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UPDATE 2-U.S. tax agency proposes new rules for tax-exempt political groups

Patrick Temple-West
Tuesday, 26 Nov 2013 | 4:05 PM ET

(Recasts, adds details, background throughout)

WASHINGTON, Nov 26 (Reuters) - The Obama administration proposed new rules on Tuesday to rein in tax-exempt groups that have transformed the U.S. political landscape in recent years by harnessing hundreds of millions of dollars in anonymous donations to influence U.S. elections.

The proposal would alter definitions in the tax code that allow limited campaign and fundraising activities by the tax-exempt groups, some of which have been at the center of allegations that the Internal Revenue Service targeted conservative Tea Party groups for extra scrutiny.

These tax-exempt groups, organized under section 501(c)(4) of the tax code, mushroomed after a 2010 U.S. Supreme Court ruling that relaxed campaign finance rules. Part of their appeal is that the groups do not have to disclose the identities of their donors as long as they spend less than half their time and money on political activities.

Critics say the relaxed rules have opened the door to the abuse of campaign finance rules meant to curb the influence of wealthy donors in U.S. politics.

The proposed rules are open for public feedback and the IRS will need to schedule a public hearing for comments.

'POLITICAL ACTIVITY'

U.S. government officials have struggled for years to determine what qualifies as political activity. The proposed rules would more clearly define "candidate-related political activity" and also ask for public comment about how much political spending these groups should be allowed to do.

The proposed rules introduce several bright-line tests that would determine when a 501(c)(4) is doing too much campaign activity and is violating its tax-exempt status.

Among these new definitions, advertising that names a candidate 60 days before a general election would count as political activity.

Certain contributions that can now be made anonymously by these groups may need to be reported. Any "voter guides" that refer to a candidate would be considered political activity.

Also, any event within 60 days of a general election at which a candidate appears as part of the program would be a political event.

"This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by social welfare organizations," Mark Mazur, Treasury assistant secretary for tax policy, said in a statement.

In May, the Internal Revenue Service was engulfed in a scandal over targeting of 501(c)(4) groups that included "Tea Party" and other conservative phrases in their titles.

Reacting to the administration's proposal, Senator Orrin Hatch, a Utah Republican, said it was unfortunate the administration decided to move ahead with new rules before the Senate Finance Committee completed its probe into the IRS targeting scandal.

"Waiting would have been wiser and would have offered some critical guidance that would have benefited this process," he said in a statement.

'INITIAL GUIDANCE'

In a nod to the political sensitivity of the matter, Treasury and the IRS stressed that Tuesday's move was only initial guidance. They said officials will "carefully and comprehensively" consider all feedback before proposing additional guidance or finalizing any rules.

Heavy-hitting 501(c)(4) groups include Crossroads GPS, co-founded by Republican strategist Karl Rove, and Organizing for Action, started by top aides to President Barack Obama.

The IRS has acknowledged the challenge in defining when such groups cross the line to becoming predominantly political groups and should therefore lose their tax-exempt status and ability to maintain the secrecy of their donor lists.

The issue came to a head when the IRS became embroiled in a scandal after it was revealed that the agency gave burdensome extra scrutiny to groups affiliated with the conservative, small-government, low-tax Tea Party movement between 2010 and 2012.

Obama fired acting IRS head Steven Miller in response to the scandal and in May installed White House budget official Danny Werfel to lead the agency.

The Treasury and IRS said on Tuesday that the proposed guidance would replace the current system of fact-intensive inquiries with more definitive rules. Such a move would limit individual IRS officials' discretion when considering tax-exempt applications.

(Reporting by Patrick Temple-West; Writing by Karey Van Hall; Editing by Howard Goller and Jim Loney)