WASHINGTON -- For the first time since 1959, nonprofit advocacy groups face new Internal Revenue Service rules governing their political activities, an area of the tax code that has been crying out for greater clarity.
A proposed regulation unveiled Tuesday by the Treasury Department draws the boundaries more clearly -- but instantly kicked off intense debate about whether the lines are in the right place.
One phrase in the official notice summed up the imperfect nature of the exercise. The new rules, the department said, "may be both more restrictive and more permissive than the current approach."
That seemingly contradictory statement reflects the muddy zone now occupied by "social welfare" organizations set up under section 501(c)(4) of the tax code. Originally a designation used by civic leagues and homeowner associations, social welfare groups emerged in the past decade as the go-to vehicles for political operatives seeking to influence campaigns without revealing their donors.
Little governs their activities except a 54-year-old regulation that states that a group can qualify as a social welfare organization "if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community."
Tax lawyers have interpreted that to mean that advocacy groups need to spend at least 51 percent of their resources on social welfare efforts to maintain their tax status. Until now, defining what falls outside of that has been left to a subjective "facts and circumstances" test by the IRS.
The result: Social welfare groups such as Crossroads GPS and Americans for Prosperity on the right and the League of Conservation Voters and Patriot Majority on the left have pumped untold hundreds of millions of dollars into election-related activities in recent years while avoiding the donor disclosure required of more tightly regulated political committees.
The explosion of politically active nonprofit groups -- and the vague standards the IRS uses to assess them -- led to the searing crisis that engulfed the agency this year, when an inspector general's report revealed that employees had been selecting groups with names that included words such as "tea party" or "patriot" for extra scrutiny.
In the aftermath, everyone agreed the system was broken.
The new regulation defines "campaign-related political activity" that does not count towards a group's social welfare purpose, a category that would include many routine functions of advocacy groups, such as voter registration. Treasury officials said the aim is to lay down a specific, neutral definition for political intervention, an effort cheered by many Democratic lawmakers and advocates for tighter campaign finance restrictions.
"It's the IRS scandal that pushed them to do it, but it's terrific that they're having a full regulatory process," said lawyer John Pomeranz, who serves on a committee of tax law experts advising the Bright Lines Project, which developed model rules to govern the political activity of social welfare groups. "It has to get fixed, and they recognize it."
Even though the regulation is unlikely to become final before the 2014 elections, the proposal has already set off a heated debate about what constitutes partisan activity and whether limiting political activity tramples on free-speech protections.
The battle is "going to be a knock-down, drag-out," said Ellen Aprill, a tax law professor at Loyola Law School in Los Angeles.
The angst is particularly acute among conservative groups, which have made more use of the freedom the tax code gives them to engage in campaigns.
"The phone and email exploded," said Dan Backer, an Alexandria, Va. lawyer specializing in election law who represents many nonprofit groups on the right. "We are all going to spend a tremendous amount of time and energy fighting back against this."
"The IRS is approaching this as, 'We are giving you the right to speak and you are going to speak within the confines we tell you,' " Mr. Backer added. "And that's wrong. This whole effort is simply a way to empower government to regulate speech."
Others challenge that notion, noting that groups that want to engage in campaigns can simply form political committees, which are also tax-exempt, but must disclose their contributors.
Still, critics of the proposed rule include many liberal advocacy groups, which expressed alarm that the new regulation would treat activities such as distributing voter guides and running get-out-the-vote efforts as political.
"Treasury and the IRS drew a very deep and troubling line in the sand," the Alliance for Justice, an association of more than 100 nonprofit groups on the left, said in a statement. "Though the new definitions attempt to clarify existing rules, they also create a danger to citizen participation in our democracy."
The debate is likely to lead to an examination of the fundamental role of 501(c)(4)s. In seeking comments on the proposed regulation, the Treasury Department asked a broader question: How much should groups set up ostensibly for the "social welfare" of the community get to play in politics?
The new rules propose restrictive boundaries on communications to voters close to election day, defining ads that mention a candidate or even a political party 60 days before a general election as "campaign-related." That could severely hamper the ability of advocacy groups to engage in public debate about legislation that comes up during election season, attorneys said.
But the language also suggests that issue ads that air outside of that small window would not be viewed as political, which could give groups more leeway to influence campaigns than they have now.
The regulation would also make it harder for social welfare groups to shuffle money back and forth -- a tactic that has been used by groups on the right to avoid donor disclosure.