IRS Proposed Rule for 501(c)(4) Organizations May Ultimately Affect 501(c)(6) Trade Associations
On November 26, 2013, the Treasury Department issued proposed regulations that would drastically change how 501(c)(4) organizations can engage in political speech. The Department’s move is no surprise given its announcement earlier this year that it would revisit these regulations after it came to light that IRS employees had inappropriately screened groups with names that included “tea party” and “patriot.” The breadth of the proposed regulations, however, and the Department’s announcement that it is seeking comments on whether it should also apply its proposed rules to 501(c)(5) and 501(c)(6) organizations is surprising and should be of concern to trade associations.
Section 501(c)(4) of the Internal Revenue Code confers tax-exempt status on non-profit organizations that are operated exclusively for the promotion of social welfare. Under long-standing Treasury Department regulations, a group can obtain this status so long as it is primarily engaged in social welfare activities. This means a 501(c)(4) organization can engage in political activities and maintain its tax-exempt status so long as its political activities – or, in regulatory parlance, “intervention in political campaigns” – are secondary to the organization’s social welfare activities. The characterization of a 501(c)(4)’s activities as either social welfare or political intervention activities is thus critically important to determining whether an organization qualifies for tax-exempt status, as is understanding how to quantify an organization’s political activities. But neither the Treasury Department nor the IRS has ever issued clear, definitive guidelines on what activities constitute political intervention or what proportion of an organization’s activities must promote social welfare for it to satisfy the primary activity test. Instead, the IRS utilizes a case-specific facts-and-circumstances analysis. Critics of political activity by 501(c)(4) organizations argue that the lack of clear regulations enable these organizations to skirt campaign finance laws by engaging in campaign-related activities under the guise of social welfare activities.
The Department’s Proposed Regulations
The Treasury Department’s November 26 proposal would replace its vague facts-and-circumstances test for analyzing what constitutes “political intervention” by a 501(c)(4) with a more concrete test based on a new regulatory term, “candidate-related political activity.”
Under the Department’s proposed regulations, all communications that expressly advocate a view, whether for or against, a clearly identified political candidate or candidates of a political party would be considered “candidate-related political activity.” Other activities that would be considered “candidate-related political activity” include:
- Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party. This would include material posted by the organization on its website.
- Grants to tax-exempt organizations that conduct candidate-related political activities (a grantor will be exempt from this provision if it obtains a written certificate from a grantee stating that it does not engage in, and will not use grant funds, for candidate-related political activity).
- Voter registration drives and “get-out-the-vote” drives.
- Preparation or distribution of voter guides that refer to candidates or, in general elections, to political parties.
- Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of a program.
In announcing the proposed regulations, the Treasury Department also invited comments on several critical issues. First, the Department invited comments on what proportion of an organization’s activities must promote social welfare for an organization to qualify as tax-exempt under section 501(c)(4). This indicates that the Treasury Department is considering proposing a bright-line rule limiting the amount of political activity an organization can engage in without endangering its tax-exempt status (any such proposal would be subject to a notice-and-comment period before implementation).
Second, the Department invited comments on whether, and under what circumstances, material posted by a third party on an interactive part of the organization’s website, such as a blog, should be attributed to the organization for purposes of this rule.
Third, the Department invited comments on whether its proposed limits on “candidate-related political activity” should also apply to 501(c)(5) and 501(c)(6) organizations. Specifically, the Department is considering amending its regulations governing these organizations to provide that exempt purposes would not include “candidate-related political activity” as defined in the proposed regulations.
The Proposed Rules Could Affect a Broad Universe of Organizations, Including Trade Associations
While the discourse surrounding 501(c)(4) organizations usually focuses on very politically controversial organizations like Crossroads GPS and Priorities USA, the Department’s proposed regulations could affect a much broader universe of organizations, especially if it incorporates the “candidate-related political activity” definition into its regulations governing 501(c)(5) and 501(c)(6) organizations.
This is because many 501(c)(4), 501(c)(5), and 501(c)(6) organizations – including trade associations – routinely participate in activities that would not be considered “political intervention” activities under the IRS’s test, but that would be considered “campaign-related political activity” under the Department’s proposed regulations. This includes get-out-the-vote drives, distributing voter guides, and holding events with candidates near elections. Accordingly, if the proposed regulations are finalized as proposed, 501(c)(4) organizations would have to closely monitor their level of engagement in these activities to ensure that they do not cross the line and become the organization’s primary activity. And if the Department incorporates its proposed “campaign-related political activity” definition into the regulations governing 501(c)(5) and 501(c)(6) organizations, these organizations would have to similarly monitor these activities.
If the Department incorporates its proposed “campaign-related political activity” definition into the regulations governing 501(c)(5) and 501(c)(6) organizations, it could also significantly affect how these organizations communicate with their members. Take the following example: within 60 days of a general election, a trade association posts a legislative alert advocating passage of legislation sponsored by a Member of the House of Representatives who is also running for re-election. Under the current regulatory scheme, in many circumstances, the post would not be deemed “political intervention” activity. But under the Department’s proposed regulations, this post would automatically be considered “candidate-related political activity” – and thus a non-exempt activity – if it references the sponsor and if it is on the website within 60 days of a general election (or 30 days of a primary election).
And here is another example: A trade association hosts a blog on its website where third parties post comments supporting or opposing candidates. If the final regulations provide that such third party communications will be attributed to the organization that hosts the blog on its site (an issue the Department invited comments on), trade associations would have to carefully consider the risks of hosting blogs on their sites and, if a trade association decides to host one, it would need to closely monitor the level of political communications on the blog.
In sum, while the Department’s proposed regulations are getting headlines for how they will affect politically controversial 501(c)(4) organizations, the proposed regulations may wind up affecting the day-to-day operations of a far broader universe of organizations.
The Treasury Department is currently accepting comments on the proposed regulations. Comments must be submitted by February 27, 2014.
 26 CFR § 1.501(c)(4)-1(a)(2)(i).
 26 CFR § 1.501(c)(4)-(1)(a)(2)(ii).