Background
Freedom Path is a nonprofit advocacy organization that applied for section 501(c)(4) status in 2011. In 2020, the IRS formally denied Freedom Path’s application, finding that it did not operate exclusively for the promotion of social welfare.
Freedom Path filed suit in federal court seeking a declaratory judgment that it qualifies for exempt status under section 501(c)(4) and that the standards used by the IRS, principally Reg. section 1.501(c)(4)-1 and Rev. Rul. 2006-4, are unconstitutionally vague. The Court considered each of these standards separately: first, evaluating the regulations under the Primary Activity inquiry; second, addressing the revenue ruling under the Political Activity inquiry.
Primary Activity
Under Reg. section 1.501(c)(4)-1(a)(1)(ii) and (2)(ii), a section 501(c)(4) organization must primarily engage in activities that promote the common good and general welfare of the community, not including direct or indirect participation in political campaigns. The long-standing interpretation of this regulation permits section 501(c)(4) organizations to engage in some degree of political campaign activity provided it is not the organization’s primary activity. Nevertheless, the Court notes that it is unclear how much political campaign activity is permissible before it becomes the organization’s primary activity: arguments range from “more than insubstantial” to “more than 50%.”
The Court found the regulations vague and turned to the revenue ruling.
Political Activity
Rev. Rul. 2004-6 provides a nonexhaustive 11-factor facts-and-circumstances test to evaluate the line between permissible issue advocacy and political campaign intervention. The Court noted that while the revenue ruling provides six hypothetical scenarios to clarify how the IRS will apply the factors, they lack any explicit analysis and do not provide any patterns, principles, or methods guiding how to balance the facts and apply the tests.
The Court found the revenue ruling vague.
Unconstitutionally vague standards
Section 501(c)(4) organizations must apply both tests: first, they must determine whether a communication is political activity; and second, whether such expenditure causes the organization’s primary activity to be political. The Court held that the combined effect of the two provisions, the regulation and the revenue ruling, renders them unconstitutionally vague. The Court emphasized that vague standards affecting speech require heightened clarity under the First Amendment. Here, the guidance lacks clear standards, could be inconsistently applied, and could create uncertainty about what constitutes political campaign intervention and how much political campaign intervention disqualifies an organization from section 501(c)(4) status.
Exempt status
The Court, however, declined to grant exempt status to Freedom Path, finding that neither party had provided a constitutionally sound and statutorily grounded alternative standard for section 501(c)(4) organizations. The Court directed both parties to file briefs proposing clearer, constitutionally valid standards.
RSM US insights
Since 2016, Congress has prohibited the IRS from using appropriations to issue guidance on section 501(c)(4) standards or applying standards other than those in place in 2010 (the same standards the Court found unconstitutionally vague). Combined with the Court’s ruling, organizations are left with more questions than answers. Organizations that engage in political activity can take the following steps to protect their exempt status:
- Review political activity policies for clarity.
- Document advocacy efforts to distinguish them from political activity.
- Monitor the proportion of political expenditures.
