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Monday, November 8, 2010

501(c)(4) Organizations and Campaign Activity: Analysis Under Tax and Campaign Finance Laws

Erika K. Lunder
Legislative Attorney

L. Paige Whitaker
Legislative Attorney

In the 2010 midterm election cycle, tax-exempt § 501(c)(4) social welfare organizations are reportedly spending millions of dollars in an attempt to influence the elections. These organizations are permitted to engage in campaign activity under federal law, subject to regulation under both the Internal Revenue Code (IRC) and the Federal Election Campaign Act (FECA).

Some had predicted that § 501(c)(4) groups would be more active in this election cycle than in past ones because of the Supreme Court’s recent decision in Citizens United v. FEC. In that case, the Court invalidated long-standing prohibitions in FECA on corporations and labor unions using their general treasury funds to make independent expenditures and electioneering communications. Since many § 501(c)(4) organizations are incorporated, they had been subject to these prohibitions unless qualifying for an exception. In addition, prior to Citizens United, no § 501(c)(4) organizations—regardless of corporate status—could serve as conduits for corporate or labor union treasury funds to pay for independent expenditures and electioneering communications. In the 2010 election cycle, § 501(c)(4) organizations are among the entities operating with less restriction due to the Supreme Court’s recent ruling in Citizens United v. FEC.

At the same time, it is important to realize that § 501(c)(4) social welfare organizations are still subject to regulation under FECA and the IRC. For example, under FECA, incorporated § 501(c)(4) organizations are prohibited from making political contributions and would still be required to establish a political action committee (PAC) in order to do so. One requirement under the IRC is that the organization must have the promotion of social welfare as its primary activity. Thus, a group that wants to maintain its § 501(c)(4) status cannot have campaign activity (along with any other activity that does not serve its exempt purpose) as its primary activity. Furthermore, § 501(c)(4) organizations engaging in campaign-related activities may be required to report information to the Federal Election Commission (FEC) and the Internal Revenue Service (IRS).

In the 111
th Congress, numerous bills have been introduced responding to the Citizens United decision. Many would affect § 501(c)(4) organizations. For example, the primary legislative response to Citizens United, the DISCLOSE Act (H.R. 5175, as passed by the House, and S. 3628) would generally subject § 501(c)(4) organizations to the act’s disclosure and disclaimer provisions, although there would be an exception for qualifying large groups.

Date of Report: October 21, 2010
Number of Pages: 13
Order Number: R40183
Price: $29.95

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