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US Treasury, IRS Issue Guidance For Tax-Exempt Entities

by Mike Godfrey, Tax-News.com, Washington

29 November 2013


The United States Department of the Treasury and the Internal Revenue Service (IRS) have announced they are issuing initial guidance regarding qualification requirements for tax-exemption as a social welfare organization under section 501(c)(4) of the Internal Revenue Code.

501(c)(4) tax-exempt organizations that operate to promote social welfare are named after the section of the Internal Revenue Code under which they were created, and, to date, have been allowed to engage in political activities (as long as political lobbying is not their primary purpose). Gift tax, currently applied at a 35 percent rate to sums given in excess of USD14,000 per year, has not generally been assessed on donations to such entities.

Information is still being sought from the IRS on how it had, in the past, targeted enforcement action on individual donors that made contributions to 501(c)(4) organizations, including local Tea Party groups, with the possibility of imposing gift taxes.

The IRS currently applies a "facts and circumstances" test to determine whether an organization is engaged in political campaign activities that do not promote social welfare. The proposed guidance would reduce the need to conduct fact-intensive inquiries by replacing this test with more definitive rules.

The new guidance would define the term "candidate-related political activity," and amend current regulations by indicating that the promotion of social welfare does not include this type of activity. It is hoped that the proposed rules will reduce the need to conduct fact-intensive inquiries, including inquiries into whether activities or communications are neutral and unbiased.

The proposed guidance also seeks initial comments on other aspects of the qualification requirements, including what proportion of a 501(c)(4) organization's activities must promote social welfare, and whether similar standards should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector.

While the initial guidance has been issued, Treasury and the IRS have stressed that there are a number of steps in the regulatory process that must be taken before any final guidance can be issued. They expect to receive a large number of comments, which they are committed to consider fully before issuing additional proposed guidance or final rules.

"This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations," said Treasury Assistant Secretary for Tax Policy Mark J. Mazur. "We are committed to getting this right before issuing final guidance that may affect a broad group of organizations. It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently."

However, Republican Congressional leaders were skeptical as to the reason for, and timing of, the guidance's issuance. "There continues to be an ongoing investigation, with many documents yet to be uncovered, into how the IRS systematically targeted and abused conservative leaning groups," commented Dave Camp (R – Michigan), Chairman of the House of Representatives Ways and Means Committee. "Before rushing forward with new rules, I would hope Treasury would let all the facts come out first."

His Republican colleague, Orrin Hatch (R – Utah), Ranking Member of the Senate Finance Committee, stated that he found it "unfortunate that the Administration decided to move ahead with these new rules before the Finance Committee could conclude its bipartisan investigation into the targeting of those applying for tax-exempt status," but the Ranking Member of the Ways and Means Committee, Sander Levin (D – Michigan), pronounced the proposed guidance to be a "reasonable starting place."

TAGS: Finance | tax | business | law | Internal Revenue Service (IRS) | enforcement | ministry of finance | tax authority | gift tax | United States | charities | standards | regulation | Tax

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