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Attorneys Question W&M Over Exempt Orgs’ Political Activities

SEP. 4, 2023

Attorneys Question W&M Over Exempt Orgs’ Political Activities

DATED SEP. 4, 2023
  • Institutional Authors
    Harmon, Curran, Spielberg & Eisenberg LLP
  • Code Sections
  • Subject Areas/Tax Topics
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Tax Analysts Document Number
  • Tax Analysts Electronic Citation
    2023 TNTF 170-15
    2023 EOR 10-51
  • Magazine Citation
    The Exempt Organization Tax Review, Oct. 2023, p. 308
    92 Exempt Org. Tax Rev. 308 (2023)

September 4, 2023

U.S. House of Representatives
Committee on Ways and Means
1139 Longworth House Office Building
Washington, DC 20515

RE: Request for Information: Understanding and Examining the Political Activities of Tax-Exempt Organizations under Section 501 of the Internal Revenue Code

Dear Representatives Smith and Schweikert,

We are attorneys with Harmon, Curran, Spielberg & Eisenberg, LLP, a nationally recognized law firm located in Washington, D.C., which provides nonprofit organizations with advice on tax exemption, lobbying, election-related activity, employment, and other legal matters. The firm's core values are consistent with its clients and include strengthening citizen advocacy, achieving social and economic justice, expanding civil rights, and promoting environmental stewardship. We write this letter in response to your (the Committee on Ways and Means, or simply, the “Committee”) August 14 request for information (the “RFI”) about the political activities of tax-exempt organizations described in section 501(c)(3) and 501(c)(4) of the Internal Revenue Code (the “Code”).1 Although we may have represented some of the progressive organizations described in the Committee's letter, we write this response in our capacity as experts on the political activities of exempt organizations and not on behalf of or at the request of any client. The opinions expressed herein are our own.

The Committee's request is framed in terms of “concerning reports” about progressive donors and organizations that have allegedly violated Code restrictions on political activities by section 501(c)(3) and 501(c)(4) organizations without mentioning conservative bad actors,2 including the conservative donors and organizations that pioneered the very tactics these progressive donors and organizations are accused of using. The RFI includes three appendices, each of which describes a different “concern” motivating the questions asked by the RFI. We will not comment on the accuracy of the appendices, or the legality of the activities described therein. However, to be clear, there are at least as many concerning reports about conservative donors and organizations. For example, three contributions made in 2022 to two politically connected conservative groups described in section 501(c)(3) and 501(c)(4), respectively, totaled over $2 billion.3 We appreciate that it may be frustrating when one team's tactics are employed against its opponents,4 but the adage “don't hate the player, hate the game,” is apt. Many of the rules of the politics game played by some nonprofits, some of which are discussed in this letter, resulted from the efforts of Republicans.

I. Legal Background

To understand the relationship between section 501(c)(3) and 501(c)(4) organizations and political activities, a more in-depth legal background is required than the surface level summary of the Internal Revenue Service's (“IRS”) website provided in the RFI.

a. Section 501(c)(3)

Section 501(c)(3) describes organizations organized and operated “exclusively” for one or more specifically enumerated exempt purpose — including charitable, educational, or scientific purposes. The Code does not define “exclusively.” Regulations published by the Treasury Department and the IRS provide (hereinafter “Treasury regulations” or simply, “ regulations”) that “[a]n organization will be regarded as operated exclusively for one or more exempt purpose only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3).”5 The Treasury regulations go on to clarify that no more than “an insubstantial part of [a section 501(c)(3) organization's] activities” may be in furtherance of non-exempt purposes.6 Accordingly, a section 501(c)(3) organization that engages in substantial non-exempt activities is not organized and operated exclusively in furtherance of exempt purposes under section 501(c)(3).

Section 501(c)(3) also imposes several restrictions on these organizations, including the prohibition on “participat[ing] in, or otherwise interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Congress has never defined more precisely what it means to “participate in, or otherwise intervene in . . . any political campaign.” The Treasury regulations provide little additional insight but do clarify that political campaign intervention can be direct or indirect and can occur orally or in print.7 Additionally, the regulations define “candidate for public office” broadly as “an individual who offers himself, or is proposed by others, as a contestant for an elective public office, whether such office be national, State, or local.”8

The IRS published a series of revenue rulings, primarily in the 1960s and 1970s, regarding whether specific factual situations result in political campaign intervention. As a general matter, section 501(c)(3) organizations can engage in nonpartisan voter education activities such as publicly distributing legislator voting records, voter guides, and candidate responses to questionnaires.9 Additionally, other nonpartisan activities are permissible, such as providing free broadcast airtime to all candidates to present their viewpoints and conducting public forums in which all qualified candidates for a particular public office can provide their viewpoints.10 A section 501(c)(3) organization also may conduct nonpartisan voter registration and get-out-the-vote drives.11 Voter registration may be targeted to particular populations, such as women, unhoused persons, minorities, immigrants, under-educated persons, and young people.12 For factual circumstances not covered by previously published rulings, the IRS has provided guidance on the types of facts and circumstances that should be considered.13

Although political campaign intervention by a section 501(c)(3) organization is absolutely prohibited, engaging in such activities will not necessarily result in the revocation of an organization's exempt status. Congress enacted section 4955 in 1987 to soften the consequences of accidental or unintended political campaign intervention. Section 4955(a) imposes a first-tier excise tax of 10% of the amount of each political expenditure made by a section 501(c)(3) organization and 2.5% of that same political expenditure on any organization manager knowingly and willfully making such expenditure. Section 4955(b) imposes a second-tier excise tax of 100% on the organization and 50% on the organization manager if the political expenditure is not corrected within the taxable period. Accordingly, a political expenditure by a section 501(c)(3) organization might only result in imposition of the section 4955 excise tax, particularly if the violation was minor, inadvertent, or already corrected when the IRS identified it.

Congress could have used the enactment of section 4955 to clarify the meaning of political campaign intervention. However, section 4955 defines “political expenditure” by parroting the language in section 501(c)(3), without elaboration. Section 4955(d)(1) defines “political expenditure” as “any amount paid or incurred by a section 501(c)(3) organization in any participation in, or intervention in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” The Treasury regulations follow Congress' lead and define “political expenditure” by cross-reference to the regulations under section 501(c)(3), which provides that “[a]n organization is an action organization if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office” and which defines “candidate for public office.”14

b. Section 501(c)(4)

Section 501(c)(4) describes, in part, nonprofit civic leagues or organizations “operated exclusively for the promotion of social welfare.” The Treasury regulations provide that “[a]n 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.”15 The regulations go on to state that “[a]n organization embraced within [section 501(c)(4)] is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.”16

Section 501(c)(4) itself does not prohibit section 501(c)(4) organizations from engaging in political campaign activities. However, the Treasury regulations clarify that “[t]he 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.”17 Nonetheless, a section 501(c)(4) organization is permitted to engage in political campaign intervention if such activities are not its primary activities.18 All facts and circumstances are considered when determining an organization's primary activity.19

c. Section 527

For organizations that are permitted to engage in some amount of political campaign intervention, including section 501(c)(4) organizations, section 527(f) imposes a tax on the lesser of the organization's net investment income or the aggregate amount expended on political activities. This tax may be avoided if the organization has no investment income or if the organization establishes a separate segregated fund (“SSF”) for purposes of engaging in political activities.20 Under the law enacted by Congress, an SSF is treated as a separate organization and therefore political activities conducted through the SSF will not adversely affect the organization's exempt status under section 501(c).

II. RFI Input

a. Question 1:

i. Would it be helpful to 501(c)(3) and 501(c)(4) organizations for the IRS to issue updated guidance on how to define “political campaign intervention”? If yes, why?

Yes. Absolutely. In our experience, most section 501(c)(3) and 501(c)(4) act in good faith and attempt to comply with federal tax law and state and federal campaign finance laws. However, the facts-and-circumstances approach taken by current IRS guidance for determining whether an activity is educational or whether it is political campaign intervention creates considerable uncertainty. The IRS rulings on political campaign intervention are old and out of date. A ruling issued much later in 2007 does address the internet, but only to establish that a website is a form of speech. No rulings address the use of social media, which was a nascent form of communication in 2007. Furthermore, no precedential guidance has been issued since the Supreme Court's ruling in 2010 in Citizens United v. FEC,21 which is commonly credited as the reason for the astronomical rise in the use of organizations that are not required to report the sources or their funds, such as section 501(c)(4) organizations, to engage in political activities.

Furthermore, no reliable mechanism exists to obtain guidance from the IRS regarding new types of political activities. Rarely, the IRS will publish a private letter ruling (“PLR”) or revenue agent report of examination that involves political campaign intervention, both of which provide non-precedential guidance that can only be relied on by the taxpayer to which the ruling is issued. For example, in the past 15 years, the IRS has only released two significant PLRs involving political campaign intervention. In 2011, the IRS released a PLR ruling that a section 501(c)(3) organization did not engage in political campaign intervention when its related section 501(c)(4) organization created a section 527 political organization to engage in political activities.22 Specifically, the ruling found that the section 501(c)(4) organization's activities would not be attributed to the section 501(c)(3) organization because the organizations observed sufficient corporate formalities to warrant the IRS's respect of their separate corporate forms.23 However, in 2020, the IRS released a PLR ruling the opposite with respect to a section 501(c)(3) organization with a wholly owned limited liability company (treated as a corporation for tax purposes) that created a section 527 political organization.24 This is not the outcome that any exempt organization practitioner would have expected based on the 2011 PLR. The primary difference between the 2011 PLR and 2020 PLR appears to be the volume of facts provided by the taxpayer; there were substantially more facts in the 2020 PLR about how the three entities would operate. In fact, it was somewhat shocking that the IRS Office of Chief Counsel ruled at all; the more fact-intensive the analysis required, the more likely it is that the IRS will decline to rule on a request “because of the factual nature of the matter involved or for other reasons,” particularly when the PLR would not be “appropriate in the interest of sound tax administration.”25 Thus, not only is official guidance almost wholly absent, there is virtually no avenue to gain insight into the current thinking of the IRS as it applies a very fact-specific legal standard to novel and evolving factual situations.

In the absence of definitive guidance, the consequences of a misstep for a section 501(c)(3) organization are potentially catastrophic. It takes an experienced practitioner to guide organizations through the ins and outs of the few existing IRS rulings and to apply those rulings to contemporary facts and circumstances. Even still, practitioner opinions may differ regarding the IRS' anticipated reaction to a particular set of facts and circumstances. The section 501(c)(3) organizations that engage in educational advocacy that falls outside the specific (and sometimes antiquated) facts presented by IRS rulings can spend enormous amounts to retain in house or outside counsel to ensure compliance. But not every organization has the funds to spend on attorneys. Instead, small organizations may curtail their Constitutionally guaranteed right to free speech rather than risk losing their exempt status. Thus, clear guidance would help reduce the time and money organizations must spend on compliance, thereby freeing up those funds to be used in furtherance of the exempt purposes.

The harm caused by the lack of IRS guidance is not limited to section 501(c) organizations. An example is helpful here. Assume that a section 501(c)(3) organization is a policy expert in an area not related to elections, such as low-income housing. Assume also that low-income housing becomes an issue in an election. The organization chooses not to speak out on a pending legislative proposal close in time to the election for fear of losing its exempt status. By the organization choosing not to speak, the U.S. public is deprived of a potentially important viewpoint that might have made a difference in the thinking on the topic. Thus, to the extent that the lack of guidance has a chilling effect on speech, the U.S. public is also harmed. Publication of guidance is therefore important in ensuring that the U.S. public has the information needed to make informed decisions, both in elections and in everyday life.

Additionally, publication of guidance that is binding on the IRS is important for holding the IRS to consistent interpretations of the law and halting the development of secret and unexpectedly shifting law. However, we cannot ignore the fact that the IRS recently did try to issue guidance on the political activities of section 501(c)(4) organizations, only to be stymied by Congress. In November 2013, the IRS published proposed regulations under section 501(c)(4) that would have provided guidance on the types of candidate related activities that, when conducted by a section 501(c)(4) organization, would result in political campaign intervention.26 Those proposed regulations also requested comments from the public regarding “what proportion of an organization's activities must promote social welfare.”27 The comments presumably would have informed additional guidance regarding the meaning of “primarily” in the section 501(c)(4) regulations (see the discussion in the next section). The proposed regulations were not perfect and received a tremendously high number of comments for an IRS regulation — 175,885 — many of which disagreed with the IRS' approach. Nonetheless, the IRS processed and reviewed those comments as required by the Administrative Procedure Act.28 At the end of that review, in October 2015, Commissioner Koskinen announced in Congressional testimony that the IRS would withdraw the proposed regulations and instead issue new proposed regulations.29 But, in December 2015, before the IRS could take a swing at issuing new proposed regulations, the Republican-controlled legislature succeeded in blocking publication of any guidance regarding the political activities of section 501(c)(4) organizations by including a rider on the 2016 appropriations bill (the “Rider”).30 The Rider required the IRS to apply “the standard and definitions as in effect on January 1, 2010 . . . for purposes of determining status under section 501(c)(4)” and prohibited spending any funds on providing further guidance on the meaning of those terms. The Rider has been included in every appropriations bill enacted since 2015. Everyone loves to hate the IRS, but if the Treasury Department and the IRS had been permitted to do their jobs and issue guidance, we might not be where we are today.

ii. Would it be helpful to 501(c)(4) organizations for the IRS to issue updated guidance on the extent to which 501(c)(4) organizations can engage in “political campaign intervention”? If yes, why?

Yes. A section 501(c)(4) organization may engage in political campaign intervention but must take care as to how much political campaign intervention is conducted. However, neither Congress nor the IRS have explicitly defined the quantum of political activities that is permissible for a section 501(c)(4) organization. When interpreting “exclusively” within the context of section 501(c)(4), the courts generally have followed the Supreme Court's narrow interpretation of “exclusively” in Better Business Bureau v. United States, which states that “[t]he presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number of or importance of truly exempt purposes.”31

However, practitioners have long relied on the differences between the Treasury regulations under section 501(c)(3) and 501(c)(4) to support the position that a section 501(c)(4) organization can engage in more nonexempt activities, including political campaign intervention, than a section 501(c)(3) organization. That is, unlike the section 501(c)(3) regulations, the section 501(c)(4) regulations do not require a section 501(c)(4) organization's nonexempt activities to be insubstantial.32 Thus, under the Treasury regulations, a section 501(c)(4) organization is explicitly permitted to engage in more than insubstantial nonexempt activities and still be operated primarily for social welfare purposes.

That a section 501(c)(4) organization could spend less than 50% of its resources on political activities also makes sense when read in conjunction with section 527. Section 527 describes political organizations that are exempt from federal income tax on political organization taxable income. An organization is a “political organization” within the meaning of section 527 if it is “organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both,” in political campaigns. If “primarily” interpreted as more than 50%, then an organization that is not primarily engaged in political activities is described in section 501(c)(4), and an organization that is primarily engaged in political activities is described in section 527. However, if “primarily” is interpreted as “exclusively,” an entire group of organizations engaging in political activities in amounts between “insubstantial” and “primarily” would be taxable. It seems unlikely that this is Congress' intent.

Until recently, the IRS applied the more liberal interpretation of “exclusively” in the context of section 501(c)(4). Specifically, two revenue rulings from the 1960s and 1970s ruled that two organizations otherwise engaged in substantial nonexempt activities were described in section 501(c)(4).33 Furthermore, the IRS explicitly adopted the more liberal quantum in nonprecedential guidance. In a 2003 continuing professional education (“CPE”) article, the IRS explicitly stated, “[s]ince the test for exemption under IRC 501(c)(4) looks to the organization's primary activities, an organization exempt under IRC 501(c)(4) may engage in substantial non-exempt activities.”34 The CPE article goes on to state, “[i]n contrast, under the reasoning of Better Business Bureau . . ., the presence of a single noncharitable purposes, if substantial in nature, will disqualify an organization from IRC 501(c)(3) status.” Similarly, in 2013 in response to Republican allegations that the IRS was selectively targeting conservative organizations applying for recognition under section 501(c)(4), the IRS began offering an optional expedited process for section 501(c)(4) organizations engaging in political campaign intervention. Letter 5228, Applicant Notification of Expedited 501(c)(4) Option, requires a section 501(c)(4) organization to represent “that it will spend 40% or less of both the organization's total expenditures and total time (measured by employee and volunteer hours) on direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office.” The IRS still uses this optional expedited process to process section 501(c)(4) applications.35

Despite applying the more liberal interpretation of “exclusively” for over fifty years, the IRS's position appears to have shifted recently without explanation. In court briefs in two recent cases, the IRS has adopted the Better Business Bureau interpretation that “exclusively” means “insubstantial.” In Memorial Hermann Accountable Care Organization v. Commissioner, the IRS stated, “[t]he notion that section 501(c)(4) imposes a 'lower' standard than section 501(c)(3) is inconsistent with the numerous circuits that have applied the Better Business Bureau standard to section 501(c)(4).”36 Similarly, in Freedom Path v. Internal Revenue Service, the IRS again adopted the Better Business Bureau standard and therefore rejected the petitioner's argument that a section 501(c)(4) organization could use 49% of its resources on political campaign activities and still be “operated exclusively for the promotion of social welfare.”37 When questioned, IRS officials claim that no change in position has occurred.

Definitive guidance regarding the amount of political campaign intervention and other nonexempt activities a section 501(c)(4) organization may engage in is necessary for these organizations to be able to operate in compliance with the law. Many section 501(c)(4) organizations have engaged in more than insubstantial nonexempt activities in the past fifty years because that is the standard the IRS had led practitioners and the regulated community to believe was appropriate. If the IRS is going to change the standard that it applies, that change should occur in public guidance, not in the offices and conference rooms of 1100 Constitution Avenue. Furthermore, the IRS has the information it needs to issue such guidance because, as discussed previously, the IRS solicited comments in 2013 regarding the standard that should be applied. All that needs to happen is for Congress to remove the Rider.

b. Question 2: Does the IRS's current guidance on the definition of “political campaign intervention” properly account for new forms of political activity? If not, what should be included in updated guidance from the IRS to account for forms of political advocacy that are currently not covered?

No. As previously discussed in response to Question 1, the IRS has not issued any binding guidance since 2007. Therefore, IRS guidance fails to address post-Citizens United political activities. Accordingly, guidance should be issued addressing these practices, including the daisy-chaining of contributions made to section 501(c)(4) organizations, the use of internet communications, and the analysis of social media (where distinguishing the activities of an individual employee from that of their employer organization is not always simple). Additionally, the IRS should issue guidance on how to treat grants or transfers from one section 501(c)(4) organization to another section 501(c)(4) organization.

c. Question 3: Are there any tax-exempt organizations whose voter education or registration activities you suspect might have had the effect of favoring a candidate or group of candidates which would constitute prohibited participation or intervention? If yes, please describe those activities.

If the implicit assumption of this question is that any voter registration activities that having the effect of favoring a candidate or party would ipso facto be deemed political campaign intervention, then the question is based on an inaccurate premise. Indeed, any activity that affects the composition of the electorate may have such an effect, but if the voter engagement work is targeted for valid nonpartisan reasons, such as removing barriers faced by some groups but not others, or empowering historically excluded populations, then it is entirely appropriate and does not constitute political campaign intervention.

We must also acknowledge that there may be organizations across the political spectrum that engage in voter education and registration activities with a partisan intent. Under the existing IRS guidance, these activities likely would result in political campaign intervention. However, as discussed in response to Question 1, section 501(c)(4) organizations — as well as section 501(c)(5) labor unions, section 501(c)(6) business leagues, and section 501(c)(19) veterans' organizations — are permitted to engage in some amount of political campaign intervention. Furthermore, political campaign activities conducted by a section 501(c) organization (other than a section 501(c)(3) organization) are taxable under section 527(f) if the organization has net investment income. Without additional guidance on what it means for an activity to be “nonpartisan,” it is impossible to give a fully informed response to this question.

d. Question 4: Are there changes to Form 990 that would help clarify how contributions are being used by 501(c) organizations? Especially regarding contributions that are used to fund political activities by 501(c)(4) organizations or nonpartisan voter education activities that 501(c)(3) organizations are allowed to engage in such as voter registration activities, public forums, and publishing voter education guidelines?

No. Section 6033(a) generally describes the information Congress has authorized the IRS to collect on Form 990 — an organization's items of gross income, receipts, and disbursements, and “such other information for the purpose of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe.” Form 990 already requires reporting of political activities on Schedule C, thus providing the information that is necessary to enforce the internal revenue laws. Congress has not authorized the IRS to use Form 990 to enforce federal campaign finance law. If the Committee wishes to see a greater degree of collaboration between the IRS and the Federal Election Commission (“FEC”), Congress must act first.

e. Question 5: Should Congress consider policy changes to address money from foreign nationals flowing through 501(c)(3) and 501(c)(4) organizations to influence U.S. elections? If so, what specific policy changes should be considered?

It would be beneficial if Congress were to provide guidance (or direct the FEC to provide guidance) on the existing prohibition on the use of foreign funds to influence US elections.38 Questions that should be resolved include both the scope of this prohibition and the measures that a tax-exempt organization should take to investigate the source of contributions and to ensure that foreign funds are used only for permissible purposes. For instance, there is some disagreement whether the prohibition applies to advocacy on state ballot measures, or to wholly nonpartisan voter education or voter registration work. In addition, unlike federal PACs,39 section 501(c)(3) and 501(c)(4) organizations have no general obligation to refuse contributions from foreign nationals. In the absence of actual knowledge of a foreign source for a contribution, these organizations do not know what steps they must take, if any, to screen foreign funds should they choose to engage in election-related work.

f. Question 6: Does the IRS collect information from 501(c)(3) and 501(c)(4) organizations that would aid the Federal Election Commission in enforcing the foreign national prohibition under the Federal Election Campaign Finance Act of 1971?

Yes. With respect to section 501(c)(3) organizations, the IRS does collect some information that could be relevant to the foreign national prohibition. That is, section 501(c)(3) organizations must report on Schedule B the identity and amount contributed from some, but not all, donors. However, the IRS is prohibited from disclosing this information to third parties.40 There are some exceptions that permit disclosure under specified procedures, primarily relating to tax administration, but these exceptions would not cover disclosure to the FEC. Thus, if this information is to be used to enforce the foreign national prohibition, Congress must amend the tax law regarding disclosure of taxpayer information.41

For 501(c)(4) organizations, this same information used to be collected by the IRS. However, in response to political pressure under the Trump administration, in 2018 the IRS modified the relevant filing requirements so organizations other than those exempt under section 501(c)(3) are not required to report the names and addresses of their donors even to the IRS.42

g. Question 7: Given the concerns over foreign influence in our elections, should IRS examiners review the national origin of sources of donations reported by a tax-exempt organization on the agency's IRS Form 990-series?

No. The IRS lacks the authority to enforce laws other than the internal revenue laws. Given the complexity of the laws it does administer, it would be unrealistic to expect the IRS to also develop the expertise to enforce provisions of the campaign finance laws. Further, there is no requirement that organizations exempt under section 501(c) retain information on the national origin of donations they receive, so any such inquiry is not likely to produce useful information.

h. Question 8: Are there additional disclosures by 501(c)(3) and 501(c)(4) organizations engaged in “political campaign intervention” that would help prevent illegal contributions made by foreign nationals to influence U.S. elections?

Maybe. Before imposing a requirement of additional disclosure on these organizations, the government should first provide clarity on the scope of the prohibition and the extent to which it imposes an obligation on section 501(c) organizations to track the national origin of contributions received.

i. Question 9: Are you aware of organizations under section 501(c) that are tax-exempt but have the true purpose of influencing elections in favor of one political party?

An organization with a “primary” purpose of engaging in political campaign intervention would not be exempt under any paragraph of section 501(c). Instead, such an organization may be described in section 527. An organization is a “political organization” described in section 527 if it is “a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.”43 An “exempt function” is “the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office in a political organization,” among others.44 However, neither the Code nor the Treasury regulations specifically address the relationship between sections 501(c) organizations engaging in an exempt function activities and 527.

j. Question 10: Are you aware of organizations under Section 501(c) that are tax-exempt but have misused donor funds for the personal benefit of organization executives or have misused donor funds outside of the stated purpose of the donor? If so, please provide a description of those organizations and the relevant conduct.

No. We have seen press reports of such organizations but have no additional information.

We hope that you find our comments illuminating.


Stephanie N.K. Robbins

Elizabeth Kingsley

Harmon, Curran, Spiedlberg & Eisenberg, LLP
Washington, DC


1All references to the “Code” shall be to the Internal Revenue Code of 1986, as updated, unless otherwise stated.

2E.g., Heidi Przybyla, D.C. Attorney General is probing Leonard Leo's network, POLITICO (Aug. 22, 2023), available at (last visited Aug. 28, 2023).

3See, e.g., Hailey Fuchs, Two anonymous $425 million donations give dark money conservative group a massive haul, Politico (Nov. 16, 2022) (detailing large donations to DonorsTrust, a section 501(c)(3) organization that is a conduit of Republican funds), available at (last visited Sept. 2, 2023); Casey Tolan, Curt Devine & Drew Griffin, Massive dark money windfall: New conservative group got $1.6 billion from single donor, CNN (Aug. 22, 2022), available at (last visited Sept. 2, 2023) (describing a $1.6 billion contribution received by the conservative Marble Freedom Trust, a section 501(c)(4) organization, in 2022.

4Kenneth P. Vogel & Shane Goldmacher, Democrats Decried Dark Money. Then They Won With It In 2020, N.Y. TIMES (Jan. 29, 2022), available at (last visited Aug. 27, 2023).

5Treas. Reg. § 1.501(c)(3)-1(c)(1).


7Treas. Reg. § 1.501(c)(3)-1(c)(3).


9Rev. Rul. 80-282, 1980-2 C.B. 178 (candidate questionnaires); Rev. Rul. 78-248, 1978-1 C.B. 154 (publication of voting records and voter guides).

10Rev. Rul. 86-95, 1986-2 C.B. 73 (public forums); Rev. Rul. 74-574, 1974-2 C.B. 160 (broadcast airtime for candidates); see also Rev. Rul. 76-456, 1976-2 C.B. 151 (code for fair campaign practices).

11§ 4945(f); Rev. Rul. 2007-41, 2007-25 I.R.B. 1421 (Jun. 18, 2007).

12The IRS regularly issues advance rulings approving expenditures to section 501(c)(3) organizations engaged in nonpartisan voter registration. E.g., Priv. Ltr. Rul. 9540044 (Jul. 6, 1995) (voter registration targeting female voters, particular in minority communities); Priv. Ltr. Rul. 9223050 (Mar. 10, 1992) (voter registration targeting unhoused persons); Priv. Ltr. Rul. 8822056 (Mar. 4, 1998) (voter registration targeting communities whose residents are under-registered in comparison with the voting-age population of the state or region).

13See id. (addressing 21 factual scenarios involving political campaign intervention).

14Treas. Reg. § 1.501(c)(3)-1(c)(3)(iii).

15Treas. Reg. § 1.501(c)(4)-1(a)(2)(i).


17Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii).

18Rev. Rul. 81-95, 1981-1 C.B. 332.

19Rev. Rul. 68-45, 1968-1 C.B. 259.

20§ 527(f)(3).

21558 U.S. 310 (2010).

22PLR 201127013 (Apr. 15, 2011).

23Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

24PLR 202005020 (Oct. 31, 2019).

25Rev. Proc. 2023-1, § 6.02, 2023-1 I.R.B. 19 (Jan. 3, 2023).



2855 U.S.C. §§ 551-559.

29Rick Cohen, IRS Commissioner Koskinen on 501(c)(4) Regulations: No Timeline, NONPROFIT QUARTERLY (Oct. 29, 2015), available at (last visited Aug. 27, 2023).

30Department of the Treasury Appropriations Act, 2016, Pub. L. No. 114-113, § 127 129 Stat. 2433 (2015). Specifically, the Rider prohibited the IRS from “issu[ing], revis[ing], or finaliz[ing] any regulation, revenue ruling, or other guidance . . . relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of section 501(c)(4).”

31326 U.S. 279, 283 (1945); e.g. Contracting Plumbers Coop. Restoration Corp. v. United States, 488 F.2d 684, 686 (2d Cir. 1973); Am. Women Buyers Club, Inc. v. United States, 338 F.2d 556, 528 (2d Cir. 1964).

32See Treas. Reg. § 1.501(c)(3)-1(c)(1) (providing that an organization will not be regarded operated exclusively in furtherance of exempt purposes “if more than an insubstantial part of its activities is not in furtherance of an exempt purpose”).

33Rev. Rul. 75-286, 1975-2 C.B. 210; Rev. Rul. 66-179, 1966-1 C.B. 139.

34John Francis Reilly, Carter C. Hull, & Barbara A. Braig Allen, IRC 501(c)(4) Organizations, EXEMPT ORGANIZATIONS — TECHNICAL INSTRUCTION PROGRAM FOR FY 2003, at I-25 (2003), available at (last visited Sept. 1, 2023).

35See Internal Revenue Manual (directing an agent to prepare Letter 5228 if the agent cannot determine whether an organization applying for recognition under section 501(c)(4) is primarily engaged in political campaign intervention).

36Reply Brief of Respondent at 52, Memorial Hermann Accountable Care Organization v. Commissioner, No. 4412-22X (Tax Ct. Jan. 30, 2023).

37Memorandum of Points and Authorities in Opposition to Plaintiff's Motion for Summary Judgment and In Support of Defendants' Cross-Motion for Summary Judgment at 8 & 15-16, Freedom Path, Inc. v. Internal Revenue Service, No. 1:20-cv-01349 (Apr. 20, 2021).

3852 U.S.C. § 30121.

39Id.; 11 C.F.R. § 110.20(g).

40§ 6013.

41It is worth noting that private foundations are required to include information about their funding sources on the Form 990-PF and that information is publicly available. This discussion pertains only to “public charities” — that is, section 501(c)(3) organizations that are not private foundations and file the Form 990 or 990-EZ.

42Rev. Proc. 2018-38; Treas. Reg. § 1.6033-2(a)(2)(ii)(F).

43§ 527(e)(1).

44§ 527(e)(2).


  • Institutional Authors
    Harmon, Curran, Spielberg & Eisenberg LLP
  • Code Sections
  • Subject Areas/Tax Topics
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Tax Analysts Document Number
  • Tax Analysts Electronic Citation
    2023 TNTF 170-15
    2023 EOR 10-51
  • Magazine Citation
    The Exempt Organization Tax Review, Oct. 2023, p. 308
    92 Exempt Org. Tax Rev. 308 (2023)
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