The Sec. 501(c)(4) Story: Program Notes – Part 4 – Controversy #3

iStock_ExclusiveXSmallSocial welfare, inappropriateness, resignations, hearings, and complexity—the Sec. 501(c)(4) story has it all…

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

Controversy #3

What qualifies for Sec. 501(c)(4) status, and how do other rules interact with this provision?

As described earlier, there can easily be challenges in determining if social welfare is an organization’s primary purpose. Other issues also exist. It is still unresolved whether contributions to Sec. 501(c)(4) organizations should subject the donor to gift tax, even though in 2011 the IRS announced it was closing current examinations and suspending further action on that question, noting it was a “difficult area with significant legal, administrative, and policy implications” (IRS memo and website (7/7/11)).

In 2011, the American Bar Association Section of Taxation asked the IRS for guidance on how the decision in Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), affects the requirement that activities of Sec. 501(c)(4) organizations and Sec. 501(c)(6) trade associations be primarily nonpolitical (7/25/11 letter). Specifically, the tax section noted that the existing regulations focus on lobbying activities rather than electioneering, when these organizations are now more involved in electioneering than in lobbying.

While the TIGTA report focuses on delays and use of inappropriate criteria in reviewing applications, others complain that the IRS has been too lenient in policing existing Sec. 501(c)(4) organizations. For example, on May 23, 2013, a nonprofit group, Democracy 21, sent a letter to TIGTA suggesting that some Sec. 501(c)(4) organizations do not qualify for that status. The group also calls upon the IRS to modify the 1959 regulations that allow a Sec. 501(c)(4) organization to be primarily engaged in social welfare activities when the statute uses the term “exclusively.”

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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3 comments on “The Sec. 501(c)(4) Story: Program Notes – Part 4 – Controversy #3

  • Annette, in part 5 you indicate a solution. I don’t recall that happening…did I miss something? CW.

  • Hi,

    Sorry for any confusion. A solution has not yet been reached although there are more recommendations now with the National Taxpayer Advocate weighing in on June 30 with some helpful items. She also recommended making up to $1,000 “apology” payments to groups adversely affected by delays or having to produce information not needed for the approval. She also suggests that perhaps the Federal Election Commission should be the one to determine the nature and amount of political activity rather than the IRS.

    Congress is still waiting for additional information from IRS. I think this might get addressed in some manner with upcoming tax reform. We’ll see.

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