The IRS recently examined whether a charity described in Internal Revenue Code section 501(c)(3) violated the proscription against political campaign activity by including on its Internet website candidate questionnaire and endorsement pages paid for by a Code section 501(c)(4) affiliate.  Technical Advice Memorandum (“TAM”) 200908050 (February 20, 2009).  The 501(c)(3) attempted to justify its actions with the following facts:

  • The 501(c)(3) and 501(c)(4) affiliates maintained separate Internet websites for many years, but the 501(c)(4) site experienced repeated technical problems throughout the period – it was unstable, vulnerable to hackers, and crashed often.
  • The web manager for the 501(c)(4) observed that other section 501(c)(4) organizations “shared” websites with related section 501(c)(3) organizations and recommended that all 501(c)(4) website material should be moved to and housed within the 501(c)(3) website as a separate set of web pages.
  • The two organizations sought and received legal advice regarding the operation and maintenance of a shared website.
  • The 501(c)(4) pages, which included candidate questionnaires and endorsements, were designed as a separate subset of the site and the 501(c)(4) reimbursed the 501(c)(3) for its proportional share of the website costs pursuant to a reimbursement agreement between the two organizations.

The IRS was unimpressed.  It examined the website in its entirety, noting that every web page contained a banner with the 501(c)(3) logo and that the link to the 501(c)(4) pages described that organization as the “local political arm” of the 501(c)(3).  Moreover, the 501(c)(4) web pages contained the 501(c)(3) banner with its logo at the top of the page.  Each 501(c)(4) web page also displayed all of the links to 501(c)(3) pages along the top, side, and bottom, as well as the 501(c)(3) disclaimer and copyright notices on the bottom.  Thus, for example, if a user clicked the link entitled “Support Us” or “About Us” while on any of the 501(c)(4) web pages, the “Us” was the 501(c)(3), not the 501(c)(4).

The IRS observed that, although the 501(c)(3) asserted that the design of the shared site contained separate sections (or web pages) for each organization, the only visual distinction between the layout and graphic design of the web pages designated as 501(c)(4) was that the 501(c)(4)’s logo and address appeared below the 501(c)(3) banner.

Facing an adverse decision by the IRS, representatives of the 501(c)(3) at conference “claimed that the Service was changing its view from only looking at allocation of costs between a section 501(c)(3) organization and a section 501(c)(4) organization and was now looking at overall graphic design.”  And that is exactly what the IRS did.  The IRS determined that the 501(c)(3) intervened in political campaigns by distributing campaign endorsements on its website.

Although private determinations are not precedent with respect to other taxpayers, this TAM clearly raises the alarm for all exempt organizations to review their website practices to make sure that nothing “on” the site would violate the tax rules under which they operate.  The public accessibility of websites makes them easy targets for IRS scrutiny – let the poster beware.