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Liberal groups sue IRS to stop campaign spending by tax-exempts

A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton
A woman walks out of the Internal Revenue Service building in New York in this May 13, 2013 photo. REUTERS/Shannon Stapleton

By Patrick Temple-West

WASHINGTON (Reuters) - Advocates for campaign finance transparency sued the Internal Revenue Service on Wednesday to force it to deny tax-exempt status to groups spending funds on political activities, launching a legal case that tax lawyers said faced long odds.

Ahead of the 2012 elections, liberal and conservative tax-exempt groups raised hundreds of millions of dollars from anonymous corporate and individual donors, then spent the money on political advocacy, usually negative television ads.

The lawsuit, filed in federal court, centers on the tax code's definition of political activity for these tax-exempt, 501(c)(4) groups. The law says they must operate "exclusively for the promotion of social welfare."

But the federal regulations the U.S. Treasury wrote to enforce the law says the groups must spend their time and money "primarily" on social welfare causes.

The leeway in the definition of "primarily" has been criticized as a loophole allowing the groups to attack candidates running for office without disclosing their donors' names.

The lawsuit asks the court to rule the IRS is unlawfully interpreting Congress's intent in the 501(c)(4) law, and that 501(c)(4) groups must be barred from all political activity.

"The public has a right to know who's bank rolling these election campaigns," said Representative Chris Van Hollen, a Maryland Democrat suing the IRS with Democracy 21, Campaign Legal Center and Public Citizen Inc, liberal-leaning groups that advocate for more campaign finance transparency.

The IRS did not immediately comment on Wednesday.

These 501(c)(4) groups were at the center of a May IRS inspector general's report that criticized the IRS for unfairly scrutinizing applicants linked with the conservative-leaning Tea Party movement.

Ahead of the 2012 elections, Van Hollen and the three advocacy groups were unsuccessful in getting more campaign spending transparency, either through Congress or the courts.

Conservative tax-exempt groups dominated their liberal counterparts in spending during the 2012 campaigns, according to figures from the Center for Responsive Politics.

The lawsuit also asks the court to halt the IRS's new "fast track" approval program for 501(c)(4) groups.

The IRS said in June it will quickly approve such applications from groups that promise to limit their political campaign intervention to 40 percent of their spending and time.

Lawyers specializing in tax-exempt law said the lawsuit faces little chance of succeeding in court. The challengers first must convince the court they have enough grievances for the lawsuit to proceed.

The challengers must also persuade the court to overturn a 50-year-old tax code rule that Congress has never revisited to say the IRS is wrong in its interpretation.

"It's hard to see courts intercede in this conflict," said Jeffrey Altman, a partner with Whiteford Taylor Preston LLP.

The case, in U.S. District Court for the District of Columbia, is Hollen v Internal Revenue Service No. 1:13-cv-01276.

(Reporting by Patrick Temple-West; Editing by Howard Goller and Tim Dobbyn)

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