In the weeks before the 2010 election, every other tv commercial seemed to be a political ad sponsored by a concerned citizens group regarding a particular candidate. Most of these groups are organized as tax-exempt Section 501(c)(4) social welfare organizations or Section 501(c)(6) trade associations. Although a Section 501(c)(4) or Section 501(c)(6) organization may engage in political campaign activities in furtherance of its exempt purposes (subject to applicable state and federal campaign finance laws), such activities must not constitute the organization’s primary activities. See e.g., Rev. Rul. 81-95, 1981-1 C.B. 332; Kindell & Reilly, “Election Year Issues,” 2002 IRS EO CPE Text.
Watchdog groups have been calling on the IRS to investigate many of the high profile organizations behind the ads, questioning whether these organizations should maintain their status as a Section 501(c) organization in light of what they would argue is substantial political activity. As things heat up for the 2012 election year, I anticipate even more political ads sponsored by Section 501(c) organizaitons. I also anticipate that there will be even more IRS scrutiny and resources devoted to compliance. In order to protect tax-exempt status, any Section 501(c)(4) and Section 501(c)(6) organization that engages in political campaign activities should be cautious to maintain sufficient sufficient records to demonstrate that their primary activities are not political campaign activities. This includes a proper allocation of expenses among the organization’s activities, such as overhead.