The U.S. Internal Revenue Service recently denied a nonprofit political training academy’s application for a federal income tax exemption as a social welfare organization under Section 501(c)(4) of the U.S. Internal Revenue Code (“IRC”). The IRS’s determination letter, publicly released in redacted form on July 15, 2011, concluded that the organization was not operated primarily to promote social welfare because its activities were conducted primarily for the benefit of a political party and a private group of individuals, rather than the community as a whole.
For a nonprofit organization to qualify for exemption under IRC § 501(c)(4) as a social welfare organization, it must be operated exclusively for the promotion of social welfare. This means that the organization must be primarily engaged in promoting in some way the common good and general welfare of the people of the community. Treas. Reg. 1.501(c)(4)-1(a)(2)(i). As the U.S. Court of Appeals for the Third Circuit put it, a 501(c)(4) organization is “a community movement designed to accomplish community ends.” Erie Endowment v. United States, 316 U.S. 151 (3d Cir. 1963). The IRS and the courts have ruled repeatedly that an organization operated primarily to benefit its members is not entitled to the 501(c)(4) exemption. See, e.g., Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d 684 (2d Cir. 1973), cert. denied, 419 U.S. 827 (1974); Commissioner v. Lake Forest, 305 F.2d 814 (4th Cir. 1962); Rev. Rul. 73-306, 1973-2 C.B. 179; Rev. Rul. 73-349, 1973-2 C.B. 179; Rev. Rul. 75-286, 1975-2 C.B. 210.
In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the U.S. Tax Court denied an exemption under IRC § 501(c)(3) to an organization whose primary activity was to operate an academy to train individuals for careers as political campaign professionals. The academy grew out of programs operated by the National Republican Congressional Committee (“NRCC”) that were designed to train candidates and to train and place campaign professionals in Republican campaigns. The activities of the academy were funded entirely by the National Republican Congressional Trust, and its curriculum focused on Republican political strategies and case studies without a counterbalance of comparable studies of other political parties. Although students in the academy were not required formally to declare a party affiliation, in practice, admission was limited to applicants who were likely to work in Republican organizations and campaigns. The Tax Court held that the organization did not operate exclusively for exempt, educational purposes under IRC § 501(c)(3) because it conducted its activities to benefit the private interests of Republican entities and candidates.
In the current determination letter, the IRS cited American Campaign Academy for the proposition that “[e]ducational activities undertaken to provide a partisan benefit are considered to serve private interests, rather than the public good.” The articles of incorporation and bylaws of the applicant organization explicitly stated that its primary activity was to train and recruit individuals who are members of the party–the determination letter does not say which party–to run for political office. According to the IRS, the organization explicitly “measure[s] [its] success in terms of the number of graduates who have run for, or won, elective office representing the Party.” Because such activities are deemed to serve private interests rather than to promote social welfare, the IRS concluded that the organization was not entitled to the 501(c)(4) exemption.