The Sec. 501(c)(4) Story: Program Notes – Part 1

Hands Raised HiResFor decades, a saga involving Sec. 501(c)(4) has been developing, and it likely reached its climax in the past month. These “program notes” serve to help those watching this drama unfold gain a better understanding of the story. The term “story” is not intended to make light of any of the events or players. A program notes approach is just one way to look at and describe a serious set of events involving a tax provision with inherent challenges for administration and compliance.


The key theme of the story is tax law complexity and the problems that complexity can generate for both the government agency trying to administer the system and the taxpayers trying to comply with it.


•  Offices in Cincinnati and Washington, within the IRS Tax Exempt and Government Entities Division.
•  Offices of the Treasury Inspector General for Tax Administration (TIGTA).
•  Various House and Senate committee hearing rooms.


•  IRS personnel in the Tax Exempt and Government Entities Division (see organizational chart at Exhibit 1), and the IRS deputy commissioner they report to.
•  J. Russell George, Treasury Inspector General for Tax Administration, and TIGTA auditors.
•  Organizations seeking Sec. 501(c)(4) status.
•  Sec. 501(c)(4)—while not a person, this Code provision plays a big role in the story.

In addition to being a nonprofit, a Sec. 501(c)(4) organization is to operate “exclusively for the promotion of social welfare” (except for certain employee associations). Despite the presence of the term “exclusively” in the statute, Regs. Sec. 1.501(c)(4)-1(a)(2)(i) looks at the organization’s primary purpose. “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. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.”

In addition, under Regs. Sec. 1.501(c)(4)-1(a)(2)(ii), 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.” Thus, a Sec. 501(c)(4) organization can engage in political campaign activities and lobby for legislation as long as that is not its primary activity.

Common issues in determining if an organization qualifies for Sec. 501(c)(4) status are whether it promotes the general welfare rather than only the welfare of a specific group of people, such as those living in a particular apartment building. The IRS notes on its website that “‘social welfare’ is inherently an abstruse concept that continues to defy precise definition.” General Counsel Memorandum 34345 (9/14/70) refers to “social welfare” as an “elastic term.” In addition, the determination of the organization’s primary activity can be challenging, particularly where it is not clear if political campaign activity is its primary purpose.

Another challenge for Sec. 501(c)(4) organizations involved in political activity is that certain activities related to the selection, nomination, or election of someone to public office may give rise to tax. As noted in Rev. Rul. 2004-6: “Because public policy advocacy may involve discussion of the positions of public officials who are also candidates for public office, a public policy advocacy communication may constitute an exempt function within the meaning of § 527(e)(2). If so, the organization would be subject to tax under § 527(f).” The ruling provides a set of facts and circumstances and six examples to help illustrate when a lobbying effort becomes a taxable “exempt function.”

The Congressional Research Service (CRS) observes that Sec. 501(c)(4) organizations with campaign activities are also subject to the Federal Election Campaign Act (FECA) (see CRS report, 501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws (5/17/13)).

This blog post is written in five parts:

1.  The Sec. 501(c)(4) Story: Program Notes – Part 1
2.  The Sec. 501(c)(4) Story: Program Notes – Part 2-Plot and Controversy #1
3.  The Sec. 501(c)(4) Story: Program Notes – Part 3-Controversy #2
4.  The Sec. 501(c)(4) Story: Program Notes – Part 4-Controversy #3
5.  The Sec. 501(c)(4) Story: Program Notes – Part 5-Controversy #4 & Resolution

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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