A Solution to the (c)(4) Problem: Get Rid of Them

As you all must know by now, either fromprior posts on this blog or any of a million other sources, the IRS is in deeptrouble for its handling of certain 501(c)(4) applications.  I’m not going to comment directly on what theIRS did or didn’t do in its administrative systems that resulted in the currentmess.  But I do think it is time tocomment on the root of all the trouble, which is the existence of 501(c)(4)itself.

Today in the NYT on-line “Room forDebate” feature, which you can view here, I proposed my solution: just getrid of 501(c)(4) (there are also very thoughtful contributions from LloydMayer – who also posts on this blog, Ellen Aprill, Doug Mancino and RosemaryFei).  But I was limited to 300 words in that format; here I have thefreedom to flesh out my argument a bit more, so I’m going to take advantage.

The argument boils down to this: theadministrative havoc created by the (c)(4) designation in conjuntion with theCitizens United case simply does not outweigh whatever marginal public benefitthe (c)(4) designation produces. Accordingly, we should repeal it.  

So let’s begin with some background.  Have you ever asked what the difference isbetween a “social welfare” organization under (c)(4) and a charityunder (c)(3)?  My students in my Tax-exempt Organizations class do soevery year.  And here is the convoluted, though ultimately simple, answer.

A 501(c)(4) organization is one that,according to IRS regulations, “is operated exclusively for the promotion ofsocial welfare if it is primarily engaged in promoting in some way the commongood and general welfare of the people of the community. An organizationembraced within this section is one which is operated primarily for the purposeof bringing about civic betterments and social improvements.”  Now it should be fairly obvious that“bringing about civic betterments and social improvements” is a charitablepurpose that would qualify an organization for tax-exemption under 501(c)(3),rather than 501(c)(4).  Indeed,“improving society” is a core rationale for the existence of charity.  So why do we have 501(c)(4) at all?  Why aren’t these organizations simply exemptunder 501(c)(3)? 

The answer lies principally in two acutedifferences in the statutory language between 501(c)(3) and 501(c)(4).  501(c)(3) states that an organization qualifiesfor exemption under that section only if “no substantial part of the activitiesof which is carrying on propaganda, or otherwise attempting, to influencelegislation . . . and which does not participate in, or intervene in (includingthe publishing or distributing of statements), any political campaign on behalfof (or in opposition to) any candidate for public office.”  In other words, 501(c)(3) organizationscannot engage in a “substantial” amount of lobbying, and cannot engage AT ALLin political campaign activity.  Incontrast, 501(c)(4) contains no such limitations, and in fact the IRS’s view isthat lobbying to advance social welfare is itself a social welfarepurpose.  As a result, a (c)(4) can engage in an unlimited amount of lobbying, contraryto the (c)(3) limitation.  On the otherhand, the regulations under (c)(4) confirm that political campaign activity isNOT a social welfare purpose; but note that (c)(4) does not have the absolute prohibition against political campaign activity that a (c)(3) does.  Accordingly, a (c)(4) also can engage inpolitical campaign activity, as long as its primary purpose remains promotionof social welfare.  

So when you boil all this down, a501(c)(4) is essentially an organization with a charitable purpose that eitherengages in too much lobbying or too much (i.e., ANY) political campaignactivity to qualify as a 501(c)(3) organization. And that in turn leads to theultimate question: why should we grant tax exemption to an organization thatwould qualify as a charity but essentially violates the limitations onpolitical activity in 501(c)(3)? 

[Side note here: Ms. Fei and Mr. Mancinonote that there are a few organizations that don’t engage in excessive lobbyingbut are (c)(4)’s because they don’t meet some other requirement of (c)(3)status, like the strict private benefit rule. I’ll pen a longer response to that at some point, but my quick responseis pretty much the same: even if that is true – and I think the IRS hasn’t beenentirely clear on these points – it shouldn’t be.  Why give a tax break to organizations thatdon’t serve a broad enough charitable class or generate private benefits thatwould disqualify them from charitable status?]  

My answer is, we shouldn’t.  Part of the problem with answering questionslike this is that we do not have any coherent theory for why we give“charities” tax exemption – or indeed, what a “charity” is for exemptionpurposes.  But most people agree thatcharities are organizations that provide a “public benefit” by offeringservices otherwise unavailable from the private market and whichgovernment either chooses not to provide or is affirmatively prohibited fromproviding (e.g., religion).  Differentfolks explain this differently – the economists talk about market failure; thepolitical scientists and sociologists talk about “pluralism” and so forth.  But the general concept is the same: we canthink of charities as organizations that are “gap fillers” – they fill theholes left by the private market and government.  Exemption is a partial government subsidy tohelp these organizations provide their services – partial, because the governmentcan’t or won’t fully fund the activities of these organizations, but governmentcan “help” by freeing them from tax payments (it also helps by permitting a taxdeduction for charitable contributions to these organizations  and permitting them to issue tax-exemptbonds). 

If you buy this explanation (andadmittedly not everyone does), then the (c)(4) essentially is filling a highlyspecialized niche – it’s a charity that lobbies too much, or engages inpolitical campaign activity.  So myquestion is whether this is a kind of market failure (or pluralism or whatever)that justifies the partial government subsidy of tax exemption.  My answer is “no” – why should governmentsubsidize organizations to lobby the government?  Do we really believe there is a seriousmarket failure in lobbying?  That thereis too little lobbying in the world?  Somuch so that the government should give a partial subsidy for lobbying?

But, you may respond, don’t (c)(4)organizations lobby on behalf of groups that otherwise have little voice ingovernment?  Suppose that anorganization’s primary purpose is to lobby for more government programs for thepoor.  Surely that is something that isworth subsidizing, right?  Idisagree.  Note that a charity exemptunder 501(c)(3) and conducting some kind of active program for the poor can infact engage in SOME lobbying – just not a “substantial amount” oflobbying.  I think one can make a goodcase that if you are concerned about “giving voice” tootherwise-disenfranchised groups, that voice is best expressed by groups thathave active programs involving services to those disenfranchised, rather thanorganizations that do nothing but purport to represent those groups inlegislation.  And if your primaryactivity is conducting a charitable program other than lobbying, you getexemption under 501(c)(3) AND you can lobby (some).  But even if you disagree with this argument, I come back to the following point: if we think too much lobbying (and ANY political campaign activity) is “bad” for a charity, what is the justification for creating a “charity lite” category that permits these things?

So my bottom line is this.  The (c)(4) designation doesn’t get us much publicbenefit that we couldn’t get with a (c)(3) that has an active program of serviceand lobbies on the side.  And yet as wehave seen over the past two years, the (c)(4) presents virtually insolubleadministrative problems of line-drawing regarding when political campaignactivity is “primary” and between “issue advocacy” and lobbying (completelypermitted) and “political campaign activity” (permitted as long as it is notthe “primary purpose”).  Despite Ms. Fei and Mr. Mancino’s pleas for better enforcement, I’m highly doubtful that the IRS will ever be able to adequately enforce these lines in the (c)(4) context.  They can’t even enforce them in the (c)(3) context very well, where the backdrop is an absolute prohibition on political campaign activity coupled with a softer limit on lobbying.  So what would make anyone think there is some “magic formula” that will make these things enforceable in the (c)(4) context with even less-well-defined limits?

So my solution:get rid of the (c)(4).  It just isn’tworth the angst.

JDC