Yesterday afternoon, November 26, 2013, the Treasury Department and the Internal Revenue Service (“IRS”) issued Proposed Regulations (available here) that would clarify the limitations on political campaign activities by tax-exempt social welfare organizations. In connection with these Proposed Regulations, the Treasury Department and the IRS have requested comments on these limitations as well as the need to revise the general standard used to evaluate tax-exemption for social welfare organizations. Hospitals, health systems and other charitable organizations should familiarize themselves with these Proposed Regulations because the IRS has signaled that certain concepts from these Proposed Regulations could be extended beyond just social welfare organizations.
Current Requirements
Section 501(c)(4) of the Internal Revenue Code (the “Code”) provides tax-exemption for “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” According to the current Treasury Regulations, 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.” Unlike Code Section 501(c)(3) charitable organizations, which are absolutely prohibited from any political campaigning whatsoever, a social welfare organization may engage in some political campaign activity, so long as it is “primarily” engaged in promoting social welfare.
Campaigning and Controversy
In recent years, the number of Code Section 501(c)(4) organizations has mushroomed, and many of these new social welfare organizations were involved in political campaigning. Last spring, the IRS revealed that it had been taking certain steps to identify and screen Code Section 501(c)(4) applicants that may be engaged in political activities, which ignited a political firestorm. Since then, the IRS has promised to provide greater clarity regarding political campaigning by social welfare organizations, and the Proposed Regulations are a significant step toward such clarity.
Key Elements of Proposed Regulations
Instead of the current facts and circumstances approach, the Proposed Regulations use a new term: “candidate-related activity.” This term includes many activities long viewed as political campaigning, such as expressly advocating for or making a contribution to a candidate – a term that the Proposed Regulations expand to include not only candidates for elected office but also nominees for appointed office, such as judges or executive branch officials. The Proposed Regulations also go further by defining as candidate-related activities such activities as conducting voter registration drives or preparing or distributing voter guides. To be clear, a social welfare organization still may engage in candidate-related activity but only so long as it does not become the organization’s primary activity. The Proposed Regulations do not include a bright-line rule for how much candidate-related activity a social welfare organization may conduct, but in the Preamble to the Regulations, the IRS does specifically request comment regarding how this standard should be measured such as through a more specific definition of the term “primarily.”
Danger for Charities
On their face, the Proposed Regulations do not apply to Code Section 501(c)(3) charitable organizations. The Preamble, however, makes numerous references to Code Section 501(c)(3) organizations, and the Treasury Department and IRS specifically request comments “on the advisability of adopting an approach to defining political campaign intervention under [Code] section 501(c)(3) similar to the approach set forth in these [Proposed Regulations] …” Such a change could have drastic ramifications for Code Section 501(c)(3) organizations that engage in activities that were previously uncontroversial, such as conducting voter registration drives, or Code Section 501(c)(3) organizations that commit minor violations of the absolute proscription against campaigning, particularly since even a de minimis violation of this proscription could cost a Code Section 501(c)(3) organization its tax-exempt status.
Next Steps/Practical Takeaways
In the Preamble, the Treasury Department and the IRS acknowledge the broad interest in campaigning by Code Section 501(c)(4) organizations, both from the organizations themselves and from the general public and state that they expects numerous comments in response to the Proposed Regulations. The Proposed Regulations are to be published in the Federal Register on November 29, at which time the Preamble will be revised to state the deadline for submitting comments and requesting a hearing. This deadline should be on or about February 27, 2014. Politically-minded Code Section 501(c)(4) organizations should immediately familiarize themselves with the Proposed Regulations, should evaluate the potential effect on their activities and should consider submitting written comments to the Treasury Department and the IRS. Code Section 501(c)(3) organizations should do the same, particularly in light of the possibility that similar standards could be extended to charitable organizations.
For additional guidance in regards to the Proposed Regulations or for assistance in preparing comments, please contact:
- Jeff Carmichael at 317-977-1443 or jcarmichael@hallrender.com;
- Calvin Chambers at 317-977-1459 or cchambers@hallrender.com; or
- Your regular Hall Render attorney.
Please visit the Hall Render Blog at http://blogs.hallrender.com/ for more information on topics related to health care law.
