IRS Issues Final Regulations Providing Relief for Certain Tax-Exempt Organizations
On May 26, 2020, the Treasury Department and the IRS issued final rules (T.D. 9898) stating that certain tax-exempt groups will no longer be required to provide the names and addresses of major donors on annual returns filed with the IRS. These regulations specify that only organizations described in section 501(c)(3) and section 527 organizations are required to continue to provide names and addresses of contributors on their Forms 990 (Return of Organization Exempt From Income Tax), Forms 990- EZ (Short Form Return of Organization Exempt From Income Tax), and Forms 990-PF (Return of Private Foundation). Most of the information filled out on these annual returns in available for public inspection.
Charitable Organizations (501(c)(3))’s and Political Organizations (Section 527)
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes and none of its earnings may inure to any private shareholder or individual. Organizations descried in 501(c)(3) are referred to as charitable organizations and such charitable organizations are barred from taking any action in an attempt to influence legislation as a substantial part of its activities, and this cannot participate in any campaign activity for or against political candidates.
This Treasury Decision revises §1.6033-2(a)(2)(ii)(F) to provide that organizations described in section 501(c)(3) generally are required to provide names and addresses of contributors of more than $5,000. Similarly, §1.6033-2(a)(2)(iii)(D) is revised to remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to the following organizations:
- Social and recreation clubs per 501(c)(7)
- Fraternity Beneficiary Societies and Associations per 501(c)(8), and
- Domestic Fraternal Societies and Associations per 501(c)(10).
Political organizations that are tax-exempt under section 527 of the code will also still have to report contributor names and addresses. A 527 group is created primarily to influence the selection, nomination, election, appointment, or defeat of candidates to federal, state, and local office. These final regulations also clarify that section 527 organizations with gross receipts greater than $25,000 generally are subject to the reporting requirements under section 6033(a)(1) as if they were exempt from taxes under section 501(a).
Social welfare organizations (501(c)(4)) and Business Leagues (501(c)(6))
Under the final regulations, social welfare organizations and business leagues are not required to provide donor names and addresses. The following organizations qualify as social welfare organizations under 501(c)(4):
- Civil leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare;
- Local associations of employees, where membership is limited to the employees of a designated person in a particular municipality, and the net earnings are used exclusively tor charitable, educational, or recreational purposes; and
- Certain organizations that engage in substantial lobbying activities (i.e. the National Rifle Association, the American Civil Liberties Union, and Citizens United).
Additionally, the Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, under 501(c)(6), so long as they are not organized for profit and no part of the net earnings are used for the benefit of any private shareholder or individual. Organizations that qualify under 501(c)(6) are also allowed to engage in some political activity.
Commentators in favor of the IRS’s decision not to collect names and addresses of substantial donors to some tax-exempt organizations discussed the concern that supporters of certain organizations would face harassment if their status as contributors was publicly revealed. This would produce a “chilling effect,” discouraging potential contributors from giving to certain tax-exempt organizations and rise to a violation of a first amendment violation with regards to freedom of speech and freedom of association. On the other hand, critics asserted that the new rules will lead to an increase in the flow of money into U.S. elections through organizations described in section 501(c)(4) and (6). The IRS quashed this criticism and underscored section 6103 of the Code generally prohibits the IRS from disclosing any names and addresses of organizations’ substantial contributors to federal agencies for non-tax investigations, including campaign finance matters, except in narrowly prescribed circumstances.
As a final note, all tax-exempt organizations are required to maintain records regarding their substantial contributions, irrespective if they have to follow the annual reporting requirement. Still, states have the authority to impose their own reporting requirements as both the Treasury Department and the IRS expect each state to “determine the appropriateness of the burdens it may impose in light of its own tax administration needs.”