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Section 527 tax-exempt political organizations are now history

What is the difference between Section 527 and the Tea Party 501(c)(4) organizations that the IRS scrutinized in 2012?

Presidential candidates are not the only ones with a vested interest in winning an election. Section 527 and 501(c)(4) organizations are two types of groups where stakeholders can donate money to further political interests and campaigns.

READ: How will changes in tax policy affect your 2013 tax return?

The Internal Revenue Code (IRC) defines 501(c)(4)’s, or social welfare organizations, as tax-exempt because they do not direct profits to any one stakeholder but rather serve the promotion of social welfare. In practice, however, the definition of promoting social welfare has been interpreted somewhat creatively.

This section of the code is vague enough that it has been used to classify those tax-exempt organizations that are unclassified. Their purpose is not clearly outlined in any of the other sections of the IRC, so they are awarded exemption under 501(c)(4).

Until recently, these group types were restricted in their public outreach activities in the 60 days leading up to an election. If your organization wanted to influence elections within those final and crucial 60 days, you needed to apply for tax-exemption under Section 527 instead. Section 527 is reserved specifically for political organizations.

The catch is – Section 527s are required to fully disclose their contributions, including their donor lists. Some donors prefer to remain nameless to the government, but in order to remain anonymous, their electioneering wings would be clipped, and their money would be ineffectual during that crucial 60-day window. Then the Supreme Court changed the rules.

READ: What tax evasion will cost you

In 2010, the Court ruled in Citizens United vs. Federal Election Committee that the provisions under 501(c)(4) violated the First Amendment rights of organizations. The 60-day window was seen as a restriction on free speech, and it was removed. Social welfare organizations had become the perfect political entity. Naturally, applications for tax-exempt status under IRC 501(c)(4) exploded after that.

Now, you might see slews of television ads before election day, put on by either of these organization types and in promotion of any cause – from greenhouse gas reduction to rejecting the Marketplace Fairness Act.

 


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