Section 501(c)(4) of the Internal Revenue Code ("IRC") exempts from the federal income tax certain nonprofit corporations that are operated exclusively for the promotion of social welfare (commonly referred to as "Social Welfare Organizations") and certain local employee organizations (the characteristics of local employee organizations are beyond the scope of this blog). Generally, Social Welfare Organizations are organizations that promote the common good and general welfare of the community as a whole.
An organization that primarily benefits a private group typically will not qualify for IRC 501(c)(4) exempt status. For example, a countywide recreational facility may be operated by a Social Welfare Organization, while an organization that operates a recreational facility that only serves the residents of a housing subdivision is unlikely to qualify for IRC 501(c)(4) exempt status. Social Welfare Organizations can be advocacy organizations which attempt to influence legislation and are permitted limited involvement in political campaign activities.
Previously, the Internal Revenue Service (the "IRS") typically first became aware of the existence of a Social Welfare Organization when the organization (a) filed its first Form 990, Return of Organization Exempt from Income Tax (the "Form 990"); or (b) applied for recognition of its exempt status by filing a Form 1024, Application for Recognition of Exemption Under Section 501(c) (the "Form 1024"). Given the level of Form 990 reporting compliance among tax exempt organizations, a Social Welfare Organization could be in existence for years before the IRS became aware of its existence. In fact, some advocacy organizations were structured so that the organization would be established, operated, and dissolved before the IRS became aware of their existence.
To address the reporting gap with respect to Social Welfare Organizations, Congress adopted IRC Section 506 which requires a Social Welfare Organization (IRC 501(c)(4) organizations) to notify the IRS no later than 60 days after the organization is established that it is operating as an IRC 501(c)(4) Organization. On July 8, 2016, the IRS released Revenue Procedure 2016-41 which sets forth the procedures for satisfying this notice requirement.
Revenue Procedure 2016-41 clarifies that subject to certain exemptions (described below), all Social Welfare Organizations that were in existence on July 8, 2016 and that are created after July 8, 2016 are required to satisfy the notice requirement. A Social Welfare Organization is exempt from the notice requirement if, on or before July 8, 2016, the organization either:
(a) Applied for a determination letter that the organization was exempt from taxation (i.e., filed a Form 1024); or
(b) Filed at least one annual information return or notice (i.e., a Form 990, Form 990-EZ or a Form 990-N).
Social Welfare Organizations in existence on July 8, 2016 that did not qualify for this exemption from the notice requirement were given until September 6, 2016 to satisfy the notice requirement.
Revenue Procedure 2016-41 provides that a Social Welfare Organization will satisfy its notice requirement by filing a Form 8976, Notice of Intent to Operate Under Section 501(c)(4). The Form 8976 must be submitted online at https://services.irs.gov/datamart/login.do. Paper submissions will not be accepted. The individual submitting the Form 8976 must establish an account at the above-referenced website in order to electronically submit the form. The Form 8976 must be accompanied by the payment of the correct user fee ($50.00 for 2016) on www.pay.gov. In future years, the amount of the user fee will be set forth in the instructions or publications dealing with the Form 8976.
The information to be included on the completed Form 8976 includes:
(a) Name of the organization;
(b) Address of the organization;
(c) Employer Identification Number (EIN) of the organization;
(d) Date of organization;
(e) State or other jurisdiction of organization;
(f) Statement that the purpose of the organization is to operate either as a (i) social welfare organization/civic lease, or (ii) local association of employees; and
(g) Month the organization's annual accounting period ends.
The Form 8976 also includes a statement whereby the individual filing the form attests that: (a) the information provided is correct; (b) the individual submitting the form is authorized to submit the Form 8976 on behalf of the organization; and (c) the form is accompanied with the correct user fee.
The requirement that a Social Welfare Organization file a Form 8976 is in addition to the requirement that a Social Welfare Organization file annual information returns (e.g., Form 990s). Likewise, the filing of the Form 8976 does not address whether the Social Welfare Organization qualifies for tax exempt status (which is accomplished by the submission of a Form 1024).
A Social Welfare Organization that fails to submit a completed Form 8976 within 60 days of its establishment is subject to a penalty of $20.00 per day (with a maximum penalty of $5,000.00).
In addition, if the organization fails to submit the completed Form 8976 by the due date, the IRS may send correspondence requesting that the Social Welfare Organization submit the Form 8976 by a specified future date. If the organization fails to submit the Form 8976 by the date specified in above-referenced IRS correspondence, the person or persons responsible for the failure may be jointly and severally liable for a penalty of $20.00 for each day (after the date specified in the correspondence) during which the failure to file continues. For purposes of this penalty, "person" includes any officer, director, trustee, employee, member or other individual whose duty it is to submit the Form 8976. However, the total amount imposed on all persons is limited to $5,000.00.
In summary, IRC Section 506 imposes a requirement that Social Welfare Organizations (e.g., IRC 501(c)(4) organizations) notify the IRS no later than 60 days after the organization has been established. Given the potential penalties for failure to satisfy this notice requirement, persons involved in the establishment of Social Welfare Organizations (e.g., IRC 501(c)(4) organizations) should take steps to promptly file the Form 8976 for each newly established organization.