The Internal Revenue Service has been harshly criticized for singling out conservative organizations when it investigated which groups were legitimately applying for 501(c)(4) status, which makes them tax exempt, keeps donors confidential and allows some political activity.
But should the 501(c)(4) status even exist? Should nonprofits be allowed any political activity?
Recently, organizations exempt from taxes under Section 501(c)(4) have gotten a bad name, due to their use – and, perhaps, abuse – for political purposes, spending staggering sums to influence elections in 2012 without disclosing their donors. These new organizations began applying for recognition of their exemption in increasing numbers starting about six years ago. The trickle increased to a flood after the Supreme Court’s Citizens United decision opened the gates to independent expenditures on candidate elections by corporations.
But Section 501(c)(4) has been around for more than 50 years, and we should not let the current scandal obscure the unique and useful place (c)(4)’s occupy in the universe of tax-exempt organizations.
If Section 501(c)(4) were eliminated, low-income housing providers and neighborhood associations would be taxed like businesses, even though they operate to benefit society and not their shareholders.
Just as 501(c)(3) organizations are often referred to as “charities,” those exempt under 501(c)(4) are called “social welfare organizations,” sometimes described as a step down from charity, or “charity-lite.” What’s the difference? Unlike charities, (c)(4)’s cannot offer their donors charitable contributions deductions on their income taxes, a serious disadvantage in fundraising; the trade-off is that (c)(4)’s can engage in unlimited lobbying in furtherance of social welfare (charities can do some), and in some candidate electoral activity (how much is debated; charities cannot do any). In addition to being more empowered politically, (c)(4)’s are permitted to confer somewhat more benefit on their members, their neighborhood or some other group that cannot qualify as a charitable class.
The types of organizations who have historically occupied the (c)(4) niche follow directly from these differences. The Sierra Club, the AARP and the National Rifle Association, to name examples, are too politically engaged to be charities, yet they work toward what each believes will be a better world. Charities who find Section 501(c)(3)’s restrictions hamper their advocacy, often create a (c)(4) affiliate to pursue their lobbying agenda. Health maintenance organizations, low-income housing providers and homeowner or neighborhood associations are all examples of groups that may confer too much private benefit on their members, tenants and residents to qualify for (c)(3) status, yet their contributions to the social welfare are undeniable and warrant their continued exemption from federal income taxes.
If Section 501(c)(4) were eliminated, these groups would be taxed like businesses, even though they operate to benefit society and not their shareholders or corporate executives. The I.R.S. needs to fix Section 501(c)(4) to address its use by abusive organizations, but we shouldn’t eliminate it.