Section 501(c)(4) Advocacy Organizations: Political Candidate-related and Other Partisan Activities in Furtherance of the Social Welfare

• Jurisdiction: United States,Federal
• Citation: Vol. 36 No. 03
• Publication year: 2013

Washington Law ReviewVolume 36, No. 3, SPRING 2013

Section 501(c)(4) Advocacy Organizations: Political Candidate-Related and Other Partisan Activities in Furtherance of the Social Welfare

Terence Dougherty(fn*)

I. INTRODUCTION

In the wake of the 2012 presidential election, tax and political law lawyers are left with a number of unanswered questions concerning the political activities of tax-exempt organizations. Under what circumstances may a tax-exempt advocacy organization conduct activities in support of candidates for political office and in furtherance of other partisan interests, such as political parties? How much activity of this type-if any-should be permissible? Should there be restrictions on the types of political activities an advocacy organization may undertake? For example, how directly may such an organization support partisan interests? Must partisan activities clearly be in furtherance of the organization's tax-exempt purposes? May partisan goals be a constitutive purpose of a tax-exempt advocacy organization? May a Super PAC-a political action committee that is independent of candidates, candidate committees, and political parties but is formed for the express purpose of promoting candidates for political office-form or coordinate with a tax-exempt advocacy organization?

Despite the importance of these questions, there are striking gaps in the authority of federal tax law governing the conduct of political candidate- and other partisan-related activities by tax-exempt organizations. Organizations exempt from taxation under Section 501(c) of the Internal Revenue Code of 1986, as amended (the Code), do not have a clear definition of those political activities that generally are prohibited in the case of Section 501(c)(3) organizations(fn1) and are limited and regulated in the case of Section 501(c)(4) organizations.(fn2) Section 501(c)(4) organizations-known as social welfare organizations-do not have clear guidance regarding how much of this activity is permissible and whether there are limitations on the types of these activities that are consistent with Section 501(c)(4).

Further, notwithstanding the holding of one of the most cited and decades old Supreme Court cases involving taxation, Moline Properties-which as a basic matter requires that federal tax law respect the independent tax status of corporations formed for valid business reasons, that are not a sham, and that do not act merely as an agent or instrumentality of a third party(fn3) organizations that conduct political activities do so, to some extent, at their own risk of attribution of those activities among their related Section 501(c) corporations, including a Section 501(c)(3) corporation that is not permitted to engage in those activities.(fn4)

This lack of guidance may be related to institutional discomfort within the Internal Revenue Service (IRS) and the Treasury Department with taking and defending solid stands in interpreting congressional statutes that restrict the political speech of organizations that are not operated for profit-a considerable deviation from their traditional tax collection role. Further, the statutory framework in this area is not a model of clarity. The IRS authority addressing the restrictions on Section 501(c) tax-exempt organizations' activities in the political arena primarily in the context of Section 501(c)(3)-the subsection of the Code defining charitable and educational organizations-strictly regulates the political candidate-related activities of organizations exempt under this subsection. Because most of this guidance addresses what is prohibited, it is not easily translatable into guidance addressing the quantity and quality of political activities that may be undertaken by those exempt organizations, including social welfare organizations exempt under Section 501(c)(4), which may engage in some political activities, including activities related to political candidates.

This gap has led to instances of opportunistic behavior: an “anything goes” approach to these activities by Section 501(c)(4) organiza-tions.(fn5) Based on the understanding that exempt activities must constitute the organization's “primary” activities and that political candidate- and party-related activities are not exempt activities, they take the position that as long as expenditures on these activities do not exceed fifty percent of the organization's expenditures-i.e., are less than primary-anything goes; the organization can engage in these activities regardless of the nature of the political activities and whether they are in furtherance of the organization's social welfare purposes.

The lack of clarity in this area has become more problematic as a result of recent changes in federal, and in some cases state, campaign finance law, which regulates communications and spending relating to candidates for federal and state elective office by for-profit and nonprofit entities. Prior to January 2010, federal election law generally prohibited corporations from using their general treasury funds to make contributions to and coordinate their communications with federal candidates, candidate committees, and political parties.(fn6) Corporations also were generally prohibited from using their general treasury funds to pay for communications expressing support for or opposition to federal candidates- “express advocacy”-that are made independently of federal candidates, candidate committees, and political parties,(fn7) and from funding certain broadcast advertisements aired close to elections that identify a federal candidate that neither expressly support nor oppose a federal candidate but are considered to be the functional equivalent of express advocacy.(fn8)

In January 2010, however, in Citizens United v. Federal Election Commission, the Supreme Court invalidated the federal election law prohibiting corporations from using their general treasury funds to make independent expenditures and functionally equivalent electioneering communications and, by implication, any similar state campaign finance law restrictions, thus allowing corporations to make unlimited expenditures for communications supporting and opposing candidates.(fn9) Because most tax-exempt organizations are organized as corporations, as a matter of campaign finance law, Citizens United greatly expanded the ability of tax-exempt organizations to engage in federal and state candidate-related work. This has resulted in a significantly increased interest in the extent that these organizations may engage in these activities consistent with their federal tax-exempt status.(fn10)

The extent that 501(c)(4) social welfare organizations can undertake political candidate-related activities is of particular interest. This exemption category encompasses organizations that conduct activities that “promote social welfare,” including unlimited lobbying work, and has historically included the majority of the constituency-based, tax exempt advocacy organizations in the United States: organizations that engage in work on broad social and political issues.(fn11)

Following Citizens United, a number of organizations that have obtained or are seeking tax-exemption status have been formed in order to work closely with political candidate organizations, including those political committees known as “Super PACs.”(fn12) Super PACs are federally registered political action committees that are set up and presumably operate independently of a federal candidate or party but whose purpose is making independent expenditures and functionally equivalent electioneering communications to support a specific federal candidate.(fn13) These organizations' activities have generated significant controversy and press interest;(fn14) both members of Congress and watchdog groups have questioned whether these activities are consistent with Section 501(c)(4) status, and there have been calls to regulate or at least enhance the disclosure relating to these activities.

In this Article, I refer to two categories of political activities: those related to candidates for public office and those related to non-candidate partisan interests, such as political parties. I bifurcate political activities into these two categories following the tax law framework applicable to Section 501(c)(3) and Section 501(c)(4) organizations that engage in partisan activities. Section 501(c)(3) organizations are statutorily prohibited from engaging in, and Section 501(c)(4) organizations are subject to Treasury regulations that limit their ability to engage in, activities considered to directly or indirectly support or oppose candidates for public elective office.(fn15) By contrast, activities that benefit partisan political interests not related to specific candidates for public elective office are not subject to a blanket prohibition but are regulated as activities that benefit “private” interests. The IRS has taken the position that the permissibility of these activities by both Section 501(c)(3) organizations and Section 501(c)(4) organizations should be determined through application of the “private benefit” doctrine.(fn16)

Conceptually, when it comes to determining whether an organization's purposes and activities are consistent with tax-exempt status, the basis for this bifurcation is not as solid in the Section 501(c)(4) context as it is in the Section 501(c)(3) context. Because there is no statutory...