On Tuesday, November 26th, the Internal Revenue Service (“IRS”) announced the release of proposed regulations that seek to provide guidance to tax-exempt social welfare organizations and entities seeking such status regarding the boundaries of proper political engagement under Internal Revenue Code Section 501(c)(4) and its associated Department of Treasury regulations. The newly-drafted guidelines, which have been submitted for public review and comment, appear to be a concerted first-step by the IRS to clarify the presently ambiguous legal framework governing the limits of 501(c)(4) political conduct. Unfortunately, however, the proposed rules (as presently constructed) appear poised to generate just as many questions as answers for 501(c)(4) organizations looking to navigate the federal compliance gauntlet.
Under the current provisions of the Internal Revenue Code, a 501(c)(4) social welfare entity may engage in political activities on behalf of or in opposition to candidates for public office without risking the entity’s tax-exempt status provided such “non-exempt” activities do not constitute the entity’s primary purpose. For decades, however, ascertaining the difference between non-exempt political engagement and exempt political engagement that promotes social welfare has been left to a subjective “facts and circumstances” test. Reliance on this amorphous standard has made it extremely difficult for 501(c)(4)s to assess with any degree of accuracy the limits of permissible political engagement under federal tax law. In response to this and other public policy concerns, the present IRS proposals seek to implement a bright-line rule for identifying specific types of non-exempt political conduct that cannot constitute the primary purpose of a 501(c)(4) organization.
Limitations on “Candidate-Related Political Activity”
To this end, the draft IRS proposals seek to revise portions of the current Treasury regulations to establish a specific category of conduct, termed “candidate-related political activity”, which is expressly excluded from qualifying as exempt, social-welfare activity when undertaken by 501(c)(4) organizations. This new classification of 501(c)(4) conduct, which is broadly defined in the recently-submitted regulatory amendments, encompasses a wide range of political engagement activities, including many traditionally understood to be exempt under present law. For example, the new IRS rules consider the following forms of political engagement as candidate-related political activity:
- non-partisan voter registration drives;
- non-partisan “get-out-the-vote” campaigns;
- the preparation and distribution of voter guides that merely refer to specific candidates or political parties; and
- hosting events involving candidates (including debates) within 60 days of a general election (or 30 days of a primary election).
While it is not clear whether these particular restrictions will survive to the final iteration of the proposed regulations, it is certain that defining such activities as non-exempt would drastically change the political engagement playing field for 501(c)(4) entities and curb their ability to engage in even non-partisan, politically-related activities that further their overarching social welfare goals.
In addition to defining the above activities as non-social welfare promoting, the proposed IRS regulations also seek to classify the following conduct as non-exempt, candidate-related political activity:
- communications that are made within 60 days of a general election (or 30 days of a primary election) that clearly identify a candidate or political party;
- communications or expenditures that must be reported to the Federal Election Commission; and
- grants and contributions to Section 527 political organizations and other tax-exempt entities that conduct candidate-related political activity.
The first two categories of behavior, designed to capture electioneering communication and independent expenditure activities undertaken by 501(c)(4)s, will limit the ability of social welfare organizations to engage in candidate-related, issue advocacy communications close to elections. Paradoxically, however, they may also make 501(c)(4) organizations a more attractive vehicle for candidate-related, public policy communications early in an election year. For example, social welfare organizations that might otherwise have been weary of funding politically-tinged, issue advocacy communications several months before a primary might instead find safe harbor in engagement outside of the proscribed 30-day and 60-day windows.
If implemented as currently drafted, the final category of conduct classified above as a candidate-related political activity – grants and contributions by 501(c)(4)s to other politically-engaged non-profit organizations – might also severely limit the ability of many social welfare entities to aid the public policy activities of like-minded groups. Specifically, the proposed regulations would treat all grants and contributions (including in-kind donations and other volunteer support) made by 501(c)(4)s to other tax-exempt organizations as non-exempt political activity if the recipient organization engages in any form of candidate-related political activity. This would be a substantial departure from present IRS regulations and would undoubtedly chill inter-organizational grant making between politically-oriented non-profits. Tax-exempt organizations of all types should be mindful of how this regulatory amendment, if instituted, could affect their overall operations.
Finalization of Regulations and the Potential Impact on Other Types of Tax-Exempt Entities
In light of the new ground being broken by these preliminary regulations and their potential effect on the already-ambiguous legal standards for politically-active 501(c)(4)s, the Treasury Department will undoubtedly be receiving a wide range of public comments over the next few months concerning the contents and application of the proposed rules and guidance. Regardless of how those comments shape the final regulations implemented by the IRS, 501(c)(4) organizations need to be prepared for what lies ahead and begin developing sensible policies and procedures to minimize future risk associated with political engagement. Likewise, 501(c)(3) charities, 501(c)(5) labor organizations, and 501(c)(6) trade associations need to be weary of how the finalized regulations will influence future IRS treatment of their political activities.