Dark money, like dark pools, hide vital information

November 19, 2014 04:47 AM

With almost all the results finally in, the official winner of the 2014 election is now clear: something called "dark money," which reached record levels this year. Its victory has its roots in an adverb choice made by the IRS more than half a century ago.

President Barack Obama, who's pretty good with words himself, could easily order the Internal Revenue Service to change its language. That would help curb the influence of dark money, political contributions that are shielded from public view, which amounted to some $200 million in 2014 -- most of it spent on negative advertisements.

The rise of dark money began in a 1950 law clarifying which kinds of groups should be tax-exempt: "civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” Nine years later, the IRS adopted rules, redefining “exclusively” to mean “primarily.”

It was a neat trick that allowed nonprofit groups to engage in some commercial activity -– think of a museum that houses a gift shop -- and it worked well enough for five decades. But two other legal facts slowly eroded its benefits: nonprofits cannot be compelled to disclose their donors. Meanwhile, neither the courts nor the IRS has ever clearly defined what it means to be “primarily” engaged in the promotion of social welfare.

Eventually, special-interest groups, wealthy individuals and political parties began to exploit these loopholes, creating nonprofit groups to get around laws that require public disclosure of contributions intended to influence elections. By avoiding words that expressly advocate for or against a candidate, these groups can claim to be engaged in educational activity promoting social welfare.

That’s nonsense, of course. They are engaged in traditional political activity, and the contributions they receive should be disclosed, as federal law requires of other such political donations.

The IRS has been studying how to tighten its rules for nearly a year and is expected to release a proposal early in 2015. Returning to the statute’s “exclusively” standard is not a feasible solution: that would eliminate tax exemptions for nearly all large nonprofit organizations, from hospitals to universities. So the goal must be a rule that prohibits such organizations from engaging in campaign-related activity.

That’s no easy task, but it can be done. Obama should direct the IRS commissioner, John Koskinen, to draw bright lines between social-welfare organizations and political committees, so that the latter cannot dress up as the former. This would also allow the IRS to spend less time policing political spending, work for which it is spectacularly ill-suited.

The IRS’s initial attempt at new rules drew bipartisan criticism: Republicans tend to view any action by the IRS as an attack on free speech, while Democrats -- and reform organizations that decry “dark money” -- worry that the new rules will make it harder for nonprofit groups to conduct voter registration drives. If the new rules mean that the League of Women Voters has to finance voter registration drives through a political committee rather than its general fund, so be it. That’s a small price to pay to protect the integrity of public disclosure.

Political donors who wish to remain anonymous will always look for new loopholes to exploit. But that doesn’t mean the federal government should make them easy to find.

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