IRS Seeks Comments on Tax-Exempt Status

January 14, 2014

Initial guidance on qualification requirements for tax exemption as a social welfare organization has been issued by the IRS and the Department of Treasury. The agencies are also seeking comments on the requirements – and expect to receive a large number of them.

“Candidate-related political activity” is defined in the new guidance and would amend current regulations by stating that the promotion of social welfare does not include this type of activity.

Organizations that operate to promote social welfare apply for tax-exempt status under section 501(c)(4) of the tax code.

What proportion of a 501(c)(4) organization’s activities must promote social welfare is also discussed. The proposed rules would restrict the ability of social welfare groups from conducting a wide range of activities, including advertisements to get out the vote.

There are a number of steps in the regulatory process that must be taken before any final guidance can be issued. A 90-day deadline for comments ends in late February, which will be followed by public hearings and review.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur.

“We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

Currently, a “facts and circumstances” test determines whether an organization is engaged in political campaign activities that do not promote social welfare. The proposed guidance includes more definitive rules and would reduce the need to conduct fact-intensive inquiries.

Under the proposed guidelines, candidate-related political activity includes:

1. Communications

• Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.
• 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.
• Communications expenditures that must be reported to the Federal Election Commission.

2. Grants and Contributions

• Any contribution that is recognized under campaign finance law as a reportable contribution.
• Grants to Section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities. (Note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).

3. 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.