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IRS Finds Too Much Political Activity for Social Welfare Status

By Bruce R. Hopkins, EditorFebruary 26, 2014 | Print

As discussed in last month’s issue, the IRS is seeking comments from the public on the methodologies to use in determining how much political activity an exempt social welfare organization (an IRC § 501(c)(4) entity) can engage in, and in quantifying various program activities. Now comes the agency, denying recognition of this category of exemption to an organization, the primary activity of which is the promotion and advocacy of open debate on contemporary federal and state public policy issues, based on the extent of revenue expended for political purposes (Priv. Ltr. Rul. 201403019).

The organization stated that one of its primary activities will be the undertaking of projects concerning a particular issue. It estimated that this activity will account for about 49 percent of its time. It advised the IRS that another 49 percent of its time will be devoted to “public education through mass media communication,” such as by means of its website. The remaining 2 percent of the time is spent on fundraising.

We know that measurement of program activity of an exempt organization in terms of time expended is obviously one way of measuring program activity. What we do not know, and this ruling does not explain, is how this organization went about measuring the activity on this basis and what the IRS expects from an organization in proving the time expenditure percentage.

In this organization’s first year, it expended approximately 60 percent of its revenue on the production and distribution of a flier that encouraged defeat of a candidate for public office. The timing of this communication coincided with the electoral campaign. As the IRS noted, the production and distribution of this flier “constituted direct political campaign intervention in opposition of a candidate for public office.”

The IRS also observed that the organization’s website is devoted to raising money for political advertisements to help elect individuals to Congress who share its values. In its second year of operation, the organization spent over 82 percent of its revenue on efforts to coordinate its activities concerning its website. This, too, was held to be political campaign intervention. Again, there is no mention of the methodology used in computing these percentages. But, also again, it is obvious that the expenditure of funds is a way to measure the scope of programs.

In another instance, an organization was said to spend 60 percent of its “time and resources” in promoting participation in a political party. Another 30 percent of its time and resources are expended on a particular voting demographic. Noting that 90 percent of this organization’s efforts are political in nature, the IRS ruled that the organization cannot qualify for exemption as a social welfare entity (Priv. Ltr. Rul. 201403020). [23.5]

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