Sec. 501(c)(4) and Private
Benefit
Ellen Aprill
John E. Anderson Professor of Tax Law
Loyola Law School
Los Angeles, CA
Overview
• Recently, the IRS has invoked the
private benefit doctrine to deny
or revoke 501(c)(4) status for a
number of organizations, all
which also had a political tinge.
• That is, the IRS asserted that
these groups primarily benefited
a private group of citizens and
thus could not be exempt.
• Are these actions a new approach
or business as usual?
Quick Review - what is a 501(c)(4)?
•
•
•
•
“Civic leagues or organizations not
organized for profit but operated
exclusively for the promotion of
social welfare.”
“Exclusively” means “primarily.”
Must be operated “primarily for the
purpose of bringing about civic
betterment and social
improvements.” Reg. 1.501(c)(4)2(i).
“Organization must be a
community movement designed to
accomplish community ends.” Erie
Endowment
No private inurement
Comparing 501(c)(3) and 501(c)(4)
• Greater latitude given to
501(c)(4)’s, i.e. can benefit a
smaller group than (c)(3)s.
– Organization formed to
preserve and develop beauty
of a city qualifies for
501(c)(3). Rev. Rul. 68-14.
– Organization with
membership limited to those
on city block and formed to
preserve and beautify public
areas in the block does not
qualify for 501(c)(3),but does
for 501(c)(4). Rev. Rul. 75286.
Comparing basis for private benefit
limitation on eligibility for exemption
•
•
•
For 501(c)(3), doctrine derives
from requirement that a 501(c)(3)
serve a public rather than a private
purpose. Reg. 1.501(c)(3)-1(d)(ii),
American Campaign Academy.
For 501(c)(4), doctrine is a logical
extension of requirement that
organization must promote
“common good and general
welfare of people of community.”
Reg. 1.501(c)(4)-2(i), 1981 EO CPE
Note: Private inurement
prohibition applies to both
501(c)(3) v. (c)(4): Presence of NonExempt Activity or Purpose per EO CPE
• 501(c)(4)’s may engage in
substantial non-exempt
activities.
• In contrast, under Better
Business Bureau (BBB),
presence of a single,
substantial noncharitable
purpose will be
disqualifying under
501(c)(3).
• That is, per case itself,
BBB does not apply to
501(1)(4).
Services to members and other private
parties by 501(c)(4)s per EO CPE
• A 501(c)(4) generally cannot
limit its services and benefits
to members.
– Some membership groups,
however, primarily serve
community interests.
• 501(c)(4) organization cannot
impose restrictions that bear
no relationship to fulfillment
of the organization’s social
welfare aspirations.
• Some private benefit
permissible, but activities
must remain primarily social
welfare.
PLR 201224034: Recent denial of 501(c)(4)
status because of private benefit
• Organization formed to
promote solutions to State’s
challenging problems
through advocacy and
publicity.
– Anticipated programs include
those aimed at environment,
enforcement raids, school
programs, job development.
– Founder is sole director;
president, secretary, and
treasurer (only officer)
and primary funder.
PLR 201224034 con’t
• Activities suspended during
Founder’s election campaign
• Founder maintains blog; 5 of
17 entries criticized former
opponent in race for elected
office and contained link to
Founder’s campaign website
• Organization will also
conduct activities in
connection with Founder’s
election as chair of statemandated County
organization .
Conclusion in PLR 201224034: Not
eligible for exemption under 501(c)(4)
• Ruling states that programs
designed strictly to promote
Founder and Founder’s pursuits.
• Cites BBB – does it apply?
• Relies on Contracting Plumbers
Cooperative Restoration Corp to
conclude not eligible if primarily
benefit private group.
•
– That case involved repair to city
streets only by members of
organization, thus advancing
members’ business interest
– But here no members.
Issue is benefit to Founder, who is
also sole director and officer.
• Why not use private inurement?
PLR 201224034 con’t
• Emphasizes Founder as single
member and officer of board and
absence of community input or
oversight.
• Is ruling in fact based on
governance concerns?
– See, e.g., PLR 201203025
(inurement when board members
related)
– Some have suggested that IRS
concludes that there is per se
inurement/private benefit in such
situations. Hopkins, Fishman.
– See Leff, Federal Regulation of
Nonprofit Board Independence:
Focus on Independent
Stakeholders as a ‘Middle Way,’ 99
Ky. L. 731 (2011).
PLR 201224034 con’t
• Does ruling turn on
assumption of future
inappropriate dealings with
entities such as statemandated County
organization?
• Ruling also states:
“Additionally, you have not
established that your primary
activity is not to engage in
direct or indirect political
intervention.”
• As others have noted,
requiring an organization to
show that it is not a political
organization is unusual.
Recent rulings identified by press as
involving affiliates of Emerge America
•
•
•
•
All groups are devoted to cultivating
female political Democratic leaders
3 groups – Nevada, Maine,
Massachusetts – denied exemption as
501(c)(4)s in 2011 in near identical,
heavily redacted rulings.
– PLRs 201128032, 34, 35
5 groups – probably California,
Arizona, New Mexico, Wisconsin, and
Kentucky – have exemption revoked in
2012 in near identical, less redacted
rulings.
– PLRs 201221025, 26, 27, 28, 29
None of the rulings asserted excessive
campaign intervention
Rulings rely on American Campaign Academy to
conclude that organizations primarily benefit private
parties and individuals.
• Ruling states that standard for
determining private benefit
described in American
Campaign Academy applies to
(c)(4) as well a (c)(3).
• Thus, an organization which
conducts education to benefit
a political party and
candidates serves private
interests.
• Despite benefit to community,
primary benefit is to Party and
its candidates; activities have
partisan objective.
American Campaign Academy, 92 T.C.
1053 (1989)
• School founded to train
campaign professionals seeks
501(c)(3) status.
• Denied on basis that it served
Republican entities and
candidates more than
incidentally and thus did not
operate exclusively for exempt
purpose, as c-3 operational
test and BBB requires, because
it operated for the benefit of
private interests.
American Campaign Academy con’t
• Although no formal placement
program, record lacked
evidence that any graduate for
Democratic candidate; 85
grads worked in Republican
campaigns; several worked as
consultants; one in foreign
country.
• Outgrowth of National
Republican Congressional
Committee program; funding
from National Republican
Congressional Trust; affiliation
of applicants could be
deduced
American Campaign Academy con’t
• Case distinguished primary
private benefit provided to
students from secondary private
benefit provided to eventual
employers.
• Court accepts IRS argument that
“where the training of individuals
is focused on furthering a
particular targeted private
interest, the conferred secondary
benefit ceases to be incidental to
the providing organization’s
exempt purpose.”
American Campaign Academy con’t
• Even if political
candidates and entities
comprise a charitable
class, must prove that “its
activities benefited the
members of the class in a
nonselect manner.”
• Court concludes that
organization cannot meet
strict 501(c)(3) tests,
which require service to
public interests rather
than to private ones.
American Campaign Academy con’t
• Purported to distinguish
rulings which gave
501(c)(3) status to
programs to train
individuals to work in
particular industry and
funded by that industry.
• “[P]etitioner must show
that Republican entities
and candidates possess
charitable
characteristics.”
Criticism of American Campaign
Academy by Prof. John Colombo
•
•
•
The notion that training violates the
private benefit rules because a
majority of graduates gravitate to one
political party over another is like
saying that Stanford should lose
exemption if we found that its
graduates disproportionately worked
for Apple.
But arguably different result, namely
denial of exemption, should obtain if
noncharitable organization has special
access to charitable benefits denied to
others, e.g. Republican party having
special access to ACA graduates.
Others (Darryll Jones, Laura Chisolm)
make similar criticisms.
Can American Campaign Academy be
applied to 501(c)(4)s?
• Case decided private
benefit very much on
the basis of (c)(3)
standards
– Those receiving
secondary benefit must
constitute a charitable
class.
– Cannot have substantial
nonexempt purpose
under BBB.
More on extending American
Campaign Academy (ACA)
• ACA criticized even when applied
to (c)(3).
– Under ACA, Emerge America
groups would not be eligible for
(c)(3) under suggested
Colombo’s revised private
benefit doctrine of special access
by noncharitable groups (here
Democratic Party)
• When are (c)(4)s subject to BBB
requirement of no substantial
nonexempt purpose?
• (c)(4)s allowed to be partisan
• No allegation of campaign
intervention in these rulings
But, whatever the academic criticism,
American Campaign Academy is precedent
• It is a longstanding IRS position
that, per ACA, activities
conferring substantial private
benefit upon partisan political
interests prevent qualification for
501(c)(4) as well as 501(c)(3),
even if the activities do not
constitute campaign intervention.
– ABA 2004 Report on 501(c)(4)
citing 1997 letter from IRS to
Empower America.
• If so, why was exemption
initially granted to the Emerge
America affiliates?
Should these groups in fact 527s?
• An activity engaged in in
between elections, which is
directly related to, or
supports, the process of
selection, nomination, or
election of an individual in
the next applicable political
campaign is an exempt
[527] function.
– Reg. 1.527-2(c)(1) .
• Between elections . . . P
does train staff members for
the next election,
– Reg. 1.527-2(c)(5) Example 7.
Do these rulings suggest that organization’s burden re
inurement and private benefit will be higher when
organization has a clearly an identifiable partisan flavor?