For a year that continued to prominently feature Section 501(c)(4) organizations – in politics, news, and public discourse and debates – it seems fitting to end 2015 with a summary of recent federal legislation that changes (or, in one case, prevents changes to) the rules applicable to Section 501(c)(4) organizations. We anticipate that there will be more to come in 2016, so stay tuned for updates.
Consolidated Appropriations Act of 2016
In the wake of the recent IRS controversy surrounding exemption applications for 501(c)(4) organizations, many in the nonprofit community have been hoping for increased clarity around the types of activities in which these organizations may engage. The recently enacted Consolidated Appropriations Act of 2016 makes this prospect remote. The Act prohibits the Department of Treasury (and the IRS) from using any funds from Treasury in the fiscal year ending September 30, 2016, to issue, revise, or finalize any regulations, revenue rulings, or other guidance not limited to a particular taxpayer relating to the standards used to determine whether an organization is operated exclusively for social welfare purposes under Section 501(c)(4) (including the “candidate-related political activities” regulations proposed on November 29, 2013 that were the subject of near-universal criticism). With that, the murkiness surrounding the permissible political activities of Section 501(c)(4) organizations is likely to continue.
In other 501(c)(4) news, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”) on December 18, 2015. This new law has significant implications for Section 501(c)(4) organizations – and, in some cases, other Section 501(c) organizations as well.
First, the PATH Act requires Section 501(c)(4) organizations to notify the IRS of their formation within 60 days of their establishment. The notice must include (i) the organization’s name, address, and taxpayer identification number; (ii) the date on, and state in, which the organization was organized; and (iii) a statement of the organization’s purposes. The IRS is required to acknowledge the notice within 60 days of receipt. If a Section 501(c)(4) organization fails to timely provide the notice, it will be subject to a penalty of $20 per day, up to a maximum of $5,000 (penalties also may be imposed on organization managers in certain circumstances). Section 501(c)(4) organizations may still request determination letters from the IRS, but they will have to do so using a new, as-yet-unreleased form instead of Form 1024 (which will continue to be used by other Section 501(c) organizations seeking IRS determination of exempt status).
The PATH Act also requires existing Section 501(c)(4) that have not filed Form 1024 or Form 990 on or before December 18, 2015, to provide the notice outlined above within 180 days of December 18, 2015.
Second, 501(c)(4) organizations, as well as any other organizations described in Section 501(c), will now be permitted to seek declaratory judgments concerning IRS determinations of tax-exempt status under Section 7428. This option was previously only available to Section 501(c)(3) organizations. Now, if the IRS denies a Section 501(c)(4) organization’s application for exemption or revokes its exemption, the organization may petition a court to overrule the IRS (after the organization has exhausted all administrative remedies available to it within the IRS).
Finally, the PATH Act aligns black letter law with stated IRS policy that contributions to Section 501(c)(4) organizations (as well as to Section 501(c)(5) and Section 501(c)(6) organizations) are not subject to gift tax.