By Hugh K. Webster, Esq.
Webster, Chamberlain & Bean, Washington, DC
Lois Lerner, Internal Revenue Service Director of the Exempt Organizations Division, has announced that the IRS "will consider proposed changes" in the regulations governing eligibility for §501(c)(4) tax-exempt status, in particular with respect to political activities. According to Ms. Lerner, the Exempt Organizations Division will "work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance." These statements are contained in a July 17 letter from Ms. Lerner to two organizations that had petitioned the IRS to revise its position regarding the permissible level of political activity by §501(c)(4) organizations.
Section 501(c)(4) organizations have long been politically active, but several such organizations have become especially visible in the 2012 Presidential election, causing some to question the appropriateness of significant political involvement under this provision of the tax code.
Section 501(c)(4) exempts from taxation "social welfare" groups, that is, "[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare … and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes." Although the statutory language states that such organizations must operate "exclusively" for the promotion of social welfare, IRS regulations state that these organizations must only be "primarily engaged" in promoting social welfare: An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.1
Federal courts have long interpreted the statute consistently with the regulations, i.e., a §501(c)(4) organization must primarily operate to bring about social improvements.2 Though the U.S. Supreme Court has not explicitly held that the somewhat counterintuitive definition of "exclusively" as "primarily" is permissible, this has become "the applicable definition."3
Unlike §501(c)(3), §501(c)(4) has no explicit prohibition on political activities. While IRS regulations are clear that the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office,4 in fact otherwise lawful political activities will not adversely affect an organization's exempt status under §501(c)(4) as long as the primary focus remains on promoting social welfare.5
One key issue is what constitutes a "primary" activity of a §501(c)(4) organization. The traditional interpretation has been that "primary" means 50% or more, though the IRS has never actually adopted this position, opting instead for a facts and circumstances analysis.6 The view that a §501(c)(4) entity may engage in political activities as long as they do not comprise 50% or more of the total activities of the organization is based on definitions or applications of the words "primary" or "primarily" in other contexts related to tax-exempt organizations. For example, a §501(c)(3) organization will be regarded as operated exclusively for one or more exempt purposes, as required by law,7 if it engages "primarily" in activities which accomplish one or more of such exempt purposes specified in §501(c)(3),8 and the word "primarily" in this context is considered to mean more than 50%.9 There are examples of similar definitions and interpretations.10
This is second time in recent months that the IRS has looked at §501(c)(4) organizations with a possible eye toward discouraging political activism. In early 2011, it was reported that the IRS was planning to initiate enforcement actions under the federal gift tax against certain individuals who had made previous donations to §501(c)(4) organizations. This created controversy and attracted the attention of Members of Congress, ultimately resulting the IRS announcing that it would "not use resources to pursue examinations" on the gift tax issue, and if it did so in the future, it would be "prospective and after notice to the public."11
In reviewing this issue, another consideration for the IRS will be the relationship between §501(c)(3) and §501(c)(4) recognized by the courts in connections with challenges to the political and legislative restrictions on §501(c)(3) organizations. For example, in Regan v. Taxation With Representation,12 one basis for the Supreme Court upholding the restrictions on lobbying by a §501(c)(3) organization was the ability of such an organization to establish a §501(c)(4) subsidiary entity that could more freely advocate.13 Imposing additional limitations on §501(c)(4) organizations could impact that analysis.
No timetable has been given for the IRS to complete its examination of §501(c)(4) to determine if any changes are to be made.
For more information, in the Tax Management Portfolios, see Webster, 613 T.M., Lobbying and Political Expenditures, and in Tax Practice Series, see ¶6510, Charitable Organizations.
1 Regs. §1.501(c)(4)-1(a)(2)(i) (emphasis added).
2 See FEC v. Beaumont, 539 U.S. 146, 150 n. 1 (2003) (noting that a §501(c)(4) organization may engage in political activities "as long as it is primarily engaged in activities that promote social welfare"); Monterey Public Parking Corp. v. U.S., 481 F.2d 175, 176 (9th Cir. 1973) ("[U]nder Section 501(c)(4) `not organized for profit but operated exclusively for the promotion of social welfare' means that the taxpayer must be primarily engaged in promoting the common good and general welfare of the community… .").
3 Democrat Leadership Council v. U.S., 542 F. Supp.2d 63 (D.D.C. 2008).
4 Regs. §1.501(c)(4)-l(a)(2)(ii).
5 Rev. Rul. 81-95, 1981-1 C.B. 332. See also 1995 EO CPE Text, Political Organizations and IRC 501(c)(4) ("Thus, an organization exempt under IRC 501(c)(4) may engage in political campaign activities if those activities are not the organization's primary activity.").
6 Rev. Rul. 81-95.
8 Regs. §1.501(c)(3)-1(c)(1).
9 E.g., PLR 201203022.
10 E.g., Regs. §1.6033-1(g)(1)(iii) ("An organization … is primarily supported by contributions of the general public for any accounting period if more than 50 percent of its income and receipts for such period is actually derived from voluntary contributions and gifts made by the general public…"); Regs. §53.4942(b)-1(a)(2)(ii) ("An organization will be treated as being primarily engaged directly in the operation and maintenance of the described residential facilities if at least 50% of the qualifying distributions … normally made by the organization are expended for the operation and maintenance of the facilities.").
12 461 U.S. 540 (1983).
13 461 U.S. at 544.