IRS Guidelines for Political Advocacy by Exempt 501(c) Organizations: Revenue Ruling 2004-6

CRS Report for Congress
IRS Guidelines for Political Advocacy by
Exempt 501(c) Organizations:
Revenue Ruling 2004-6
Erika Lunder
Legislative Attorney
American Law Division
Summary
IRS Revenue Ruling 2004-6 provides guidance on the definition of “exempt
function” in section 527 of the Internal Revenue Code. The ruling, released in
December 2003, was intended to be an election-year reminder to tax-exempt 501(c)(4),

501(c)(5), and 501(c)(6) organizations that, in addition to their responsibility to comply¹

with campaign finance laws, they are subject to tax on certain political expenditures.
The ruling lists criteria that the IRS uses when determining whether an expenditure for
an issue advocacy communication is taxable and provides examples.
Section 501(c) of the Internal Revenue Code describes various organizations that
qualify for tax-exempt status. Under the Code, some of these organizations may
participate in political campaign activity.² These include the organizations described in
IRC §§ 501(c)(4) [social welfare organizations], 501(c)(5) [labor unions], and 501(c)(6)
[trade associations]. While they may participate in such activity without risking their

501(c) status, these organizations are taxed if they make certain political expenditures.

Specifically, under IRC § 527(f), a 501(c) organization is subject to tax on any
expenditure made for an “exempt function.” An “exempt function” is the influencing or
attempting to influence the selection, nomination, election, or appointment of an
individual to a federal, state, or local public office, to an office in a political organization,³
or as a Presidential or Vice-Presidential elector. The term “exempt function” can be
confusing when talking about a 501(c) organization because the organization is not
exempt from tax when it makes an expenditure for an “exempt function.” It may be
helpful to understand that the term “exempt function” is primarily used to describe the

¹ IRS News Release IR-2003-146.
² While these organizations may participate in political campaign activity under the Internal
Revenue Code, they must still comply with applicable campaign finance laws.
³ IRC § 527(e)(2).
Congressional Research Service ˜ The Library of Congress

activities that section 527 political organizations may conduct without being subject to
tax. In other words, a 527 organization is exempt from tax when it makes an expenditure
for an “exempt function,” while a 501(c) organization is subject to tax when it makes an
expenditure for an “exempt function.”
The determination of whether an expenditure is for an “exempt function” is
dependent on the facts and circumstances of each case. Revenue Ruling 2004-6 provides
guidance in this area by presenting a non-exhaustive list of factors that the IRS considers
in determining whether an expenditure for an issue advocacy communication is for an
“exempt function.” According to the ruling, factors that tend to show an expenditure for
an issue advocacy communication is for an “exempt function” include:
^!the communication identifies a candidate for public office,
^!the communication identifies the candidate’s position on the subject of
the communication,
^!the candidate’s position has been raised (either by the communication or
in other public communications) to distinguish him or her from other
candidates,
^!the communication is timed to coincide with an electoral campaign,
^!the communication is targeted at voters in a particular election, and
^!the communication is not part of an ongoing series of substantially
similar advocacy communications by the organization on the same issue.
Factors that tend to show the expenditure is not for an “exempt function” include:
^!the absence of one or more of the above factors,
^!the communication identifies specific legislation or an event outside the
organization’s control that the organization hopes to influence,
^!the communication’s timing coincides with a specific event outside the
organization’s control that it hopes to influence,
^!the candidate is identified solely as a government official who is in a
position to act on the issue in connection with a specific event (e.g., will
vote on the legislation), and
^!the candidate is identified solely in a list of the legislation’s key sponsors.
The ruling provides six examples that involve 501(c)(4), 501(c)(5), and 501(c)(6)
organizations making expenditures for issue advocacy communications. The examples
explain whether each expenditure is for an “exempt function” and, therefore, taxable
under IRC § 527(f). There was little guidance in this area prior to the ruling, but the
ruling is consistent with the IRS’s position on such things as voter education activities.⁴
If a 501(c) organization makes an expenditure for an “exempt function,” then it is
taxed at the highest corporate tax rate on the lesser of its net investment income or the
amount of taxable expenditures. So long as the organization is allowed to participate in
political activity (e.g., is a 501(c)(4), 501(c) (5), or 501(c)(6) organization), its tax-exempt
status is not at risk simply because it made a taxable expenditure. In order to avoid being

⁴ See PLR 9652026 (1996); PLR 9725036 (1997); PLR 9808037 (1997); PLR 199925051 (1999).

subject to tax, a 501(c) organization may set up a separate segregated fund that qualifies
to be treated as a 527 organization.⁵
Section 527 Political Organizations. While the ruling is intended to provide

501(c) organizations with guidance on when they become subject to tax under IRC §

527(f), the ruling also helps clarify the tax treatment of 527 organizations. These
organizations are political organizations that are organized and operated primarily to
accept contributions and make expenditures for “exempt functions.”⁶ They are exempt
from tax on certain types of income to the extent that the funds are used for “exempt
functions.” By providing guidance on the definition of “exempt function,” the ruling may
be helpful to them.
501(c)(3) Organizations. Tax-exempt 501(c)(3) organizations are mainly formed
for religious, educational, and charitable purposes. These organizations may lobby on
public policy issues, but may not participate in political campaign activity. Although
Revenue Ruling 2004-6 does not explicitly address 501(c)(3) organizations, it may still
be helpful for determining what 501(c)(3) organizations can and cannot do with respect
to issue advocacy communications. This is because the IRS has at times taken the
position that political activities prohibited under section 501(c)(3) are correspondingly
treated as being for an “exempt function” under section 527.⁷ Thus, the ruling may
provide guidance on whether the IRS will consider an issue advocacy communication to
be a prohibited 501(c)(3) political activity. However, it is not clear that the determination
that an activity is for an “exempt function” will necessarily mean that it is a prohibited

501(c)(3) political activity.⁸

⁵ IRC § 527(f)(3).
⁶ IRC § 527(e)(1). For further information, see CRS Report RS21716, Political Organizations
Under Section 527 of the Internal Revenue Code, by Erika Lunder.
⁷ For example, see PLR 9652026 (1996); PLR 9725036 (1997); PLR 9808037 (1997); and PLR

199925051 (1999).

⁸ See Brant Goldwyn, Nonprofit Groups Can Lobby Office-Holders During Election Campaign,
IRS Official Says, D^AI^LYT^AXR^EP^ORT (January 29, 2004).