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Treasury Department proposing new rules on tax-exemption eligibility

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The Treasury Department proposed new guidelines Tuesday that would affect so-called social welfare groups applying for tax-exempt status, such as those that the Internal Revenue Service subjected to inappropriate screening during the 2010 and 2012 election cycles.

The intended rule change would establish a new term, “candidate-related political activity,” to help the IRS determine which organizations should be disqualified from 501 (c)(4) status.

The department said it will also seek recommendations for changing how much of a group’s activities could fall into that prohibited category before they would be ineligible for tax-exemption.

Many lawmakers have criticized the IRS’s current policy of allowing organizations to qualify as long as the majority of their activities do not involve political actions, a standard that is difficult to measure.

The newly proposed rules would clarify that social welfare does not count as prohibited activity. It would also define the term “candidate-related political activity” to include communications, grants and contributions and activities closely related to elections or candidates advocating for a clearly identified political candidate.

Below is the text of the department’s announcement:

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today will issue initial guidance regarding qualification requirements for tax-exemption as a social welfare organization under section 501(c)(4) of the Internal Revenue Code.  This proposed guidance defines the term “candidate-related political activity,” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity.  The proposed guidance also seeks initial comments on other aspects of the qualification requirements, including what proportion of a 501(c)(4) organization’s activities must promote social welfare.
The initial guidance is expected to be posted on the Federal Register later today.
There are a number of steps in the regulatory process that must be taken before any final guidance can be issued.  Given the significant public interest in these and related issues, Treasury and the IRS expect to receive a large number of comments.  Treasury and the IRS are committed to carefully and comprehensively considering all of the comments received before issuing additional proposed guidance or final rules.
“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur.  “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations.  It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”
“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” said IRS Acting Commissioner Danny Werfel.  “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”
Organizations may apply for tax-exempt status under section 501(c)(4) of the tax code if they operate to promote social welfare.  The IRS currently applies a “facts and circumstances” test to determine whether an organization is engaged in political campaign activities that do not promote social welfare.  Today’s proposed guidance would reduce the need to conduct fact-intensive inquiries by replacing this test with more definitive rules.
In defining the new term, “candidate-related political activity,” Treasury and the IRS drew upon existing definitions of political activity under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments.
Under the proposed guidelines, candidate-related political activity includes:
1.      Communications
2.      Grants and Contributions
3.      Activities Closely Related to Elections or Candidates
These proposed rules reduce the need to conduct fact-intensive inquiries, including inquiries into whether activities or communications are neutral and unbiased.
Treasury and the IRS are planning to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).  In particular, there has been considerable public focus regarding the proportion of a section 501(c)(4) organization’s activities that must promote social welfare.  Due to the importance of this aspect of the regulation, the proposed guidance requests initial comments on this issue.  The proposed guidance also seeks comments regarding whether standards similar to those proposed today should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector.

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