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Tuesday, June 4, 2013

501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws

Erika K. Lunder
Legislative Attorney

L. Paige Whitaker
Legislative Attorney

The campaign activities of tax-exempt 501(c)(4) social welfare organizations continue to receive considerable attention. These groups operate with less restriction after the Supreme Court’s decision in Citizens United v. FEC, which invalidated long-standing prohibitions in the Federal Election Campaign Act (FECA) on corporations and labor unions using their general treasury funds to make independent expenditures and electioneering communications. However, even after Citizens United, 501(c)(4) groups are still subject to regulation under FECA and the Internal Revenue Code (IRC).

Under FECA, incorporated groups are prohibited from making political contributions and are still required to establish a political action committee (PAC) in order to do so. (In contrast to independent expenditures and electioneering communications, contributions are given to a candidate or political committee). Additionally, the claim is sometimes made that 501(c)(4) groups should be required to register as political committees under FECA. This is important because political committees must raise and spend funds subject to FECA contribution limits, source restrictions, and disclosure requirements.

Under the IRC, a Treasury regulation requires that 501(c)(4) organizations have the promotion of social welfare as their primary purpose. This means two things: (1) campaign activity (along with any other non-exempt purpose activity) cannot be the organization’s primary activity and (2) a group that primarily benefits private partisan interests may jeopardize its 501(c)(4) status. Questions abound about these two restrictions and how they are applied (e.g., how is campaign activity measured?), and the IRS has been criticized for failing to issue guidance in this area.

501(c)(4) organizations are required to report information to the IRS and FEC. They are generally required to file an annual information return (Form 990) with the IRS. Information about campaign activity is reported on the form’s Schedule C, which is subject to public disclosure. While large donors are reported on the form, no identifying information is required to be publicly disclosed. Additionally, groups making independent expenditures and electioneering communications must file reports with the FEC. Only those donors giving more than $200 specifically “for the purpose of furthering” an independent expenditure are disclosed. For electioneering communications, FECA requires the disclosure of donors who contributed at least $1,000; however, if the group establishes a separate bank account, consisting only of donations from U.S. citizens and legal resident aliens made directly to the account, then only those donors who contributed at least $1,000 to the account are disclosed. A Federal Election Commission (FEC) regulation provides an exception to the donor disclosure requirement for electioneering communications. The regulation permits corporations—including incorporated 501(c)(4) groups—and labor unions making disbursements for electioneering communications to disclose only the identity of each person who made a donation of at least $1,000 specifically “for the purpose of furthering” an electioneering communication. This regulation has been the topic of ongoing litigation, Center for Individual Freedom v. Van Hollen, which is currently pending in the U.S. District Court for the District of Columbia.

Date of Report: May 17, 2013
Number of Pages: 18
Order Number: R40183
Price: $29.95

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