The Internal Revenue Service (IRS) recently came under scrutiny for its investigation into “Tea Party” affiliated 501(c)(4) entities and their political spending. Tax-exempt 501(c)(4) entities (also known in short-hand as (c)(4)’s), such as unions and other civic leagues, can engage in limited political spending related to their promotion of social-welfare goals. The questions are: "How much political spending is too much?" and "What kinds of political spending are appropriate?"
In response to the heightened interest, the IRS and the U.S. Department of Treasury (Treasury) recently issued proposed guidance aimed at “clarifying” which conduct by tax-exempt social welfare organizations, qualifies as political activities that would not be considered to promote social welfare. The proposed guidance defines the term “candidate-related political activity,” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity. Whether this constitutes actual regulatory “guidance” or a wholesale revision of statutory laws by executive agency fiat will likely be a basis for opposition to the changes or future legal challenges.
Section 501(c)(4) of the Internal Revenue Code provides a federal income tax exemption, in part, for “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” The IRS currently applies a “facts and circumstances” test to determine whether an organization is engaged in political campaign activities that do not promote social welfare. Therefore, an organization that primarily engages in activities that promote social welfare will be considered under the current regulations to be operating exclusively for the promotion of social welfare, and may qualify for tax-exempt status under section 501(c)(4) even though it engages in some political campaign intervention. In sum, under the current rules, social welfare organizations may conduct some political work as long as it is not their main activity.
Recently, social welfare organizations funded by anonymous donors have become a big force in federal elections. According to a tally by the Center for Responsive Politics, which tracks money in politics, social welfare organizations reportedly spent $256.3 million in political spending in 2012. That spending number is up from $82.7 million in 2008. A recent IRS report relating to IRS review of applications for tax-exempt status states that “[o]ne of the significant challenges with the 501(c)(4) [application] review process has been the lack of a clear and concise definition of ‘political campaign intervention.’”
The proposed regulations would amend Treas. Reg. §1.501(c)(4)-1(a)(2)(ii) to delete the current reference to “direct or indirect participation or intervention in political campaigns on behalf or in opposition to any candidate for public office,” to state that “the promotion of social welfare does not include direct or indirect candidate-related political activity.” In defining the new term, “candidate-related political activity,” the IRS and Treasury state that they drew upon existing definitions of political activities under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments. These proposed regulations provide that “candidate” means an individual who identifies himself or is proposed by another for selection, nomination, election, or appointment to any public office or office in a political organization, or to be a Presidential or Vice-Presidential elector, whether or not the individual is ultimately selected, nominated, elected, or appointed. It is important to note these proposed regulations include activities related to candidates for a broader range of offices (such as activities relating to the appointment or confirmation of executive branch officials and judicial nominees), than the historical application of section 501(c)(4).
The proposed regulations seek to identify which activities will be considered candidate-related political activity for purposes of the regulations under section 501(c)(4). Under the proposed guidelines, candidate-related political activity would include:
- Communications that expressly advocate for a clearly identified political candidate or candidates of a political party
- Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party
- Communications expenditures that must be reported to the Federal Election Commission
2. Grants and Contributions
- Any contribution that is recognized under campaign finance law as a reportable contribution including monetary and in-kind contributions to or the solicitation of contributions on behalf of campaign, party and other political committees
- Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities
3. Activities Closely Related to Elections or Candidates
- Voter registration drives and “get-out-the-vote” drives
- Distribution of any materials prepared by or on behalf of a candidate or by a section 527 political organization
- Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties)
- Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program
The Treasury and IRS are requesting comments from the public regarding these proposed regulations by February 27, 2014. For instance, the Treasury and IRS have not yet defined what proportion of a 501(c)(4) group’s activities must promote social welfare. In other words, they have yet to determine what percentage of a 501(c)(4) group’s time and money can be spent on politics before threatening its tax-exempt status.
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