tax forms and notesA substantial number of organizations exempt under Internal Revenue Code (Code) § 501(c)(4), and their individual officers and directors, may be subject to financial penalties if they do not file a Form 8976, Notice of Intent to Operate Under Section 501(c)(4), with the Internal Revenue Service (Service or IRS) on or before September 6, 2016.

On July 8, 2016 the IRS released a revenue procedure for implementing new statutory requirements for certain organizations that operate under section 501(c)(4) of the Internal Revenue Code. This requirement comes on the heels of the December 2015 enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

The recently released Revenue Procedure 2016-41 contains temporary regulations implementing the 501(c)(4) provisions of the PATH Act and describes the new Form 8976 and the related rules for filing it.

Continue Reading New Mandatory IRS Notification Process for 501(c)(4) Nonprofit Organizations Finally Announced

By U.S. Government [Public domain], via Wikimedia Commons
For the rest of the 2016 election season, nonprofits in Arizona can be politically active without registering as a political committee. As long as they meet basic qualifications, nonprofits can run candidate ads, support ballot measures, and even make contributions, all without the burdens of registration, ongoing reports, and disclosure of donors.

Arizona concluded its 2016 legislative session in May with the passage of an important campaign finance law, House Bill 2296. This bill mirrors one passed earlier in the session, Senate Bill 1516. Both bills exempt certain nonprofit organizations from Arizona’s definition of a political committee, but SB 1516 would have only taken effect starting in 2017. HB 2296, on the other hand, makes these rules effective in time for the 2016 election. As of June 1, 2016, nonprofits active in Arizona elections will not have to register as a political committee and will be free from the regulatory obligations that come with being a political committee.

Continue Reading 2016 Election: New Rules for Nonprofits in Arizona

MeeTtheCandidatesAlthough it appears that rules governing the political activities of 501(c)(4) organizations will be some time in coming, the IRS recently provided some new insights into how 501(c)(3) organizations can – and cannot – interact with the political world.  In an adverse determination publicly released earlier this month, the IRS looked closely at how a 501(c)(3) organization can engage in educational activities, like conventions and conferences, that involve candidates who may identify with a particular political party.

In general, organizations recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code cannot engage in what is called “political campaign intervention.”  This requirement is absolute:  as a condition of getting (c)(3) status, organizations essentially cannot be too politically partisan in nature.  For tax purposes, political campaign intervention includes any communications or activities that support or oppose one or more candidates for public office.  This includes the more clear-cut activities, like running an ad opposing a candidate or making endorsements in a particular race.  But it also can include other activities where the organization uses its resources to give one candidate an advantage over another.

In this determination, the IRS addressed one of these less obvious situations.  Here, the organization applying for recognition as a 501(c)(3) told the IRS it planned to hold symposiums of “thinkers, statesmen and opinion leaders” as its primary activity.  The organization anticipated that elected politicians, as well as candidates in the 2012 presidential race about to compete in a key primary, would be in attendance and would be speakers.  An agenda for the symposium submitted by the organization to the IRS showed that all political speakers invited were affiliated with one particular party; it also included a “Meet the Candidates” event, for attendees paying an additional fee.

In planning its symposium, the organization also internally discussed using contacts within the political party to get speakers and to increase attendance, targeting county party groups for attendees, coordinating with local college and high school groups associated with the party for events, and keeping the state party chair up to date and involved in decisions.  Continue Reading Too Close for Comfort? The IRS Gives New Guidance on 501(c)(3)s and Working with Candidates

Ron Jacobs and Larry Norton presented “Election-Year Advocacy: Maintaining Your Nonprofit’s Clear Message in Cloudy Legal Seas,” a webinar covering topics for nonprofits engaged in political activity. It included topics such as:

  • The rules that apply to 501(c)(4) and 501(c)(6) organizations and how those rules are changing;
  • How to operate a political action committee (PAC), including guidelines for fundraising and advocacy communications;
  • Specific activities that 501(c)(3) organizations can and cannot engage in, and how the proposed IRS rules for 501(c)(4)’s may impact 501(c)(3)’s;
  • Rules on coordinating activities with campaigns and political parties;
  • How successful enterprises can combine a 501(c)(3), 501(c)(4) and/or 501(c)(6) organization, a PAC, and even a Super PAC;
  • The Supreme Court’s recent decision striking down aggregate contribution limits, and how it could influence 2014 elections at the state and federal level;
  • IRS proposals to change the 501(c)(4) rules; and
  • Changes to state disclosure laws.

You can view the handout for the presentation or watch it below:

PanelOn Wednesday, April 9, at 6:00 Ron Jacobs will moderate a panel at the George Washington University Law School on the IRS’s proposed rules for political activity of 501(c)(4) organizations. Panelist include Cleta Mitchell of Foley & Lardner LLP, John Pomeranz of Harmon, Curran, Spielberg & Eisenberg, LLP, and Paul Ryan of the Campaign Legal Center. Each brings a different perspective to what the IRS has proposed and how it will affect political activities on the right and left. The event is free and open to the public.

Tasher Great Room, Burns Law Library, GW Law 716 20th St NW, Washington, DC 20052

downbutnotoutThe IRS recently denied tax-exempt status to two organizations based on their political activities. The two groups – whose names have been redacted from letters released by the agency – sought tax-exempt status under Section 501(c)(4), which is reserved for “social welfare” groups whose primary purpose is to benefit the general community.

Controversy has been swirling around campaign spending by 501(c)(4) groups. Unlike PACs and other organizations formed primarily to influence elections, a 501(c)(4) is permitted to keep its donors confidential, leading some critics to term their election-related spending “dark money.” Last year, a furor over IRS targeting of Tea Party groups mired the agency in Congressional hearings and resignations from senior officials, and appeared to paralyze the processing of applications from groups seeking 501(c)(4) status. 

In the last couple of months, however, the IRS has reasserted its authority. The IRS and the Treasury Department proposed new rules in late November, which seek to clarify when activities conducted by 501(c)(4) groups will be considered election-related. The proposed rules take such an expansive view of election-related spending that our earlier blog post characterized the agencies’ proposal as an “unsafe harbor.” The agency’s latest action to reject two applications for 501(c)(4) tax-exempt status based on purported political activities may be further evidence of revived interest in this area.

In one case, the requesting group presented sketchy plans to focus public debate and officeholders on an issue of interest to the organization. (The issue is unidentified in the released IRS materials.) According to the IRS, the group acknowledged spending about 60% of its first year’s budget on an election-year flier advocating the defeat of a candidate. The IRS also noted that the group’s website was devoted to raising money for political ads to help elect members of Congress who share the organization’s views. The bulk of the group’s spending in its second year was to compensate one of its directors, whose primary work appeared to relate to the lone flier and the group’s website. None of these activities, the IRS concluded, promote the public good and social welfare.

In the other case, the group seeking exemption under 501(c)(4) was formed to serve as a liaison between the community and one of the state political parties. (The state and party is unidentified.) The agency noted that even if an organization substantially benefits the community, it will not qualify for exemption if it also primarily benefits private interests. In this case, the group’s mission, as described in its bylaws, was to promote participation in the state party and support candidates – activities which the IRS concluded would benefit the private interest of the State party, and thus disqualify the group from 501(c)(4) status. 

It is premature to say whether these recent IRS actions portend more vigorous review of 501(c)(4) applications or merely a small step by an agency under siege to rehabilitate itself. After all, these are relatively easy targets. Neither group appears to be represented by outside counsel. The first group had very little funding and seems to have produced nothing more than a website and a single flyer. The application by the second group is not unlike one submitted in the late eighties by a school formed to train and place campaign professionals in Republican campaigns. Indeed, the IRS’s response to the second group cites a long string of rulings from the sixties and early seventies, which is perhaps intended to tamp down concerns that the agency may be looking to establish new precedent.

In any event, a staggered giant appears to have found its footing.  What the IRS does next about political activity by 501(c)(4) groups remains to be seen.

Nonprofit groups raising money in New York are required by new rules to report nationwide spending on communications that support or oppose candidates and ballot initiatives, or that simply refer to candidates within certain periods before an election. When a group spends more than $10,000 on such communications in regard to New York state or local elections, it must also itemize these expenditures and disclose donors of $1,000 or more.

The new disclosure obligations apply to nonprofits that raise funds from New York residents and thus were already required to register and file annual reports with the New York Attorney General’s Charities Bureau. According to New York Attorney General Eric Schneiderman, the rules principally target 501(c)(4) organizations that use so-called “dark money,” a term that describes political spending that is not publicly disclosed under federal or state election laws, or federal tax laws. 

Section 501(c)(3) organizations are exempt from the new disclosure requirements even if otherwise required to register and file annual reports. Membership organizations that only solicit their own members are exempt from the annual reporting requirements, and therefore are also exempt from the new disclosure obligations.


These new rules pose significant
fundraising and compliance challenges for nonprofits because of their nationwide reach, applicability to grassroots lobbying communications, and requirements for donor disclosure. 

We have prepared a client alert that addresses the new rules more fully and offers tips for compliance. See more here.

Obviously the IRS has spent a great deal of time trying to determine whether certain groups qualify for exemption under Section 501(c)(4) of the tax code. Why 501(c)(4) status matters so much is really about disclosure and not about tax revenue at all.

Unlike contributions to Section 501(c)(3) organizations, contributions to 501(c)(4)s are not deductible by the donor. Thus, the tax consequences flow to the recipient, not the donor. That is, the recipient does not have to pay taxes on its revenue. There is another part of the tax code, Section 527, that allows political organizations not to pay tax on the revenue they spend for political activities, meaning that there is very little tax difference between a 501(c)(4), which is limited in how much political activity it can conduct, and a 527, which can spend every penny it brings in on political activity.

So why does it matter which section of the tax code applies? Disclosure. To understand how we got here, a little history is needed.

The late 1990s and the rise of the 527

Rewinding to a time when we were still going to party like it’s 1999, there were major limits on a 501(c)(4)’s federal political activity. Specifically, the Federal Election Campaign Act (“FECA”) prohibited corporations from making “independent expenditures” that expressly advocated the election or defeat of candidates. Thus, most 501(c)(4)s were not permitted to make independent expenditures. In other words, although under tax law a 501(c)(4) could engage in limited political activity (as long as it was not its primary purpose), it could not do so under campaign finance law. 501(c)(4)s could, however, engage in issue advocacy, which could refer to candidates.

The IRS’s concept of campaign intervention is broader than just “express advocacy.” Thus, many groups that were engaged in activities that looked a lot like campaign intervention, even if they did not expressly advocate, chose to organize under Section 527. There were no disclosure obligations in that section of the tax code, so it really was a function of choosing which bucket the organization fit into: 501(c)(4) or 527. Even if the IRS were to challenge a 501(c)(4) on the basis that its primary purpose was campaign intervention, the result would have been to categorize it as a 527, and little or no additional tax likely would have been due.

In reality, during this time, many donors simply gave large contributions to the national political parties because they could accept “soft money.” This funded “issue ads” that were often thinly-veiled efforts to support or oppose candidates. 

527 disclosure

Over time, more and more groups organized under Section 527 and avoided registering as political committees under FECA. They did this by avoiding express advocacy in their public communications. Thus, they could accept unlimited individual and corporate funds, and not disclose their donors or their expenditures anywhere. 

Congress reacted to this perceived loophole by passing a law that required organizations claiming to be exempt under Section 527 to register with the IRS and, if they were not otherwise required to disclose their donors and expenditures (with the FEC or a state), file regular disclosures with the IRS.

Thus, even if 527s avoided registering with the FEC – which was important from the standpoint of not being subject to contribution limits of $5,000 per person per year and no corporate contributions – they would still have to disclose donors publicly.

Shortly after the 527 disclosure provisions were added, Congress enacted the Bipartisan
Campaign Reform Act
, which prohibited the political parties from accepting
soft money. Thus, the only real outlet for those who wished to make large political contributions was 527 committees.

Citizens United

In January 2010, the Supreme Court changed everything by allowing corporations to make independent expenditures. Now 501(c)(4)s could engage in express advocacy, as long as campaign intervention was not their primary purpose. And, 501(c)(4)s do not have to disclose their donors. There are still FEC disclosure obligations for 501(c)(4)’s that make independent expenditures or raise money through explicit calls to elect or defeat a candidate, but through careful crafted messages disclosure can often be avoided. 

The IRS controversy

Which brings us to why the IRS needs to know about the political activities of a 501(c)(4) organization. If the 501(c)(4) should actually be a 527, the overall tax consequences are minimal. But, the disclosure consequences are extreme. As a 501(c)(4), an organization can make independent expenditures but avoid disclosing any information about its donors. A 527, on the other hand, has to disclose all of its donors, either to the IRS or to the FEC as a super PAC (or to a state, but this post focuses on federal campaign activities). If the IRS were to deny exempt status to a 501(c)(4) and determine it should be a 527, then it may face penalties for not registering and reporting with the IRS.

In sum, the consequence of whether any of the Tea Party groups involved in this controversy satisfied the requirements of a 501(c)(4) organization or were better classified as 527s was whether their donors had to be disclosed or not. We will discuss at another time whether the tax code is really the best way to deal with disclosure issues.

On May 10, 2013, the nonprofit tax bar – and much of the country – was rocked by reports that Lois Lerner, director of the Internal Revenue Service’s Exempt Organizations Division apologized for the Service’s inappropriate flagging of conservative political groups for additional review during the 2012 election season. She made this apology in response to a question from longtime nonprofit tax attorney Celia Roady at the annual meeting of the American Bar Association’s tax section in Washington, DC. Lerner admitted that would-be tax-exempt entities that included the words “Tea Party” or “patriot” in their applications for recognition of exempt status were singled out for additional scrutiny, including burdensome questionnaires and, in some cases, improper requests for the names of their donors.

And on May 14, 2013, the Treasury Inspector General for Tax Administration released his report on the issue, concluding that “[e]arly in Calendar Year 2010, the IRS began using inappropriate criteria to identify organizations applying for tax-exempt status to review for indications of significant political intervention.” The report said that “[t]he IRS . . . identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention.” Would-be 501(c)(4) exempt organizations are permitted to engage in some political campaign intervention, but it cannot constitute the primary activity of the organization.

There has been no evidence to date that the IRS made approval or denial decisions regarding these exemption applications based on these criteria, but the fact that additional scrutiny was leveled on this basis alone is, without question, very troubling. The IRS must enforce the tax-exempt provisions of the federal tax code – especially if there are signs of abuse – but the Service has a strict obligation to do so objectively, without bias, and without regard to political viewpoints.

The IRS has undertaken major compliance projects targeting certain sectors of the tax-exempt community. Colleges and universities and credit counseling agencies are two recent examples. In fact, the IRS’ final report on its college and university compliance project was just released last month (click here to read Venable’s article on the report). In conducting such reviews, the IRS certainly had to use criteria to identify the colleges or universities, or the credit counseling agencies, to be subject to such scrutiny. Sometimes the name of an entity easily identifies itself as falling into a particular category, but sometimes it does not.

In the current firestorm, it is not at all clear how an entity’s name suggests whether it will be engaged in prohibited political activity. It is understandable that, for efficiency reasons, the IRS tried to find ways to more easily identify would-be exempt organizations that might be engaged in impermissible political campaign activity (perhaps it could have focused on those groups that checked the box on the exemption application stating  they would engage in political activities). That being said, there is no question that the manner in which the IRS went about doing so was wholly inappropriate.

There are legitimate concerns that organizations are using their 501(c)(4) tax-exempt status to engage in political activity that exceeds the current limits. Many in Congress have raised this as an issue. Thus, we can expect more attention by the IRS and others in this area.

In the end, are there any lessons for the broader tax-exempt community? Yes, but until the Treasury Inspector General’s report is digested, it is too soon to say. More to come on that front in the coming weeks. But to nonprofit attorneys like this author – someone who works very closely with the IRS Exempt Organizations Division – this is a rare instance of a very public spotlight being shined on a world that is usually reserved for the inside-baseball players that reside in Washington.

In case it has slipped your mind, the first quarter LD-2 reports are due on Monday, April 22, 2013; hopefully you are just about finished with your report. If you haven’t, remember the first quarter report offers an opportunity to consider which method your organization uses to report lobbying expenses: A, B, or C.

Methods

 

The Lobbying Disclosure Act (“LDA”) provides these options in recognition of the fact that business and nonprofit entities must also track lobbying for tax purposes, and that the lobbying and tax laws do not define lobbying the same way. While using one method might simplify things for some filers, there are other considerations. You must use the same definition for an entire year, so now is the time to choose.

Businesses and Trade Associations: Method A or Method C

Section 162(e) of the Internal Revenue Code prohibits businesses from deducting their expenses related to certain kinds of lobbying activities. In addition, Section 162(e)(3) prevents businesses from avoiding this tax by paying their trade associations do their lobbying. Thus, associations must either (1) notify their members how much of their dues are used for lobbying and therefore are nondeductible or (2) pay a proxy tax on the amount the association spends on lobbying. Unfortunately, the definitions of lobbying under section 162(e) and the accompanying regulations in 26 C.F.R. § 162-29 are not the same as the definitions of lobbying found in the LDA.

To avoid keeping multiple sets of timesheets, books, and records, to determine how much money an organization spends on lobbying, the LDA allows businesses and trade associations to use the 162(e) definition to report the amount spent on lobbying (Method C). This might make life easier, but requires more ongoing involvement with your accounting office and can result in an artificially high amount being reported on the LD-2 report, because it will include things like money spent on state lobbying and on grassroots lobbying (two often very expensive activities that are not reported when using the LDA definitions). This article gets into the weeds on the differences, but the following chart provides a basic overview of how the LDA and 162(e) definitions differ.

Chart

501(c)(3) Charities: Method A or Method B

501(c)(3) organizations have a different set of tax issues to consider: whether a substantial part of their activities are considered to be “carrying on propaganda or otherwise attempting to influence legislation.” If they are, then they can lose their exempt status or face tax penalties. As this article explains, there are several ways organizations can track their lobbying. One of those methods, known as the 501(h) election, provides a concrete set of definitions of lobbying (by statute and regulation), in exchange for specific monetary limits on the amount a 501(c)(3) can spend on lobbying. These definitions differ from the LDA definitions of lobbying.

Like the option for businesses and association to report using their applicable Tax Code definitions, the LDA allows these electing charities to choose to report using the definitions of lobbying they use when making the 501(h) election (found in Section 6033(b)(8) of the Tax Code). Only those entities that have made the 501(h) election are allowed to choose Method B. Those using the general “facts and circumstances test” must use Method A to report.

Considerations

At the end of the day, there are several factors to balance when deciding which method to use when reporting:





Scale3

•    Is most of your lobbying federal legislative branch lobbying? If so, it won’t matter much if you use your applicable tax code method or the LDA method to report, because the numbers will be similar. In that case, you can probably use Method B or C (depending on which is applicable to your organization) to simplify.

•    If your lobbying includes a lot of state lobbying and/or grassroots lobbying, the number you report using the Tax Code will likely be significantly higher than if you report using Method A. You will have to balance the ease of keeping one set of books with the potential public relations issues of having a high lobbying number.

•    If your lobbying involves a lot of executive branch lobbying, using the Tax Code will both produce a lower number and make tracking your lobbying time much easier.

Regardless of the method you choose, remember that a good tracking system should be accurate and easy to use, so that your organization produces accurate tax returns and accurate LDA reports.