Section 501(c)

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Title 26 of the United States Code, Section 501(c) - stylized as 26 U.S.C. § 501(c), but frequently cited simply as 501(c) - is the section of the federal code of the United States that deals with tax-exempt status of approved organizations. As of 2010, with the passage of the Affordable Care Act and the establishment of "Qualified Nonprofit Health Insurance Issuers," there are 29 categories of nonprofit organizations recognized by the US government, ranging from credit unions to retirement pension funds to fraternal orders. However, the two subsections that get the most attention are:

  • 501(c)(3), which is reserved for "Organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals."[1]
  • 501(c)(4), a more broadly defined statute that is made up of "civic" and "social welfare" organizations. These organizations can engage in an unlimited amount of lobbying, but only a limited amount of politicking, so long as politicking is not the primary purpose of the organization. The Sierra Club, Human Rights Campaign, Planned Parenthood Action Fund, and the National Rifle Association are all 501(c)(4) organizations. Unlike 501(c)(3) organizations, the IRS does not have a specific form for organizations seeking 501(c)(4) status. Supposedly, there is no requirement to apply for 501(c)(4) status at all. But having the IRS confirm that your organization is eligible for 501(c)(4) status is highly recommended before proceeding with any (questionable) activities.[2]

The tax-exempt status of religious organizations with 501(c)(3) status often come under scrutiny when clergy use their pulpits as a platform to deliver political diatribes or for stump speeches for specific candidates and campaigns, such as on "Pulpit Freedom Sunday."

In May 2013, 501(c)(4) status experienced its first broad examination by the public. The Obama Administration took heat from several right-wing groups and politicians after it was confirmed that the IRS had given extra scrutiny to several political organizations seeking 501(c)(4) tax-exempt status by claiming that they were really "social welfare organizations." Of course, they invited the scrutiny by significantly blurring the lines between social welfare and political activity, and the "scandal" fell apart.[3]

Since the Citizens United ruling in January 2010, many political groups have tried to disguise themselves as social welfare groups as a way to claim 501(c)(4) status. There is an extra bonus to 501(c) status: Such groups are virtually exempt from IRS audits, and their donors lists are confidential.