[EL] big IRS story - a note on taxes

[John Pomeranz]

Responding to the points made by Sean, Mark, and Ellen:

The question of whether a 501(c)(4) gets any "benefit" in exchange for subjecting itself to the constraints associated with that tax-exempt status and IRS regulation is, as Ellen notes, an old one.  Under current tax law, expenditures for lobbying and political activity (a large part of 501(c)(4) work) may not be deducted as business expenditures.  Therefore, the key question is on the revenue side:  Are the funds given to 501(c)(4)s are "income" (a payment by a person in exchange for the organization's promise to use of those funds to engage in mission-related work the payor wants to see accomplished) or "gifts" (gratuitous support without promise of any compensation given to an organization for which the donor has some desire to support).  We've seen this debate come up as well in the context of whether 501(c)(4) donors are subject to gift taxes.  See excellent articles on this by Barbara Rhomberg and Ellen's more recent powerful response.

If 501(c)(4)s are funded with "income," then they need the 501(c)(4) exemption from federal income tax, because they won't be able to offset any of that income with deductions for lobbying and political activities, so much of their income would be subject to tax absent the exemption.  If 501(c)(4) funds are all "gifts,"  then they don't have any taxable income, and 501(c)(4) status is less important.  Of course, in the latter case you create gift-tax problems for your major donors.  (You also start seeing nonprofit corporations that don't claim tax-exempt status - "taxable nonprofits.")

As for treating 501(c)(4) revenue as contributions to capital, that can complicate the ability of these organizations to form under state nonprofit corporation laws, as most such capital contributions are accompanied by an equity stake in the organization, which most nonprofit corporation acts would prohibit.  There are some states in which a nonprofit may be created with shareholders, but the rights of those shareholders would have be more limited than shareholders in most for-profit corporations (e.g. the non-distribution aspect referenced by Ellen) if the organization hopes to qualify as tax-exempt.  (For an interesting example of a tax-exempt organizations with shareholders, see the recent fight related to control of the 501(c)(3) Cato Institute.)  That said, there are efforts that look a lot like traditional 501(c)(4) advocacy groups that are organized as for-profit, taxable entities that receive funding in the form of capital and engage in advocacy efforts as vendors to other groups and individuals.

Quite apart from these interesting (to some) questions of structure, revenue, and tax-exempt status, it is important to remember that all of the groups that were targeted by the IRS in the scandal that broke yesterday had made the decision to subject themselves to IRS scrutiny and the restrictions of 501(c)(4) status.  Indeed, they had the option to self-declare 501(c)(4) status and forego the IRS scrutiny of the application process.  These groups had made the calculation that there were benefits to be had that were worth these additional burdens.  As it turned out, the scrutiny they received was excessive, which may lead future organizations to make a different choice, but under the rules that were supposed to have been applied, it's clear that these groups perceived a real "benefit" in 501(c)(4) status.


John Pomeranz
Harmon, Curran, Spielberg & Eisenberg, LLP
1726 M Street, NW, Suite 600
Washington, DC  20036
office: 202.328.3500
mobile: 703.597.7663
fax: 202.328.6918
e: jpomeranz at harmoncurran.com





From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Scarberry, Mark
Sent: Saturday, May 11, 2013 11:41 AM
To: law-election at uci.edu
Subject: Re: [EL] big IRS story - a note on taxes

Sean's helpful post raises these questions in my mind (questions I may have asked before, and that I may have forgotten the answers to*):

But for (c)(4) status, would contributions to the corporation be income? (They might be analogous to shareholder contributions of capital, such as by purchase of stock newly issued by a corporation, which are not income.)

If so, are the typical expenses incurred by a (c)(4) the kinds of expenses that would be deductible (in determining taxable net income) for  a "for profit" corporation?

On a related point, I think it is an insufficient answer to say that the corporate form provides benefits in exchange for which a showing must be made to the federal government. Limited liability is not conferred by the federal government but by the states. To the extent that the federal government might simply disregard the corporate entity for tax purposes, it does not seem to me that a contributor who does not get a tax deduction for the contribution would have taxable income simply because a disregarded entity spends the money that was contributed.

Mark

Mark S. Scarberry
Professor of Law
Pepperdine Univ. School of Law

* As Churchill is reported to have said, correction of the use of prepositions at the end of sentences is something "up with which I will not put."

From: law-election-bounces at department-lists.uci.edu<mailto:law-election-bounces at department-lists.uci.edu> [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Sean Parnell
Sent: Saturday, May 11, 2013 7:56 AM
To: 'Estelle Rogers'; 'John Pomeranz'
Cc: law-election at uci.edu<mailto:law-election at uci.edu>
Subject: Re: [EL] big IRS story - a note on taxes

I've seen a few references here and elsewhere to c4 groups being subsidized by taxpayers or having some sort of privileged tax status, so I thought it might be worth clearing up a point about U.S. tax code. Corporate taxes are based on one fundamental premise - taxes are levied on profits earned by the corporation. Because c4 groups are intentionally nonprofit corporations, and thus have no profits on which taxes might be levied, it's not really accurate to somehow suggest they are ducking taxes or receive some sort of special tax exemption. You could, tomorrow, pass a law that says c4 groups are subject to corporate income taxes in exactly the same way a for-profit corporation is, and it would be meaningless - no profits = no tax liability.

There may be others, but to my knowledge there is only one industry in which firms (incorporated or otherwise) are subject to a federal 'gross receipts tax' wherein a percentage is levied against all revenues regardless of profitability, and that is the medical device industry which (warning - editorial content ahead) failed to 'volunteer' to 'contribute' to the Affordable Care Act by cutting a deal with the Obama administration.

So, the 'privileged' tax status of c4 groups (all nonprofits, for that matter) really isn't all that privileged, other than c3 groups whose donors can subtract donations from their own taxes. Setting aside all the tax loopholes and preferences that Congress has carved out over the years, the reason most corporations (for-profit and non-profit alike) don't pay corporate income taxes is that they don't have profits available to be taxed (there is something called unrelated business income for nonprofits that is taxed, but that's a separate matter).

Best,


Sean Parnell
President
Impact Policy Management, LLC
6411 Caleb Court
Alexandria, VA  22315
571-289-1374 (c)
sean at impactpolicymanagement.com<mailto:sean at impactpolicymanagement.com>

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