This week, a federal district court issued an important ruling in a case that could significantly alter limits on the political campaign activities of 501(c)(4) organizations and how those activities are defined.
Background
The ruling, in Freedom Path, Inc. v. Internal Revenue Service, found the limit on political campaign activities of 501(c)(4)s – and the IRS’s guidance on exactly which activities count as political – to be unconstitutionally vague. The court did not decide what the limits and definitions should be. Rather, it instructed the parties to file briefs “advancing interpretations” of how to determine a 501(c)(4) organization’s primary activity and how to define the political campaign intervention that must not be the organization’s primary activity.
The resolution of this case (which remains ongoing) could fundamentally change the operations of 501(c)(4) organizations that attempt to influence elections, and the case could provide guidance to all tax-exempt organizations. While it is too early to tell for sure, the court’s reasoning suggests looser limits on 501(c)(4)s’ political campaign activities.
What This Means
While focused only on 501(c)(4) “social welfare” organizations, the ruling provides a helpful primer on the existing landscape for both 501(c)(3) and 501(c)(4) organizations, as well as 527 organizations. Each type has its own prohibitions, limitations or requirements concerning political activity, but the IRS has typically applied the same or similar tests in determining what counts as political activity (sometimes called “campaign intervention”) for all three types of exempt organizations. As a reminder, 501(c)(3) organizations are absolutely prohibited from supporting or opposing candidates. 501(c)(4) organizations have long been permitted to engage in some ill-defined amount of partisan political activities, so long as the organization is “primarily” engaged in the “promotion of social welfare” (by doing something other than participating or intervening in election campaigns). In contrast, 527 political organizations must engage in political campaign activities as their primary purpose.
The court pointed out that the IRS’s view of how to determine a 501(c)(4) organization’s “primary” activity has long been unclear. A former IRS commissioner once suggested that so long as 51% of an organization’s activities “advance social welfare” (and do not involve partisan political activities), the organization can qualify for tax-exemption under Section 501(c)(4). The IRS later promulgated an “expedited” review process that allowed 501(c)(4)s that opted in to that process to spend up to 40% of their expenditures on partisan political activities, so long as 60% of their expenditures “advance social welfare.” In the Freedom Path litigation, the IRS has advanced a more restrictive position – based on precedent relating to 501(c)(3) organizations – that 501(c)(4)s’ political activities cannot be more than “insubstantial.” After reviewing these various positions, the court bluntly stated, “Freedom Path does not know how much political campaign intervention is too much, and the IRS cannot even agree with itself on the answer.” Further complicating matters, since 2016, Congress has prohibited the IRS from issuing new regulations in this area.
The court further observed that it is also unclear whether a particular activity counts as a political campaign activity (for purposes of the limits on 501(c)(4)s’ activities and the prohibition on 501(c)(3)s’ activities). The court focused on two Revenue Rulings (2004-06 and 2007-41) that outline a “facts and circumstances test” and relevant factors. The court faulted these tests for failing to offer “guidance as to how officials should weigh the factors against one another or how many [of the factors] it takes to reach the threshold for political campaign intervention.” The court singled out one of the factors – whether the position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign – as especially vague.
Next Steps
Taken together, the court found the inquiry into a 501(c)(4) organizations’ “primary activity,” and the meaning of “political activities” that cannot be the organization’s primary activity, to be unconstitutionally vague. As noted, the court did not offer answers. Rather than rule on how to determine an organization’s primary activity or whether a particular activity counts as political campaign intervention, the court instructed the parties to provide proposals of how to answer these questions in a manner that is not unconstitutionally vague. The parties’ answers – especially those of the IRS – might provide significant guidance to all tax-exempt organizations. We will continue to monitor this case and its outcomes.
If you have questions about how these developments might impact your organization, please contact Wade Hauser or Sarah Duniway, or your regular Lathrop GPM attorney.