Congress: Revise Rules on Advocacy by Charities

Two recent decisions, each involving a group with strong ties to a high-profile Republican politician, underscore the need for a thorough review of Internal Revenue Service rules that govern political advocacy by non-profit organizations.

In the first decision, the I.R.S. ruled that former House Speaker Newt Gingrich did not violate the law by relying on a tax-exempt group, the Progress and Freedom Foundation, to sponsor a college course for which he was the principal instructor. Two years ago, following a well-publicized House Ethics Committee report charging that he had wrongly used tax-free money to advance his political career, Mr. Gingrich accepted responsibility for failing to be more careful and paid a $300,000 fine.

In the second decision, a U.S. Circuit Court of Appeals upheld I.R.S. and lower-court rulings that denied charity status to a tax-reform commission led by the former Vice-Presidential nominee Jack Kemp. In 1996, after sponsoring a series of studies and public hearings, the group issued a report calling for the adoption of a flat tax in place of the current income tax, which the I.R.S. interpreted as an improper effort to influence that year’s election campaign.

According to the Gingrich ruling, which was made public this month, the Progress and Freedom Foundation’s course, “Renewing American Civilization,” fell within the limits of permissible activities by charities. Although Mr. Gingrich may have received some political benefits from the course, the tax agency said they were “incidental” to the chief purpose of the course, which was to educate students about trends in American government and society.

Moreover, the I.R.S. ruled, the course’s endorsement of ideas by Democrats, its reliance on facts rather than “unsupported opinion,” its availability at “established colleges and universities,” and its direction by people with academic credentials — including Mr. Gingrich himself — distinguished it from other programs previously found to be ineligible for charity status.

In the Kemp case, the appeals court said the lower courts and the I.R.S. were right to conclude that Mr. Kemp’s commission was really an advocacy group for the flat tax and had not given serious consideration to other alternatives. While the commission could still be exempted from paying tax as a “social welfare,” or advocacy, organization, it would lose the ability to receive tax-deductible gifts and foundation grants. Yet if the I.R.S. decides to apply the standard of “study first, advocate later” more broadly, many other groups that now are classified as charities would also not qualify as such.

In any event, the I.R.S.’s power to judge whether an organization’s views were based on careful study — or merely expressed political preference — is an invitation to accusations of arbitrariness and partisanship. That is why Congress needs to review the rules governing political activities by tax-exempt groups.

Judge Learned Hand, in a 1930 case concerning the American Birth Control League, enunciated what is still the basic principle in this area: “Political agitation, however innocent the aim, must be conducted without public subvention” — that is, without financial assistance from the government.

Since then, however, the possible ways of influencing politics have multiplied far beyond the generally prohibited methods of partisan campaigning and legislative lobbying. And as government has expanded, more tax-exempt groups have become involved in trying to affect public policy or to obtain government grants. As a result — and despite subsequent Congressional efforts to clarify it — applying Judge Hand’s dictum has become so complex a problem that the unwary can easily fall afoul of it.

Even expert legal advice might not be enough. In the Gingrich case, the House Ethics Committee relied on an analysis by one of the nation’s leading specialists on the law of tax-exempt organizations to reach its conclusion that the former Speaker may have violated the law. That the I.R.S. has now concluded otherwise says less about the expert’s work than about the formidable difficulties of applying precedents in this murky area to new and ambiguous situations.

The Ethics Committee’s chairwoman at the time of the Gingrich hearings, Connecticut Representative Nancy L. Johnson, seemed to recognize this. At the end of the hearings, she indicated that she would use her position as chairwoman of the House committee that oversees the I.R.S. to review the existing laws and regulations. However, the examination never occurred, in part because many of the organizations representing the nation’s tax-exempt groups opposed opening the door to potentially adverse changes.

Though often outspoken in defending non-profit advocacy against challenges from Republicans, those groups, through their silence, have apparently not perceived similar dangers in the objections lodged against Mr. Gingrich and Mr. Kemp. But ducking the issue has a big price: It discourages civic participation by groups that might have a great deal to contribute but that are nervous about the ambiguities and pitfalls in the current rules. It also potentially makes the Treasury Department, through I.R.S. rulings on tax exemption, a big part of public controversies — precisely the outcome Judge Hand had sought to avoid.

If Congress were to revisit the issue, it might start by reconsidering Judge Hand’s dictum, which assumes that a tax exemption is equivalent to a government subsidy, and thus can oblige its beneficiaries to refrain from certain actions. However, if a tax exemption’s real purpose, as some legal scholars have argued, is simply to recognize that money contributed, earned, or held for the purpose of serving the public ought not to be taxed, the case for limiting political activities becomes much weaker. By this logic, in fact, gifts to political organizations deserve to be considered as deductible as those to charities.

Federal grants and contracts are a different matter. The argument that they are really subsidies to private groups and ought not to help pay for political activities ought to be taken seriously. That was the claim made by a number of Republicans during the past two Congresses and resisted vigorously by many in the non-profit world. However, a suitably crafted set of limits on the use of government money for advocacy might not be too great a price to pay for permitting a broader use of private donations or earned income, which would make it easier for the I.R.S. to stay out of political controversies.

By belatedly exonerating Newt Gingrich, the I.R.S. has taken a step in that direction. But piecemeal change — one organization, and one tax ruling, at a time — will only add to the already widespread confusion about what is permissible. Congress should act, but if it won’t, the non-profit world ought to take the lead in proposing new rules.

Leslie Lenkowsky is professor of philanthropic studies and public policy at the Indiana University Center on Philanthropy, and a regular contributor to these pages. His e-mail address is llenkows@iupui.edu.