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Wednesday, February 16, 2011

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 reportedly spent 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).

Many had predicted that § 501(c)(4) groups would play an active role in the election cycle in light of the Supreme Court’s 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.

While § 501(c)(4) organizations are operating with less restriction under FECA after Citizens United, it is important to realize that § 501(c)(4) 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 were introduced responding to the Citizens United decisionMany would have affected § 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 have generally subjected § 501(c)(4) organizations to the act’s disclosure and disclaimer provisions, although there would have been an exception for qualifying large groups. No similar legislation has yet been introduced in the 112th Congress.

Date of Report: January 27, 2011
Number of Pages: 13
Order Number: R40183
Price: $29.95

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