Alvin S. Brown, Esq., Tax Attorney, Warns Large Donors to Section 501(c)(4) Organizations Of Serious Tax Consequences If Their Exempt Status Is Retroactively Revoked

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The IRS Is Focusing On Whether Section 501(c)(4) Social Welfare Organizations Are Being Operated Exclusively To Promote Social Welfare Or Political Campaigns.

Abuses of section 501(c)(4) organizations will likely result in the retroactive revocation of their exempt status.

In a letter dated August 6, 2012, Senator Orin G. Hatch and Senagor Charles Grassley sent a letter to Donald H. Shulman, IRS Commissioner requesting that IRS provide them with specific information as to whether it has started drafting possible changes to the Code Sec. 501(c)(4) regulations and the “exact mechanism” and time frame for effectuating any such changes.

Section 501(c)(4) of the Code provides for the exemption from federal income tax of organizations not organized for profit but operated exclusively for the promotion of social welfare.

Section 1.501(c)(4)-1(a)(2)(i) of the Income Tax Regulations provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.

Section 1.501(c)(4)-1(a)(2)(ii) of the regulation provides that the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.

Section 527(b) of the Code imposes a tax on the taxable income of certain political organizations.

Tax attorney Alvin Brown notes that in order to qualify for exemption under section 501(c)(4) of the Code, an organization must be primarily engaged in activities that promote social welfare. Although the promotion of social welfare within the meaning of section 1.501(c)(4)-1 of the regulations does not include political campaign activities, the regulations do not impose a complete ban on such activities for section 501(c)(4) organizations. Thus, an organization may carry on lawful political activities and remain exempt under section 501(c)(4) as long as it is primarily engaged in activities that promote social welfare.

Tax attorney Alvin Brown adds that to be tax-exempt as a social welfare organization described in Internal Revenue Code (IRC) section 501(c)(4), an organization must not be organized for profit and must be operated exclusively to promote social welfare. The earnings of a section 501(c)(4) organization may not inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any managers agreeing to the transaction. To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).

Rev. Rul. 67-368, 1967-2 C.B. 194 holds that an organization whose primary activity is rating candidates for public office does not qualify for exemption under section 501(c)(4) because such activity does not constitute the promotion of social welfare.

According to Tax Attorney, Alvin Brown, to the extent that 501(c)(4) organizations are intended to provide “political” benefits, they would be subject to the retroactive revocation of their exempt status and large donor contributions to them would be subject to federal gift tax liability.

According to Mr. Brown, the interest of Senator Hatch and Senator Grassley in possible new IRS regulations on the activities of section 501(c)(4) organization is a reflection of their concern that the IRS may upset the funding of these organizations during the present political campaign. Mr. Brown believes that there is substantial ambiguity in determining whether a 501(c)(4) organization is directly or indirectly participating or intervening in political campaigns on behalf of or in opposition to any candidate for public office. Nevertheless, regardless of what the IRS does or not do in examining the activities of 501(c)(4) activities, Mr. Brown cautions large donors that if these organizations are in violation of their limitations under section 501(c)(4), Mr. Brown is of the opinion that adverse decisions by the IRS will result in the retroactive revocation of the exempt status of these organization with adverse tax consequences to both the donors and the organizations.

In summary, the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax under section 527(f).

Obviously section 501(c)(4) is a difficult statute to administer because the “primary benefit” standard is largely subjective. Massive donations are being funneled to these organizations and it is clear that the IRS is concerned that these funds are being spent primarily to support the election of candidates running for political office. It would not be surprising for these organizations to be subject to IRS audits resulting in the retroactive revocation of their exempt status. Donors should be aware of this risk. My personal prediction is that some of these organizations who have been abusing section 501(c)(4) standards will have their exempt status revoked retroactively.

Alvin S. Brown, Esq.
Tax Attorney
575 Madison Ave., 8th Floor
New York, NY 10022-8511
ab(at)irstaxattorney(dot)com
http://www.irstaxattorney.com
(212) 588-1113

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Alvin Brown
Alvin Brown & Associates, LLC.
212-588-1113
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