In this post, we cover some important background information on IRS rules regarding charities and politics.
For a basic understanding of the different types of non-profits, read this post that I wrote back in January.
The type of non-profit that we are most concerned about in the “Outside the Lines” series is the 501(c)(4) “Social Welfare Organization.” While promoting social welfare, according to the IRS,
However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity.
So the question comes down to how to define “primary activity.” The IRS itself is not particularly helpful on this score. This 1995 IRS document does not give any hard and fast guidelines on what constitutes “primary activity.” Instead the IRS suggests that each case will be looked at based on the “facts and circumstances” unique to that nonprofit.
More useful are documents produced by that American Bar Association’s (ABA) Tax Section. You may recall that the current IRS scandal involving 501(c)(4)’s began on May 10th with a planted question posed to IRS official Lois Lerner. That question was asked at a meeting of the ABA Tax Section’s Exempt Organizations Committee
A 2004 document put out by that very ABA Committee sheds some helpful light on the question of what constitutes “primary” activity.
In footnote 82, it provides evidence for support for a 50 percent rule, in a public statement made by an IRS official back in 1990. The ABA notes (p. 39) that “Many practitioners believe that ‘less than primary’ means that less than 50% of an organization’s expenditures in a year.”
The ABA document indicates (p. 7) that “No percentage along any scale of measurement has been set as the dividing line between primary and less-than-primary.” It also (p. 7) states that “it is presumed that an organization must qualify for exemption during each of its tax years” although others may differ on that requirement.
On that last point, I would maintain that a non-profit must prove its compliance each and every year. It cannot average election years in with off-years to show a number under half.
Beyond the ABA, many prominent media outlets have reported on the issue and assumed a 50 percent limit on the political activity of 501(c)(4) entities.
- The Washington Post—cites a 50 percent standard (May 13, 2013)
- The Nation—cites a 49 percent rule (May 21, 2013)
- The Hill—cites a 49 percent rule (June 27, 2013)
What do I conclude? A 501(c)(4) must show every year that they are spending less than 50 percent of their spending on political activity. To avoid any confusion between a “revenue” test and a “spending” test, I use the larger number for the year whenever calculating a percentage.
Cross-posted at Bill Glahn – comments welcome.