Chapter 7 - § 7.5 • OTHER § 501(C) ORGANIZATIONS

• Jurisdiction: Colorado

§ 7.5 • OTHER § 501(c) ORGANIZATIONS

§ 7.5.1—In General

I.R.C. § 501(c) lists 29 different types of tax-exempt organizations. Section 7.4 focused on § 501(c)(3) organizations. This section focuses on tax-exempt organizations that fall within the other 28 tax-exempt categories of I.R.C. § 501(c). Each such organization must meet the requirements of the particular paragraph of § 501(c) under which the exemption is sought — that is, I.R.C. §§ 501(c)(1), (2), or (4) through (29).

In general, compliance with a particular paragraph of I.R.C. § 501(c) requires that the organization be organized and operated for the exempt purposes specified in such paragraph. In addition, like a § 501(c)(3) organization, the organization must generally comply with other requirements prohibiting private inurement and private benefit and requirements regarding business activities. Compare the § 501(c)(3) rules discussed in § 7.4. The type of private inurement or benefit prohibited is generally tailored to the tax-exemption category involved. See generally Treas. Reg. §§ 1.501(a)-1(c) and 1.501(c)(2)-1 through 1.501(c)(21)-1. For example, the type of private inurement or benefit prohibited will be different for a labor union (I.R.C. § 501(c)(5)) than for a social club (I.R.C. § 501(c)(7)). Also, the Code and Treasury Regulations place restrictions on the ability of some exempt organizations to participate in political campaigns or other political activities. For an extended discussion of lobbying and political activities by tax-exempt organizations, see Chapter 10 of this Guide, "Lobbying and Political Activities."

In sum, each tax-exemption category under § 501(c) carries with it its own unique benefits and operational requirements. Organizations that may fall under more than one category should thoroughly investigate the differences and choose which category best suits their needs.

The following publications are particularly helpful to organizations seeking exemption under one of the other paragraphs of § 501(c):

• IRS Publication 557, "Tax Exempt Status for Your Organization";
• Rev. Proc. 80-27, 1980-1 C.B. 677 (rules for applying for group exemption);
• IRS Package 1024, "Application for Recognition of Exemption Under Section 501(a)," "Instructions for Form 1024," and "Form 1024"; and
• Internal Revenue Manual (IRM) §§ 7.25, et seq. (Exempt Organizations Determinations Manual).

Practice Pointer
A search using the section of the organization's exempt category, e.g., "501(c)(5) or 501(c)(6)," in the Private Letter Rulings Database in LEXIS or Westlaw will generate a list of citations to IRS Private Letter Rulings concerning the specific type of organizational category of interest, including rulings determining whether a proposed arrangement would be recognized as tax exempt and whether revenue from certain activities of an exempt entity would be taxed as unrelated business income.

§ 7.5.2—Civic Leagues, Social Welfare Organizations, and Local Associations of Employees — § 501(c)(4)

Exempt Purposes

I.R.C. § 501(c)(4) describes two types of exempt organizations: (1) civic leagues and other organizations concerned with social welfare (commonly referred to as "social welfare organizations"), and (2) local employee associations. The first type is very prevalent in Colorado.

A social welfare organization will be exempt if it is organized or operated as a nonprofit organization, and it is operated exclusively for the promotion of social welfare. Treas. Reg. §§ 1.501(c)(4)-1(a)(1). The organization must engage primarily in activities to promote the common good and general welfare of the people in the community. Treas. Reg. §§ 1.501(c)(4)-1(a)(2)(i). This does not include operating a social club for the benefit, pleasure, or recreation of members or carrying on business with the general public in a manner similar to that of a for-profit organization. Id.; see generally IRM §§ 7.25.4, et seq. (Civil Leagues, Social Welfare Organizations, and Local Associations of Employees discussed in the Exempt Organizations Determinations Manual).

A local association of employees must meet two conditions for exemption: (1) all membership of the association must be limited to employees of a designated person (including corporations and other organizations) in a particular municipality; and (2) the association's net earnings must be devoted exclusively to charitable, educational, or recreational purposes. Treas. Reg. § 1.501(c)(4)-1(b). For the group to qualify as a local association, the group's activities must be confined to a particular community, place, or district; they cannot be limited only by the borders of the state in which the association is located. Treas. Reg. § 1.501(c)(12)-1(b); see also IRM § 7.25.4.14 (Local Associations of Employees).

Section 501(c)(4) organizations are subject to the same private inurement prohibition that applies to § 501(c)(3) organizations. The intermediate sanctions rules under I.R.C. § 4958 also permit the IRS to impose penalty taxes on insiders that benefit from a transaction or arrangement that violates the private inurement transaction, and organization managers that approve such arrangement or transaction. IRM § 7.25.4.1 (Overview). See Chapter 9, "Private Inurement, Private Benefit, and Intermediate Sanctions," for a complete discussion of the private inurement prohibition and the intermediate sanction rules.

Section 501(c)(4) organizations are subject to the unrelated business income tax imposed under I.R.C. § 511. See Chapter 13, "Unrelated Business Income Tax and the Doctrine of Commerciality," for a complete discussion of this tax.

Contributions to § 501(c)(4) organizations are generally not eligible for a charitable contribution deduction under I.R.C. § 170. IRS Pub. 557, at 47, but see IRM § 7.25.4.1 under "tax treatment of donations" and "volunteer fire companies" for possible exception. However, they may be deductible as trade or business expenses, if ordinary and necessary to the conduct of the taxpayer's business (note that a deduction is not allowed to the extent dues are used for political or legislative activities). IRS Pub. 557, at 47, citing IRS Pub. 557, at 49 (deduction not allowed for dues used for political or legislative activity and exceptions); see also additional requirements for disclosures that may be required at IRS Pub. 557, at 15-16 (Dues Used for Lobbying or Political Activities).

Section 501(c)(4) organizations that solicit nondeductible contributions must include a conspicuous and easily recognizable statement that the contribution is not deductible as a charitable contribution for federal income tax purposes. Failure to do so can result in significant penalties. This disclosure statement is required only if: (1) the organization normally has gross receipts over $100,000 per year; (2) the solicitation is part of a coordinated fundraising effort that solicits more than 10 persons during the year; and (3) the solicitation is made through one of the following manners: written, printed, televised, by radio, or by telephone. Id. at 15 (Solicitation of Nondeductible Contributions).

New Filing Requirement for I.R.C. § 501(c)(4) Organizations

On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The PATH Act adds § 506 to the Internal Revenue Code, which imposes a new filing requirement (enforced by penalties) on new and certain existing I.R.C. § 501(c)(4) organizations (the § 506 requirements). With this new provision, the prior strategy of "self-declaring" I.R.C. § 501(c)(4) status is no longer viable.

Under I.R.C. § 506, § 501(c)(4) organizations must file an initial notification, together with a user fee, and must provide supporting information with the first Form 990-series information return filed after submitting the initial notification.

Under regulations issued in July 2016, § 501(c)(4) organizations submit the initial notification on IRS Form 8976, "Notice of Intent to Operate Under Section 501(c)(4)." See Rev. Proc. 2016-41. The form can only be filed electronically. The IRS then responds by acknowledging receipt of the form. Organizations must file the initial notification within 60 days of being established. I.R.C. § 506(a). The deadline may be extended for new organizations for reasonable cause (I.R.C. § 506(d).); however, there is no provision for an extension for existing organizations.

The supporting information (provided with the first filed Form 990) is information supporting the organization's treatment as an I.R.C. § 501(c)(4) organization. Regulations prescribe the specific information required. I.R.C. § 6033(f)(2) (as added by PATH Act § 405(b)(3)); (T.D. 9775 and Rev. Proc. 2016-41). The supporting information is required under I.R.C. § 6033(f), as amended by the PATH Act. Section 6652(c)(1) provides the penalties for a failure to include information required to be shown on a return filed under I.R.C. § 6033(a)(1).

The PATH Act imposes a penalty of $20 per day, up to a maximum of $5,000, on organizations that fail to timely file the initial notification. I.R.C. § 6652(c)(4)(A) (as added by PATH Act § 405(c)). The PATH Act also penalizes organization manager(s) $20 per day, up to a maximum of $5,000, if after demand by the IRS they fail to provide the initial notification. I.R.C. § 6652(c)(4)(B) (as added by PATH Act § 405(c)).

Organizations organized after December 18, 2015 are subject to the I.R.C. § 506 requirements. PATH Act § 405(f)(1). Also, any existing organization that did not apply for a written determination of its I.R.C. § 501(c)(4) status by December 18, 2015, and that has not filed at least one Form 990-series return is subject to the § 506 Requirements. PATH Act § 405(f)(2). The § 506 requirements do not apply to organizations that applied for recognition of their I.R.C. § 501(c)(4) status by December 18, 2015 or to "self-declared" I.R.C. § 501(c)(4) organizations that have filed at least one Form...