Two campaign finance reform advocates have asked the IRS to investigate the special tax status claimed by four tax-exempt organizations that are expected to play a major role in influencing the 2012 elections. The two watchdog groups: Democracy 21 and the Campaign Legal Center, are arguing that the four political groups: Crossroads Grassroots Policy Strategies, American Action Network, Priorities USA, and Americans Elect, should be required to register as political organizations, lose their tax-exempt status, and publicly disclose their donors. Currently, all four organizations are established as 501(c)(4) entities.
The laws surrounding 501(c)(4)s are convoluted. According to the Treasury Regulations, a 501(c)(4) organization is one that is operated “exclusively” for the promotion of social welfare and is “primarily” engaged in promoting the common good and general welfare of the people of a community for the purpose of bringing about civic betterment and social improvements. Generally speaking, social organizations are allowed to advocate a particular stance on a political issue as long as it is not their “primary” focus to participate directly or indirectly in political campaigns on behalf of or in opposition to any candidate for public office. Thus, the law does appear to allow an organization exempt under IRC 501(c)(4) to engage in political campaign activities if those activities are not the organization’s “primary” activity. In contrast, exempt organizations under IRC 501(c)(3) are absolutely prohibited from engaging in political activities (and may, in addition, be subject to tax under IRC 4955 if they make any “political expenditures”). Whether an organization is “primarily” engaged in promoting social welfare is determined by examining all the facts and circumstances surrounding the organization.
In reality, the law surrounding tax-exempt entities is often one giant grey area. Thus it is hard to say whether the advocates who petitioned the IRS to examine these four groups will be successful. As is often the case with tax-exempt organizations, the law is not abundantly clear on all of the activities that cause them to lose their tax exempt status. This is especially true when dealing with organizations outside the realm of 501(c)(3) legislation, the most popular and well-known of all tax-exempt entities. Of course, the law surrounding tax exempt organizations is complicated for a reason. Exemption from taxes is a powerful status that removes money from the federal coffers at a time when this county is running record deficits and even a slight failure to follow the rules may lead to a speedy revocation by the IRS, which can be absolutely devastating for the entity involved. This is why it is important to establish a relationship with a knowledgeable tax attorney before forming a tax-exempt entity as well as during its administration.