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A Tax Lesson for Election Law

Posted on Sep. 30, 2019
Ellen P. Aprill
Ellen P. Aprill

Ellen P. Aprill is a professor of law and the John E. Anderson Chair in Tax Law at Loyola Law School Los Angeles. She thanks Beth Kingsley, Marc Owens, Justin Levitt, Michael Morley, Lloyd Mayer, and Sanford Holo for their helpful comments.

In this article, Aprill examines the complicated role that tax law plays in regulating campaign finance and the weaknesses in our campaign finance and tax laws.

Copyright 2019 Ellen P. Aprill.
All rights reserved.

An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act,1 tax regulation of campaign finance has increased importance.

Background: FEC Proceedings

On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee.2 The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.3

As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.”4 Although unlike section 501(c)(3) organizations,5 a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention,6 the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates,7 neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).8

Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.”9 Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions,10 and a 501(c)(4), unlike a 501(c)(3), is not such an organization.11

In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.12

At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.”13 Republican members disagreed, and the FEC postponed its decision.14

After that meeting, the time for the commission’s decision was extended.15 FEC staff distributed three additional draft opinions, none of which required the proposed organization to be described in “section 170(c) of the Internal Revenue Code.”16 The three opinions instead cited the “other lawful purpose” language of the applicable campaign finance law.17 Both draft advisory opinions 19-33-B and 19-33-C concluded (with slightly different reasoning) that the Price committee could not donate its funds to the 501(c)(4) because the donation would result in the conversion of committee funds to the personal use of Price by enabling him, even if uncompensated, to promote his reputation and policy positions.18 Draft advisory opinion 19-33-D determined that uncompensated service by Price, as described in the request, did not constitute impermissible personal use.19

At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.”20 The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action.21

Section 501(c)(3) Versus 501(c)(4)

Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law.

The planned organization proposed in the Price committee request could easily qualify under 501(c)(3) as a tax-exempt educational organization — an entity unquestionably described in section 170(c). So why would the committee propose a 501(c)(4) instead?

Of course, there are several differences under tax law between a section 501(c)(3) organization and a section 501(c)(4) organization. If deductibility is not an important consideration, many of those differences favor choosing a 501(c)(4). A 501(c)(3) must file an application for exemption.22 Although the average age of inventory for such applications has declined 32 percent since the end of the government shutdown in January, processing these applications takes time.23 (Given that Price’s congressional service ended early in 2017, a further delay in transferring funds seems to be only a minor consideration, but it is one nonetheless.)

Under current law, a 501(c)(4) must file a notice with the IRS of its operation as a 501(c)(4) within 60 days of formation.24 A 501(c)(4), however, is not required to file an application for exemption, although it can choose to do so.25 Any exemption application for 501(c) status, including status as a 501(c)(3) or a 501(c)(4), must be made publicly available on request.26 If a proposed 501(c)(4) does not file an exemption application, less information regarding its planned operations and organizing documents is available.

The Price committee request states that the proposed 501(c)(4) would be “registered” as a 501(c)(4). It is not clear whether this refers only to the required notice or also means recognized as exempt under an application for exemption. FEC draft advisory opinion 19-33-A describes the Price committee request as representing that the new entity “will obtain recognition as a tax-exempt entity from the Internal Revenue Service,” but the committee request does not explicitly state that. Registering is not the same as receiving IRS recognition of exempt status under section 501(c)(4). (I also note that this FEC draft advisory opinion states that 501(c) describes organizations “that are exempt from paying federal taxes.” That statement is inaccurate; section 501(c) exempts organizations from federal income taxes. Other federal taxes, such as employment taxes, still apply.27)

The requirements for 501(c)(4) status are not as strict as those applicable to 501(c)(3) organizations, which must serve an open-ended charitable class.28 In contrast, section 501(c)(4) organizations must, according to the regulations, only promote “in some way the common good and general welfare of the community.”29

Both 501(c)(3) and (c)(4) organizations must file an annual information return on Form 990,30 “Return of Organization Exempt From Income Tax,” and the forms from the three most recent tax years are among those that must be made publicly available. Because of a recent change in position by the IRS,31 section 501(c)(4) organizations may no longer have to disclose to the agency the names of major donors on Schedule B of Form 990. Section 501(c)(3) groups are still required to do so, although they redact names from the version of the Form 990 made available to the public.

Moreover, section 501(c)(3) organizations with activities such as those described in the Price committee request need to show that they satisfy complicated rules regarding public support.32 If those requirements are not met, the organization will be recharacterized as a private foundation instead of a public charity33 and find itself subject to the private foundation excise taxes.34 Section 501(c)(4) organizations do not face such concerns. These are all good reasons why the Price committee may have preferred a transfer to a 501(c)(4) group, but transfer of campaign committee funds to a 501(c)(4) also introduces uncertainties under tax and election law.


Under tax law, 501(c)(4) organizations may, and frequently do, form political action committees (PACs).35 Although a PAC may be no more than a separate bank account, it is treated under the tax law as a separate organization that may need to file a Form 990 and a return on Form 1120-POL, “U.S. Income Tax Return for Certain Political Organizations,” among other potential tax filing requirements.36 It is not clear whether the undertakings in the Price committee request regarding limitations on political activity by the proposed 501(c)(4) would extend to its formation of a PAC, or whether a PAC would be sufficiently separate to not be bound by these limitations.

Also, transfer to a 501(c)(4) may expose former lawmaker Price to income tax on the amounts transferred. Section 527 governs taxation of political organizations, including campaign committees. Section 527(d) explains when transfers from a political organization will be deemed not to be have made for the personal use of the taxpayer and thus are not income to the candidate. They include transfers “to or for the use of” public charities (except for supporting organizations)37 — that is, except for organizations that achieve public charity status because of their relationship to other kinds of public charities and not because of their own activities. Thus, section 527(d) does not list among tax-free transfers those to supporting organizations, private foundations, or 501(c)(4) organizations.

Unofficial IRS guidance, however, has permitted tax-free transfers to private foundations in specified cases. A well-respected 2000 IRS continuing professional education (CPE) text explains how the phrase “for the use of” in section 527(d) operates.38 It describes a private letter ruling (LTR 9425032) in which contributions from campaign committees transferred to a private foundation were considered “for the use of” public charities described in section 527(d). In that ruling, the private foundation had been formed to make contributions to college and university scholarship funds. As the training text states, “Under the law of the state in which the private foundation was incorporated, it was considered a charitable trust,” with its terms enforceable by the state’s attorney general. The CPE text further explains that a contribution by a political organization to a private foundation or supporting organization would be permissible under section 527(d) only if the provisions requiring contributions to a qualifying public charity are under a “legally enforceable trust” or “a similar legal arrangement.”

The CPE text did not discuss 501(c)(4) groups with self-imposed constraints regarding political activities. As the newly approved American Law Institute Restatement of the Law of Charitable Nonprofit Organizations observes,39 states sometimes treat 501(c)(4) organizations as charities subject to attorney general enforcement, and other times they do not.

The Price committee request did not specify the domicile of the planned 501(c)(4) organization or how the promised restrictions would bind it. If the state of domicile treats a 501(c)(4) such as the one proposed by Price as a charitable trust because the restrictions are stated in a legally binding document, the former legislator may avoid income taxation under section 527(d) based on the reasoning of the CPE text. I do not, however, believe this conclusion is beyond doubt.

If state law does not treat a 501(c)(4) with these restrictions as a charitable organization subject to attorney general oversight, I do not think the separate account described in the request would suffice, especially when the limitations on the account relate only to influencing elections and not to lobbying (a restriction a bit inconsistent in my view with the representation regarding the 501(c)(4) as a whole).

Further Considerations

As noted previously, both 501(c)(3) and 501(c)(4) organizations must file an annual information return on Form 990 listing the names of their officers and directors. Thus, if the Price committee decides to proceed and form a 501(c)(4), its Form 990 would show Price’s role as chief executive officer and president and whether he receives compensation or not. In other cases, an organization’s Form 990 would not be a source for information relevant to FEC restrictions. The form would, for example, disclose compensation only if the recipient is an officer, director, key employee or one of the organization’s five most highly compensated employees. Thus, if a former candidate or a family member became an employee but did not fall into one of those three categories, the Form 990 would not show that relationship.

Issues of disclosure and oversight over transferred campaign funds are not unique to the Price committee’s request. They arise because both election law and tax law allow transfer of excess campaign funds to many kinds of organizations, including political parties, that would continue to be subject to FEC disclosure and oversight. I would recommend either that the law be amended to permit transfers of excess campaign funds only to organizations subject to ongoing FEC jurisdiction, or, as many have argued,40 that disclosure requirements to 501(c) groups be expanded generally. Moreover, even if the FEC were operational, current law fails to give the commission the authority to proactively enforce restrictions on transferred funds.41 Thus the Price committee request reminds us again of weaknesses in our campaign finance and tax laws.


1 The FEC “will no longer even have enough commissioners to legally meet,” and thus will be unable to take on some of its most basic actions, including holding board meetings, starting audits, making new rules, and levying fines for campaign finance violations. Shane Goldmacher, “The Federal Election Commission Needs 4 of 6 Members to Enforce the Law. It Now Has 3,” The New York Times, Aug. 26, 2019. See Dave Levinthal, “Federal Election Commission to Effectively Shut Down. Now What?Center for Public Integrity (Aug. 26, 2019). The FEC has had the bare minimum of four commissioners for the past year and a half. President Trump nominated Trey Trainor in September 2017 and has renominated him twice, but the Senate has failed to hold a confirmation hearing. Id.

2 Elections LLC Advisory Opinion Request (May 31, 2019) (the Price committee request).

3 See Laura Zornosa, “Should Regulators Let Jet-Setting Tom Price Use Campaign Cash for Nonprofit Travel and Expenses?Center for Public Integrity (July 25, 2019). As the article points out, Price, a former legislator, served as secretary of the Department of Health and Human Services for seven months before resigning amid criticism of his use of taxpayer funds for private charter flights. Id.

4 Price committee request, supra note 2.

5 Section 501(c)(3) exempts entities only if “no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

7 See 52 U.S.C. section 30114(b); FEC, “Personal Use.

8 Price committee request, supra note 2.

9 52 U.S.C. section 30114(a).

12 FEC, Draft AO 2019-10 (Price for Congress) Draft A (July 17, 2019).

13 See Zornosa, supra note 3.

14 Id.

15 Letter from Stefan Passantino to Kevin Paulsen.

16 The FEC record includes copies of two tweets from me stating that a tax lawyer would not read section 170(c) as did Draft Opinion A, because section 170(c) describes organizations for which a charitable contribution deduction is allowed, and no such deduction is allowed for contributions to 501(c)(4)s. Vice Chair Matthew Peterson and Commissioner Caroline C. Hunter, the Republican members of the FEC, submitted copies of those tweets for the record.

17 See Levinthal and Carrie Levine, “A Republican Wants Old Campaign Cash to Fund His Nonprofit. A Democrat Might Show the Way,” Center for Public Integrity (July 26, 2019).

19 Draft advisory opinion 19-33-D.

21 Even before the vice chair’s resignation, Rick Hasen wrote, “Many more aggressive political folks use FEC deadlock as a green light.” He also observed that many FEC complaints and lawsuits “will take a long time to resolve.” Hasen, “FEC Deadlocks Over Advisory Opinion on Tom Price Attempt to Transfer Congressional Funds to Political 501(c)(4),” Election Law Blog (Aug. 22, 2019).

22 Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” Churches and very small organizations need not file an application. See IRS, “Instructions for Form 1023.” Small organizations can use Form 1023-EZ, “Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” See IRS, “Instructions for Form 1023-EZ.”

23 Fred Stokeld, “IRS Makes Progress on EO Application Backlog,” Tax Notes Federal, Sept. 9, 2019, p. 1829.

25 See IRS Instructions for Form 1024-A, “Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code.”

28 See Ellen P. Aprill, “Charitable Class, Disaster Relief, and First Responders,” Tax Notes, Nov. 14, 2016, p. 949.

29 Reg. section 1.501(c)(4)-1(a)(2).

31 See Rev. Proc. 2018-38, 2018-31 IRB 280. However, on July 30, 2019, the Montana district court ruled that the revenue procedure was invalid because the change constituted a legislative rule and the IRS failed to follow notice-and-comment rulemaking. Bullock v. IRS, No. 4:18-cv-00103 (D. Mont. 2019). The IRS responded by releasing proposed regulations (REG-102508-16) to provide the necessary notice-and-comment period.

33 Section 509(a). See Foundation Source, “What Is a Private Foundation?

34 Sections 4940-4985. See IRS, “Private Foundation Excise Taxes.”

35 See John Francis Reilly and Barbara A. Brig Allen, “Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations,” 2003 EO CPE Text, L-18.

36 See IRS, “Filing Requirements.”

37 Section 509(a)(5). See IRS, “Supporting Organizations — Requirements and Types.”

38 See Judith E. Kindell and John Francis Reilly, “Election Year Issues,” 2002 EO CPE Text, 413-415.

39 See American Law Institute, “Restatement of the Law of Charitable Nonprofit Organizations,” section 1.01 (approved May 20, 2019) (on file with author).

40 See, e.g., Roger Colinvaux, “Political Activity and Tax Exemption: A Gordian’s Knot,” 34 Va. Tax Rev. 1 (2014); Hasen, “Three Wrong Progressive Approaches (and One Right One) to Campaign Finance Reform,” 8(1) Harv. L. & Pol. Rev. 21 (2014); Lloyd Hitoshi Mayer, “Politics and the Public’s Right to Know,” 13(1) Elec. L. J. 138 (2014); Aprill, “Regulating the Political Speech of Noncharitable Exempt Organizations After Citizens United,” 10(4) Elec. L. J. (2011).


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