501(c)(4)s: The Good, the Bad and the Flat Out Illegal

Section 501(c)(4) of the Internal Revenue Code governs non-profit organizations devoted to social welfare. They are allowed to lobby for political, civil, or other similar causes. These organizations are exempt from federal taxation and may donate to political campaigns. Most importantly, unlike Super PACS that must disclose their donors to the FEC, there is currently no such requirement for 501(c)(4)s (although a recent DC Circuit case required disclosure under some circumstances and many states are beginning to do the same). 

Generally speaking, assuming it complies with certain restrictions, a 501(c)(4) does not have to disclose its donors to the public. Furthermore, so long as political campaign activities are not the organization’s primary activity (meaning more than 49%), the 501(c)(4) may donate to political campaigns. Depending on who you ask, 501(c)(4)s are either a breeding ground for dark money corruption or a bastion for a voice in the era of cancel culture. Who’s right? In my humble opinion, both. 

The Good

501(c)(4)s allow political participators to exercise and support their political beliefs without fear of social or other reprisal. For example, let’s say you work for a company that has a board of directors who are outspoken advocates for gun control. Yet, you are a strong proponent of the Second Amendment and take a robust view against gun control. As a result, you tend to keep your political views private and make an effort not to share these views at work because, at least in part, you have legitimate concerns about how your political views may affect your career. 

One way to anonymously advocate for your view is to donate to a 501(c)(4) that supports candidates and legislation that advance you political beliefs. Most Americans would agree that one should be able to support lawfully and deeply held political beliefs without fear of retribution from one’s employer, school, social club, neighbors, etc.  

The Bad (Part 1)

Let’s say you are a powerful elected statewide official who wants your mother to be elected sheriff of a small county. Your mother has no law enforcement experience and is running on the platform of not enforcing parking violators. She has a lot of parking tickets. You love your mother, but you don’t want to be seen as supporting a wildly incompetent sheriff. So you have your trusted minions set up a 501(c)(4) “dedicated to the freedom to park.” You then use your position to solicit donors to fund the 501(c)(4)—knowing that the donors are not reported and the funding cannot be linked back to you. The 501(c)(4) then puts 49% of donations directly into your mother’s campaign and spends the remaining 51% of donations on TV ads presenting real-life parking ticket nightmares. Most Americans would think this is the type of dark money nepotism scheme that needs to be abolished. However, it is all perfectly legal. 

The Bad (Part 2)

Let’s say you own a company that produces school uniforms for private institutions. In an effort to expand your market, you want to pass legislation to mandate school uniforms in all state public schools. Clearly you do not want the public to know you are the genesis and force behind this proposed legislation. So you solicit a trusted third party to create a 501(c)(4) that calls for the legislation. You secretly control the 501(c)(4) and are the sole donor. Through the 501(c)(4) you spend 49% of donations to directly support candidates that support the law. The remaining 51% is spent on TV ads expounding the virtues of school uniforms and telling viewers to call their legislator to insist they support the legislation. The legislation passes and no one ever knows you were behind the entire effort to become rich. Most Americans would think this is politics mixed with capitalism gone wrong and should not be allowed. However, it is perfectly legal.  

The Flat out Illegal

What happens if we change the facts slightly? Let’s say your public school uniform plan is not getting any traction, and you can’t find any candidates that want to take on your cause. So, you go find some. You tell individuals that if they are willing to run for office, you will fund their entire campaign as well as attack ads against their opponents. In return, once in office, they must pass your proposed legislation. They agree. In order to further distance yourself and your candidates from the 501(c)(4) you create additional 501(c)(4)s— all funded through the original. One 501(c)(4) donates directly to the candidates’ campaigns, another buys attack ads against your candidates’ opponents, and another buys the commercials telling viewers to support the legislation. You succeed. Your candidates are in office, and you are rich.  

Yes! We finally have a crime! Since there is a clear quid-pro-quo we have a conspiracy to commit bribery, theft of honest services, money laundering, RICO, yada…yada…yada. Yet, unless someone talks, how is this scheme ever discovered? There is no paper trail linking you to 501(c)(4) or the candidates. There is no requirement for public disclosure of donors with the FEC or anyone else. Even if a federal prosecutor were able to convince a judge that there was reasonable cause to order disclosure of a 501(c)(4)’s tax returns, they will not list the donors. Because of this, it is extremely difficult to establish probable cause to search the 501(c)(4)’s records, where one might find actual incriminating evidence.  

Bottom Line  

There are legitimate and compelling reason for 501(c)(4)s to exist; however, the anonymity that 501(c)(4)s afford their donors allows the organizations to be abused to the detriment of the people—completely legally. Even when a crime is committed, 501(c)(4)s are structured in such a way that they are extremely difficult to discover, let alone prosecute. Ultimately, we as a nation must decide whether the benefit outweighs the harm. Yes, 501(c)(4)s can be tinkered with to mitigate that harm, but is there any real political will to do so? That answer is an entirely other “Good, Bad and Flat out Illegal.”

This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

Barnes & Thornburg LLP is a large, full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business. Read more Metropreneurial Legal Insights.

barnes-thornburg-01