Wednesday, February 20, 2013

Challenge to Regulations under Code Section 501(c)(4) under Way

Tax Notes Today reports an intriguing development in the battle over the use – or abuse – of section 501(c)(4) organizations to support candidates for political office.  According to the story, available electronically at 2013 TNT 34-8, an unsuccessful Illinois candidate for a congressional seat and Citizens for Responsibility and Ethics in Washington (CREW) ) are suing the IRS over regulations interpreting section 501(c)(4) of the Internal Revenue Code to grant federal income tax exemption to entities "primarily engaged in promoting in some way the common good and general welfare of the people of the community."   The complaint alleges that the regulations are inconsistent with the language of Code section 501(c)(4), which exempts organizations “operated exclusively for the promotion of social welfare.”

This could become a noteworthy case – if a court concludes that the plaintiffs have standing.  The Tax Notes Today story cites fellow blogger (and University of Illinois Law Professor) John D. Colombo for his appropriately cautious words on the difficulty of establishing standing in tax cases like this one.  But if the plaintiffs jump the procedural hurdles, it will be interesting to see how much deference the regulation receives from the judiciary. Readers who follow the electioneering of tax-exempt entities are aware of the considerable latitude the current regulations are thought to provide social welfare organizations in participating in the political process.  It should be noted, however, that a court could interpret the language of the regulations to be more restrictive of pursuing non-exempt purposes – and therefore closer to the literal meaning of the statute – than is commonly assumed.

For additional coverage, see this story from The Hill and the CREW webpage discussing the suit and supplying a link to its complaint filed in the United States District Court for the District of Columbia.     


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Hard to see how they prevail on either the standing question or the merits. Regardless of whether the 501(c)(4) are well done, it's doubtful that the IRS abused its discretion in formulating them.

Posted by: jpe | Feb 26, 2013 7:43:58 AM

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