The IRS on Tuesday issued its eagerly anticipated 30-day report summarizing its initial review and assessment of “what went wrong” in connection with the IRS’s use of inappropriate criteria to screen exemption applications from Tea Party groups seeking recognition that they are 501(c)(4) social welfare organizations. We had previously blogged on this here and here.
Much of the initial focus is on Appendix E of the Report, which creates an optional expedited process for certain 501(c)(4) exemption applications. The new optional process will be of limited utility to most applicants other than the Tea Party applications that have languished at the IRS because the process is, as the IRS Report says, “currently available” only to 501(c)(4) applicants whose applications (i) were pending for more than 120 days as of May 28, 2013 and (ii) indicate that the organization may be involved in political campaign intervention or issue advocacy.
Nevertheless, to the extent the optional expedited process may give an indication of a new path forward that the IRS could take with respect to 501(c)(4) applications more generally, there are a few interesting points worth noting.
Safe Harbor to Satisfy the 501(c)(4) “Primary” Test
The process creates a safe harbor for applicants willing to certify for all past, present and future years that:
- 60% or more of its total expenditures (including reasonably allocable overhead) and total time (measured by employee and volunteer hours) is devoted to social welfare activity; and
- less than 40% of its total expenditures and total time is devoted to political campaign activity.
There are several notable aspects to the safe harbor. One, the safe harbor establishes that a 60/40 split between social welfare and political campaign activity readily satisfies the obligation of a social welfare organization to operate primarily for social welfare purposes. Those who maintain that “primarily” should mean “more than 50%” will be disappointed, as will those who maintain that only a de minimis amount of political campaign activity should be permissible.
Two, the inclusion of volunteer time may make it more complicated for organizations with active, volunteer Board members to qualify for the safe harbor.
Three, the Report rather prominently points out that the certification must be made under penalties of perjury. This may be a nod to reform groups that have complained about applicants that have apparently applied for recognition of exemption making statements in their applications that they had no plans to engage in political campaign activity, but then shortly thereafter appeared to engage in significant political campaign activity.
Some Surprising Tidbits
Interestingly, the Report also states that solely for purposes of determining an applicant’s eligibility for the optional expedited process, political campaign activity includes:
- any public communication within 60 days prior to a general election or 30 days prior to a primary election that identifies a candidate in the election—this appears to import the FEC concept of electioneering communications into the tax analysis for the first time;
- conducting an event at which only one candidate is, or candidates of only one party are, invited to speak—this emphasizes how prudent it is to invite speakers from all parties, or at least from all major parties, and to document the breadth of the invitations; and
- any grant to another 501(c) organization other than a 501(c)(3) organization if the recipient engages in political campaign activities, except that an organization may rely on a representation from an authorized representative of the recipient to the contrary so long as the organization “does not know whether the recipient engages in any political campaign” activity—this suggests that there may be a concern on the IRS’s part that certain 501(c)(4) grant-making organizations may be attempting to avoid or game the political campaign activity limitation by making grants to other organizations.
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The Report is, as it states, an initial report on what went wrong, and perhaps it is not much more than that. However, one is left wondering if the IRS would consider (or perhaps is considering) a streamlined and expedited process for approving 501(c)(4) applications based on representations made by applicants with little or no further IRS review—a move that has been strenuously resisted in the past. In addition, one wonders if some of the above factors that are to be considered as political campaign activity solely for purposes of the safe harbor indicate activities that the IRS is considering treating more generally as political campaign activity or is otherwise concerned about.