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IRS Denial Of Tax Exempt Status To Political Group May Be Cause For Other Groups’ Concern

A recent decision by the IRS to revoke the tax-exempt status of Emerge America, a small political nonprofit organization, may concern larger groups, such as Crossroads GPS and Priorities USA, that have already spent millions on the 2012 U.S. presidential election and are looking to spend millions more.  The IRS decision, released last month, involved a so-called campaign school in which a partisan group provided “training” to candidates.  “You are not operated primarily to promote social welfare because your activities are conducted primarily for the benefit of a political party and a private group of individuals, rather than the community as a whole,” reads the IRS letter.

These organizations are incorporated under Section 501(c)(4) of the tax code.  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, provided that those activities are not the organization’s “primary” activity.  Note that the word “primary” appears twice in the IRS’ statement above.

The IRS has faced pressure recently over their regulation of tax-exempt organizations such as Emerge America.  Senate Democrats have urged the agency to impose limits on how much these entities can spend on politics.  Further complicating issues is the January 2010 U.S. Supreme Court decision in Citizens United, which removed restrictions on corporate and union campaign expenditures, and spurred an increase in tax-exempt spending on political campaigns.

Certainly these heavy-hitting organizations will be watching the IRS carefully.  At risk will be the groups’ tax-exempt status, which lets them collect millions of dollars from individuals and corporations while keeping their donors anonymous.  However, it is doubtful that the IRS’ attention will have any effect on the upcoming 2012 elections, so those organizations who wish to pump millions of dollars into political advertising this year will probably feel safe in doing so.