[Congressional Record Volume 158, Number 127 (Wednesday, September 19, 2012)]
[Senate]
[Pages S6428-S6433]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
INTERNAL REVENUE SERVICE AND 501(c)(4) ORGANIZATIONS
Mr. LEVIN. Mr. President, our representative form of government is
based on the premise that citizens who vote in our elections are
informed about who is seeking to influence elections. Sadly, we
continue to see that information obscured by organizations who are
misusing our tax code for political gain.
As we have discussed on this floor many times, the Supreme Court
opened our campaign finance system to a torrent of unlimited and secret
special-interest money in Citizens United. But even the Supreme Court
acknowledged in Citizens United that disclosure is important:
``[P]rompt disclosure of expenditures can provide
shareholders and citizens with the information needed to hold
corporations and elected officials accountable for their
positions and supporters. Shareholders can determine whether
their corporation's political speech advances the
corporation's interest in making profits, and citizens can
see whether elected officials are in the pocket of so-called
moneyed interests.'' Citizens United v. FEC, 130 S. Ct. 876,
916 (2010).
Yet, according to the Center for Responsive Politics, as of September
13, spending on political advertising by groups that either do not
disclose, or only partially disclose their donors, has increased four-
fold, from $32 million in the 2008 election to more than $135 million
at the same point in the current election.
These groups are exploiting our tax code by organizing as tax-exempt
``social welfare'' groups and then spending tens of millions of
undisclosed dollars on political campaigns.
The Internal Revenue Service (IRS)--the organization that grants
these groups their tax-exempt status in the first place--should be
protecting the voting public from these groups that pretend to be
acting in the social welfare but are instead engaging in partisan
politics.
The law in this area is clear. 26 U.S.C. Sec. 501(c)(4) states that
``Civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare, or local associations
of employees, the membership of which is limited to the employees of a
designated person or persons in a particular municipality, and the net
earnings of which are devoted exclusively to charitable, educational,
or recreational purposes'' are exempt from taxation. The word
``exclusively'' is in the tax code for a reason. Congress didn't say
``partially,'' or ``primarily.'' We said that these groups had to be
operated ``exclusively'' for the promotion of social welfare. The IRS,
in writing the implementing regulations to the statute, said that, ``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.'' [emphasis added] By substituting the word
``primarily'' in the regulation with the word ``exclusively'' in the
statute, the IRS essentially redefined what Congress required a social
welfare organization to be.
Mr. President, I asked the IRS for an explanation as to why they have
not
[[Page S6429]]
responded to the increasing growth of groups that parade as social
welfare groups but are obviously organized for politically partisan
purposes. In my letters, I asked the IRS how they interpret the
explicit language in the tax code which says that entities must operate
``exclusively'' for the promotion of social welfare, to allow any tax
exempt partisan political activity by 501(c)(4) organizations. Their
response? That the regulation has been in place for over 50 years. That
is not an excuse if new abuses require a review of an IRS regulation.
I also asked the IRS if they are fulfilling their enforcement
function by notifying these groups that are obviously engaged primarily
in political activity that they are violation of the law. Again, the
IRS response was inadequate. During the past 6 months, according to the
IRS letter, no notices of proposed or final revocation have been issued
to section 501(c)(4) organizations. None. So even under the
``primarily'' test the IRS is not enforcing the law in the face of the
avalanche of evidence that our laws are being flouted.
The law is clear. Even the watered-down IRS regulation is clear. It
is time that the IRS enforces the law, or at least its own regulation.
I ask unanimous consent that the correspondence with the IRS be
printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
U.S. Senate, Committee on Homeland Security and
Governmental Affairs,
Washington, DC, July 27, 2012.
Hon. Douglas H. Shulman,
Commissioner, Internal Revenue Service,
Washington, DC.
Dear Commissioner Shulman: I am writing to express my
concern about how the IRS interprets the law regarding the
extent to which 501(c)(4) ``social welfare'' organizations
can engage in partisan political activity. The July 13, 2012
response by Lois G. Lerner, Director of Exempt Organizations,
to my June 13, 2012 letter was unsatisfactory.
In the response, Ms. Lerner stated that ``The IRS takes
steps to continually inform organizations of their
responsibilities as social welfare organization to help them
avoid jeopardizing their tax-exempt status,'' and ``actively
educates section 501(c)(4) organizations at multiple states
in their development about their responsibilities under the
tax law.'' [Emphasis added.]
Her discussion does not describe an IRS initiative to
``continually inform'' or ``actively educate.'' Rather, it
shows the IRS is passively making some information available
once a 501(c)(4) entity is already in existence. Further, her
discussion of the explanatory materials available to the
public, and the materials themselves, are confusing. This
leads to a predictable result: organizations are using
Internal Revenue Code Section 501(c)(4) to gain tax exempt
status while engaging in partisan political campaigns. There
is an absurd tangle of vague and contradictory materials that
the IRS provides. Making the problem worse is that the IRS
knows there is a problem because of the public nature of the
activity, but has failed to address it.
First, the law.
26 U.S.C. Sec. 501(c)(4) states that ``Civic leagues or
organizations not organized for profit but operated
exclusively for the promotion of social welfare, or local
associations of employees, the membership of which is limited
to the employees of a designated person or persons in a
particular municipality, and the net earnings of which are
devoted exclusively to charitable, educational, or
recreational purposes'' are exempt from taxation. [Emphasis
added.] Merriam-Webster defines ``exclusively'' as ``single,
sole; whole; undivided.'' Therefore, it would appear that the
law prevents entities that organize under Section
501(c)(4)from any activity that is not operated exclusively
for the promotion of social welfare or an association of
employees.
Consistent with the law is a 1997 letter from the IRS
denying tax-exempt status to a group called the National
Policy Forum. The letter indicates that the IRS based its
denial on the fact that the organization was engaged in
partisan political activity, stating that ``partisan
political activity does not promote social welfare as defined
in section 501(c)(4),'' and that the applicant ``benefit[s]
select individuals or groups, instead of the community as a
whole.
One part of Internal Revenue Service Publication 557 in its
guidance states, consistent with the law, that:
``If your organization is not organized for profit and will
be operated only to promote social welfare to benefit the
community, you should file Form 1024 to apply for recognition
of exemption from federal income tax under section
501(c)(4).'' [Emphasis added]
Another part of Internal Revenue Service Publication 557
starts off by agreeing with the law and states, ``Promoting
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.'' The IRS is accurately and clearly stating, in some
places at least, that ``social welfare'' advocacy does not
include campaigning for or against a candidate or candidates.
So far, so good--until that same Publication 557 states:
``However, if you submit proof that your organization is
organized exclusively to promote social welfare, it can
obtain an exemption [from taxes] even if it participates
legally in some political activity on behalf of or in
opposition to candidates for public office.''
That language seems inconsistent with the other referenced
parts of Publication 557 (as well as being inconsistent with
law and precedent), unless it means that the exemption isn't
available for the political activity portion funded by
501(c)(4) receipts.
Further, an IRS regulation that interprets Section
501(c)(4) states that, ``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.''
[Emphasis added.]
So the IRS regulation says the law's requirement of
``exclusively'' really means ``primarily,'' something very
different from ``exclusively.''
The IRS webpage cites an internal training article which
states:
```[S]ocial welfare' is inherently an abstruse concept that
continues to defy precise definition. Careful case-by-case
analyses and close judgments are still required.'' [Emphasis
added.]
Fair enough.
In its Compliance Guide for Tax-Exempt Organizations, the
IRS gives direction regarding how to make a case-by-case
evaluation whether a communication is political. That Guide
says that the following factors indicate that an advocacy
communication is political campaign activity:
The communication identifies a candidate for public
office;
The timing of the communication coincides with an electoral
campaign;
The communication targets voters in a particular election;
The communication identifies the candidate's position on
the public policy issue that is the subject of the
communication;
The position of the candidate on the public policy issue
has been raised as distinguishing the candidate from others
in the campaign, either in the communication itself or in
other public communications; and
The communication is not part of an ongoing series of
substantially similar advocacy communications by the
organization on the same issue.
The guide further lays out the factors that indicate when
an advocacy communication is not political campaign activity:
The absence of anyone or more of the factors listed above;
The communication identifies specific legislation, or a
specific event outside the control of the organization, that
the organization hopes to influence;
The timing of the communication coincides with a specific
event outside the control of the organization that the
organization hopes to influence, such as a legislative vote
or other major legislative action (for example, a hearing
before a legislative committee on the issue that is the
subject of the communication);
The communication identifies the candidate solely as a
government official who is in a position to act on the public
policy issue in connection with the specific event (such as a
legislator who is eligible to vote on the legislation); and
The communication identifies the candidate solely in the
list of key or principal sponsors of the legislation that is
the subject of the communication.
It is clear from the application of those factors that what
is going on in the U.S. with certain 501(c)(4) organizations
in their television advertisements are political campaign
activities.
Below are two transcripts of advertisements that were put
on television by 501(c)(4) organizations. As you can see, the
subject of Advertisement #1 is a Democratic Senator, and the
subject of Advertisement #2 is a Republican Senator. This is
not a partisan issue.
Television Advertisement #1:
``It's time to play: Who is the biggest supporter of the
Obama agenda in Ohio. It's Sherrod Brown. Brown backed
Obama's agenda a whopping 95 percent of the time. He voted
for budget busting ObamaCare that adds $700 billion to the
deficit. For Obama's $453 billion tax increase. And even
supported cap-and-trade which could have cost Ohio over
100,000 jobs. Tell Sherrod Brown, for real job growth, stop
spending and cut the debt. Support the new majority agenda at
newmajorityagenda.org.''
Television Advertisement #2:
``Before Wall Street gave him $200,000 in campaign cash. .
. . Before he voted to let bank CEOs take millions in
taxpayer funded bonuses. . . . Dean Heller was a stockbroker.
No wonder he voted against Wall Street reform; against
holding the big banks accountable. Heller even voted to risk
your Social Security here, in the stock market. Dean Heller:
he votes like he still works for Wall Street, and that's bad
for you.''
Those ads, and so many like them, clearly fit the factors
the IRS has laid out in its guide for what constitutes a
political campaign activity. The advertisements make no
pretense at nonpartisanship; they are blatantly and
aggressively partisan communications.
[[Page S6430]]
Entities that file under Section 501(c)(4) of the Internal
Revenue Code and take advantage of its tax exemption benefits
should have to make a choice: either lose their exempt status
(and pay taxes) or eliminate the partisan political activity.
The IRS needs to immediately review the activities of
501(c)(4) entities engaging in running partisan political ads
or giving funds to Section 527 organizations that run such
ads. The IRS needs to advise 501(c)(4) entities of the law in
this area and the factors it will look at in reviewing
501(c)(4) status and tax exemption issues.
Please provide me with the following information no later
than August 10, 2012:
1. How can the IRS interpret the explicit language in 26
U.S.C. 501(c)(4), which provides that ??510??(c)(4) entities
must operate ``exclusively'' for the promotion of social
welfare, to allow any tax exempt partisan political activity
by 501(c)(4) organizations?
2. Since partisan political activity does not meet the IRS
definition of ``promoting social welfare,'' how can an
organization that participates in any partisan political
activity be``organized exclusively to promote social
welfare?''
3. The Exempt Organizations 2011 Annual Report and 2012
Work Plan states: ``As in any election year, EO will continue
its work to enforce the rules relating to political campaigns
and campaign expenditures. In FY 2012, EO will combine what
it has learned from past projects on political activities
with new information gleaned from the redesigned Form 990 to
focus its examination resources on serious allegations of
impermissible political intervention.''
a. Typically, how long after a complaint to the IRS does a
compliance review begin?
b. What approximate time does it take to review the
complaint?
c. How many persons are involved in the enforcement of the
501(c)(4) rules?
4. The Exempt Organizations 2011 Annual Report and 2012
Work Plan states that 501 (c)(4) organizations ``can declare
themselves tax-exempt without seeking a determination from
the IRS. EO will review organizations to ensure that thel
have classified themselves correctly and that they are
complying with applicable rules.''
a. Why does the IRS allow 501(c)(4) organizations to self-
declare?
b. When an organization ``self declares'' as a 501(c)(4)
organization, how does the IRS get notice and how long does
it take the IRS to conduct the review to ensure that that
organization has classified itself correctly?
5. The IRS Compliance Guide for Tax-Exempt Organizations
states:
``When a 501(c)(4), (5) or (6) organization's communication
explicitly advocates the election or defeat of an individual
to public office, the communication is considered political
campaign activity. A tax-exempt organization that makes
expenditures for political campaign activities shall be
subject to tax in an amount equal to its net investment
income for the year or the aggreate amount expended on
political campaign activities during the year, whichever is
less.''
a. How does the IRS keep track of these explicit
communications and ensure that the organization pays this
tax?
b. What is the reason for the requirement that the tax will
be based on ``whichever is less'' between its net investment
income for the year or the aggregate amount expended on
political campaign activities?
c. What tax would an organization have to pay if it spends
all of its income on political advertising (therefore it has
NO net investment income)?
6. Ms. Lerner's letter quotes the IRS webpage on Social
Welfare Organizations:
``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. However, a section 501(c)(4) social welfare
organization may engage in some political activities, so long
as that is not its primary activity. However, any expenditure
it makes for political activities may be subject to tax under
section 527(f)?'' [Emphasis added]
a. What is the statutory basis of the language that allows
501(c)(4) organizations to engage in some political
activities?
b. How does the IRS keep track of these political
activities and ensure that the organization pays the tax
under section 527(f)?
7. In her July 13 letter, Ms. Lerner states that the IRS
also addresses the issue of political activities in the Forms
990 and 990-EZ.
Are Forms 990 and 990-EZ made public? If so, where can they
be accessed?
8. Internal Revenue Service Publication 557 states that, if
a 501(c)(4) entity can ``submit proof that [the] organization
is organized exclusively to promote social welfare, it can
obtain an exemption even if it participates legally in some
political activity on behalf of or in opposition to
candidates for public office.''
Have the following 501(c)(4) organizations a) applied for;
and if so, b) received the described exemption for political
activity from the IRS?
a. Crossroads Grassroots Policy Strategies
b. Priorities U.S.A.
c. Americans Elect
d. American Action Network
e. Americans for Prosperity
f. American Future Fund
g. Americans for Tax Reform
h. 60 Plus Association
i. Patriot Majority USA
j. Club for Growth
k. Citizens for a Working America Inc.
l. Susan B. Anthony List
9. Have you reminded 501(c)(4)s which publicly seem to be
operating in the partisan political arena as to the factors
you will consider in determining whether they are engaging in
partisan political activity? If not, why not?
I have enclosed a copy of Ms. Lerner's letter. If you have
any questions, please contact me, or have your staff contact
Kaye Meier of my staff at [email protected] or 202/
224-9110. Again, it is urgent that I receive your answers by
August 10, 2012.
Sincerely,
Carl Levin,
Chairman, Permanent Subcommittee
on Investigations.
____
Department of the Treasury,
Internal Revenue Service,
Washington, DC., August 24, 2012.
Hon. Carl Levin,
Chairman, Permanent Subcommittee on Investigations, U.S.
Senate, Washington, DC.
Dear Senator Levin: I am responding to your letter to
Commissioner Shulman dated July 27, 2012, requesting
additional information about section 501(c)(4) organizations.
This response supplements the previous responses dated June
4, 2012 and July 13, 2012, and addresses the additional
questions raised in your recent letter.
Question 1. How can the IRS interpret the explicit language
in 26 U.S.C. Sec. 501(c)(4), which provides that 510(c)(4)
entities must operate ``exclusively'' for the promotion of
social welfare, to allow any tax exempt partisan political
activity by 501(c)(4) organizations?
We note that the current regulation has been in place for
over 50 years. Moreover, unlike Internal Revenue Code section
501(c)(3), which specifically provides that organizations may
``not participate in, or intervene in . . . any political
campaign on behalf of (or in opposition to) any candidate for
public office.''), section 501(c)(4) does not contain a
specific rule or limitation on political campaign
intervention by social welfare organizations.
Question 2. Since partisan political activity does not meet
the IRS definition of ``promoting social welfare,'' how can
an organization that participates in any partisan political
activity be ``organized exclusively to promote social
welfare?''
As stated above, longstanding Treasury Regulations have
interpreted ``exclusively'' as used in section 501(c)(4) to
mean primarily. Treasury Regulation Sec. 1.501(c)(4)-
1(a)(2)(i), promulgated in 1959, provides: ``An organization
is operated exclusively for the promotion of social welfare
if it is primarily engaged in promoting the common good and
general welfare of the people of the community.'' Applying
this Treasury Regulation, Revenue Ruling 81-95, 1981-1 C.B.
332, concluded that ``an organization may carry on lawful
political activities and remain exempt under section
501(c)(4) as long as it is primarily engaged in activities
that promote social welfare.''
Question 3. The Exempt Organizations 2011 Annual Report and
2012 Work Plan states: ``As in any election year, EO will
continue its work to enforce the rules relating to political
campaigns and campaign expenditures. In FY 2012, EO will
combine what it has learned from past projects on political
activities with new information gleaned from the redesigned
Form 990 to focus its examination resources on serious
allegations of impermissible political intervention.''
a. Typically, how long after a complaint to the IRS does a
compliance review begin?
b. What approximate time does it take to review the
complaint?
The IRS routinely receives examination referrals from a
variety of sources including the public, media, Members of
Congress or their staff, and has a longstanding process for
handling referrals so that they receive an impartial,
independent review from career employees. When the IRS
receives a referral about a particular organization, it is
promptly forwarded to the Classification unit of the Exempt
Organizations (EO) Examination office in Dallas, Texas.
Pursuant to IRM 4.75.5.4(1), within 30 days of receiving the
referral, the Classification staff begins evaluating whether
the referral has examination potential, should be considered
in a future year, needs additional information to make a
decision, or falls within the categories of matters that are
referred for EO Referral Committee review. Although IRM
4.75.5.4(1) sets a goal of 90 days to complete reviews of
referrals, the time it takes to fully review a particular
referral varies, depending on such factors as the issues
involved and the availability of relevant information (i.e.
organization's Forms 990, external sources such as media
reports, internet searches, etc.).
In those cases in which the IRS needs additional
information about the subject of a referral that is not
readily available, such as its Form 990 that has not been
filed yet for the tax year at issue, Classification may
suspend classifying the referral and places it in the follow-
up category until the additional information is available.
Once the additional information is received, reviewed, and
supports the referral being classified as having examination
potential, the referral is sent to unassigned inventory,
until a revenue agent with the appropriate level of
experience for the issues involved in the matter is available
to conduct an examination.
Once in inventory, there are numerous factors that can
affect how long it takes to
[[Page S6431]]
complete the examination process. While it is difficult to
predict how long any single examination will take, for cases
closed in FY 2011, the average time it took to close a case
was 210 days.
c. How many persons are involved in the enforcement of the
501(c)(4) rules?
The Exempt Organizations (EO) function is responsible for
the enforcement of section 501(c)(4) statutory rules and
regulations as well as those applicable to all other types of
tax-exempt organizations.
For FY 2011, the total number of EO staff was 889. Other
than the 14 employees in the Director's office, the three EO
offices are staffed as follows:
Rulings and Agreements (R&A), which includes EO
Determinations and EO Technical, ensures organizations meet
legal requirements during the application or private letter
ruling process, and through guidance. In FY 2011, R&A had 332
employees.
EO Examinations (Exam) is comprised of various units,
including the Classification unit, the EO Compliance Unit,
and the Review of Operations unit. Exam develops processes to
identify areas of noncompliance, develops corrective
strategies, and coordinates with other EO functions to ensure
compliance, so that organizations maintain their exempt
status. In FY 2011, Exam had 531 employees.
EO Customer Education and Outreach (CE&O) coordinates,
assists and supports the development of educational materials
and outreach efforts for organizations to understand their
responsibilities under the tax law. In FY 2011, CE&O had a
staff of 12 employees.
The employees in these functions are responsible for the
regulation of all types of tax-exempt organizations,
including section 501(c)(4) organizations.
Question 4. The Exempt Organizations 2011 Annual Report and
2012 Work Plan states that 501(c)(4) organizations ``can
declare themselves tax-exempt without seeking a determination
from the IRS. EO will review organizations to ensure that
they have classified themselves correctly and that they are
complying with applicable rules.''
a. Why does the IRS allow 501(c)(4) organizations to self-
declare?
The Internal Revenue Code expressly provides that certain
tax-exempt organizations must give notice to the IRS, by
filing an application for exemption, in order to claim tax-
exempt status. The Internal Revenue Code does not require an
organization to provide notice to the IRS to be treated as
described in section 501(c)(4). By contrast, for example,
Section 508 generally requires an organization to provide
notice to the IRS before it will be treated as described in
section 501(c)(3).
b. When an organization ``self declares'' as a 501(c)(4)
organization, how does the IRS get notice and how long does
it take the IRS to conduct the review to ensure that the
organization has classified itself correctly?
As with other tax exempt organizations, organizations
claiming to be tax-exempt under section 501(c)(4) generally
are required to file a Form 990 on an annual basis.
The Exempt Organizations office of the IRS is responsible
for the compliance of over one million organizations with
diverse goals and purposes. In order to ensure the highest
degree of compliance with tax law while working with limited
resources, EO maintains a robust and multi-faceted post-
filing compliance program that conducts reviews of exempt
organizations in various ways, such as:
Review of Operations (ROO) reviews: Because a ROO review is
not an audit, the ROO carries out its post-filing compliance
work without contacting taxpayers. Instead, the ROO looks at
an organization's Form 990, website, and other publicly
available information to see what it is doing and whether it
continues to be organized and operated for tax-exempt
purposes. If it appears from a ROO review that an
organization may not be compliant, the organization is
referred for examination.
Compliance checks: In a compliance check, IRS contacts
taxpayers by letter when we discover an apparent error on a
taxpayer's return or wish to obtain further information or
clarification. A compliance check is an efficient and
effective way to maintain a compliance presence without an
examination. We also use compliance check questionnaires to
study specific parts of the tax-exempt community or specific
cross-sector practices.
Examinations: Examinations, also known as audits, are
authorized under Section 7602 of the Code. For exempt
organizations, an examination determines an organization's
continued qualification for tax-exempt status. We conduct two
different types of examinations: correspondence and field.
Because the IRS cannot review every existing organization
in every tax year, we use the review techniques described
above to maximize our coverage of the tax exempt sector in
both our general program work and our project work. The
project work, which results from our strategic planning
process, is designed to focus on specific areas affecting the
EO sector and to direct more effective use of our resources
in the effort to strengthen compliance and improve tax
administration. Described in the EO 2012 Work Plan, the
sections 501(c)(4), (5) and (6) Self-Declarers is one such
project. This project focuses on organizations that hold
themselves out as being tax-exempt rather than seeking IRS
recognition of their exempt status.
Question 5. The IRS Compliance Guide for Tax-Exempt
Organizations states:
``When a 501(c)(4), (5) or (6) organization's communication
explicitly advocates the election or defeat of an individual
to public office, the communication is considered political
campaign activity. A tax-exempt organization that makes
expenditures for political campaign activities shall be
subject to tax in an amount equal to its net investment
income for the year or the aggregate amount expended on
political campaign activities during the year, whichever is
less.''
a. How does the IRS keep track of these explicit
communications and ensure that the organization pays this
tax?
Tax-exempt organizations filing Forms 990 or 990-EZ are
required to report political activities. Organizations that
engage in direct or indirect political campaign activities
are also required to complete Schedule C of Form 990 or 990-
EZ. Organizations subject to tax under section 527(f) are
required to comply with the statutory reporting and payment
rules. The IRS also receives referrals regarding such
activities from a variety of sources that are handled through
an impartial, independent review. See the response to
question 3 for the description on the IRS referral process.
b. What is the reason for the requirement that the tax will
be based on ``whichever is less'' between its net investment
income for the year or the aggregate amount expended on
political campaign activities?
The statute under section 527(f) explicitly states that a
501(c) organization is subject to its tax based on ``an
amount equal to the lesser of--(A) the net investment income
of such organization for the taxable year, or (B) the
aggregate amount expended during the taxable year for such an
exempt function.''
c. What tax would an organization have to pay if it spends
all its income on political advertising (therefore it has NO
net investment income)?
Under the statute cited above, an organization that
otherwise meets the requirements of section 501(c)(4) social
welfare tax-exempt status, which spends all its income on
political advertising and has no net investment income would
not owe any tax under section 527(f). It may however, through
such spending (and depending on the otherwise applicable
facts of the case), no longer qualify as an organization that
is tax-exempt under section 501(c)(4).
Question 6. Ms. Lerner's letter quotes the IRS webpage on
Social Welfare Organizations:
``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. However, a section 501(c)(4) social welfare
organization may engage in some political activities, so long
as that is not its primary activity. However, any expenditure
it makes for political activities may be subject to tax under
section 527(f). [Emphasis added.]
a. What is the statutory basis of the language that allows
501(c)(4) organizations to engage in some political
activities?
Please see responses to questions 1 and 2, above.
b. How does the IRS keep track of these political
activities and ensure that the organization pays the tax
under section 527(f)?
Section 501(c)(4) organizations filing Forms 990 or 990-EZ
are required to report political activities. Organizations
that engage in direct or indirect political campaign
activities are also required to complete Schedule C of Form
990 or 990-EZ. Organizations subject to tax under section
527(f) are required to comply with the statutory reporting
and payment rules. The IRS also receives referrals regarding
such activities from a variety of sources that are handled
through an impartial, independent review. See the response to
question 3 for the description on the IRS referral process.
Question 7. In her July 13 letter, Ms. Lerner states that
the IRS also addresses the issue of political activities in
the Forms 990 and 990-EZ.
Are Forms 990 and 990-EZ made public? If so, where can they
be accessed?
Yes, Forms 990 and 990-EZ are made public. Tax-exempt
organizations are required to make their returns widely
available for public inspection. Organizations are required
to allow the public to inspect the Forms 990, 990-EZ, 990-N,
and 990-PF they have filed with the IRS for their three most
recent tax years. Exempt organizations also are required to
provide copies of these information returns when requested,
or make them available on the Internet. The annual
information returns also are available from the IRS, as well
as from third-party sources that post them on their websites.
Question 8. Internal Revenue Services Publication 557
states that, if a 501(c)(4) entity can ``submit proof that
[the] organization is organized exclusively to promote social
welfare, it can obtain an exemption even if it participates
legally in some political activity on behalf of or in
opposition to candidates for public office.''
Have the following 501(c)(4) organizations a) applied for;
and if so, b) received the described exemption for political
activity from the IRS?
a. Crossroads Grassroots Policy Strategies
b. Priorities U.S.A.
c. Americans Elect
d. American Action Network
e. Americans for Prosperity
f. American Future Fund
g. Americans for Tax Reform
h. 60 Plus Association
i. Patriot Majority USA
[[Page S6432]]
j. Club for Growth
k. Citizens for a Working America Inc.
l. Susan B. Anthony List
Initially, to clarify, section 501(c)(4) organizations do
not receive ``exemption for political activity.'' Rather,
organizations are recognized under section 501 (c)(4) as tax-
exempt when they demonstrate that they plan to be primarily
engaged in activities that promote social welfare. If they
meet that standard, the fact that they engage in other
activities that do not promote social welfare, such as
political campaign intervention, will not preclude
recognition of their tax-exempt status. Whether an
organization meets the statutory and regulatory requirements
of section 501 (c)(4) depends upon all of the facts and
circumstances, and no one factor is determinative.
As discussed in our response to you dated June 4, 2012,
section 6103 of the Internal Revenue Code prohibits the
disclosure of information about specific taxpayers unless the
disclosure is authorized by some provision in the Internal
Revenue Code. The IRS cannot legally disclose whether the
organizations on your list have applied for tax exemption
(unless and until such application is approved). Section 61
04(a) of the Code permits public disclosure of an application
for recognition of tax exempt status only after the
organization has been recognized as exempt.
Searching the names exactly as provided, our records show
that the following organizations have been recognized by the
IRS as tax exempt under section 501(c)(4).
Americans For Prosperity
American Future Fund
60 Plus Association
Patriot Majority USA
Citizens for a Working America Inc.
With respect to the other organizations for which you
inquired, we will be able to determine if they have been
recognized by the IRS as tax-exempt with additional
information, such as an address or EIN, that specifically
identifies the organization. Organizations often have similar
names or maintain multiple chapters with variations of the
same name. With respect to many of the other organizations
you identified, numerous organizations in our records have
very similar names. IRS staff can work with your staff in
identifying the specific organizations for which you are
interested. IRS staff is also available to assist your staff
to navigate searchable databases on the IRS public website.
As previously discussed, information on organizations with
applications currently pending legally cannot be provided
unless and until the application is approved. Please note
that organizations that hold themselves out as tax-exempt
without IRS recognition and organizations that have pending
applications for recognition are required to file annual
returns/notices.
Question 9. Have you reminded 501(c)(4)s which publicly
seem to be operating in the partisan political arena as to
the factors you will consider in determining whether they are
engaging in partisan political activity? If not, why not?
As described in the July 13, 2012 response, the IRS takes
several steps to continually educate organizations of the
requirements under the tax law and inform them of their
responsibilities to avoid jeopardizing their tax-exempt
status. We believe these steps ensure the IRS administers the
nation's tax laws in a fair and impartial manner.
I hope this information is helpful. If you have questions,
please contact me or have your staff contact Catherine Barre
at (202) 622-3720.
Sincerely,
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
____
U.S. Senate, Committee on Homeland Security and
Governmental Affairs,
Washington, DC, August 31, 2012.
Hon. Douglas H. Shulman,
Commissioner, Internal Revenue Service,
Washington, DC.
Dear Commissioner Shulman: Thank you for the August 24,
2012 response by Steven T. Miller, Deputy Commissioner for
Services and Enforcement, to my July 27, 2012 letter.
I find it unacceptable that the IRS appears to be passively
standing by while organizations that hold themselves out to
be ``social welfare'' organizations clearly ignore the tax
code with no apparent consequences.
Frankly, the response that ``long standing Treasury
Regulations have interpreted `exclusively' '' as used in
section 501(c)(4) to mean ``primarily'' and the argument that
``section 501(c)(4) does not contain a specific rule or
limitation on political campaign intervention by social
welfare organizations'' are not persuasive. The word
``exclusively'' as written in the statute is clear and speaks
for itself. Its clarity is not diminished because the section
does not mimic words in another section, which words are also
clear.
As a follow-up to your letter, I would like to know the
following:
1. If the IRS determines that an organization that has been
given 501(c)(4) status has not engaged primarily in social
welfare activities, but instead was primarily engaged in
activity within the scope of section 527, what are the
consequences for the organization? What are the consequences
for such an organization having not filed timely Forms 8871
and 8872? Must they file such forms after the fact? What
taxes would be due? Will contributions that already have been
made to that organization be taxable to that organization?
2. How many 501(c)(4) organizations which appear to be
primarily engaged in political activity have been notified by
the IRS within the last 6 months that they may be in
violation of the law?
It is urgent that I receive your answers promptly, and no
later than September 10, please.
Sincerely,
Carl Levin,
Chairman, Permanent Subcommittee on
Investigations.
____
Department of the Treasury,
Internal Revenue Service,
Washington, D.C., September 14, 2012.
Hon. Carl Levin,
Chairman, Permanent Subcommittee on Investigations, U.S.
Senate, Washington, D.C.
Dear Senator Levin: I am responding to your letter to
Commissioner Shulman dated August 31,2012, requesting
additional information about section 501(c)(4) organizations.
This response supplements the previous responses dated June
4, 2012, July 13, 2012 and August 24, 2012, and addresses the
additional questions raised in your recent letter.
Question 1. If the IRS determines that an organization that
has been given 501(c)(4) status has not engaged primarily in
social welfare activities, but instead was primarily engaged
in activity within the scope of section 527, what are the
consequences for the organization? What are the consequences
for such an organization having not filed timely Forms 8871
and 8872? Must they file such forms after the fact? What
taxes will be due? Will contributions that already have been
made to that organization be taxable to that organization?
If an IRS audit or examination concludes that a section
501(c)(4) organization does not engage primarily in social
welfare activities, the IRS may revoke the tax-exempt status
of that organization. If the tax-exempt status is revoked,
the organization is a taxable entity effective, in general,
as of the first day of the tax year under examination. The
organization is required to file Federal income tax returns,
generally a Form 1120, U.S. Corporation Income Tax. The tax
treatment of the organization's contributions and other
income is determined under normal rules of Subtitle A.
Whether an organization no longer qualifies to be tax-
exempt under section 501(c)(4) does not determine whether it
is a political organization under section 527. Section
527(e)(1) defines a political organization as a party,
committee, or other organization that is organized and
operated primarily for the purpose of directly or indirectly
accepting contributions or making expenditures for an exempt
function (as defined in 527(e)(2)). If an organization meets
this definition, then its tax status is determined under
section 527.
Subject to certain exceptions, to be tax-exempt under
section 527, a political organization is required to give
notice electronically to the Service. The required notice
form is Form 8871, Political Organization Notice of Section
527 Status. To be tax-exempt, the political organization must
file Form 8871 within 24 hours after the date on which it was
established. If the organization has a material change in any
of the information reported on Form 8871, it must file an
amended Form 8871 within 30 days of the material change to
maintain its tax-exempt status. When the organization
terminates its existence, it must file a final Form 8871
within 30 days of termination.
An organization that is required to file Form 8871, but
fails to file on a timely basis, will not be treated as a
tax-exempt political organization for any period before the
date Form 8871 is filed. The taxable income of the
organization for any period in which it failed to file Form
8871 (or, in the case of a material change, the period
beginning with the date of the material change and ending on
the date it satisfies the notice requirement) is subject to
tax and must be reported on the annual income tax return Form
112Q-POL. The tax is computed by multiplying the
organization's taxable income by the highest federal
corporate tax rate, currently 35 percent. For purposes of
computing its taxable income for any period, the organization
includes its exempt function income (including contributions
received, membership dues, and political fundraising
receipts), minus any deductions directly connected with the
production of that income, but may not deduct its exempt
function expenditures for the period.
Generally, tax-exempt political organizations that have, or
expect to have. contributions or expenditures exceeding
$25,000 during a calendar year are required to file Form
8872, Political Organization Report of Contributions and
Expenditures, beginning with the first month or quarter
during the calendar year in which they accept contributions
or make expenditures. A tax-exempt political organization
subject to the periodic reporting requirement may choose to
file Form 8872 on a monthly basis or on a quarterly/
semiannual basis, but it must file on the same basis for the
entire calendar year. In addition, tax-exempt political
organizations that make contributions or expenditures with
respect to an election for federal office as defined in
527(j)(6) may be required to file pre-election reports for
that election.
A tax-exempt political organization that does not timely
file the required Form 8872, or that fails to include the
information required on the Form 8872. must pay an amount
calculated by multiplying the amount of contributions and
expenditures that are not disclosed by the highest federal
corporate tax rate, currently 35 percent.
[[Page S6433]]
Question 2. How many 501(c)(4) organizations which appear
to be primarily engaged in political activity have been
notified by the IRS within the last 6 months that they may be
in violation of the law?
When the IRS examines a section 501(c)(4) organization, the
objective of the audit is to determine whether that
organization qualifies for tax-exempt-status as a social
welfare organization. As discussed in our June 4, 2012
response to your March 30, 2012 letter, that determination
looks to whether the organization is primarily engaged in
activities that promote social welfare, not organized or
operated for profit, and the net earnings of which do not
inure to the benefit of any private shareholder or
individual. The examination looks at the activities engaged
in during the complete taxable year at issue. Although 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, a section 501(c)(4) social welfare organization can
engage in political activities as long as it is primarily
engaged in activities that promote social welfare.
If the IRS believes that an organization does not meet the
requirements under section 501(c)(4), the IRS notifies the
organization of its intention to revoke the organization's
exempt status, explaining the law and reasons for the
proposed revocation. The organization has 30 days from the
date of that letter to protest or appeal the determination
before a final revocation letter is issued to the
organization.
During the past six months, no notices of proposed or final
revocation were issued to section 501(c)(4) organizations.
Note that the IRS currently has more than 70 ongoing
examinations of section 501(c)(4) organizations (this
includes examinations for a variety of issues, some of which
include whether the organization is primarily engaged in
activities that promote social welfare). It is also important
to note that the Service also maintains a determination
process to review the operations of an organization to
determine whether it should be recognized as tax exempt. In
this area, we also review compliance with the legal
requirements, including whether an organization is primary
engaged in activities that promote social welfare. There are
currently more than 1,600 organizations in the determination
process seeking recognition as a section 501(c)(4)
organization. The level of political activity is an issue in
a number of these determination cases.
I hope this information is helpful. If you have questions,
please contact me or have your staff contact Catherine Barre.
Sincerely,
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
____________________