Defending Nuance in an Era of Tea Party Politics : An Argument for the Continued Use of Standards to Evaluate the Campaign Activities of 501(C)(4) Organizations

Tax-exempt groups such as 501(c)(4) “social welfare” organizations have become popular channels by which to steer money into federal elections. If they engage in too much campaign activity, however, they risk losing their tax-exempt status. The IRS polices the political activity line by looking at all relevant “facts and circumstances,” an approach that led to charges of delay and political bias in a recent high-profile report. As a result of the “Tea Party scandal,” numerous experts have called on the IRS to now replace its “vague” ex post standard for evaluating excessive campaign activity with a “bright line” ex ante rule.This Article reaches a very different conclusion. I argue that continued use of a standard is a more efficient and effective way to limit abuse of the tax system. I reach this conclusion through two lines of analysis. First, I consider the “rules/standards” dialectic and conclude that a standards-based regime is preferable where, as here, there is (1) a high level of complexity, (2) a culture of circumvention, and (3) problems with enforcement. Second, I look at the parallel area of campaign finance reform, where rules predominate over standards, and find that many of the problems predicted by the theoretical analysis are borne out in fact. Indeed, I argue that the “scandal” resulted in large part not from a failure of the IRS's standards-based approach to tax exemption, but instead from the inherent limitations of a series of rules. The Article concludes with recommendations for reforming and re-invigorating the IRS's current “facts and circumstances” approach