DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE WASHINGTON, DC

PRIVACY, GOVERNMENTAL LIAISON AND DISCLOSURE

20224

February 29, 2012

Adam Rappaport CREW 1400 Eye Street, N.W. Suite 450 Washington, DC 20005 Dear Mr. Rappaport: I am responding to your Freedom of Information Act (FOIA) request dated November 7, 2011, that we received on November 14, 2011. You asked for copies of any report, findings, or recommendations provided to Congress in response to the September 28, 2010, letter Senate Finance Committee Chairman Max Baucus sent IRS Commissioner Shulman requesting the IRS survey major section 501(c)(4), (c)(5), and (c)(6) organizations involved in political activity to determine whether they are operated for the organizations intended tax exempt purpose, and are acting as conduits for major donors advancing their own private interests. I am enclosing a copy of the requested documents consisting of 26 pages. This is a full grant of your request. Your request for a fee waiver was considered and granted, however no fees were incurred to process your request. If you have any questions please call Tax Law Specialist Valerie Barta, ID # 245581, at 512-499-5211 or write to: Internal Revenue Service, HQ Disclosure, 2980 Brandywine Road, Stop 211, Chamblee, GA 30341. Please refer to case number F12318-0088. Sincerely,

Marie A. Twarog Disclosure Manager Headquarters (HQ) Disclosure Office Enclosure

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United states enatc

COMMITTEE ON FINANCE
WASHINGTON,

DC 20510-6200

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September 28, 20 18,

The Honorable Douglas H. Shulman Commissioner Internal Revenue Service I Ill Constitution Avenue, N.W. Washington, DC 20224 Via Electronic Transmis!ion Dear Commissioner Shulman: The Senate Finance Committee has jurisdiction over revenue matters, and the Committee is responsible for conducting oversight of the administration of the federal lax system, including matters involving lax-exempt organizations. The Committee has focused extensively over the past decade on whether taxexempt groups have been used for lobbying or other financial or political gain. The central question examined by the Committee has been whether certain charitable or social welfare organizations qualify for the tax-exempt status provided under the internal Revenue Code. Recent media reports on various 501(c)(4) organizations engaged in political activity have raised serious questions about whether such organizations are operating in compliance with the Internal Revenue Code. The law requires that political campaign activity by a 501 (c)(4), (cX5) or (cX6) entity must not be the primary purpose of the organization. If it is determined the primary purpose of the 501(cX4), (cX5) and (cX6) organization is political campaign activity the tax exemption for that nonprofit can be terminated.

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Even if political campaign activity is not the primary purpose of a 5Ol(c)(4), (c)(5). and (cX6) organization, it must notify its members of the portion of dues paid due to political activity or pay a proxy tax under Section 6033(e).

Also, tax-exempt organizations and their donors must not engage in private inurement or excess benefit transactions. These rules prevent private individuals or groups from using tax-exempt organizations to benefit their private interests or to profit from the tax-exempt organizations activities.
A September 23 New York Times article entitled Hidden Under a Tax-Exempt Cloak, Private Dollars Flow described the activities of the organization Americans for Job Security. An Alaska Public Office Commission investigation revealed that AJS, organized as an entity to promote social welfare under 501(c)(6), fought development in Alaska at the behest of a local financier who paid for most of the referendum campaign. The Commission report said that Americans for Job Security has no other purpose other than to cover money trails all over the country. The article also noted that membership dues and assessments plunged to zero before rising to $12.2 million for the presidential race.
...

A September 16 Time Magazine article examined the activities of Washington D.C. based 501(c)(4) groups planning a $300 million spending blitz in the 2010 elections. The article describes a group transforming tseIf into a nonprofit under 501(c)(4) of the tax code, ensuring that they would not have to publically disclose any information about its donors.
...

These media reports raise a basic question: is the tax code being used to eliminate transparency in the funding of our elections elections that are the constitutional bedrock of our democracy? They also raise concerns about whether the tax benefits of nonprofits are being used to advance private interests.

With hundreds of millions of dollars being spent in election contests by taxexempt entities, it is time to take a fresh look at current practices and how they comport with the Internal Revenue Codes rules for nonprofits. I request that you and your agency survey major 501 (cX4), (c)(5) and (c)(6) organizations involved in political campaign activity to examine whether they are operated for the organizations intended tax exempt purpose and to ensure that political campaign activity is not the organizations primary activity. Specifically you should examine if these political activities reach a primary purpose level the standard imposed by the federal tax code and if they do not, whether the organization is complying with the notice or proxy tax requirements of Section 6033(e). I also request that you or your agency survey major 501 (c)(4), (c)(5), and (c)(6) organizations to determine whether they are acting as conduits for major donors advancing their own private interests regarding legislation or political campaigns, or are providing major donors with excess benefits.

Possible violation of tax laws should be identified as you conduct this study. Please report back to the Finance Committee as soon as possible with your findings and recommended actions regarding this matter.

Based on your report I plan to ask the Committee to open its own investigation and/or to take appropriate legislative action. Sincerely,

QLMax Baucus Chairman

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE WASI-((NGTON. DC. 20224
COMMISSiONER

February 17, 2011

The Honorable Max Baucus

Chairman Committee on Finance United States Senate Washington, DC 20510 Dear Mr. Chairman: I am responding to your letter about political campaign activities of organizations claiming to be tax exempt under sections 501(c)(4), (5) and (6) of the Internal Revenue Code (the Code). You wrote that such activities may be inconsistent with the taxexempt status of these organizations. You asked us to survey major 501 (c)(4), (5) and (6) organizations involved in political campaign activity to examine whether they are operated for the organizations intended tax exempt purpose and to ensure that political campaign activity is not the organizations primary activity. To meet the requirements for tax exemption, a section 501(c)(4), (5) or (6) organization must engage primarily in activities that further its exempt purpose. As you acknowledge in your letter, under the law, section 501(c)(4), (5) and (6) organizations may engage in political campaign intervention, so long as the intervention, along with any other non-exempt activity, Is not their primary activity. They also may conduct unlimited issue advocacy and lobbying, as long as those activities are germane to their exempt purposes. To determine the primary activities of an organization, including determining whether political campaign activity is a primary activity of an organization, we must wait until the organization files its annual information return to review the organizations activities for the entire year, as well as the facts and circumstances surrounding those activities. Only after a review of all the relevant information, including all expenditures and volunteer time, can we determine whether the organization is meeting the requirements for exemption, and whether any tax is due. This makes it difficult for us to assess during the tax year whether an organization claiming to be exempt under 501(c)(4), (5) or (6) is complying with the applicable limits on political campaign activity. Also, many organizations permissibly extend their due date for filing their annual information returns, which increases the delay between any improper activity that an organization conducted and our receipt of the information needed to assess the organizations compliance with the legal requirements. We face an additional challenge in the initial formation of these organizations. The fact that these types of organizations have no legal requirement to file an application with us to seek a determination that they are exempt within section 501(a) results in many such organizations essentially self declaringw exemption without our determination as to

2 exempt status. This means we do not have an opportunity to review the stated purposes and actMtles of such an organization before it flies one or more Forms 990. We share your concern that tax-exempt organizations of all types comply with the applicable laws governing political campaign activities and not use them for improper purposes. We took a major step in 2008 to enhance the reporting of tax-exempt organizations other than charities (including those described in sectIon 501 (c)(4), (5), or (6)), by requiring them to provide specific information on the annual Form 990 about their political campaign activities. Requiring this information makes the organizations political campaign actMties more transparent to us and to the general public. We use this information in determining if political campaign activity is an organizations primary purpose and whether any tax may be due. in the work plan of the Exempt Organizations Division, we announced that beginning in FY2O1 1, we are increasing our focus on section 501 (c)(4), (5) and (6) organizations. With the additional information available on the new Form 990, we will look at issues relating to political activity, inurement, and the extent of compliance with the requirements for tax exemption by organizations that self-Identify themselves under these sections. We appreciate your request to conduct a survey of these types of organizations, but given the liming of information challenges discussed above, we feel that this is not likely to provide us with the necessary compliance Information, in our view, focusing our efforts on the annual information returns that we receive from these organizations is most appropriate. To ensure that tax-exempt organizations follow the tax laws, we are committed to a balanced program overseeing a wide range of tax-exempt organizations, including those exempt under the sub-sections cited in your letter. Additional information on the relevant law Is In the enclosure. Thank you for your attention to this area of the law. We appreciate your continuing support of our efforts to administer the tax laws that apply to tax-exempt organizations, and we welcome the opportunity to meet with you and your staff to chscuss these matters. Please call me at (202) 622-9511, or Floyd Williams, Director of Legislative Affairs, at (202) 622-4725, if you need additional information or would like to schedule a meeting. Sincerely,

L)QLJ

H. Shulman

Enclosure

Enclosure Types of Tax-Exempt Organizations Charitable organizations described in section 501 (c)(3) must be organized and operated to further charitable, religious, educational, etc. purposes. As such, they must be operated for the public rather than private benefit and their net earnings may not inure to the benefit of any private shareholder or individual. Section 501 (c)(3) organizations are eligible to receive tax-deductible charitable contributions under section 170. To be treated as a tax-exempt section 501(c)(3) organization, most charitable organizations (other than churches) must notify the IRS by filing Form 1023, Application for Recognition of Tax-Exempt Status. The exempt purpose of section 501 (c)(4) social welfare organizations is to promote social welfare by promoting the common good and general welfare of people in the community. For section 501(c)(5) labor, agricultural, and horticuftural organizations, the exempt purpose is the betterment of conditions of those engaged in their pursuits, the improvement of the grade of their products, or the development of a higher degree of efficiency in their respective occupations. The section 501 (c)(6) business league exempt purpose is to promote the common business interest of its members and not to conduct a regular trade or business for profit. The net earnings of these organizations may not inure to the benefit of any private shareholder or individual (for section 501(c)(4) and (6) organizations) or member (for section 501(c)(5) organizations). The exempt purpose of section 527 political organizations is attempting to influence the election, selection, nomination, or appointment of any individual to federal, state, or local public office, office in a political party or the Presidential and Vice-Presidential electors. These include candidate committees, party committees, and political action committees (PACs). Certain section 527 political organizations are automatically tax exempt: FEC political committees, state and local candidate committees, state and local party committees, and small organizations that never receive more than $25,000 in gross receipts during any taxable year. All other section 527 political organizations must electronically file Form 8871 to be tax-exempt, including state PACs that receive more than $25,000 in any taxable year. if they do not file Form 8871, they are taxable section 527 organizations and subject to tax on all of their income (including contributions) at the highest corporate rate. They are not eligible to receive tax-deductible charitable contributions under section 170. Types of Advocacy The Internal Revenue Code distinguishes between different types of advocacy that tax-exempt organizations may engage in, particularly lobbying activity and political campaign activity. Lobbying activity is the attempt to influence legislation. For these purposes, legislation includes action on acts, bills, resolutions, or similar items by the Congress, any state

2 legislature, any local council, or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. Political campaign activity is the attempt to influence the election of candidates to public office. This includes any activities that favor or oppose one or more candidates for public office, such as candidate endorsements, contributions to political campaign funds, or public statements of position (verbal or written) made by or on behalf of an organization in favor of, or in opposition to, any candidate for public office. General advocacy includes activity attempting to influence the public on issues of concern to the organization, attempting to influence actions by the executive branch of government such as issuance of regulations, and activities intended to encourage people to participate in the electoral process in a manner that does not favor or oppose any particular candidates. The IRS bases its determination of whether an activity constitutes lobbying or political campaign activity on all of the relevant facts and circumstances. Consequently, a communication made shortly before an election that identifies a candidate and takes a position may not constitute political campaign activity in certain circumstances. See Rev. Rul. 2004-6 for examples of the facts and circumstances considered in making such a determination. Advocacy by Tax-Exempt Organizations As the chart below illustrates, the different types of tax-exempt organizations discussed above have different rules as to the types of advocacy they may conduct consistent with their tax-exempt status. Engaging in each type of advocacy through some form of tax-exempt organization is possible, but not all types of tax-exempt organizations can engage in each type of advocacy.
501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6) 527

Receive Tax-Deductible Charitable Contributions

Engage in Legislative

YES
LTD

NO
YES

NO
YES

NO
YES

NO LTD YES LTD

Advocacy Engage in Candidate Election Advocacy

Engage in Public Advocacy Not Related to Legislation or

NO
YES

LTD YES

LTD YES

LTD YES

Election of Candidates

By statute, section 501(c)(3) charitable organizations may not engage in lobbying activity as a substantial activity and are absolutely prohibited from engaging in political campaign activity. They may engage in other advocacy activities, including encouraging people to participate in the electoral process in a manner that does not

3 support or oppose any candidates for public office, without jeopardizing their tax-exempt status. In addition to the possibility of loss of tax-exempt status if they engage in political campaign activity or too much lobbying activity, the expenditures for such activities may be subject to an excise tax under section 4955 for political campaign activity or section 4911 or section 4912 for lobbying activity. A section 501(c)(3) organization that loses its tax-exempt status due to too much lobbying or political campaign activity may not be treated as a section 501 (c)(4) organization. At the opposite end of the spectrum are section 527 political organizations. As their exempt purpose is to engage in political campaign activity, they are unlimited in the amount they may do. However, they are limited in the amount of lobbying and other advocacy they may conduct. Section 527 political organizations that expend more than an insubstantial amount from any fund for non-political campaign activity will be subject to tax on all the income (including contributions) to that fund. The organizations described in sections 501(c)(4), 501(c)(5), and 501(c)(6) are treated similarly as to the treatment of their advocacy activities. Activities that further the respective exempt purposes of these three types of tax-exempt organizations not only include general advocacy activities related to their exempt purpose, but can also include lobbying activity related to their exempt purpose. Thus, for example, a ballot measure committee may qualify as a section 501 (c)(4), (5), or (6) organization. Political campaign activity does not further their respective exempt purposes so they are limited in the amount of political campaign activity they may engage in without jeopardizing their tax-exempt status as that activity, along with all other non-exempt purpose activity, must be less than primary.
While section 501(c)(4), (5), and (6) organizations may engage in a limited amount of political campaign activity without jeopardizing their tax-exempt status, they are subject to tax under section 527(f) on the lesser of their net investment income or the amount expended for their political campaign activity. In determining whether an activity is subject to tax under section 527(f), all the relevant facts and circumstances are considered.

Additionally, section 501(c)(4), (5), and (6) organizations may be subject to the notice and proxy tax requirements of section 6033(e). Under section 162(e), the organization cannot generally take a deduction of expenses for lobbying and political campaign activity as an ordinary and necessary business expense. Although in some instances, dues or similar amounts paid to section 501 (c)(4), (5), and (6) organizations may be deductible as an ordinary and necessary business expense, they are not deductible to the extent the organization uses dues or similar amounts for attempting to influence legislation or candidate elections. Unless substantially all of the organizations members do not deduct their dues or similar amounts as a business expense, the section 501(c)(4), (5), and (6) organization must either (1) notify its members of the portion of the dues used for lobbying or political campaign activity or (2) pay a proxy tax on that amount. Rev. Proc. 98-19 provides tests for determining whether substantially all of an organizations members do not deduct dues as business expenses. In making

4 the calculation, the organization does not include any expenses that were subject to tax under section 527(f), so it includes only those expenditures for political campaign activity that exceed the organizations net investment income. The IRS has recognized the need for guidance in this area and issued Rev. Rul. 2004-6, which provides examples illustrating facts and circumstances to be considered in determining whether section 501 (c)(4), (5), and (6) organizations are subject to tax under section 527(f). Tax-Exempt Organization Reporting and Disclosure Requirements Most tax-exempt organizations must file an annual information return with the IRS. Section 501 (c)(3) charitable organizations that are churches or government instrumentalities have no requirement to file the annual information return. Also, section 527 political organizations that are automatically tax-exempt and were not required to file Form 8871 have no requirement to file the annual information return. Depending on the amount of the organizations annual gross receipts and net assets, the annual information return is the Form 990, the Form 990-EZ, or the Form 990-N. Section 527 political organizations are not required to file Form 990-N. These forms are publicly available. However, other than for section 527 political organizations, the IRS is not permitted by statute, and the organizations have no requirement, to disclose the names and addresses of contributors. Therefore, the publicly available information generally does not include Schedule B. Over the last several years, the IRS has imaged Form 990 series returns on DVD and made them available to the public. Recipients of this information then make these returns available on the internet to anyone. The forms are due on the l5 day of the fifth month following the end of the organizations taxable year (May 15 for calendar year organizations), but organizations may request extensions of up to six months (so many calendar year organizations do not file until November 15 of the year after the taxable year being reported). Organizations filing Form 990 or Form 990-EZ must report whether they had any expenditures for political campaign activity and, if so, how much they expended. Section 501 (c)(3) charitable organizations must also report their lobbying activities, if any. Section 501 (c)(4), (5), and (6) organizations that have not established that their members cannot deduct substantially all of their dues as a business expense must report on their lobbying and political campaign activity, unless it consists solely of inhouse lobbying that was less than $2,000. This information is now collected on Schedule C of Form 990 or Form 990-EZ. As discussed above, section 527 political organizations must file Form 8871 to be tax-exempt, unless they are automatically tax-exempt because they are an FEC political committee, state or local candidate committee, state or local party committee, or a small organization that never receives more than $25,000 in gross receipts for any taxable year. Organizations file these forms electronically, and they are publicly available on the IRS web site. Section 527 political organizations that have filed Form 8871 must also

5 periodically report information on their contributions and expenditures using Form 8872 unless they meet the requirements of a qualified state or local political organization. These forms are also publicly available on the IRS web site. As only those section 527 political organizations that filed Form 8871 must file Form 8872, a section 527 political organization that is not exempt because it has not filed Form 8871 is not required to file Form 8872. Thus, an organization that did not qualify as a section 501 (c)(4) organization because its primary activity was political campaign activity and therefore was an organization described in section 527 would have no requirement to disclose contributor information unless and until it filed Form 8871. Section 527 political organizations report their taxable income on Form 1 120-POL. Under section 6103, this form is not publicly disclosable. While the taxable income of tax-exempt section 527 political organizations consists primarily of investment income, the taxable income of those section 527 organizations that are not exempt because they have not filed Form 8871 includes all income, including contributions. However, those organizations have no requirement to disclose any information other than the aggregate amount of those contributions on Form I 120-POL. Section 501 (c)(4), (5), and (6) organizations use Form 11 20-POL to report any tax due under section 527(f). If those organizations pay the proxy tax under section 6033(e), they report it on Form 990-T. While the Forms 990-T that section 501 (c)(3) charitable organizations file are required to be publicly disclosed, those that section 501(c)(4), (5), and (6) organizations file are not.

Page 1 of3
CCU Case Detail Results: 2010-15106 Type LA Tracking Narrative TR Field Other Field Due Date 11/09/2010 Received Date 09/29/2010 Document Date 09/28/2010 Closure Date 02/17/2011

TAMIS Field Legacy System Field

Related Field

Format Letter Issue EP/EO Issues Topic LA TRACKING CASE-PLEASE PREPARE RESPONSE FOR THE COMMISSIONERS SIGNATURE-Chairman of the Senate Finance Committee (SFC) wrote to the Commissioner about his concerns with lobbying practices or other financial or political gain by tax exempt organizations. He is requesting the IRS survey major 501(c)(4), (c)(5) and (c)(6) organizations involved in political activity to examine whether they are operated for their intended tax exempt purpose. Special Instructions The attached congressional inquiry requires special handling. The analyst working this case *must* contact Mary Dash at (202) 622-6833 or Marcie Williams (202) 622-5197. Please print and follow the attached instructions for responding to LA Tracking controls. By: Alexander, Bonnie On: 09/29/2010 Case Creation Information Added By Added On 11/05/2010 Cumbuka Ortez 11:09 09/29/2010 Bonnie Alexander 10:10 09/29/2010 Cynthnia Brown 03:38 02/17/2011 Dorothy Becones 03:45 02/02/2011 Gloria Assignment_History Office Commissioners Office Tax Exempt/Government Entities EO-Rulings and Agreements C&L-Office of Legislative Affairs Commissioners Office Special Instructions

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12/20/201 1

Page 2 of 3
09:19 01/11/2011 04:34 Henning Cumbuka Ortez Deputy Commissioner, Services & Enforcement Signature package prepared for Deputy Commissioners signature. Please assign to Legislative Affairs.

01/06/20 11 12:53

Cumbuka Ortez

Communications & Liaison

Case Event Log History Comment Type Action Date Final response signed by 02/17/2011 Closure Closed Commissioner. Response Attached Package signed by 02/17/2011 Action Signed Commissioner. Notified/assigned package to creating office (Leg. Affairs) of case pick up and processing accordingly. Commissioner is still reviewing 02/17/2011 Action Comments package. Received case from DCSE office. 02/01/2011 Action Review Under Chief of Staff review. Reviewed and approved by the 02/02/2011 Action Approval Office of the DCSE. Hancicarried to Commissioners office. Reopening case to attach 01/06/2011 Action Reopened correct final response to Chairman Baucus. Legislative Affairs received draft 01/05/2010 Action Comments response from Nikole Flax. Final responses attached. 11/05/2010 Closure Closed Response Attached Deputy Commissioner Steve 11/05/2010 Action Change of Miller will sign final response. Sig nature Authority Legislative Affairs prepared 01/06/2011 Action Comments signature package on 1/6/11. clarification for note 10/21, 10/29/2010 Acton Comments Deputy Commissioner for
-

Added By Cumbuka Ortez Dorothy Becones

Marcie Williams Dorothy Becones Gloria Henning Cumbuka Ortez Cumbuka Ortez Cumbuka Ortez Cumbuka Ortez Cumbuka Ortez Ma rs hall e I a c kso n

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Page 3 of 3
Enforcement and Service (Steve Miller) per staff attorney-The letter is pending before the Deputy Commissioner for review The Due Date was revised From: 10/21/2010 To: 11/09/2010

10/2 1/2010 Action

Extension Request Due Date Revised

Marsha lie ackson Marshalle Jackson

10/21/2010 Action

Salutation Salutation

Case From (Name (Email (Phone (Fax Iceil Phone

Case Addressee (Name (Email (Phone JFax (Cell Phone

(Address (City/State/Z

(Address (City/State/Zip

Case Contact Contact Type Salutation Name Email Home Work Fax Address City/State/Zip Phone Phone Washington 511 (202) Max Congressional DC 20510 Hart 224Baucus Senate 2651 Building Case Documents File Name Baucus_15106.doc

Source Date 02/01/2011 Final Response 09/28/2010 Incoming 02/01/2011 Final Response 02/17/2011 Final Response 01/25/2011 Final Response 01/25/2011 Final Response

Baucus_15106.pdf Action Routing Sheet 15106.pdf Final_Baucus_15106.pdf

LTR-2010-15106-BaucusRevOl2l2OlLdoc Enclosure_15106.doc

Description Final response prepared by Leg Affairs for signature package Incoming Letter Action Routing Sheet
Final response signed by Commissioner. Final response revised by the Office of the DCSE Enclosures

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DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE WASHINGTON, DC. 20224
COMWI$IONER

February 17.2011

The Honorable Orrin G. Hatch United States Senate Washington, DC 20510 Dear Senator Hatch: I am responding to your letter on the tax compliance of organizations claiming exemption under sections 501 (c)(4), (c)(5), and (c)(6) of the internal Revenue Code. To meet the requirements for tax exemption, a section 501 (c)(4), (5) or (6) organization must engage primarily in activities that further its exempt purpose. Under the law, section 501 (cX4), (5) and (6) organizations may engage in political campaign Intervention, so long as the intervention, along with any other non-exempt activity, is not their primary activity. They also may conduct unlimited issue advocacy and lobbying, as long as those activities are germane to their exempt purposes. As you acknowledge in your letter, to determine the primary activities of an organization, induding determining whether political campaign activity is a primary activity of an organization, we must wait until the organization files its annual information return to review the organizations activities for the entire year, as well as the facts and circumstances surrounding those activities. Only after a review of all the relevant information, including all expenditures and volunteer time, can we determine whether the organization is meeting the requirements for exemption, and whether any tax is due. This makes it difficult for us to assess during the tax year whether an organization claiming to be exempt under 501 (c)(4), (5) or (6) is complying with the applicable limitations on political campaign activity. Also, many organizations permissibly extend their due date for filing their annual information returns, which increases the delay between any improper activity that an organization conducted and our receipt of the information needed to assess the organizations compliance with the legal requirements. We face an additional challenge in the initial formation of these organizations. The fact that these types of organizations have no legal requirement to file an application with us to seek a determination that they are exempt within section 501(a) results in many such organizations essentially self declaring exemption without our determination as to exempt status. This means we do not have an opportunity to review the stated purposes and activities of such an organization before it files one or more Forms 990. We took a major step in 2008 to enhance the reporting of tax-exempt organizations other than charities (including those described in section 50I(c)(4), (5), or (6)), by requiring them to provide specific information on the annual Form 990 about their

2 political campaign activities. Requiring this information makes the organizations political campaign activities more transparent to us and to the general public. This information is used by the IRS in determining if political campaign activity is an organizations primary purpose and whether any tax may be due. In the work plan of the Exempt Organizations Division. we announced that beginning in FY2OI 1, we are increasing our focus on section 501(c)(4), (5) and (6) organizations. With the additional information available on the new Form 990, we will look at issues relating to political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identify themselves under these sections. Our efforts principally will be focused on the annual information returns that we receive from these organizations. To ensure that tax-exempt organizations follow the tax laws, we are committed to a balanced program overseeing a wide range of tax-exempt organizations. Thank you for your attention to this area of the law. I am sending a similar letter to Senator Kyl. We appreciate your continuing support of our efforts to administer the tax law that applies to tax-exempt organizations, and we would welcome the opportunity to meet with you and your staff to discuss these matters. If you have any questions or would like to schedule a meeting, please call me at (202) 622-9511, or Floyd Williams, Director of Legislative Affairs, at (202) 6224725.

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224
COMMII$IONCR

February 17,2011

The Honorable Jon Kyl United States Senate Washington, DC 20510 Dear Senator Kyl:
I am responding to your letter on the tax compliance of organizations claiming exemption under sections 501(c)(4), (cX5), and (c)(6) of the Internal Revenue Code. To meet the requirements for tax exemption, a section 501 (c)(4), (5) or (6) organization

must engage primarily in activities that further its exempt purpose. Under the law, section 501 (c)(4), (5) and (6) organizations may engage in political campaign intervention, so long as the intervention, along with any other non-exempt activity, is not their primary activity. They also may conduct unlimited issue advocacy and lobbying, as long as those activities are germane to their exempt purposes. As you acknowledge in your letter, to determine the primary activities of an organization, including determining whether political campaign activity is a primary activity of an organization, we must wait until the organization files its annual information return to review the organizations activities for the entire year, as well as the facts and circumstances surrounding those activities. Only after a review of all the relevant information, including all expenditures and volunteer time, can we determine whether the organization is meeting the requirements for exemption, and whether any tax is clue. This makes it difficult for us to assess during the tax year whether an organization claiming to be exempt under 501(c)(4), (5) or (6) is complying with the applicable limitations on political campaign activity. Also, many organizations permissibly extend their due date for filing their annual information returns, which increases the delay between any improper activity that an organization conducted and our receipt of the information needed to assess the
organizations compliance with the legal requirements. We face an additional challenge in the initial formation of these organizations. The fact that these types of organizations have no legal requirement to file an application with us to seek a determination that they are exempt within section 501(a) results in many such organizations essentially self declaring exemption without our determination as to exempt status. This means we do not have an opportunity to review the stated purposes and activities of such an organization before it files one or more Forms 990.

We took a major step in 2008 to enhance the reporting of tax-exempt organizations other than charities (including those described in section 501(c)(4), (5), or (6)), by requiring them to provide specific information on the annual Form 990 about their

2 political campaign activities. Requiring this information makes the organizations political campaign activities more transparent to us and to the general public. This information is used by the IRS in determining if political campaign activity is an organizations primary purpose and whether any tax may be due. In the work plan of the Exempt Organizations Division, we announced that beginning in FY2O1 1, we are increasing our focus on section 501 (c)(4), (5) and (6) organizations. With the additional information available on the new Form 990, we will look at issues relating to political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identify themselves under these sections. Our efforts principally will be focused on the annual information returns that we receive from these organizations. To ensure that tax-exempt organizations follow the tax laws, we are committed to a balanced program overseeing a wide range of tax-exempt organizations. Thank you for your attention to this area of the law. I am sending a similar letter to Senator Hatch. We appreciate your continuing support of our efforts to administer the tax law that applies to tax-exempt organizations, and we would welcome the opportunity to meet with you and your staff to discuss these matters. If you have any questions or would like to schedule a meeting, please call me at (202) 622-9511, or Floyd Williams, Director of Legislative Affairs, at (202) 622-4725. Sincerely,

Doug as H. Shulman

Action Routing Sheet

Request for Signature of: Commissioner Douglas H. Sliulman Subject: Political campaign activities of tax exempt organizations i-trak Control #:
2011-15432
Secretary
InitlaliDate

Date:

February 1, 2011

Due Date:
Reviewer

February 4,2011
Comment

Reviewing Office
FlOyd 1. WIlliams, Director Legislative Affairs

Initial/Date

Steven T. Miller, Deputy Commissioner for Services & Enforcement Carol Campbell, Deputy Chief of Staff Jonathan Davis, Chief of Staff Douglas H. Shulman, Commissioner

summary:
Senator Kyl arid Senator Hatch wrote about political campaign actMties of tax exempt organizations.

Prepared By:

Phone:

Office Symbols:

Bldg/Room #

Christinne Rodriguez

202-927-4372

CL:LA

Main IR- Room 3240

Page 1 of5
CCU Case Detail Results: 2011-15432 Type Congressional Correspondence Narrative TR Field Other Field Received Date 02/04/2011 10/07/2010 Due Date Document Date 10/06/2010 Closure Date 02/17/2011

TAMIS Field Legacy System Field

Related Field

Format Fax Issue Exempt Organization Topic Sen. Hatch and Sen. Kyl wrote about the Senate Finance Committees request to survey major 501(c)(4), (c)(5) and (c)(6) organizations. Special Instructions LEGISLATIVE AFFAIRS IS THE CONTROLLING OFFICE FOR THIS INQUIRY. PLEASE CALL 202-622-3730 IF YOU HAVE QUESTIONS. PLEASE CLEAR DRAFT RESPONSE THROUGH LEGISLATIVE AFFAIRS. FAX THE RESPONSE AND INCOMING LETTERS TO MARY DASH AT 202-927-9613. DO NOT EMAIL DRAFT UNLESS SPECIFICALLY REQUESTED AS PART OF LA TRACKING PROCESS. By: Graves, Diane On: 10/07/2010 Case Creation Information

Added On 10/13/2010 11:08 10/07/2010 08:49 02/17/2011 03:46 02/0212011 09:20 01/21/2011

Added By Winonna 1-lolton Diane Graves Dorothy Becones Gloria Henning Winonna

Assignment_History Special Instructions Office EO-Rulings and Agreements Tax Exempt/Government Entities C&L-Office of Legislative Affairs Commissioners Office Deputy Commissioner, Forwarding control

http ://ds0006 1. dcc. irs.gov : 7777/etralc-cc/page.request.do?page=page.ccu.... 12/20/201 1

Page 2 of 5
08:55 Holton Services & Enforcement per Glorias request. WH

Case Event Log History Comment Date Type Action Floyd Williams will 02/17/2011 Action Comments hand-deliver final response to the offices of Senators Kyl & Hatch on February 18, 2011. Final responses signed 02/17/2011 Closure Closed Response by the Commissioner Attached attached. Signature package 02/17/2011 Action Signed signed by Commissioner. Notified/assigned to creating office (Leg. Affairs) for case pick up and processing accordingly. Received case from 02/01/2011 Action Review DCSE office. Under Chief of Staff review. Reviewed and 02/02/2011 Action Approval approved by the Office of the DCSE. Handcarried to Commissioners office. per staff attorney01/14/2011 Action Extension Request Please update the due dates of these E-Traks until Friday, February 4, 2011. I will let Legislative Affairs know. Thanks, Mattew
-

Added By Cumbuka Ortez

Cumbuka Ortez Dorothy Becones

Dorothy Becones Gloria Henning

Marshalle ackson

01/14/2011 Action

Due Date Revised

The Due Date was revised From: 01/14/2011 To:

.

Marshafle Jackson

hnp ://ds0006 1 .dcc.irs.gov : 7777Ietrak-cclpage.request do?page=page.ccu.... 12/20/201 1

Page 3 of 5
01/11/2011 Action 02/04/2011 Christinne Corrections/Changes Draft response received in Legislative Rodriguez Affairs for review on 01/11/2011. Legislative Affairs

returned changes to Floyd Williams on 01/11/11.

01106/2011 Action Comments Legislative Affairs preparing signature package for Steve Millers signature. per staff attorneyresponse letter is pending with Commissioner Shulmans Office. The Due Date was revised From: 12/10/20 10 To: 01/14/2011 per staff attorneyupdate E-Trak with the new due date of December 10, 2010 for both items. The responses are pending with the Deputy Commissioner (Steven T. Miller) for review. If you have any questions, let me Cumbuka Ortez

12/10/2010 Action

Extension Request

Marshalle lackson

12/10/2010 Action

Due Date Revised

Marshalle ackson

11/10/2010 Action

Extension Request

Marshalle ackson

know.
11/10/2010 Action Due Date Revised The Due Date was revised From: 11/09/20 10 To: 12/10/2010 per staff attorney, due date changed to 11/9 The Due Date was revised From:
...

Marshalle ackson

10/29/2010 Action 10/29/2010 Action

Extension Request Due Date Revised

Marshalle ackson Marshalle lackson

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12/20/201 1

Page 4 of 5 10/29/2010 To:

11/09/2010 Case From

Salutation IName lEmail IPhone IFax ICell Phone IAddress

Case Addressee

cityi5tateIZip

Salutation IName (Email (Phone IFax ICell Phone IAddress (City/State/Zip Case Contact Contact Type Salutation Name Email Home Work Fax Address City/State/Zip Phone Phone United Washington (202) Jon Congressional Sen. States DC 20510 224Kyl Senate 4521
730

Hart Senate Office Building Congressional Sen. Orrin Hatch

(202) 2245251

United Washington States DC 20510 Senate

104

Hart Senate Office Building Case Documents File Name LTR-2011-15432-KylRev02012011.doc LTR-2011-15432-Hatch-

Source Date 02/01/2011 Final

Response 02/01/2011 Final

Description Kyl final draft response

Hatch final draft

Response 10/06/2010 Incoming

02/01/2011 Other

Rev02012011.doc Sen. Hatch & Sen. Kyl

15432.pdf Action Routing Sheet_15432 .pdf

response Incoming e-mail

LegAffARS

http:J/ds0006 1. dcc. irs.gov : 7777/etrak-cc/page.request.do?pagepage. ecu.... 12/20/2011

Page 5 of 5
02/17/2011 Final Response 02/17/2011 Final Response Hatch_Final_15432.pdf Final response to Hatch signed by Commissioner. Final response to Kyl signed by Commissioner

Kyl_final_15432.pdf

coe

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