This past March 2012, critics from both major political parties called for changes to the rules governing what qualifies as a social welfare organization, also known as a 501(c)(4) organization. A social welfare organization is exempt from federal income taxation,1 may conduct unlimited lobbying,2 and may conduct limited campaign activities.3 It is often used as a vehicle for tax-exempt charitable organizations, which generally may not conduct campaign activities directly,4 to conduct campaign activities indirectly. The proposed changes would intensify the burden on entities seeking classification as 501(c)(4) organizations.
Understanding the proposed changes first requires some background information. Section 501(c)(4) of the Internal Revenue Code, in relevant part, provides for an exemption for “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” With respect to the meaning of “exclusively,” the regulations provide “[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.”5 Campaign activities are permitted to the extent they do not constitute a primary engagement, and the organization should maintain 501(c)(4) tax-exempt status so long as it files and the IRS approves a Form 1024. By contrast, a 501(c)(3) charitable organization generally may not conduct any campaign activity,6 while a section 527 “political committee” may engage in unlimited campaign activity.7 It is not uncommon for a 501(c)(3) charitable organization to form a 501(c)(4) affiliate and for a 501(c)(4) to form a 527 affiliate. Using that structure, a charitable organization may effectively be active politically while maintaining taxexempt status. Furthermore, a Schedule of Contributors that all three types of organizations must file annually is not open for public inspection in the case of a 501(c)(4) organization. Thus, creating a 501(c)(4) organization can facilitate donor anonymity.
On March 12, 2012, a group of seven Senate Democrats led by Charles E. Schumer wrote a letter to the IRS. They requested that the IRS (i) adopt a bright line rule for what “primarily” means (and suggested that 51% is not consistent with the word “exclusively”), (ii) require 501(c)(4) organizations to “show their math” to demonstrate that their social welfare activities are primary, and (iii) require 501(c)(4) organizations to tell potential donors what percentage of a donation, if any, may be taken as a business deduction. The letter concluded that, if the IRS fails to take administrative action regarding these issues, legislation would be introduced to do so.
On March 14, 2012, a group of twelve Senate Republicans led by Orrin Hatch wrote their own letter to the IRS commissioner. They requested clarity on the Form 1024 approval process and the questions to be asked as part of that process. The letter was motivated by concerns regarding “selective enforcement and the duty to treat similar taxpayers similarly.” 17
On March 27, 2012, the House Oversight Committee launched an investigation into IRS review of Forms 1024 filed by conservative organizations. House Democrats have called on the IRS to scrutinize certain Republican-affiliated 501(c)(4)s to determine whether those organizations have engaged in excessive political activity.8
At this point, it is not clear whether the calls for action will lead to any changes in the substance of 501(c)(4) law or the procedure for reviewing and governing 501(c)(4) organizations or Form 1024s. The cries may be nothing more than political posturing against the backdrop of the upcoming Presidential election. Nonetheless, they are worth keeping an eye on because some of the changes, if enacted, could have a big impact on 501(c)(4) organizations.