This post was written by our summer intern, Christopher Stanko. Chris is currently a second-year JD/Masters of Accounting candidate at the University of Colorado Law School and Leeds School of Business.
IRC 501(c)4 organizations are tax-exempt, nonprofit associations or corporations. They have historically been social welfare organizations, civic leagues, and local associations of employees. For example, many HOAs and veteran's groups are 501(c)4. However, 501(c)4 organizations have been used lately as lobbying and political campaign tools.
(Originally posted at D. J. Marcus's Law Blog)
IRC 501(c)4 organizations basically become political action committees (PACs) that can do substantial lobbying and campaigning without losing their non-profit status. For example, a corporations can set up its own 501(c)4s as the political arm of the corporation. It then donates funds to the 501(c)4 . However, funds donated to 501(c)4s are not tax deductible, so it's not as if the corporation doesn't have to pay tax on the money it uses for political purposes. Although donations aren't tax deductible, the major reason this type of entity has become popular for political campaigning and lobbying lies in the fact that 501(c)4s do not have to disclose their donors publically. Thus, corporations and unions can set up 501(c)4s, fund them, and then not be linked publically to their 501(c)4's political activities. In addition to their anonymity, 501(c)4s aren't subject to the donation limits to which PAC's are subject. donations by individuals to federal PACs are limited to $5,000 per year. It is important to note, however, that as a result of the D. C. Court of Appeals decision in SpeechNow.org v. FEC, PACs which make only "independent expenditures" that are not coordinated with a specific candidate or party are, similarly, not bound by this donation limit.
The recent Citizens United decision further highlighted the controversial use of 501(c)4's. While the Supreme Court decision did not overturn the federal ban on direct corporate and union contributions to candidates and political parties, it did strike down the part of the McCain-Feingold Act that prohibited for-profit corporations, non-profit corporations, and unions from broadcasting "electioneering communications." An "electioneering communication," as defined by the Act, is a communication that mentions a candidate's name sixty days before a primary or thirty days before a general election. The Court ruled that the Act's prohibition of "electioneering communications" by corporations and unions violated the First Amendment. Thus, 501(c)4s are now able to air "electioneering communications" at any time.
From a comment by Adam B
501c4s can't make direct contributions to federal candidates; they can only do independent expenditures in that regard. Morever, don't forget the 51% rule for maintaining c4 status.
The main issue of Citizen's United was whether or not corporations were considered actual persons under the Constitutionhow the First Amendment was a restriction on Congressional action, not a personal right. Before, individuals like George Soros or the Koch brothers could always donate as much of their own money as they wanted to making "electioneering communications," and those on the majority side of the Court's ruling argued that Congress did not have the power to restrict corporations and unions from doing the sameshould have the same freedom under the First Amendment. However, corporations and unions aren't subject to the same consequences as individuals. For example, if a corporation breaks the law or gets sued civilly some top executives could also be in trouble, but for the most part the corporation will only have to pay a fine. After all, the whole purpose of forming a corporate entity in the first place is to limit personal liability. Thus, others argue that these entities now enjoy more freedom without the responsibility that comes with it.
501(c)4s and the Citizen's United decision will likely remain contentious issues for the foreseeable future. For example, the IRS's recent actions regarding imposing a gift tax on 501(c)4 donations has developed into a particularly querulous sub-debate between the two political parties. The fight began earlier this year when the IRS tried to impose a gift tax on five Republican donors' donations to 501(c)4s. The Republicans, led by Senator Orrin Hatch and other members of Congress, complained that IRS was being manipulated by the Obama Administration and the IRS subsequently decided that it would delay imposing the gift tax until it reviewed one of its prior rulings. Four anonymous political donors are now accusing the IRS of a lack of impartiality with their rule-making process. In an additional controversy, the IRS in April ruled that tax-exempt hospitals could set-up 501(c)4s for political purposes. 501(c)4s will surely gain a lot of renewed attention as the 2012 election season draws near.
Thanks to johnny wurster and VClib for checking my ConLaw and Adam B for the campaign finance law primer.