Proposed Regs Aim to Restrict Political Activities by Tax-Exempt Organizations.
(Parker Tax Publishing December 05, 2013)

Wading into an area that has been fraught with controversy (much of it involving the IRS itself), the IRS has issued proposed regulations that would preclude the granting of 501(c)(4) tax-exempt status to organizations with certain political activities. REG-134417-13 (11/29/13).

Code Sec. 501(c)(4) provides a federal income tax exemption, in part, for civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. The regulations under Code Sec. 501(c)(4) have not been amended since 1959, although Congress took steps in the intervening years to address the relationship of political campaign activities to tax-exempt status. In particular, Code Sec. 527, which governs the tax treatment of political organizations, was enacted in 1975 and provides generally that amounts received as contributions and other funds raised for political purposes are not subject to tax.

Organizations may apply for tax-exempt status under Code Sec. 501(c)(4) if they operate to promote 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. The proposed regulations are aimed at reducing the need to conduct fact-intensive inquiries by replacing the facts-and-circumstances test with more definitive rules.

Currently, an organization exempt from tax under Code Sec. 501(c)(4) may engage in political campaign activities if those activities are not the organization's primary activity. In contrast, organizations exempt under Code Sec. 501(c)(3) are absolutely prohibited from engaging in political activities. It is problematic that Code Sec. 501(c)(4) does not define "political campaign activities"; instead, the definition and interpretation of terms used generally occurs under Code Sec. 501(c)(3). Certain people and groups have protested that organizations engaging in political activities, such as campaigning for particular candidates, should not be tax exempt.

The proposed regulations define the term "candidate-related political activity," and would amend current regulations by providing that the promotion of social welfare does not include this type of activity. The IRS also seeks comments on other aspects of the qualification requirements, including what proportion of a Code Sec. 501(c)(4) organization's activities must promote social welfare.

Prop. Reg. Sec. 1.501(c)(4)-1(a)(2)(ii) provides 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 drew upon existing definitions of political activity under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments. Under the proposed guidelines, candidate-related political activity includes (1) communications that expressly advocate for a clearly identified political candidate or candidates of a political party; (2) 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; (3) communications expenditures that must be reported to the Federal Election Commission.

OBSERVATION: The current regulations provide, in part, that an organization is operated exclusively for the promotion of social welfare within the meaning of Code Sec. 501(c)(4) if it is "primarily engaged" in promoting in some way the common good and general welfare of the people of the community. Some have questioned the use of the "primarily" standard in the Code Sec. 501(c)(4) regulations and suggested that this standard should be changed. The IRS is considering whether the current Code Sec. 501(c)(4) regulations should be modified in this regard and, if the "primarily" standard is retained, whether the standard should be defined with more precision or revised to mirror the standard under the Code Sec. 501(c)(3) regulations. The IRS is requesting comments on whether this standard should be retained.

For a discussion of social welfare organizations exempt from tax under Code Sec. 501(c)(4), see Parker Tax ¶60,510.(Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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