[EL] Fwd: 501(c)(4)'s and "exclusively"

[John White]

Section 501 is not the only place in the Code where the terms like "exclusively" are modified to mean something less than all.  Section 351, regarding corporate formation, permits tax-free formation of a corporation provided that the exchange of property is "solely" for issuer stock.  The same section explains later that gain is taxed only to the extent that "other" property is received - a significant modification of the general rule.  I have long told my students, "America, what a country!" because in America "solely" can mean not "solely."


John J. White, Jr.
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From: law-election-bounces at department-lists.uci.edu [mailto:law-election-bounces at department-lists.uci.edu] On Behalf Of Ellen Aprill
Sent: Monday, May 20, 2013 10:31 AM
To: law-election at department-lists.uci.edu
Subject: [EL] Fwd: 501(c)(4)'s and "exclusively"

Here again is what I posted on this question last week.  I would add that the "primarily" gloss also eliminates any possible doubts about fundraising efforts.  Without "primarily," some groups might wonder if fundraising for their exempt purpose is the same as engaging in that purpose.

  Ellen
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Ellen P. Aprill
John E. Anderson Professor of Tax Law
Loyola Law School
919 Albany Street
Los Angeles, CA 90015
213-736-1157

---------- Forwarded message ----------
From: Ellen Aprill <ellen.aprill at lls.edu<mailto:ellen.aprill at lls.edu>>
Date: Wed, May 15, 2013 at 10:06 PM
Subject: 501(c)(4)'s and "exclusively"
To: law-election at department-lists.uci.edu<mailto:law-election at department-lists.uci.edu>


Much has been made of the fact that section 501(c)(4) says that such organizations must be "exclusively" for promotion of social welfare while the 501(c)(4) regulations say that "exclusively" means "primarily."

I would like to put that regulatory move in context by noting that the regulations under 501(c)(3) also say "exclusively" means "primarily."  That is, this reinterpretation of "exclusively" is not unique to 501(c)(4)'s.

In part, the reinterpretation of "exclusively" is necessary because the Internal Revenue Code recognizes and allows tax exempts to engage in unrelated business activities.  Yes, such activities are subject to tax, but the elaborate system of the unrelated business income tax clearly acknowledges and accepts that these organizations need not engage exclusively in their exempt purpose.  (The recent report on colleges and universities from the IRS had much to say about how these groups incorrectly reporting and calculating their unrelated business income tax, but compliance with the UBIT rules is a separate issue.)

Further, I have questions and concerns about a rule that establishes a bright line test for (c)(4) political campaign intervention, such as the 5-10% that Democracy 21 and the Campaign Legal Center have proposed.  Under such a test, what happens to groups that engage in political campaign intervention more than 10% but are not engaged primarily in such activity as section 527 requires?   Would they simply be taxable organizations?  (See Don Tobin, "Political Advocacy and Taxable Entities:  Are They the Next Loophole?" 6 First Amend. Rev. 41.)  It seems to me that any change establishing a bright line for 501(c)(4) campaign intervention requires changes to section 527 as well so that 527 applies to all campaign intervention the bright line amount (for all noncharitable exempt organizations, not just (c)(4)s).

Perhaps I am missing something or others on the list have other suggestions that, I hope, they will share.

  Ellen

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Ellen P. Aprill
John E. Anderson Professor of Tax Law
Loyola Law School
919 Albany Street
Los Angeles, CA 90015
213-736-1157<tel:213-736-1157>

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