The ‘Proposed’ Regulation Gambit

Proposing a new rule is not the same as changing the rules, but the Obama administration seems to think it can achieve its goal of regulating political speech either way.

The administration recently proposed a set of strict new regulations that would bar certain nonprofits from securing a tax exemption if they participate in more than a limited amount of “candidate related” political activity. Current Internal Revenue Service rules require that 501(c)(4) organizations be organized for the purpose of “social welfare.” The new rules, if adopted, would explicitly exclude certain political activity from that category.

Such organizations have cropped up regularly in the news since the IRS scandal earlier this year, which revealed that the Service inappropriately targeted groups filing for tax-exempt status under 501(c)(4) rules. While the IRS Internal Review Board did not find evidence of political bias in the actions of Lois Lerner, who headed the IRS branch determining whether the organizations that applied for tax-exempt status qualified to receive it, the IRS effort to curtail the political speech of social welfare groups, and the shaky legal foundation for that effort, has been obvious to all.

These are only proposed regulations, so they are not technically binding in the tax world. However, proposed regulations often stay on the books in that form for years, or even decades. The proposed regulations typically serve as an informal guide that the IRS and tax practitioners use to shape their understanding of tax law. This is exactly what the administration wants; the proposal can deter the operation of 501(c)(4)s that support political candidates without actually providing a clear target for a court challenge.

Such a challenge would likely go first to the U.S. Court of Appeals for the District of Columbia, where Obama has three pending nominees whose appointments now cannot be filibustered. If a D.C. Circuit packed with administration-friendly judges upholds the new restrictions, the issue might then proceed to the U.S. Supreme Court. If and when a case challenging these regulations gets there, the high court that decided Citizens United will have no trouble concluding that these regulations are invalid on their face.

The government has no business telling anyone, including not-for-profit organizations, what they can say and when they can say it. That principle is central to our civil liberties. Moreover, the government has no business taxing the profits of a not-for-profit organization. Its rules defining what a not-for-profit organization is do not limit the speech or advocacy of such organizations. The key test of a not for profit is the rule – unchallenged by anyone – that no net earnings can benefit any private shareholder or individual. But for the government to define certain kinds of speech as incompatible with social welfare, and thus incompatible with the organization’s tax-exempt status, is to effectively impose a tax on that speech.

This is not the first attempt to bar 501(c)(4) groups from engaging in political speech. This time, as before, the courts will almost certainly strike down such an effort. But that process will take time. The proposal, when invoked by IRS bureaucrats, could cause headaches for such nonprofits in the interim. In fact, that is the idea.

Despite the gambit of issuing an edict in the form of the proposed regulations, which will probably not be finalized for the duration of the Obama presidency, I suspect that a well-funded 501(c)(4) will still launch a prompt legal challenge. If such a case gets to the current Supreme Court, the new rules will very likely be struck down. This court has made it clear that the government has no business regulating political speech, and will have no trouble concluding that taxing contributions that support such speech steps far over the line into trying to regulate it.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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