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July 27, 2011 -- Campaign Legal Center & Democracy 21 Urge IRS to Issue New Regulations to Enforce the Statutory Limits on Campaign Activity by Section 501(c)(4) Organizations

Today, the Campaign Legal Center and Democracy 21 filed a petition with the Internal Revenue Service, arguing that existing IRS regulations permit section 501(c)(4) groups to make far more campaign expenditures than is allowed by the Internal Revenue Code and requesting that the IRS issue new regulations that better enforce the law.

 

Existing IRS regulations authorize section 501(c)(4) organizations to intervene and participate in campaigns as long as such campaign activities do not constitute the “primary” activity of the organization, but Section 501(c)(4) of the Internal Revenue Code establishes tax exempt status only for “[c]ivic leagues or organizations” which are “operated exclusively for the promotion of social welfare. . . .”  (Emphasis added).

According to Paul Seamus Ryan, FEC Program Director & Associate Legal Counsel at the Campaign Legal Center,  “The IRS has a duty to issue a clear set of regulations that state what type and level of campaign activity 501(c)(4) groups may engage in and maintain their tax-exempt status.  What we have seen in recent years is a proliferation of c4 political front groups that abuse their privileged tax exempt status to evade campaign finance disclosure laws.  What was once a small trickle of abuse by these organizations is now a gusher.”

“It would be irresponsible of the IRS not to move promptly to rectify this shortcoming as section 501(c)(4) groups have become the vehicle of choice for anonymous, massively funded political attack ads.  A growing number of these organizations have nothing whatsoever to do with the promotion of ‘social welfare’ and everything to do with the promotion of ‘partisan warfare,’” Ryan stated.

Democracy 21’s President Fred Wertheimer, which took the lead in drafting the petition, said “IRS regulations are improperly permitting 501(c)(4) groups to spend far more money on campaign activity than is allowed by the Internal Revenue Code and by court rulings interpreting the Code.”  

“But even under these flawed IRS regulations, we believe that organizations like Crossroads GPS, the brainchild of Karl Rove and Priorities USA, recently formed by two former Obama White House officials, are still not entitled to 501(c)(4) tax-exempt status. The overriding purpose of these groups is to influence elections, not to engage in ‘social welfare’ activities,” Wertheimer said.

The IRS Petition

According to the IRS petition, “Section 501(c)(4) of the IRC establishes tax-exempt status for “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. . . .”  (emphasis added).

IRS regulations provide that "the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office."  Existing IRS regulations, nevertheless, authorize section 501(c)(4) organizations to intervene and participate in campaigns as long as such campaign activities do not constitute the “primary” activity of the organization.  26 C.F.R. § 1.501(c)(4)–1(a)(2)(i).

According to the petition:

The “primary” activity standard established by the IRS regulation is not further defined by the IRS.  Instead, a revenue ruling explains that “all facts and circumstances are taken into account in determining a § 501(c)(4) organization’s primary activity.” Practitioners, however, have interpreted this “primary” activity requirement to mean that section 501(c)(4) organizations can spend up to 49 percent of their total expenditures in a tax year on campaign activities, without such campaign activities constituting the “primary” activity of the organization.

The claim that section 501(c)(4) groups can spend up to 49 percent of their total expenditures on campaign activity direct conflicts with court decisions holding that a section 501(c)(4) organization cannot engage in a substantial amount of  a “nonexempt activity,” such as campaign activity, according to the petition.

Court rulings make clear that a section 501(c)(4) organization cannot engage in more than an insubstantial amount of campaign activity and comply with the statutory standard for tax exempt status under section 501(c)(4).  Any “substantial, non-exempt purpose” – such as intervention or participation in political campaigns – will defeat an organization’s tax-exempt status under section 501(c)(4).

The petition calls on the IRS “to expeditiously adopt new regulations to provide that an organization that intervenes or participates in elections is not entitled to obtain or maintain tax- exempt status under section 501(c)(4) if the organization spends more than an insubstantial amount of its total expenditures in a tax year on campaign activity.”

 
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