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501(c)(4) Social Welfare Organizations Facing Increased Scrutiny

Posted in Political Law

By David Fine

Super PACs have garnered most of the attention this campaign season, given the massive spending of such organizations. According to The Daily Beast, a total of 363 Super PACs had spent $373 million this election cycle as of March 12, 2012.

We know a lot about Super PAC contributors and expenditures because of FEC disclosure requirements applicable to Super PACs. Much less is known about the operations of 501(c)(4) social welfare organizations, which are significant political players but subject to no meaningful disclosure requirements by the Internal Revenue Service. Many organizations have related 501(c)(4) and Super PAC organizations, such as American Crossroads on the Republican side and Priorities USA Action on the Democratic side.

While well-known to political law experts, three features of 501(c)(4)s have attracted broader attention in the last few months. First, 501(c)(4)s, like other nonprofits, are not required to disclose their donors. The effect is that contributors may remain anonymous by donating to a non-profit organization, which in turn contributes to a Super PAC. For example, American Crossroads receives contributions from its sister 501(c)(4), American Crossroads GPS and Priorities USA Action similarly receives contributions from Priorities USA, its 501(c)(4) counterpart. The Super PAC discloses the 501(c)(4) as the contributor. The contributors to the 501(c)(4) are not disclosed.

Interest groups are beginning to push companies that fund politically-oriented non-profits. Recently, groups such as Common Cause and labor unions organized to pressure such companies with boycotts, shareholder pressure, and even the divestment of pension funds.

501(c)(4)s are “social welfare organizations” under the IRS code. Such groups must be primarily engaged in the promotion of social welfare. While they may engage political activity, such activity cannot constitute the organization’s “primary activity.” There is no specific test for whether a 501(c)(4)s primary activity is political.

Political spending by non-profits has exploded. According to Roll Call,

In 2010, the first election after Citizens United, non-disclosing tax-exempt groups spent $133.3 million on candidate-oriented expenditures, according to the Center for Responsive Politics.

In 2012, election-related nonprofit spending is expected to soar even higher. Crossroads GPS collected an estimated $32.6 million in 2011 – far more than the $18.4 million raised by the group’s affiliated super PAC, American Crossroads. Together, the groups have said they will spend $240 million. The conservative super PAC FreedomWorks for America received $1.4 million – nearly half of its $3 million budget – from its affiliated nonprofit FreedomWorks, according to the CRP. Two Democrat-friendly super PACs – Priorities USA Action and American Bridge 21st Century, have received more than $200,000 apiece from their respective nonprofit affiliates.

The Center for Responsive Politics reported that the percentage of spending from groups that do not disclose their donors has risen from 1 percent to 47 percent since the 2006 midterm elections and that 501c non-profit spending increased from zero percent of total spending to 42 percent in 2010.

This activity has increased pressure – both partisan and non-partisan – on the IRS to step up its scrutiny of 501(c)(4)s. Legislation has also been introduced to increase disclosure by 501(c)(4)s.

In my view, it is unlikely that any meaningful regulation will occur during this election cycle, and 501(c)(4)s will continue to be used as vehicles to fund Super PACs and to make direct political expenditures. Moreover, attempts at regulation raise First Amendment concerns, among others, and will be opposed vigorously by certain non-profit organizations.

Nevertheless, and especially in light of the increased scrutiny, 501(c)(4) organizations must be careful to maintain a legitimate social welfare purpose and be able to demonstrate, in the face of an audit, that political activity is not their primary activity. Corporations and other potential donors to 501(c)(4) social welfare organizations would also do well to keep in mind this controversy as they plan their political giving strategies.