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The Future of Non-Profits & Politics
Nonprofit organizations have played an important role in America's history, but that role may soon be redefined as the IRS seeks to reform the tax code provision that gives life to these organizations. Currently, a nonprofit organized under Section 501(c)(4) of the tax code can engage in politics and remain tax-exempt if more than half of its money and time is spent on "social welfare activities." As a result, especially in recent years, several nonprofit organizations have entered into the political arena with big wallets and a set agenda, both on local and national stages - especially because political nonprofit organizations are permitted to keep donor names confidential. A study by the Center for Responsive Politics found that political spending by nonprofit organizations skyrocketed from less than $5.2 million in 2006 to more than $300 million in 2012.
"Social welfare", as it stands now, can include some political activity, with an unlimited amount of lobbying. The problem is that the tax code lacks a clear and concise definition of political activity. In November 2013, the Treasury Department and the Internal Revenue Service proposed new rules aimed at clarifying the definition of political activity. Under the proposal, the new definition would include:
· Any public communication made 60 days before a general election or 30 days before a primary election that "clearly identifies a candidate" or a political party, whether in an ad, on a website, or another forum;
· Preparing voter guides;
· Conducting get-out-the vote drives;
· Contributing money or other items of value to a candidate or a political party; and
- Communications that expressly advocate the election or defeat of a clearly identified candidate.
The percentage of a nonprofit's resources that can be devoted to political activity remains unclear; however, the rulemaking calls for comment on the level of candidate-related political activity that should cause the revocation of 501(c)(4) status. What is clear is the apparent disdain for the proposal from organizations and activists across the political spectrum.
In an extraordinary showing of unity, both Republicans and Democrats have voiced their concerns with the draft rules; among them, the possible encroachment upon First Amendment rights and the dulling of civic engagement. The proposal received more than 140,000 comments that were submitted to the agency - a new record for any draft federal regulations - before the comment period ended on February 27, 2014. Now, it is up to the IRS to review the comments, hold a public hearing, and decide how to proceed. It is highly unlikely that the proposal will remain as-is, given the intense backlash it received. For the time being, it is an episode of wait-and-see coupled with the rare occasion where both sides of the aisle agree on tax reform - even if, as in this case, they are just agreeing that they do not agree with an agency's proposal.
This article is intended as a summary of state and federal law and does not constitute legal advice.
Required Disclosure under Circular 230:
Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.