The Real Story Behind 501(c)(4)s and 527s — Part I

by Kellye

Due to the current IRS controversy, 501(c)(4) groups have become a topic of conversation in the media again. What exactly is a 501(c)(4) organization? How does it differ from other 501(c) organizations, in particular, a 501(c)(3) charitable organization? How does it differ from a political 527 organization?

The original intent of the tax law that Congress passed that was incorporated into section 501(c) of the IRS code over 75 years ago was to give federal tax-exempt status to non-profit organizations which weren’t political groups. In particular, the law stated that organizations desiring 501(c)(4) status had to be “operated exclusively for the promotion of public welfare.” However, in 1959 the IRS decided to loosen this requirement (without the consent of Congress) and allow 501(c)(4) groups to engage in political activity, as long as that political activity wasn’t the group’s primary purpose. Many of these 501(c)(4) groups became political in the 1960s not long after the IRS made that decision.

There are 29 different classifications of 501(c)’s. For example, a 501(c)(1) designation would be used for non-profit corporations organized under Acts of Congress, like federal credit unions. Business leagues, such as Chambers of Commerce, would fall under the 501(c)(6) designation. Social and recreational clubs (college fraternities and sororities, hobby clubs, alumni associations, etc.) fall in the 501(c)(7) category. Many of the categories are very specific , like the 501(c)(21) designation for black lung benefit trusts and the 501(c)(11) designation for teachers’ retirement fund associations.

Religious, educational, and charitable groups would fall under section 501(c)(3) of the IRS code. Examples include: The American Cancer Society, the Bill and Melinda Gates Foundation, Alcoholics Anonymous, the League of Women Voters, and churches. Civic leagues, social welfare organizations, and local associations of employees fall under section 501(c)(4). Examples of these given in section 501(c)(4) of the tax code are : homeowner associations, volunteer fire departments, and community associations that work to improve public services and housing. Even though there appears to be some overlap between 501(c)(3)and 501(c)(4) descriptions, the requirements for the 501(c)(3) designation are more stringent than the 501(c)(4).

Whereas a 501(c)(4) can have any organizational structure, a 501(c)(3) must be organized as a corporation, unincorporated association, community chest, fund or foundation. A 501(c)(3), except for one that is a private foundation, can engage in limited lobbying but cannot engage in political campaign activity (cannot endorse candidates, cannot spend money on political campaigns, etc). Because of this limitation on political activity, contributions to 501(c)(3) groups are tax-deductible for donors. There is no limit on the amount that a donor can give to a 501(c)(3). As long as the primary purpose of a 501(c)(4) is not political, it can lobby and engage in political activity (can endorse candidates and spend money on political campaigns, although it will be taxed on that amount). Donors can give unlimited amounts to 501(c)(4) groups, but these contributions are not tax-deductible for donors. Neither a 501(c)(3) nor 501(c)(4) group must disclose its donors.

An annual information return (Form 990) is required by the IRS for most 501(c) organizations, including 501(c)(4) groups. All funds raised and spent must be disclosed to the IRS on this form. Except in the case of private foundations, donor information is not made public.

The ability to hide donors and receive unlimited money from those donors are why 501(c)(4)s are so appealing to both donors and organizations involved in political activity. They don’t want the public to know who is behind the money. Several 501(c)(4) groups were criticized during the last election cycle due to their claims of being “social welfare” organizations. It seemed evident to most that these claims were invalid and that the primary purpose of these groups was clearly political. Lee Fang names 5 such groups that deserve more IRS scrutiny in a recent posting on the online website of The Nation magazine (read more here). Since the Supreme Court’s Citizens United ruling in January 2010, the number of applications for 501(c)(4) status has increased about 40% each year in 2011 and 2012 (according to the recently released audit of the IRS).

It is ironic that, in a case heard by the Supreme Court in 1986 (FEC v. Massachusetts Citizens for Life), the FEC argued that allowing a loophole for certain 501(c)(4)s involved in political activity would “open the door to massive undisclosed political spending by similar entities and to their use as conduits for undisclosed spending by business corporations and unions”. Surprisingly, the Court had responded that they saw no danger in that happening. Of course, we know that this is in fact what happened. However, in all fairness to the Court, they had made the assumption, based on the law, that there would be full disclosure of donors and amounts donated when that money was used for certain political activities.

Whenever a 501(c)(4), 527 group, or any other group broadcasts certain types of ads, the law requires them to disclose certain information about that ad. One of those pieces of information is where the funds that paid for the ad came from (i.e., who the donors are). However, the FEC rewrote its regulations in 2007, based on an erroneous interpretation of the Supreme Court’s FEC v. Wisconsin Right to Life ruling, and changed the disclosure rules. The FEC rewrote the law passed by Congress requiring full disclosure so that now full disclosure is only required if the donor specifically earmarks his or her donation to be used for these kinds of ads. Obviously, donors can get around disclosure by not earmarking their donations, which very few, if any, ever did in the first place.

Representative Chris Van Hollen of Maryland filed a lawsuit in 2011 against the FEC to force the FEC to rewrite its disclosure rules to what they were before 2007, which was what Congress had intended and had written into law. He won the case in March 2012, but when the FEC appealed that decision, a higher court ruled in the FEC’s favor and the disclosure rules have not been changed.

According to the Center for Responsive Politics, the percentage of outside spending in elections that was not disclosed went from 1% in 2006 to 44% in 2010. Even though the percentage of undisclosed outside spending decreased in 2012 when compared to the overall record-breaking outside spending in this election cycle, the amount of undisclosed outside spending more than doubled from $127 million in the 2010 cycle to over $300 million in the 2012 cycle.

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4 responses to “The Real Story Behind 501(c)(4)s and 527s — Part I

  1. Pingback: The Real Story Behind 501(c)(4)s and 527s – Part II | citizens for truth

  2. Pingback: Highlights of Campaign Finance History – Part 1 | citizens for truth

  3. Pingback: Let’s not let corporate tycoons cower in shame | A (or One) Skeptic

  4. Pingback: Montana, WTP, and the Supreme Court: A Tale of Irony | citizens for truth

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