A wide array of organizations can qualify to be recognized as exempt from federal income taxes. Most noted of late are those organizations which are structured to “promote social welfare” and which can seek tax-exempt status under section 501(c)(4) of the Internal Revenue Code (“IRC”). While the operative statutory language states such organizations must be organized and operated “exclusively” for such purpose, more than 50 years ago the Internal Revenue Service (“IRS”) effectively relaxed the standard by ruling such groups only needed to be “primarily” organized for such purposes. While it is not hard to parse “exclusively”, the IRS has never offered guidance on what would meet a test based on “primarily”. All of this happened long before political action committees (“PACs”), let alone so-called super-PACs, became a common feature of the political campaign landscape.
With every passing campaign ever increasing funds are deployed for and against particular candidates for public office. Some of such funds are expended by various campaign committees. Other funds are expended by sympathetic organizations that are required to be independent of a particular candidate but use their resources to further a particular candidate’s cause. In most campaigns how much any one individual or entity can contribute to a candidate or a political party is limited and those who collect funds to further a candidate’s campaign must disclose the names of each donor and the amounts donated. Historically, social welfare organizations have not been actively involved in campaigns and Congress has never imposed a limit on contributions or a requirement to disclose the identity of donors to such organizations. As a result, in recent years many involved in the political process have created new organizations and sought to have them recognized by the IRS as tax-exempt and the number of applications for tax-exempt status under IRC section 501(c)(4) nearly doubled between fiscal years 2009 and 2012.
Since political campaign activity itself is not deemed to be the promotion of social welfare, within the meaning of the IRC, the IRS is faced with the challenge of sorting out which new organizations have no intention to engage in any such activities from those which might be modestly so engaged from those which are created with the clear intention to circumvent the laws and rules which historically regulated political campaign activity and which accordingly would not qualify as tax-exempt under IRC section 501(c)(4). The efforts of the IRS to deal with the increased activity in this area was the basis of complaints which resulted this spring in a report of the Inspector General for Tax Administration of the Department of the Treasury and a series of Congressional hearings. While the whole story has yet to unfold, the entire episode highlights just how contentious matters can get when the subject is the funding of political activities.
Recently, the IRS created an optional expedited review process for those new 501(c)(4) organizations which have applications pending more than 4 months and which are prepared to certify that 60% or more of their activities are to promote non-political campaign related social welfare. The guidance also sets forth a clear procedure for processing the applications of those organizations which do not take advantage of the expedited process, as well as those organizations which appear not to qualify as tax-exempt under IRC section 501(c)(4).
The Department of the Treasury and the IRS are considering additions to the regulatory guidance currently available under IRC section 501(c)(4). However, it is not clear when such guidance will be available. In the meantime, anyone involved with an organization which has filed, or is planning to file, an application for tax-exempt status under IRC section 501(c)(4) should take note of the new guidance and take full advantage of the new expedited process if it applies. Organizations which do not expect to satisfy the newly-articulated 60% standard would be well advised to seek the guidance of a knowledgable tax specialist before proceeding.