Annette Nellen
Annette Nellen
The Sec. 501(c)(4) story: Program notes

Social welfare, inappropriateness, resignations, hearings, and complexity—the Sec. 501(c)(4) story has it all

June 13, 2013
by Annette Nellen, Esq., CPA

For decades, a saga involving Sec. 501(c)(4) has been developing, and it likely reached its climax in the past month. These “program notes” serve to help those watching this drama unfold gain a better understanding of the story. The term “story” is not intended to make light of any of the events or players. A program notes approach is just one way to look at and describe a serious set of events involving a tax provision with inherent challenges for administration and compliance.


The key theme of the story is tax law complexity and the problems that complexity can generate for both the government agency trying to administer the system and the taxpayers trying to comply with it.


  • Offices in Cincinnati and Washington, within the IRS Tax Exempt and Government Entities Division.
  • Offices of the Treasury Inspector General for Tax Administration (TIGTA).
  • Various House and Senate committee hearing rooms.


  • IRS personnel in the Tax Exempt and Government Entities Division (see organizational chart at Exhibit 1), and the IRS deputy commissioner they report to.
  • J. Russell George, Treasury Inspector General for Tax Administration, and TIGTA auditors.
  • Organizations seeking Sec. 501(c)(4) status.
  • Sec. 501(c)(4)—while not a person, this Code provision plays a big role in the story.

In addition to being a nonprofit, a Sec. 501(c)(4) organization is to operate “exclusively for the promotion of social welfare” (except for certain employee associations). Despite the presence of the term “exclusively” in the statute, Regs. Sec. 1.501(c)(4)-1(a)(2)(i) looks at the organization’s primary purpose. “An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.”

In addition, under Regs. Sec. 1.501(c)(4)-1(a)(2)(ii), the “promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” Thus, a Sec. 501(c)(4) organization can engage in political campaign activities and lobby for legislation as long as that is not its primary activity.

Common issues in determining if an organization qualifies for Sec. 501(c)(4) status are whether it promotes the general welfare rather than only the welfare of a specific group of people, such as those living in a particular apartment building. The IRS notes on its website that “‘social welfare’ is inherently an abstruse concept that continues to defy precise definition.” General Counsel Memorandum 34345 (9/14/70) refers to “social welfare” as an “elastic term.” In addition, the determination of the organization’s primary activity can be challenging, particularly where it is not clear if political campaign activity is its primary purpose.

Another challenge for Sec. 501(c)(4) organizations involved in political activity is that certain activities related to the selection, nomination, or election of someone to public office may give rise to tax. As noted in Rev. Rul. 2004-6: “Because public policy advocacy may involve discussion of the positions of public officials who are also candidates for public office, a public policy advocacy communication may constitute an exempt function within the meaning of § 527(e)(2). If so, the organization would be subject to tax under § 527(f).” The ruling provides a set of facts and circumstances and six examples to help illustrate when a lobbying effort becomes a taxable “exempt function.”

The Congressional Research Service (CRS) observes that Sec. 501(c)(4) organizations with campaign activities are also subject to the Federal Election Campaign Act (FECA) (see CRS report, 501(c)(4)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws (5/17/13)).


The plot of the Sec. 501(c)(4) story revolves around four controversial areas in need of resolution. According to timelines prepared by the House Ways and Means Committee and TIGTA (see TIGTA Rep’t No. 2013-10-053, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review, pages 30–42), the actions that generated the title for the May 2013 TIGTA report began in March 2010. The plot’s climax was a Q&A at an ABA Tax Section meeting involving Lois G. Lerner, IRS director, Exempt Organizations, that preceded the May 14 release of the TIGTA report. Within days, congressional hearings and additional investigations began, two IRS officials resigned (Acting Commissioner Steven Miller and commissioner of the Tax Exempt and Government Entities Division, Joseph Grant). Daniel Werfel was appointed acting IRS commissioner effective May 22 (see Schreiber, “Acting IRS Commissioner out in Tea Party Scandal,” JofA (5/15/13); and White House release of May 16).

Controversy 1: What was going on and which IRS units were involved in the review process for Sec. 501(c)(4) applications? Was there political targeting?

The TIGTA report states that the audit was performed due to concerns raised by members of Congress and some news reports. The allegations reviewed were whether the IRS:

  • Targeted specific groups applying for tax-exempt status;
  • Delayed processing of targeted groups’ applications for tax-exempt status; and
  • Requested unnecessary information from targeted groups.

TIGTA’s findings include (page references are to the report):

  • Applications for Sec. 501(c)(4) status increased from 1,735 in FY 2010 to 2,265 in FY 2011 and 3,357 in FY 2012 (page 3).
  • In May 2010, the IRS Determinations Unit developed criteria to help find applications involving improper level of political activity. Rather than using terminology from the Code and regulations, the criteria used actual names, such as “tea party” or specific policy positions, such as “taxes” (pages 5–6). See Exhibit 1 for the IRS Exempt Organizations (EO) organizational chart.
  • The tea party criterion was approved by first-line management in the unit and was used for more than 18 months. Employees in the unit indicated they viewed “the Tea Party criterion as a shorthand term for all potential political cases.” Per TIGTA, the criteria indicated the unit’s lack of knowledge as to allowable activities of Sec. 501(c)(4) organizations (page 7).
  • Some applications were in the review process for more than two years due to “ineffective oversight by management” (pages 11–13).
  • Some applicants were sent letters requesting information such as the names of donors and whether any officer or director had run for or would be running for public office. Some were also asked for a list of their important issues and their position on them (pages 18–20).
  • TIGTA made nine specific recommendations to the IRS.

On May 22, 2013, the House Committee on Oversight and Government Reform held a hearing titled: The IRS: Targeting Americans for Their Political Beliefs.

Controversy 2: Who knew what, and were congressional inquiries in recent years answered correctly?

The website for the May 22, 2013, hearing by the House Committee on Oversight and Government Reform includes Lois Lerner’s answers to TIGTA’s questions. The first question was whether anyone outside of the IRS influenced the selection criteria. Her answer: “To the best of my knowledge, no individual or organization outside the IRS influenced the creation of these criteria.”

The House Ways and Means Committee has posted a timeline of when groups and individuals took actions or knew something. The House Committee on Oversight sent a letter to Lerner on May 14, 2013, suggesting that she “provided false or misleading information on four separate occasions last year in response to the Committee’s oversight of IRS’s treatment of conservative groups applying for tax exempt status.” The letter also requests numerous documents for continued investigation. On May 20, 2013, the Senate Finance Committee sent a letter to Acting Commissioner Miller with 41 questions.

Controversy 3: What qualifies for Sec. 501(c)(4) status, and how do other rules interact with this provision?

As described earlier, there can easily be challenges in determining if social welfare is an organization’s primary purpose. Other issues also exist. It is still unresolved whether contributions to Sec. 501(c)(4) organizations should subject the donor to gift tax, even though in 2011 the IRS announced it was closing current examinations and suspending further action on that question, noting it was a “difficult area with significant legal, administrative, and policy implications” (IRS memo and website (7/7/11)).

In 2011, the American Bar Association Section of Taxation asked the IRS for guidance on how the decision in Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), affects the requirement that activities of Sec. 501(c)(4) organizations and Sec. 501(c)(6) trade associations be primarily nonpolitical (7/25/11 letter). Specifically, the tax section noted that the existing regulations focus on lobbying activities rather than electioneering, when these organizations are now more involved in electioneering than in lobbying.

While the TIGTA report focuses on delays and use of inappropriate criteria in reviewing applications, others complain that the IRS has been too lenient in policing existing Sec. 501(c)(4) organizations. For example, on May 23, 2013, a nonprofit group, Democracy 21, sent a letter to TIGTA suggesting that some Sec. 501(c)(4) organizations do not qualify for that status. The group also calls upon the IRS to modify the 1959 regulations that allow a Sec. 501(c)(4) organization to be primarily engaged in social welfare activities when the statute uses the term “exclusively.”

Controversy 4: Is reform needed for Sec. 501 on exempt organizations and Sec. 527 political organizations?

The controversies noted above, along with the reality that Sec. 501(c) lists 29 types of nonprofit organizations, indicates the need for simplification and greater certainty. Concern about the political nature of some Sec. 501(c)(4) organizations raises the issue of whether they should be treated as Sec. 527 political organizations or required to publicly disclose donor names (as is required for Sec. 527 donations).

Resolution (looking forward)

Certainly, there is much work ahead for Congress and the IRS to complete this story. Likely, Congress will gain a more complete picture of the events at the IRS. Then taxpayers may get “The Section 501(c)(4) Story: Part II.” Stay tuned.

Exhibit 1
IRS Organization Chart for Exempt Organizations (EO)
Note: The deputy commissioner at the top of the chart reports directly to the IRS Commissioner.
Source: TIGTA report, page 29.
For additional information and web links, visit the author’s Sec. 501(c)(4) story website.
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Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is the immediate past chair of the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog.