Why Press Bad Luck?

August 27, 2013 Current Commentary Comments Off
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At one time or another, most of us have been told not to press our luck.

Among the rare exceptions seems to be Rep. Chris Van Hollen. At any rate, he is apparently inclined to press his luck even when his luck is bad. It should come as no surprise to anyone but Van Hollen if he is unhappy with the ultimate outcome.

Van Hollen, a Maryland Democrat, is displeased with the Citizens United v. Federal Election Commission decision (as are most Democrats). Since he can’t overrule the Supreme Court, he is lashing out at another target: the way that the Internal Revenue Service evaluates social welfare groups that seek tax exemption under Section 501(c)(4) of the Internal Revenue Code.

Van Hollen wants to stop such groups from engaging in politics, apparently under the belief that social welfare is divorced from all legislative and executive branch decisions (except, of course, when those decisions favor environmental, labor, social or health care positions that Van Hollen and other Democrats support).

Van Hollen joined a lawsuit claiming the IRS is not enforcing the statute correctly. Section 501(c)(4) provides tax exemption to groups “operated exclusively for the promotion of social welfare.” IRS regulations, designed for the reality that there is almost no such thing in life as an absolute, define qualifying groups as having social welfare as their “primary purpose.”

Not good enough, says Van Hollen. The term “social welfare” is not, however, defined in the statute. Van Hollen wants the IRS to definitely label political activity as something other than social welfare.

There are a few problems with this lawsuit, beginning with the fact that Van Hollen and his co-complainants might not have legal standing to sue the IRS over the issue. The complaint might therefore get tossed from court outright. Then again, lawyers representing the IRS – part of an administration that dislikes Citizens United every bit as much as Van Hollen – might not seek a dismissal.

Also, it is not obvious to me that disqualifying groups with a political bent from 501(c)(4) status will necessarily change their tax situation. They may instead seek exemption under 501(c)(6), which relates to business leagues, or under 501(c)(7), which covers “clubs” that are “organized for pleasure, recreation, and other nonprofitable purposes.” Politics has been described as a contact sport, after all.

But the biggest problem with the lawsuit is that Van Hollen and his sympathizes want to encumber the political speech of organizations that, unlike the corporations addressed in Citizens United, do not have shareholders or profits, and therefore have no genuine income to tax. The tax exemption provisions were put into the code for the simple reason that to tax such organizations on their revenue is to destroy them. The government is not giving a tax subsidy to these groups. Their donors do not get an income tax deduction, and their employees and vendors are obliged to pay taxes on whatever they receive.

Van Hollen proposes to take this position to none other than the same Supreme Court that decided Citizens United. If his case makes it that far, what kind of decision does he expect to receive?

Here’s what I expect, in the event the case makes it to the high court: a decision stating that the government cannot consider an organization’s political activities in determining the taxable status of the organization. Companies organized for earning profits should pay tax on them; there is no reason to allow them to deduct political activities from their profits in computing the tax. But organizations that earn no profits, and have no shareholders who benefit from the accumulation of capital (and, in most cases, never accumulate capital anyway) cannot be taxed on “profits.” To do so is to prohibit the freedoms of association and expression guaranteed under the First Amendment.

That’s the position we should expect the Supreme Court majority that decided Citizens United to take. It does not seem that Van Hollen has thought that far ahead.

Pressing your luck is dangerous enough when you’re on a winning streak. Pressing bad luck is unlikely to leave you anywhere you want to be.


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