Earlier this year, while Washington was fixated on former Internal Revenue Service (IRS) employee Lois Lerner and her missing emails, her former employer quietly denied the application for exemption of an organization seeking exemption under Section 501(c)(4) for engaging in too much political activity. Final action was taken by the IRS's Appeals Office on March 19, 2014, near the height of the IRS frenzy on Capitol Hill over alleged improper IRS targeting of conservative 501(c)(4) organizations deemed to be too political. However, the original IRS decision by the IRS' Exempt Organizations Unit to deny an exemption to the group is dated May 7, 2013, during the period when Lerner was still the Director of the EO unit (she took a leave of absence beginning on May 23, 2013 and resigned on September 23, 2013). The identity of the group is unknown as the IRS document has been redacted.
Primary Activities are Political
The IRS informed the organization:
"You are not primarily operated for the promotion of social welfare of the people of the community because your primary activities are the participation in a political campaign on behalf of or in opposition to a candidate for public office."
This political activity apparently included paying for radio, television, and print advertisements, including independent expenditures, 85% of which ran during the time period before a primary or general election, and polling and public opinion research that was deemed by the IRS to be biased towards a certain candidate. The group's non-political activities included policy meetings and the development of four policy white papers, but the IRS determined these activities were not consequential in comparison to the political activities. Specifically, the IRS noted that the group expended no funds in connection with the policy meetings and the white papers were only one page each.
Section 501 (c)(4) of the Internal Revenue Code provides for the exemption from federal income tax of organizations not organized for profit but operated exclusively for the promotion of social welfare. Section 1.501(c)(4)-1(a)(2) of the Income Tax Regulations provides that an 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. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements. In addition, the regulations provide that the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate for public office.
Facts and Circumstances Test
In denying the organization exemption under Section 501(c)(4), the IRS stated that, whether an organization's primary activities are social welfare activities is determined based on all of the facts and circumstances. Rev. Rul. 68-45. All the facts and circumstances are considered when determining whether an organization claiming exemption under section 501(c)(4) has engaged in direct or indirect participation or intervention in a political campaign on behalf of or in opposition to any candidate for public office. This includes the specific factors described in Revenue Rulings 2004-6 (concerning political activities of a section 527 political organization) and 2007-41 (concerning potential political activities of a section 501(c)(3) organization). See Rev. Rul. 81-95 (citing section 501(c)(3) rulings as examples of political campaign intervention for section 501(c)(4) purposes).
When determining whether a communication is political in nature, the IRS reviews the following factors:
- The communication identifies a candidate for public office;
- The timing of the communication coincides with an electoral campaign;
- The communication targets voters in a particular election;
- The communication identifies that candidate's position on the public policy issue that is the subject of the communication;
- The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and
- The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue.
When determining whether a communication is issue advocacy (primarily focused on public policy, not politics), the IRS reviews the following factors:
- The absence of anyone or more of the factors listed above;
- The communication identifies specific legislation, or a specific event outside the control of the organization, that the organization hopes to influence;
- The timing of the communication coincides with a specific event outside the control of the organization that the organization hopes to influence, such as a legislative vote or other major legislative action (for example. a hearing before a legislative committee on the issue that is the subject of the communication);
- The communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and
- The communication identifies the candidate solely in the list of key or principal sponsors of the legislation that is the subject of the communication.
In its denial of the tax exemption, the IRS made no effort to define what the IRS regulations mean by "primarily." The denial contains no reference to the often-repeated standard that an organization is not engaged "primarily" in political activity if less than fifty percent of its resources are devoted to political activities.
Organizations that engage in too much political activity under the IRS facts and circumstances test may be more appropriately categorized as 527 Political Organizations. Unlike 501(c)(4) organizations, section 527 Political Organizations may have political activity as their primary purpose. The identity of contributors to section 527 Political Organizations generally must be disclosed while the identity of contributors to section 501(c)(4) organizations are generally not disclosed.
In December of 2013, the IRS proposed new regulations for 501(c)(4) organizations that engage in political activities. However, the proposal is controversial in the wake of the alleged improper IRS targeting of conservative organizations. In addition, those proposed regulations attempt to create new, expanded and highly criticized guidelines as to what types of activities would constitute political campaign activity by creating and defining a new concept of "direct or indirect candidate-related political activity." For both reasons, the IRS has received over 23,000 comments on the proposed regulations, and their future is unclear.
As noted above, in its denial of the tax exemption, the IRS relied upon the same overall "facts and circumstances" test that is has applied in the past. No attempt was made to re-define what constitutes direct or indirect participation in political campaigns in the manner of the proposed regulations.
Previous IRS Actions
This latest example is hardly the first time the IRS has denied an exemption application or revoked the exempt status of a 501(c)(4) organization for engaging in political activity. In fact, two groups were denied exemption under IRC section 501(c)(4) in October of 2013. In one case, the IRS denied the exemption application because the group had not established its "primary activities support social welfare." During year one, the group apparently spent 60% of their revenue on a flier that encouraged the defeat of a candidate for public office. During year two, the group apparently spent 87% of its revenue on compensating one director. In another case, the IRS denied the exemption application because the group's activities "primarily serve private interests." This group was apparently established to benefit a particular political party.
In 2011, the IRS denied the applications of three groups (Private Letter Rulings 201128032, 201128034 and 201128035) organized to train Democratic women to run for elective office because their activities were deemed to be "conducted primarily for the benefit of a political party and a private group of individuals." In 2002, the IRS revoked the exempt status of the Democratic Leadership Council because the IRS found the group primarily served the private interests of Democratic officials. However, in 2005, the U.S. District Court for the District of Columbia ruled the IRS revocation was improper.
Citizens United Decision Has Spurred Increased Interest in 501(c)(4) Organizations
The recent focus on section 501(c)(4) organizations came about because of the controversial 2010 Citizens United Supreme Court decision, which, for the first time, allowed corporate and labor union funds to be used for political advertisements that urge voters to support or oppose candidates.