Ways and Means’ Subcommittee Considers Changes in Law on Tax-Exemption, Foreign Funding, and Politics

Subcommittee on Oversight members and hearing witnesses mull some potential reforms.

During the U.S. House of Representatives’ Ways and Means Committee’s Subcommittee on Oversight held a hearing earlier today about the “Growth of the Tax-Exempt Sector and the Impact on the American Political Landscape,” members and witnesses considered some potential reforms of the law governing tax-exempt nonprofit organizations, foreign funding of them, and their participation in the political process.

“Today we’d like to hear from our panel of expert witnesses about the growth and changes the tax-exempt sector has undergone as well as discuss some recent political activities of these organizations,” Oversight Subcommittee chair Rep. David Schweikert, Republican of Arizona, said in his opening statement.

I have been alarmed to read of several public accounts of large sums of money, to the tune of millions of dollars, flowing from foreign nationals into U.S.-based 501(c)(3)s and 501(c)(4)s, which then have directed these funds into influencing American politics. While U.S. law makes it illegal for foreign nationals to donate directly to U.S. candidates for office, it seems that these actors have found a loophole. This should raise eyebrows for all Americans. At the same time, I would like to emphasize that Americans have a First Amendment right to privacy when they donate to nonprofits.

In his opening statement, Ways and Means Committee chair Jason Smith said, “Foreign nationals are prohibited from directly donating to campaigns or outside political groups. However, there is evidence that some individuals are acting like a wolf in sheep’s clothing and setting up tax-exempt organizations for the purposes of affecting our political process.”

Smith also then noted, “Other billionaires have tried to influence elections through a supposedly charitable backdoor. During the 2020 election, Mark Zuckerberg donated $328 million to 501(c)3 organizations that funded state and local election offices in ways that may have helped one political party over another.”

The hearing’s witnesses were: Justin Chung, legislative attorney at the Congressional Research Service; Scott Walter, president of the Capital Research Center (where I’m a senior fellow); Stewart Whitson, legal director at the Foundation for Government Accountability; and Philip Hackney, a professor at the University of Pittsburgh School of Law.

During the almost two-hour proceeding, members of the subcommittee and the witnesses, in either their written or oral testimony, floated or endorsed several potential reforms. Among them:

  • banning foreign contributions to tax-exempt nonprofits;
  • banning § 501(c)(4) social-welfare nonprofits that accept foreign contributions from giving to outright political super PACs for a specific number of years;
  • banning nonprofit § 501(c)(3) private foundations from funding and public charities from engaging in voter-registration projects;
  • banning private contributions to state- and local-government election administration;
  • banning foreign contributions to nonprofits engaged in activities surrounding state ballot initiatives;
  • treating donations of stocks to political §§ 527 and 501(c)(4) groups the same for capital-gains tax purposes;
  • increasing appropriations for the Internal Revenue Service (IRS) to be able to enforce existing laws and regulations;
  • allowing and encouraging the IRS to formulate (c)(4) regulations of relevance to these issues; and, …
  • redesigning IRS Forms 990, including to provide more information about fiscally sponsored projects, and 990-PF.

The subcommittee’s ranking member, Rep. Bill Pascrell, Democrat of New Jersey, said he thought there was much “common ground” on tax-exemption oversight. He later said, “I think we can come to some general agreement here.”

This article originally appeared in the Giving Review on December 13, 2023.

Michael E. Hartmann

Michael E. Hartmann is CRC’s senior fellow and director of the Center for Strategic Giving, providing analysis of and commentary about philanthropy and giving. He…
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