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Social Welfare – Not in Deceptive Campaign Ads

Social Welfare? Not in Deceptive Campaign Ads

When the Supreme Court made its landmark decision in Citizens United v. Federal Election Commission in the spring of 2010, no one questioned the fact that the decision would have far-reaching effects on campaign finance. One of those effects, however, was probably not anticipated at the time.

In the wake of the landmark decision, which allows corporations and unions to spend unlimited amounts of funds on the productions and distribution of political advertisements for or against candidates, the IRS expected to see a rise in the number of Section 527 Political Organizations, the category specifically intended for political organizations. What has resulted, however, is an increase in the number of 501(c)(4) “Social Welfare Organizations.” It turns out, there is a very specific and calculated reason behind this fact: donor anonymity.

Under the Internal Revenue Code (IRC) social welfare organizations, like Section 527 Political Organizations, are exempt from income tax, provided they adhere to certain requirements. Unlike Section 527 Political Organizations, however, social welfare organizations are not required to disclose the identity of donors. This level of confidentiality greatly enhances an organization’s ability to attract high net-worth donors who might ordinarily fear unwanted consequences from public disclosure.

The “price to pay” for said donor anonymity had traditionally been the absence of a gift-tax exemption for gifts made to social welfare organizations. Under IRC Section 2501(a) a gift tax is generally imposed when money or other property is gratuitously transferred from one party to another. Donations to 501(c)(3) organizations and Section 527 Political Organizations are exempt from this gift tax. As such, gifts to social welfare organizations traditionally bore a greater cost than those to charitable or political organizations, however; in July of 2011 the IRS announced that it no longer planned to enforce the gift tax with respect to social welfare organizations until it received direction from Congress or the issue could be better explained to the public.

In the interim, a battle has been waging between Republicans and Democrats in the Senate. The Republicans are accusing the IRS of unfairly investigating and delaying application by prospective “political” social welfare organizations, while the Democrats seek assurances from the IRS that appropriate steps will be taken to ensure that 501(c)(4) social welfare organization are not improperly engaging in campaign activity. The Democratic Senators have urged the IRS to impose a reporting requirement on social welfare organizations with political activities, as well as a strict percentage based cap on the total amount of money a social welfare organization can spend on political activities. Under the IRC, participation in political campaigns may not be a social welfare organization’s primary activity. Unfortunately, the IRC and its accompanying Regulations do not define what constitutes “primary.”

Perhaps most disturbing about this situation, a recent study by The Annenberg Public Policy Center of the University of Pennsylvania found that 85% of the dollars spent on presidential ads by the four top-spending 501(c)(4) organizations were spent on ads containing at least one claim ruled deceptive by fact-checkers at Factcheck.org, Politfact.com, the fact checker at the Washington Post or the Associated Press. These four top-spending 501(c)(4) organizations include: 1) American Energy Alliance, a group that champions free market energy policies; 2) American for Prosperity, founded to support lower taxes and limited government spending; 3) American Future Fund, a Republican-leaning Iowa based group; and 4) Crossroads GPS, a conservative public policy advocacy group advised by former Bush lieutenant Karl Rove. Third-party ads have traditionally been both more attack-driven and deceptive, noted Kathleen Hall Jamieson, Director of the Annenberg Public Policy Center. “Unsurprisingly, our 2012 studies of third-party deception confirm that as the level of donor disclosure drops, the level of duplicity rises. This year, presidential Super PAC ads are more deceptive than those sponsored by presidential candidates and [501(C)(4)] presidential ads more duplicitous than super PAC ones.”

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