities, and can insure that their not-for-profit status is used to the benefit of the larger community in which they operate.

So, even if c4 donor contributions are not tax-deductible to the donor, the very existence of the c4 itself is basically a “gift from the people,” exempting it from taxation on may of its business-like activities. And for many of these politically-oriented “social welfare organizations,” their activity starts to look quite indistinguishable from any for-profit media company. They intensely use social media to both generate revenue in the form of more contributions, and then they are selling a product to the public, in the form of public policy that further enriches the creators of, and donors to, these groups. For instance, the National Rifle Association seeks to sell more weapons for their member manufacturers, and fossil fuel corporations are trying to dismantle expensive environmental regulations, all accomplished through “not-for-profit” economic activity.

We might also include here, to be fair, teachers unions, although they are usually organized as 501(c)(5) organizations. They also use political power to try to get a better education for children and better wages for teachers. We the citizenry need a say over that “community benefit” as well, which I happen to support, although I do admit that far too many Americans prefer less education and poorer wages. But this is where community political power needs to be better enabled, rather than be run over by “dark money” political advocacy organizations hiding behind a not-for-profit mask.

In short, many 501(c)(4) organizations are selling us toxic “hamburgers,” and with taxpayer-provided subsidies as well. If we can’t stop the worst of these guys, we can surely insist on complete transparency as to where the money is both coming from and winding up.

Notes:

1. Cohen, Patricia, et al. “I.R.S. Will No Longer Force Kochs and Other Groups to Disclose Donors.” The New York Times, 17 July 2018.
2. Chittum, Ryan. “The IRS Scandal Unwinds.” Columbia Journalism Review, 25 June 2013.