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Analysis of IRS §501(c)(4) NPRM

Analysis of IRS §501(c)(4) NPRM. Gary S. Marx Marx and Lieberman, PLLC December 17, 2013. IRS §501(c)(4).

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Analysis of IRS §501(c)(4) NPRM

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  1. Analysis of IRS §501(c)(4) NPRM Gary S. Marx Marx and Lieberman, PLLC December 17, 2013

  2. IRS §501(c)(4) • Under the current provisions of the Internal Revenue Code, a 501(c)(4) social welfare entity may engage in political activities on behalf of or in opposition to candidates for public office without risking the entity’s tax-exempt status provided such “non-exempt” activities do not constitute the entity’s primary purpose.

  3. IRS §501(c)(4) • “Primary” has been construed in the past to mean more than fifty percent of the organization’s expenditures must have been in pursuit of social welfare purpose.

  4. Citizens United • The Citizens United decision led to a significant increase in political activity by some §501(c)(4) organizations. • The decision also led to the creation of Super PACs--§501(c)(4) organizations created specifically for political purposes.

  5. ISSUANCE OF NPRM • On November 29, 2013, the Treasury issued a Notice of Proposed Rule Making that seeks to provide a clearer definition of "political campaign intervention” for purposes of a social welfare organization. • The proposed regulations would amend Treasury Reg. §1.501(c)(4)-1(a)(2) to "provide specific political activities that would be considered candidate-related political activities that do not promote social welfare."

  6. KEY ASPECT OF NPRM • The primary effect of the proposed regulations would be to create a new concept entitled “candidate-related political activity.” • Activities falling within this definition would explicitly be deemed to not constitute the promotion of social welfare.

  7. CANDIDATE-RELATED POLITICAL ACTIVITIES • Currently, a "facts and circumstances" test is applied to determine whether an organization engages in political activities that fall outside the concept of social welfare. • In contrast, the proposed regulations explicitly defines certain political activities as "candidate-related political activities" and thus outside the category of social welfare.

  8. COVERED COMMUNICATIONS • Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.

  9. COVERED COMMUNICATIONS • 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.

  10. COVERED COMMUNICATIONS • Communication expenditures that must be reported to the Federal Election Commission.

  11. FEC REPORTABLE ELECTIONEERINGCOMMUNICATION • An electioneering communication is any broadcast, cable or satellite communication that fulfills each of the following conditions: • The communication refers to a clearly identified candidate for federal office; • The communication is publicly distributed shortly before an election for the office that candidate is seeking; and • The communication is targeted to the relevant electorate (U.S. House and Senate candidates only).

  12. DEFINITION OF "CANDIDATE" • The proposed regulations would define the term "candidate" to include: an individual identifying him- or herself as a candidate, or a person proposed by another, for nomination, election, or appointment to any public or political organization office; a Presidential or Vice-Presidential elector, whether or not ultimately successful; an officeholder subject to a recall election. • The current definition applies only to candidates for elective office.

  13. EXPRESS ADVOCACY COMMUNICATION • The proposed regulations would define "express advocacy communications" as any and all communications - be they written, printed, electronic, video, oral, etc. - that express a view (either for or against) regarding a clearly-identified candidate (by name, photograph or reference).

  14. WHAT IS A PUBLIC COMMUNICATION? • A communication would be "public" if it is made via broadcast, a newspaper, or the Internet; • Is a paid advertisement; • Or reaches (or has the intent to reach) at least 500 persons (including via mass mailings or telephone banks). • A web page with previously-existing political content that remains up during the requisite pre-election period would also meet this definition.

  15. GRANTS AND CONTRIBUTIONS • Contributions of money or anything of value to, or solicitation of contributions on behalf of, any person, is a covered political activity if such contribution is recognized under federal, state, or local campaign finance law as a reportable contribution. • Grants to Section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities.

  16. DONATIONS TO OTHER SOCIAL WELFARE ORGANIZATIONS • Organizations wishing to donate to a social welfare organization without having their donation tainted by the "political activity" label would need to (a) request written representation from the donee organization that it does not engage in any candidate-related political activity, and (b) accompany its donation with a written restriction that it not be used for candidate-related political activity.

  17. ACTIVITIES CLOSELY RELATED TO ELECTIONS OR CANDIDATES • Voter registration drives and "get out the vote" drives. • Distribution of any material prepared by or on behalf of a candidate or by a Section 527 political organization. • Preparation or distribution of voter guides that refer to candidates (or, in a general election, 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 the program.

  18. IMPORTANT PROPOSED CHANGE:NON PARTISAN POLITICAL ACTIVITY • Expansion of "election-related activities“ includes non-partisan voter registration and get-out-the-vote (GOTV) drives. • Includes preparation or distribution of non-partisan voter guides.

  19. IMPORTANT PROPOSED CHANGE:DEBATES • An "election-related activity" would be any event hosted by an organization, either on its premises or off-site, that takes place within 60 days of a general election or 30 days of a primary election, and that as part of the program includes appearances by one or more candidates.

  20. CATCH ALL PROVISION • “Candidate-related political activity" include: • Political activities paid for by the organization or conducted by the organization's officers, directors or employees acting in their official capacities, or by volunteers supervised or directed by the organization;

  21. CATCH ALL PROVISION • “Candidate-related political activity" include: • Political communications made (whether or not previously scheduled) as part of an official function or event, or as part of an official publication (including an organization's web site).

  22. CATCH ALL PROVISION • “Candidate-related political activity" include: • The creation or distribution of political communications which have been paid for by the organization. 

  23. SECTION 527 VS 501(C)(4) • The main distinction between 527 political organizations and 501 (c) (4) social welfare organizations is that political organizations are required to disclose contributions and expenditures. • If political organizations decline to disclose, they are required to pay tax at the highest corporate rate on the exempt function income.

  24. Tax Under IRC § 527(f) • Even though 501(c)(4) organizations may engage in campaign activity under the IRC, they are subject to tax under IRC Section 527(f) if they make an expenditure for “influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors.”

  25. Tax Under IRC § 527(f) • The tax is imposed at the highest corporate rate (currently 35%) on the lesser of the organization’s net investment income or amount of these expenditures. • For organizations with little or no net investment income or those making low-cost expenditures, the tax is of minimal import.

  26. Tax Under IRC § 527(f) • 501(c)(4) organizations may lawfully avoid the tax by setting up a separate segregated fund to conduct the taxable political activities. • The fund would be treated as a separate Section 527 political organization and be subject to applicable tax and campaign finance laws.

  27. NPRM QUESTIONS • Whether a similar approach to defining political campaign intervention should be adopted with regard to §501(c)(3) organizations - either in lieu of or in addition to the current facts-and-circumstances approach? • Whether any modifications or exceptions to the definition would be needed for §501(c)(3)'s?

  28. NPRM QUESTIONS • Whether the same or similar rules should be adopted for the purpose of defining §527 "exempt function activities" in lieu of the current Rev. Rul. 2004-6 "facts and circumstances" approach? • Whether the same approach to defining political campaign intervention should be adopted with regard to §501(c)(5) and (6) organizations?

  29. NPRM QUESTIONS • With regard to the "primarily" rule, what proportion of an organization's activities must be in furtherance of social welfare aims, in order to qualify as a §501(c)(4) organization? • Should the “primarily” standard should be more precisely defined or mirror the standard for section 501(c)(3) organizations (i.e., that no more than an insubstantial amount of the organization’s activities may be dedicated to non-social welfare activities). 

  30. NPRM QUESTIONS • Whether additional limits should be imposed on any or all activities that do not further social welfare concerns? • How to measure the activities of organizations seeking §501(c)(4) exemption?

  31. COMMENTS • Comments regarding the “primarily” standard and other comments concerning the proposed regulations must be received by the IRS by February 27, 2014.

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