Representative Chris Van Hollen (D-MD), joined by Democracy 21, the Campaign Legal Center and Public Citizen, filed a lawsuit today in federal district court in Washington, D.C challenging the IRS regulations that govern eligibility for tax-exempt status as a section 501(c)(4) “social welfare” organization.

Attorneys from the three organizations are representing the plaintiffs in the case, with Scott Nelson of Public Citizen serving as the lead counsel.

The existing IRS regulations were adopted more than a half century ago in 1959 and the lawsuit charges that the regulations are contrary to the explicit statutory language of the Internal Revenue Code and to court decisions interpreting the Code.

The lawsuit comes more than two years after Democracy 21 and the Campaign Legal Center filed a petition at the IRS on July 27, 2011 challenging the regulations at issue in the case and calling on the IRS to conduct a rulemaking proceeding to adopt new regulations that properly interpret the statute. The IRS did not act on the rulemaking petition.

Since the Citizens United decision in January 2010, there has been an explosion in the number of groups claiming tax-exempt status as “social welfare” organizations under section 501(c)(4). This has included a number of organizations who have abused the tax laws to claim section 501(c)(4) tax-exempt status in order to keep secret from the American people the donors financing their campaign expenditures.

According to Democracy 21 President Fred Wertheimer:

Democracy 21, joined by the Campaign Legal Center, petitioned the IRS more than two years ago to issue new regulations to stop the tax laws from being misused by section 501(c)(4) groups to launder secret contributions into federal elections.  If the IRS had acted on our petition it could have shut down the massive abuses of the tax laws that resulted in more than $250 million in secret contributions being spent by section 501(c)(4) groups in the 2012 federal elections. The IRS also would have avoided the issues that have arisen regarding the targeting of certain groups.

Today’s lawsuit would force the IRS to take the action we petitioned the IRS for two years ago and would require the IRS to issue new regulations to put an end to huge sums of secret money being spent in federal elections. Until this problem is addressed, the big losers here are voters being denied the campaign finance information they have a basic right to know, as long recognized by Congress and the Supreme Court. The big losers also are the taxpayers seeing the tax laws being ripped off by section 501(c)(4) groups for their own political purposes.

According to Public Citizen attorney Scott Nelson:

Congress has specified in the Internal Revenue Code that a section 501(c)(4) organization must devote itself “exclusively” to social welfare activity, yet the IRS has for decades allowed (c)(4)’s to engage in substantial electoral spending even though electoral activity falls outside the agency’s own definition of social welfare activity. And the IRS has done nothing to correct the mismatch between the law and its regulations even after it received a rulemaking petition explaining the problem and the urgency of addressing it to prevent (c)(4) organizations from being transformed into vehicles for massive electoral spending without donor disclosure.

It shouldn’t take many years for the IRS to understand that when a law passed by Congress says one thing and the IRS’s regulations and policies allow just the opposite, something needs to be done.

According to the Campaign Legal Center Senior Counsel Paul S. Ryan:

This flawed IRS regulation on the books for more than a half-century, together with recent Supreme Court decisions in Wisconsin Right to Life (2007) and Citizens United (2010) permitting 501(c)(4) corporations to pay for election ads, have produced a perfect storm that has flooded recent elections with funds from undisclosed sources. In the 2012 cycle, federal election-related spending by section 501(c)(4) organizations exceeded $256 million, triple the amount spent by such groups in the 2008 presidential election cycle ($82.7 million) and an astounding thirty-three times the amount spent by such groups in the 2004 presidential cycle ($7.6 million).

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