There are several potential loopholes in Obama's proposed regulations. Obama rules won't weaken secret money

The Obama administration proposed rules on Tuesday that could make it harder for some nonprofit groups that play politics to get away with claiming a tax exemption.

But don’t be fooled, this is not the end of political “dark money.”


The rules, released Tuesday by the Treasury Department and the Internal Revenue Service, are unlikely to stem the tide of anonymous donations that have flooded into politics since the 2010 Citizens United Supreme Court decision.

And even if the Obama administration takes an aggressive stance when the final regulations are released, political groups could circumvent the rules by converting into other types of entities not governed by the rules, veterans of campaign finance law and tax exempt status said.

( Also on POLITICO: President Obama pitches new rules for political nonprofits)

“One of the problems of this rule is it is only talking about (c)4s and you need to get a hold of all these entities,” said Donald Tobin, an Ohio State University law professor and former Justice Department tax lawyer. “Clearly when you have an entity-based regulation, it encourages people to engage in activities from another entity.”

The proposal is the first major response to a May Treasury inspector general report blasting the IRS for added scrutiny of tea party conservative groups seeking a tax exemption — a major controversy that led President Barack Obama to fire the acting IRS commissioner and other officials to exit the agency.

That inspector general report recommended the IRS tighten its rules.

If enacted, the proposed crackdown of 501(c)4 social welfare groups may help curb the use of the nonprofits for political purposes — clearing up longstanding confusion about the role of nonprofits in political campaigns.

Progressive reform groups have long argued that political nonprofits on both sides of the aisle use their tax-exempt status solely as a way to shield their donors from public scrutiny.

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Among the most prominent of the (c)4 groups are Crossroads GPS, founded by George W. Bush adviser Karl Rove, and the liberal-leaning American Bridge.

Current IRS rules require that these groups be organized for the purpose of “social welfare.” The draft regulations would explicitly exempt certain political activity on behalf of candidates as counting toward the promotion of “social welfare.”

The proposed regulations could also help clarify confusion between tax law and IRS regulations. As it stands now, the law on 501(c)4s says such groups need to “exclusively” focus on social welfare, while the IRS regulations say social welfare must be their “primary” focus.

By proposing stricter rules on what counts as political activity, the IRS is hoping to take some of the guesswork out of how to classify these activities.

For example, they propose classifying any communications within 60 days of a general election that clearly identifies a candidate or party or some get-out-the-vote efforts as political. As it stands now, a vague “facts and circumstances” test applies.

The IRS, a senior Treasury official said, is unlikely to release the final regulations until after the 2014 elections.

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Many of the largest 501(c)4s, including Americans for Tax Reform, AARP, NAACP and the pro-Obama Priorities USA, declined to comment or did not return requests on how the proposed regulations could impact them.

But experts on political nonprofits said many of the groups could simply form different types of entities if the new regulations are too burdensome.

Many political groups have branched into the for-profit realm, organizing themselves as limited liability corporations, trust or other corporate designations. America Rising, a GOP organization focused on research and tracking, has so far spent most of its funds through an LLC arm. Another group organized this way is the Democratic firm Catalist.

“If 501(c)4s become an inconvenient vehicle, I have no doubt that funders will find a different vessel and 501(c)6s and LLCs would be likely suspects,” said Kenneth Gross, a former associate general counsel for the Federal Election Commission, and now a partner at Skadden.

There are other potential loopholes in the proposed regulations.

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Marcus Owens, a former head of the IRS tax exempt unit, said the changes might make nonprofit money even more slippery.

For example, he described one section as a “gift to Karl Rove.”

That’s because while the proposed regulations count most grants to inherently political organizations as candidate related, the rules say 501(c)4 groups are in the clear if the grantee promises not to use funds for candidate-related political activity.

“What that is saying to Karl Rove is he can find willing partners who are willing to give him a certification and then ignore it – he has a green light to continue,” Owens said. “It simply changes the types of ambiguities.”

Reaction to the proposed regulations were unsurprisingly split across the political spectrum.

“The abuse of social welfare groups for political activity has been an embarrassment to our democratic system. Too often, (they) have simply become a front for corporate political mobsters to anonymously exert their power over our elections,” said Josh Orton, the political director of Progressives United. The group — founded by former Democratic Wisconsin Sen. Russ Feingold — has long advocated curtailing the role of big money in politics.

But conservative groups warned that the regulations could curb free speech or intimidate people from forming nonprofits.

Charles Spies, the founder of the pro-Mitt Romney Restore Our Future Super PAC, said the regulations amounted to little more than political intimidation.

“I think it’s Obama’s revenge against people who have been participating in the process on the other side from him,” Spies said. “It will have an immediate effect on chilling people.”

Kim Dixon contributed to this report.