Tell Me More About 501(c)(4) Organizations
Karl has talked before about our own affiliated 501(c)(4) organization, MLC Collective Fund and has also explained how some folks are using 501(c)(4) organizations as “superfoundations”.
Because I really enjoy advising our clients about 501(c)(4) organizations (including about forming 501(c)(4)s, managing resources between 501(c)(4) and 501(c)(3) affiliates, and understanding the differences in the various restrictions on activities of 501(c)(4) and 501(c)(3) organizations), I’m happy for the chance to introduce myself to the MLC Blog with a post about 501(c)(4) organizations.
Specifically, I want to talk about two important exceptions to the rule that 501(c)(4) organizations don’t pay tax.
But first, let’s quickly refresh our collective understanding of what a 501(c)(4) organization is. Karl’s discussion here with his (imaginary) billionaire friends provides an overview of the income, gift, and estate tax considerations for donors to 501(c)(4) organizations. I’ll quickly summarize those points here (but if you haven’t read through that piece yet, I encourage you to go take a look).
Overview of 501(c)(4) Organizations
ACTIVITIES: A 501(c)(4) organization must be “operated exclusively for the promotion of social welfare” – which raises two questions: (1) What is “social welfare”? And (2) what is “operated exclusively”?
o We often answer the first question by saying that a 501(c)(4) organization can do everything that a 501(c)(3) organization can do (i.e., charitable, educational, scientific, religious activities) plus the extra “good activities” that serve the common good and the general welfare of the community, but don’t quite meet the test for 501(c)(3) activities.
o On the second question, we turn to the Treasury Regulations. And in that adorable approach that we know and love from tax law, the phrase “operated exclusively” is defined in the Treasury Regulations to mean “…primarily engaged in promoting in some way the common good and general welfare of the people of the community.”[1]
Because those same Treasury Regulations tell us that promotion of social welfare does not include “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office”, we know that these candidate campaign intervention activities have to be a limited part of a 501(c)(4)’s activities. How limited is a bit unclear – and Congress has prohibited the IRS and Treasury from making it more clear. The IRS currently uses 40% as a cap on candidate campaign intervention activities when it offers 501(c)(4) applicants the option for an expedited determination. Some practitioners use 49% as the cap.
But aside from this limitation on candidate campaign intervention activities, a 501(c)(4) organization is free to do quite a lot – again, it can do everything a 501(c)(3) organization can do, plus it can promote the social good in ways that are not strictly “charitable or educational”, it can carry out an unlimited amount of lobbying activity – and it can spend at least some portion of its time and resources endorsing candidates and political parties.
TAX TREATMENT OF DONORS: Donors to 501(c)(4) organizations do not get a tax deduction for their contributions. But, they do otherwise benefit in all the ways that donors to 501(c)(3) organizations do. (See Karl’s explanation of that in billionaire-friendly terms here.)
TAX TREATMENT OF THE 501(c)(4): Like a 501(c)(3) organization, a 501(c)(4) organization is exempt from income tax on income that is sufficiently related to its social welfare purposes. Like 501(c)(3) organizations, 501(c)(4) organizations will be taxed on their “UBTI”, i.e., the income that is generated from active business operations that are unrelated to those purposes. In addition, 501(c)(4) organizations are subject to two different additional taxes that do not apply to 501(c)(3) organizations.
Two Important Exceptions to Tax Exemption for 501(c)(4) Organizations
A 501(c)(4) organization faces two sources of tax that 501(c)(3) organizations do not face:
(1) Tax on Political Expenditures:[2] Under Internal Revenue Code (IRC) Section 527(f), a 501(c)(4) organization pays tax (at the highest corporate tax rate – currently 21%) on the lesser of (a) its “net investment income” for the year and (b) the total amount it spent in the year for candidate campaign related activities. “Net investment income” for this purpose is the sum of all the 501(c)(4)’s income from interest, dividends, rents, and royalties, plus its net gain (if any) from selling assets, less any deductions for expenses incurred in producing that income.
Importantly and as a practical matter, because net income includes gains from the sale of capital assets like stock, a 501(c)(4) organization that receives a donation of a stock that has steeply appreciated in value since the donor of that stock first acquired it could find itself paying a tax on the gain resulting from the sale of that stock unless it plans out the sale in connect with its other activities. Let’s walk through the following simplified example:
Assume that Donor holds stock in Big Deal Company that is currently worth $1 million and that Donor has some nominal basis in that stock (let’s say $0 for easy calculations):
In 2026, Donor donates their Big Deal Company stock to 501c4 Org. Donor pays no tax on that donation and doesn’t get a tax deduction for the donation.
501c4 Org pays no tax on its receipt of the Big Deal Company Stock and “carries over” Donor’s $0 basis in the stock.
501c4 Org now needs to decide when to sell the Big Deal Company Stock it’s holding so that it can use the cash from the proceeds of the sale for its 501(c)(4) purposes.
If it sells the stock for $1 million (the stock’s current value) in 2026, it will recognize $1 million in capital gains. Assuming it has received no interest, dividends, rental income, or additional capital gain proceeds in the year it sells the Big Deal Company stock, its net investment income for the year is $1 million.
If 2026 is a year when 501c4 Org spent no money on candidate campaign intervention activity, the lesser of its (a) net investment income ($1 million) and (b) its candidate campaign intervention activity expenditures ($0) for the year is $0—and 501c4 Org will pay no tax under Section 527(f).
But 2026 is a mid-term election year, so let’s assume instead that 501c4 Org did spend money (say, $50,000) on candidate campaign intervention activity. In that case, the lesser of 501c4 Org’s (a) net investment income ($1 million) and (b) its candidate campaign intervention activity expenditures ($50,000) for the year is $50,000—and Section 527(f) will result in 501c4 Org paying a 21% tax on that $50,000. 501c4 Org will also need to file IRS Form 1120-POL as part of its tax return filings for that year.
So a 501(c)(4) organization that wants to minimize the tax it pays can choose to stagger the year in which it sells the appreciated stock it holds and the year it makes political expenditures. And it should definitely check in with legal counsel and the organization’s tax return preparer early in the decision-making process.
(2) Proxy Tax: Under IRC 6033(e)(2), a 501(c)(4) organization with members is subject to tax (again, at the highest corporate tax rate – currently 21%) on the amount that the 501(c)(4) organization spent on lobbying and candidate campaign intervention activity if the 501(c)(4) organization does not provide certain notices to its member(s) as required under IRC Section 6033(e)(1). Specifically, a 501(c)(4) organization must provide a notice to each of its members that states the 501(c)(4) organization’s total expenditures on lobbying and candidate campaign intervention activities and the total amount of the dues or other similar amounts paid to the organization by the member(s) to which the expenditures are allocable. Certain 501(c)(4) organizations are exempt from providing the notices under IRC Guidance (Rev. Proc. 98-19). This provides an exemption from the notice requirement for 501(c)(4) organizations that receive 90 percent or more of their annual dues (or similar amounts) from members that are 501(c)(3) organizations, government entities, or that are not permitted to deduct the amounts paid to the 501(c)(4) organizations. (Helpfully, the proxy tax does not apply to any amount that was taxed under the IRC Section 527(f) tax described above.)
These two sets of rules are definitely complex -- and there are a lot of additional details and nuances to each of the two taxes that I’ve covered above. So we advise 501(c)(4) organizations to discuss these points with experienced legal counsel and tax return preparers. But I hope that this post serves as a helpful introduction.
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Treas. Regs. § 1.501(c)(4)-1(a)(2)(i). Let’s save for another blog post the question about what, if any, remaining effect these regulations have after the Supreme Court’s undermining of all agency regulations in Loper Bright Enterprises v. Raimondo and the Fifth Circuit Court of Appeals affirmed the Tax Court’s denial of an organization’s application for 501(c)(4) stats on the basis that “operated exclusively” in Section 501(c)(4) has the same meaning and effect as the higher standard in Section 501(c)(3) notwithstanding these regulations in Memorial Hermann Accountable Care Organization v. Commissioner (MHACO).
I say that this is a tax that does not apply to 501(c)(3) organizations – but that’s only because 501(c)(3) organizations cannot engage in ANY candidate campaign intervention activity, not because they are exempt from the tax discussed here. Under Section 4955, a 501(c)(3) organization is subject to a 10% penalty tax on each political expenditure that it corrects and will be subject to an additional 100% penalty on any political expenditure that it doesn’t correct. The 501(c)(3) organization is also at risk of losing its exemption for such activities.