IRS Proposed Rule Change For 501(c)(4) Organziations

February 24, 2014 15:00 pm

by Nathan · 23 comments

A hat tip to Virginia Galloway, who now works over at the Faith and Freedom Coalition, for a proposed rule change by the Internal Revenue Service that would affect 501(c)(4) organizations. The sticking point with a lot of the political entities that organize under that definition is this:

Under the proposed definition, any public communication that is made within 60 days before a general election or 30 days before a primary election and that clearly identifies a candidate for public office (or, in the case of a general election, refers to a political party represented in that election) would be considered candidate-related political activity. These timeframes are the same as those appearing in the Federal Election Campaign Act definition of electioneering communications. The definition of “election,” including what would be treated as a primary or a general election, is consistent with section 527(j) and the federal election campaign laws.

A communication is “public” if it is made using certain mass media (specifically, by broadcast, in a newspaper, or on the Internet), constitutes paid advertising, or reaches or is intended to reach at least 500 people (including mass mailings or telephone banks). The Treasury Department and the IRS intend that content previously posted by an organization on its Web site that clearly identifies a candidate and remains on the Web site during the specified pre-election period would be treated as candidate-related political activity.

The proposed regulations also provide that candidate-related political activity includes any communication the expenditures for which an organization reports to the Federal Election Commission under the Federal Election Campaign Act, including electioneering communications.

My understanding is that it would change the tax-exempt status of these organizations who sent out communications material about the election within 60 days of the election. So, things like voter guides, candidate scorecards, etc. that a lot of political organizations, both conservative and liberal, would fall into this new definition. The IRS is currently taking comments on the proposed rule change. The deadline for comments is this coming Thursday (2/27). You can take a look at the new regulation itself over at Regulations.gov. The Faith and Freedom Coalition has its own form to post a comment against the rule change over at DoNotSilenceUs.com.

Congressman Tom Price (R-GA-06) has an op-ed on the matter in the Washington Examiner (the full text below the fold):

What happens when one voices opposition to “big government?” Under President Obama, you may be targeted by the Internal Revenue Service.

They will audit you, show up at your place of employment and sic other executive agencies on your family or business.

Now, the Obama administration intends to unilaterally modify the tax code in further efforts to silence political speech.

In November, the IRS announced that it would completely transform the 501(c)(4) classification used by groups organized for the purposes of “social welfare.”

From veterans’ organizations to civic education programs, many important nonprofits fall under this designation.

Currently, contributions to these organizations are not tax deductible for their donors, but these groups are not required to pay taxes to the U.S. federal government.

These nonprofits are allowed to participate in the political process, within limits, and typical activities include voter education, advocacy and holding town halls. Many free market groups file under this classification.

The new rules would virtually halt such activities. Plus, the IRS would require 501 (c)(4) non-profits to pay taxes, knowing full well that these groups cannot afford to do so.

Their intent is to force groups into reclassifying under a different category of the tax code, as 527 non-profits. The 527 groups are not taxed on their donations, but they are required to disclose their donors to the Obama administration.

Conservative groups would be forced to choose: Change their classification to a 527 non-profit and open up their donors to abuse at the hands of Washington bureaucrats, or shut down all-together because they can’t afford the taxes levied against them if they remain a 501(c)(4) organization.

The Obama administration argues that the current rules governing 501(c)(4) groups are too complicated for them to administer properly.

Their complaint is pretty perplexing, considering the rules governing these non-profits aren’t new. In fact, they were established in 1959. Fifty-five years seem like plenty of time for the IRS to figure out how to regulate nonprofits.

Unsurprisingly, such changes to the IRS code won’t affect a key Democrat political beneficiary — labor unions.

These groups, while nearly identical to 501 (c)(4) non-profits, fall under the 501 (c)(5) classification. Their regulations would remain untouched in this IRS overhaul, so they would be free to continue politicking as they have in years past.

This is an obvious political move by the Obama administration, as labor unions contribute the vast majority of their political donations to Democrats.

What can be done to stop this? So far, tens of thousands of patriots have registered concerns by submitting public comments to the IRS. Freedom-loving Americans refuse to be silenced.

In the meantime, congressional Republicans are working legislatively to prevent the IRS from silencing political dissent through manipulation of the tax code by executive fiat.

This week, the U.S. House of Representatives is voting on a measure that would prohibit the IRS from implementing its proposed new regulations on tax-exempt groups for one year.

This will give Congress the ability to continue its investigation into the IRS targeting scandal and long-term oversight over the agency.

Sadly, this is just the latest in the never-ending saga of Obama’s executive overreach and use of the federal government to punish those with whom he disagrees.

Public engagement and the Republican resolve are critical to fighting it. Together, we can stop this government abuse.

Rep. Tom Price, M.D. represents Georgia’s sixth congressional district. He is vice chairman of the House Committee on the Budget, and a member of the House Committee on Ways and Means, which has jurisdiction over the IRS.

DavidTC February 24, 2014 at 4:09 pm

These nonprofits are allowed to participate in the political process, within limits, and typical activities include voter education, advocacy and holding town halls. Many free market groups file under this classification.

No, they *aren’t* allowed. Or, rather, they aren’t *supposed* to be allowed.

Here are the 501(c)(4) rules: Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

Their complaint is pretty perplexing, considering the rules governing these non-profits aren’t new. In fact, they were established in 1959. Fifty-five years seem like plenty of time for the IRS to figure out how to regulate nonprofits.

Well, there *was* a way. The IRS would ask detailed questions about how the 501(c)(4) intended to use the money.

Sadly, conservatives decided to pretend that the IRS was only asking the questions of conservative groups (Instead of everyone) and decided to make a ‘scandal’ out of it. So instead of the IRS making vague decisions about spending the money, the legislature has decided to make specific laws about it.

These groups, while nearly identical to 501 (c)(4) non-profits, fall under the 501 (c)(5) classification. Their regulations would remain untouched in this IRS overhaul, so they would be free to continue politicking as they have in years past.

Yeah, all those unions will keep being allowed to not disclose their donors…oh, wait. Union memberships are, in fact, public record.

‘Hey, let’s whine and complain that we might have to do the same thing as everyone else has to do WRT to politicking…disclose who pays our bills.’

Incidentally, unions are not in any respect ‘nearly identical’ to 501(c)(4)s. There are literally thousands of pages of law controlling how unions may be created and what they may do.

But here is the best line:
In the meantime, congressional Republicans are working legislatively to prevent the IRS from silencing political dissent through manipulation of the tax code by executive fiat.

That’s right. Literally admit to lawbreaking behavior by people to question why we need a law. 501(c)(4) organizations are specifically not allowed to be political. They are for ‘charitable, educational, or recreational purposes’.

If you want to be political, you must register as a 527. Which, incidentally, let us not forget, also does not pay taxes. The only reason anyone wants a 501(c)(4) is to allow donors to remain anonymous.(And before anyone asks, I know that also happens on the left, a little.)

Harry February 24, 2014 at 5:48 pm

Why not just simplify it and move all 501(c)(4) and 501(c)(5) to Sec. 527, and take the limits off contribution limits in accord with the 1st Amendment? There is no constitutional basis for disclosure of membership rolls.

DavidTC February 24, 2014 at 7:23 pm

Why not just simplify it and move all 501(c)(4) and 501(c)(5) to Sec. 527, and take the limits off contribution limits in accord with the 1st Amendment?

Erm, if you want to remove all restrictions on union behavior you’re going to have to work fairly hard to convince the Republicans of that.

I rather suspect you’re thinking of other things, or trying to see some sort of difference that is not there. The fact that the IRS tax definition of a union is 501(c)(5) does not actually mean a union is regulated like, or operates anything like, a 501(c)(4). (Either how they are supposed to operate, or how they have been recently started being used as political entities despite not being supposed to be.):

However, there’s a perfectly good argument we don’t need the 501(c)(4) as a classification at all. There’s almost nothing that should be acceptable under that a 501(c)(4) that would not be acceptable under a 501(c)(3), aka, ‘charities’, which is where actual ‘charitable, educational, or recreational’ institution normally hang out.

The sole advantage of a (4) is hiding donors, and there’s the rather singular disadvantage is that donors can’t deduct the donation from their taxes like they can with a (3), so the only reason to make (4) is to create a ‘charitable, educational, or recreational’ institution operated by unknown people, which is complete nonsense to encourage as government policy.

There is no constitutional basis for disclosure of membership rolls.

Erm, yes there is. Non-profits are fictional people jointly owned by their members. The government has just as much right to know the membership rolls of a non-profit as it does to know who owns stock in a corporation. Those are, in fact, the exactly same thing.

Well, except in corporations you can hold multiple pieces of stock, and thus have multiple slivers of ownership, whereas you’re usually only allowed to be a member once in a non-profit and thus all members have exactly the same size of the pie. Also you can’t sell your ownership and you probably have to re-buy it every once in a while via ‘dues’. And it’s illegal to issue dividends. So the specifics vary, but they are conceptually the same thing…shared ownership of a fictional person.

If you want the government to recognize a fictional person, you have to be willing to explain, to the government, who owns that person. If the government didn’t know the members, it would be completely impossible for a court to figure out who was actually in charge if there was a dispute, for example, or to force an board election.

This applies to basically all non-profits that are ‘democracies’ of members, like all unions and all 501(c)(3)s and 501(c)(4)s. (Although often the ‘board’ and the ‘members’ are the same group of people. Aka, the membership is so small they run it directly.)

What I think you mean to say is there’s no constitutional basis for disclosure of donors. I’m not sure why you think that, though.

The government has a constitutional right to issue a tax on income. (Duh.) A non-profit is a fictional person, and thus their income can be taxed. (A fictional person created voluntarily, it must be pointed out, with the intent to be a fictional person. This isn’t the government just deciding it is one.)

And, of course, if the government so chooses, it can offer certain situations that would cause the fictional person to not be taxed if they voluntarily did them. Such as operating for the purposes of charity, or disclosing donors.

Harry February 24, 2014 at 7:51 pm

The government has just as much right to know the membership rolls of a non-profit as it does to know who owns stock in a corporation. Those are, in fact, the exactly same thing.
Please continue. I have no knowledge of the sources of your assertions.

Posner February 25, 2014 at 9:53 am

Harry, the simple answer is to prevent tax fraud. (One of) the purpose(s) of disclosing contributors to 501(c)(3) is that such a contribution is tax deductible, thus you don’t want people claiming on tax returns donations to bogus organizations, or organizations they never contributed to. Same logic applies to corporate stock , and to why 501(c)(4) DON’T have to disclose (the contribution isn’t tax deductible).

Harry February 25, 2014 at 10:24 am

David TC is saying there’s constitutional basis for disclosure of donors. If we’re talking 501(c)(3) then I agree, because if you take the deduction cheese you have to leave the marker. But 501(c)(4) or 527 should not have donor identity a matter of public record. These are special purpose nonprofits and not political parties, at least not under traditional rules. Given the track record of this administration I’d really not want my ID exposed any more than necessary. Of course John McCain and a few others have eliminated some benefits for political parties, for a reason sure, but with also with unintended consequences as we are seeing.

DavidTC February 25, 2014 at 10:54 am

I’m…not really sure how I didn’t explain it well enough.

Corporations of all sorts, even non-profits, are fictional people owned by other people. For-profit corporations generally tend to do this via ‘stock’. Non-profit ones tend to do it via membership, which is sorta like stock but slightly different. (The biggest practical difference is that membership tends to be singular, whereas stock tends to be multiple. You can have a stockholder with a lot of stock, and thus a lot of votes…but members each only get one vote.)(1)

So the members of a non-profit are the equivalent of stockholders. They elect a board to run the place. But even with a board, the members have ultimate authority. The law generally requires a member meeting at least once a year, with member notifications, just like stockholder meetings are required. (Some non-profits are set up where there’s only 9 members or whatever and they are the board, simplifying all this.)

Anyway, the government can require this information from a non-profit because the non-profit, by the mere existence of the thing, is a fictional entity run by the members. The government has the right to know who is supposed to be in control of the fictional person, because otherwise it can’t figure out who is authorized to behave on behalf of the fictional person.

Otherwise, I could walk up to the nearest Tea Party (Which generally are a 501(c)(4)s, although they really shouldn’t be. Like I say, we need to clear the political groups out of that.) and assert that I was the sole member, and had just held an election and put myself in charge. Then I could spend the corporate money on Karl Marx books to distribute. If the government could not tell who the actual members were, my claim of control of the corporation would be just as valid as theirs.

This applies, right now, to 501(c)(4)s. The government ask can who their members are, the people who have voting power in the organization. It even applies to 527s, the actual place for political groups. Although most 527s do that ‘we only have a few members and they are the board’ structure, and thus the government already knows who the members are. (The board composition of a corporation must be filed with the state secretary of state every time it changes.)

Where 501(c)(4)s are special, and why political groups want to be in them despite not being allowed there, is that they are allowed to accept anonymous donations. As opposed to a 527s, which must disclose their donations.

And, it must be pointed out, 527s don’t have to pay any taxes other there either. The sole advantage to operating as a 501(c)(4) instead of a 527 is to not disclose donors, especially as, in a 501(c)(4) you have to spend all that time and effort pretending you’re not a political organization.

1) An interesting fact is that a lot of differences are defaults under state law, and a lot of this actually can be overridden in the corporate bylaws. It might actually be possible to create a non-profit ‘membership’ that operates almost exactly how stock does, where people can buy and sell it. Although a major difference that can’t be overridden in the law is that non-profits can never issue anything that looks like dividends.

Harry February 25, 2014 at 11:32 am

We have a philosophical difference. I’m not a statist. Government has no business knowing the membership of private organizations or private corporations, absent compelling grounds for discovery. Government is fundamentally corrupt and will ultimately abuse such knowledge.

DavidTC February 25, 2014 at 12:13 pm

Government has no business knowing the membership of private organizations or private corporations, absent compelling grounds for discovery.

Except that the government has ‘compelling grounds for discovery’ trivially. For example, if I want to know who are members of a local Tea Party, I simply fill out a petition for a Tea Party member meeting with just my name on it demanding a called member meeting, and turn it in to get a meeting, and they respond that it doesn’t have the required percentage of members that have signed it (And that I’m not even a member.), so I file suit in the local court asserting that I am a member, and in fact the only member. And, tada, they have to hand over their member list to the court to demonstrate that I’m not.

Or I just skip all that, call my own member meeting, elect myself a board member, and call the police demanding they get off my property and stop using my bank accounts.

You can’t keep something a secret when the government needs to know it to enforce property rights. Asserting that an organization has the right to keep secret who owns it is rather akin to asserting that it is legal to keep secret who owns a piece of real estate. Yes, you could somehow set things up that way, but it is trivial for anyone at all to set up a situation where the court needs to know that, for example just by someone disputing ownership. And it is even more trivial for the government to learn.

And that’s not even addressing the circumstances where the government needs to know in advance. For example, if all the organization’s officers die or have gone missing, the government has to call a meeting to elect new ones, which they can hardly do if they have no idea who the members are.

Harry February 25, 2014 at 1:32 pm

Wow, you wrote all that to state what I had already said, to wit – absent compelling grounds for discovery. What else you have to share today?

DavidTC February 26, 2014 at 3:08 pm

Except that ‘compelling grounds for discovery’ is something that literally any random person can force a non-profit to have to disclose by filing a single piece of paper with the state secretary of state.

So if the government really wants to, as you have decided they are doing in your imagination, find this out so they can punish people, it takes approximately no effort for the government to create circumstances in which they would have to do so. All they have to do is find some random human to dispute their membership, and they have to provide their membership, and suddenly that list is now in open court.

And, hell, that’s ignoring the fact that the state secretary of state himself could wait until they file a change in their directors (As all corporations have to file by law) and say ‘I do not believe that election was valid. Please provide a list of all your members and the ones that voted in this election so I know this is valid.’

That is exactly the job of a state secretary of state.

Pretending it is possible to keep voting ownership of a corporation, non-profit or otherwise, secret from the state secretary of state is complete nonsense and indicates you have very little knowledge of how corporations operates.

It is the job of the government to make sure that corporations remain in the hands of the people who own them, and that impostors and thieves aren’t running around using their assets willy-nilly. To do that, governments, tada, have to know who actually does own them.

And I have no idea why you would think attempting to hide that would be a good thing. It would be like someone who rents out apartments attempting to hide who owns the apartment building from the government. That is not something that can actually happen in any reasonable way.

Harry February 26, 2014 at 3:59 pm

Membership information should be kept private from the government and other parties, unless there are compelling grounds and cause of action as found by a court, in which case normal discovery procedures apply. Such action should require open and proactive process.

DavidTC February 27, 2014 at 3:53 pm

I really have no idea why the hell you’ve decided to fixate on this, but it is still complete nonsense.

More to the point, it is perhaps worth pointing out that in the circumstances we are talking about, aka, political groups, they are usually not ‘members-elect-a-board’ non-profits. They are run by all three (or seven or eleven or whatever) members, with membership being invite-only, and the entire membership makes up the board.

Aka, political non-profits tend to be tiny invite-only direct democracies, instead of the representative democracies of a local theater or pro-literacy non-profits or whatever, where lots of members elect a smaller board, and anyone can join upon payment of dues.

As the board members are generally officers of these corporations, they must, of course, be registered with the state when they change. Period.

If you, completely nonsensically, want to argue there should be some sort of bar to keep the government from knowing the membership (Despite the fact that, as I pointed out, while this bar technically exists, it is so incredibly low it can be reached by trivial pretext on the part of anyone.), you should be aware that such a bar does not, and can not, exist at all for knowing the *board* of a corporation, and in the political groups we’re talking about the board usually *is* the entire membership.

The political groups we’re talking about, the reason people are misusing 501(c)(4)s despite them not supposed to be political, are used to hide the identity of their donors, not of their members. (Being under 501(c)(4) would not help hide their members at all, pretending that was even possible.) Their ‘members’ tend to be, in their entirety, the X people listed as being the board of directors.

Harry February 25, 2014 at 1:35 pm

The government is supposed to have only the rights granted by the people. I interpret that narrowly.

xdog February 24, 2014 at 7:13 pm

Thanks, DavidTC.

Bull Moose February 24, 2014 at 8:10 pm

These changes are very much needed! It’s sad that these groups get away with a tax exempt status to be able to impact elections. Talk about abusing the tax code…

DavidTC February 25, 2014 at 12:25 pm

They’re actually supposed to have tax exempt status. They’re just supposed to have it under the 527 section of code, not the 501 section.

This actually makes what they’re doing even worse. It’s not even to save money, it’s just to keep who’s financing them a secret. To do that, they end up abusing a section of the code intended to allow anonymous charity work. (For things like needle exchanges, or providing halfway houses to ex-cons. Or in the past, things like minority education, or whatever. Charity stuff that people might not want publicly associated with them.)

Rick Day February 24, 2014 at 9:32 pm

but if you have nothing to hide….

last audit actually found more money for us. like four figures. Good to have an accredited professional for a spouse.

So I guess it’s THANKS OBAMA?

Rick Day February 24, 2014 at 9:32 pm

what happened to George Childi?

Painterman February 24, 2014 at 11:03 pm

Well we can all rest assured that the IRS would never misuse any information divulged to them to try and intimidate donors or harass them with audits or such thug tactics like that so this is all just much ado about nothing now isn’t it? (sigh & roll eyes heavenward)

Blake February 27, 2014 at 11:13 am

Thanks for the thorough takedowns, DavidTC. If rational, well-supported arguments won the day, this discussion would be over.

objective February 27, 2014 at 8:22 pm

a couple of add-ons for the discussion..
now, i am an attorney for non-profits, but i am nowhere near the best at it :)
also, i don’t know the sixty years of history of some code and regs.
and i’m not really sure if i understood or correctly read every prior post.
last disclaimer: this is not intended as legal advice.
so- clarifications: c3′s do not report contributors/donors any more than c4′s. just total receipts. also total receipts from membership dues and broad categories of income. shoot, some c3′s (religious orgs in particular) don’t even have to file tax returns. membership is not mandatory, or even so common, in c3′s. most c3′s with members tend to be religious orgs, who vote for their Boards. most c3′s are run by Directors, who i would not call members, though they are Members of the Board. membership usually means non-Directors. membership should never be traded for anything of value. members should not even receive anything significant of value, but there are a number of guidelines about this.
so why do c4′s exist? one possible difference (again not knowing the full history): you can not get c3 exempt status if all your income is based upon membership dues. it is limited, and there are 2 different income-type tests. but most c3s get their status from the predominance of public contributions. c4′s on the other hand, i believe, are designed to be primarily club- or member-based, so may not have that limitation.
why does the president say it is hard to regualate c4′s? becuase the law limits c4 spending on electioneering to “substantial” amounts. despite litigation, that is hard to define. and since many would say “substantial” means non-trivial, it certainly kind of rules out elecitoneering activity broadly. electioneering is the domain of 527′s and the FEC.
should member lists be disclosed? for any electioneering communications, i certainy believe so. strong strong public interest in knowing who’s trying to influence you. free speech should not be anonymous when anyone is trying to convince you to vote, or even buy anything. basic protectino against fraud.
shoudl c3′s or c4′s have to disclose their members. i don’t think so, because of any sort of McCarthyism. there was a supreme court case- at least- that protected membership identities to protect freedom of association. but, the difference between freedom of association and protecting the public from fraud and anonymous electioneering (or election-racketeering) is why c4′s are not properly political orgs.

objective February 27, 2014 at 8:44 pm

oh, and it doesn’t look like things like voter guides are endangered under the new reg. makes sense, they are c4 activities as long as they are strictly educational. it’s taking a side on an issue or candidate that makes it electioneering.

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