Washington • The Obama administration moved Tuesday to limit the expansive role that nonprofit groups play in politics, proposing a new regulation that would rein in certain tax-exempt organizations that have been able to spend hundreds of millions of dollars in recent elections without revealing their donors.
Under the proposed rule, groups such as Crossroads GPS, co-founded by GOP strategist Karl Rove, and the Democratic-allied League of Conservation Voters would no longer be able to claim some of their routine activities as part of their work as "social welfare" organizations.
Instead, the new Treasury Department regulation would define things such as distributing voter guides, registering people to vote and running ads that mention elected officials close to Election Day as "candidate-related political activities." The rule would substantially roll back the level of political activity open to "social welfare" groups.
Once enacted, the new restrictions would represent a major shift for such organizations, set up under Section 501(c)(4) of the federal tax code, which currently have great latitude to engage in elections - a freedom they have increasingly exercised in recent years.
The proposal Tuesday is a preliminary but significant step to clamp down on tax-exempt groups that have altered the political landscape in the past decade, fueled by the unlimited donations that traditional political parties can no longer accept.
Election-law attorneys said they anticipate strong resistance to the proposal during an extensive comment period and legal challenges once the rule is enacted. They warned that the rule could push political money into new vehicles such as private partnerships, which can engage in politics without disclosing their backers.
"It sounds like a fairly dramatic proposal that would significantly change the ways in which tax-exempt organizations are used for political purposes," said lawyer Robert Kelner, whose clients include nonprofit groups. "The most striking thing is the apparent proposal to treat get-out-the-vote activity and voter registration as political activity, which has not been the IRS' position generally speaking up until now."
Tax experts, reformers and activists offered a range of reactions to the Treasury announcement, with many expressing apprehension and alarm, underscoring the politically delicate terrain the Internal Revenue Service must negotiate in the wake of the scandal over the agency's targeting of politically active groups for extra scrutiny.
"This is a crass political effort by the administration to get what political advantage they can, when they can," said House Oversight and Government Reform Committee Chairman Darrell Issa, R-Calif., who led the inquiry into alleged politicization of the IRS.
"This is very bad and very irritating," said Grover Norquist, the president of Americans for Tax Reform, a nonprofit that has been closely allied with the Republican Party. "This proposal appears to be motivated by politics, as was this administration's earlier war on the tea-party-sponsored nonprofits."
But the initiative was largely cheered by campaign finance reform advocates as an important effort to limit the use of secret money in campaigns. They urged Treasury to also issue a regulation defining how much - if any - political activity social welfare and other nonprofit groups should be able to engage in.
"We are at a a point now where we have had wholesale evasion of campaign finance law," said Fred Wertheimer, president of Democracy 21, a group that seeks to reduce the influence of money in politics.
Unlike political committees, 501(c)(4) groups do not have to report their donors or all of their spending to the Federal Election Commission, exploiting what President Barack Obama and other critics have called a major loophole in the campaign finance system.
In the 2012 election, social welfare groups reported spending $256 million on campaigns, according to the nonpartisan Center for Responsive Politics - a figure believed to be a fraction of their total political expenditures.
But the debate over regulating such groups is potentially politically explosive because the proposed tax code changes collide with constitutional questions about freedom of speech.
In its notice of proposed rule-making, the Treasury Department said that content posted on a nonprofit group's website close to Election Day that names a candidate "would be treated as candidate-related political activity."
That could force social welfare groups to scrub their websites to avoid jeopardizing their tax status by spending too much on politics.
"This proposal will quickly turn into a debate about the IRS trying to stifle political expression on the Internet," said Brett Kappel, a campaign finance lawyer.
This comes in the wake of the revelations earlier this year that IRS employees were using political terms such as "tea party" and "patriot" to screen for 501(c)(4) groups that were potentially engaging in excessive election-related activity.
The scandal led to congressional hearings and the departure of senior IRS officials, as well as charges by Republicans that the Obama administration was targeting groups based on their political leanings. In the aftermath, Treasury and IRS officials pledged to review the current "facts and circumstances" test used to ensure that 501(c)(4) groups are staying within the bounds of their "social welfare" mandate, saying there was a need for clearer guidance.
"The need for this regulation has been apparent and became more so after we went through the IRS debacle earlier this year," said election-law attorney Kenneth Gross, the former enforcement chief at the FEC, who now represents candidates from both major political parties.
Mark Mazur, assistant secretary for tax policy at Treasury, called the new rule "a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations."
"We are committed to getting this right before issuing final guidance that may affect a broad group of organizations," he said in a statement.
The proposed rule - which must still go through a 60-day public comment process and is likely to be the subject of a public hearing - is unlikely to be in place before the 2014 midterm elections. But through the comment process, Treasury officials said they plan to explore a range of issues, including whether similar rules should govern other tax-exempt groups, such as business leagues.
Some conservatives expressed concern that the regulation could impinge on free speech by preventing groups from running ads about legislation around the time of elections, while others noted that the rule could allow social welfare groups to run unlimited ads that reference candidates, as long as they were far in advance of Election Day.
A leading expert in nonprofit law, Marcus Owens, former director of the IRS' division of tax- exempt organizations, called the proposal confusing, adding that it is "as ambiguous if not more" than the current situation. He called particular attention to the Treasury's decision not to make a distinction between nonpartisan and partisan political activities, predicting it would set off a wave of concern on the left, the right and among good government groups who consider themselves strictly nonpartisan.
"The real bottom line at this point," Marcus said: "This will be good for lawyers."