The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Hugh K. Webster, Esq.
Webster Chamberlain & Bean, Washington, DC
The Internal Revenue Service has issued proposed regulations on
certain political - or politically tinged-activities by §501(c) (4)
organizations. The stated intent is twofold: (1) to make
determinations of what activities are "political" more
black-and-white; and (2) to broaden the scope of what is considered
to be "political activity" by §501(c)(4) organizations. In short,
the proposed regulations broaden the definition of political
activity to any candidate related political activity.
A number of §501(c)(4) organizations along the political
spectrum have bitterly criticized the proposed regulations as an
attempt to stifle legitimate participation in the political
process. Anyone wishing to submit written comments to the IRS on
the proposed regulations must do so no later than February 27,
WHAT THE PROPOSED REGULATIONS DO NOT PROPOSE TO
It is important to note at the outset that the proposed
regulations, if adopted, would not prohibit §501(c)(4)
organizations from engaging in any particular political activity.
That is, the IRS is not seeking to impose new prohibitions or to
declare that an activity permissible under current law should be
off-limits in the future.
Rather, what the proposed regulations seek to do is characterize
more activities as clearly "political" and prevent organizations
from structuring those activities in a manner that, under current
law, would avoid the "political" label. For many §501(c)(4)
organizations, the end result may be less politically active
501(c)(4)s due to fewer resources that can be dedicated to
political activity, but the nature of the political
activism permitted by §501(c)(4) is not changing under the proposed
However, for certain §501(c)(4) organizations, particularly
those highly active in the public policy arena, the proposed
regulations would effectively disqualify them from exempt status
under that Code section.
BACKGROUND ON (c)(4) POLITICAL ADVOCACY
Under current law, legislative activity, i.e., lobbying, is
recognized as being consistent with §501(c) (4) status. 1 It is a permissible
means of attaining social welfare goals,2 and in fact may
even be the organization's sole function.3
The same is not the case for political advocacy. IRS regulations
expressly state that "[t]he 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
This is not to say, however, that political activities are
prohibited. Promoting social welfare, i.e., "promoting in some way
the common good and general welfare of the people of the
community,"5 need only be the
"primary" focus of a 501(c)(4) organization.6 As stated in the
IRS regulations, a §501(c)(4) must be "primarily engaged" in social
welfare. As a result, political action is entirely acceptable, as
long as the organization is primarily focused on social welfare.7
THE "PRIMARILY ENGAGED" STANDARD REMAINS
The IRS is not proposing at this point to change the rule that a
501(c)(4) need only be "primarily," not exclusively, engaged in
promoting social welfare.
Nor is the IRS proposing to further define what "primarily"
means.8 Presently it is a
facts-and-circumstances analysis,9 and any number of
factors may be relevant, such as how much money is spent on
particular activities, the sources of revenue of the organization,
and the allocation of time devoted by employees or volunteers.
However, the IRS is seeking public comment on whether the
"primarily engaged" standard should remain and, if so, whether it
should continue to be applied on a facts-and-circumstances basis or
in some other manner, and therefore the IRS is leaving the door
open for change in the future in both of these respects.
THE BASIC DEFINITION OF "POLITICAL ACTIVITY" IS
As stated, IRS regulations currently describe political activity
under §501(c)(4) as "participation or intervention in political
campaigns on behalf of or in opposition to any candidate for public
office." The proposed regulations would change this definition
simply to "candidate-related political activity." This is a broader
definition because it is tied to a candidate, rather than
intervention in a campaign. The proposed regulations identify
specific political activities that would be considered
candidate-related political activities. This new definition sets
the stage for other changes intended to make the question of what
is political or not political for 501(c)(4) purposes more
CANDIDATE RELATED POLITICAL ACTIVITY
The following activities are deemed candidate related political
activities under the proposed regulations:
1. Voter Guides
Production and distribution of a voter guide would be considered
per se political activity if it merely "refers" to a
candidate or, in the case of a general election, refers to a
political party.10 Presently,
voter guides can be deemed educational, and therefore
non-political, based on certain considerations, such as the range
of topics covered, the inclusion of editorial opinion, and any
indications of approval or disapproval of candidates.11
While this characterization of voter guides as political does
not extend to candidate scorecards, and to a large degree they
would continue to be analyzed under a facts-and-circumstances test,
scorecards also likely would be considered regulated
"communications" (see section 4, below) .
2. Voter Registration and Get-Out-The-Vote
As with voter guides, voter registration and get-out-the-vote
efforts can be structured as non-political under the current
law,12 but that
would no longer be the case under the proposed regulations for
3. Candidate Appearances and Forums Prior to an
Hosting or conducting an event within 30 days of a primary
election or 60 days of a general election at which one or more
candidates in such election appear as part of the program would be
considered political under the proposed regulations.14 Presumably this
would include candidate forums, which presently can be hosted by
§501(c)(4) organizations in a manner that is not deemed political,
even if in close proximity to an election.15
Potentially troublesome aspects of this provision is that it
could include an appearance by a candidate, even when he or she is
appearing in an official capacity and even if the candidate is not
up for re-election for a year or more.
It is also interesting to note that this proposed regulation is
taken from a similar Federal Election Commission (FEC) regulation,
but omits certain exemptions recognized by the FEC, such as
communications via the Internet and candidate debates.16
4. Public Communications Prior to an Election.
Any public communication, including postings on a public
website, will be conclusively deemed a political activity if
published within 30 days of a primary election or 60 days of a
general election - if the communication refers to one or more
clearly identified candidates in that election or, in the case of a
general election, refers to one or more political parties
represented in that election.17
Communications that refer to specific candidates in close
proximity to an election are already often considered to be
political in nature by the IRS, but there are ways to avoid that
result, especially for advocacy that is ongoing throughout the
year, not just during election seasons.18 As
described above, the proposed regulations would eliminate any room
for argument with respect to such issue advocacy prior to an
election if any candidate or even party is mentioned.
This is probably the most controversial of the proposals.
Potentially any mention of a candidate is covered,
including mention in an official capacity. This could include, for
example, grassroots lobbying, mentioning of a bill with a
candidate's name, etc. It is even conceivable that the websites of
some organizations would be deemed wholly political unless shut
down prior to every federal election.
5. Other Activities That Would Be Considered
EXPANSION OF NEW (c)(4) REGS TO OTHER EXEMPT
The proposed regulations as currently written would apply only
to §501(c)(4) organizations. But the IRS is seeking comment on
whether any of the proposed regulations should extend to other
exempt organizations, §501(c)(3) organizations being the biggest
potential target. The new proposed rules regarding voter guides,
voter registration, get-out-the-vote, and issue advocacy seem the
most logical candidates for application to §501(c)(3)
For more information, in the Tax Management Portfolios, see
Webster, 450 T.M., Tax-Exempt Organizations: Organizational
Requirements, Webster, 451 T.M., Tax-Exempt Organizations:
Operational Requirements, Webster, 613 T.M., Lobbying and
Political Expenditures, and in Tax Practice Series, see
¶6520, Other Tax-Exempt Organizations.
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