IRS Scandal: What Is A 501(c)(4)?

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Controversy swirls around the IRS and its scrutiny of Tea Party groups.

The IRS says some of its employees singled out conservative groups for extra scrutiny when they applied for tax-exempt status as 501(c)(4)'s.

So what qualifies as a 501(c)?

Attorney Stephen Wilson explains, "There's a plethora of subdivisions under 501(c).  I think there's fifteen or twenty of them, and they all deal with separate areas."

So how do you define the specific 501(c) that these groups say they aimed for?

Wilson says, "501(c)(4) is that section that covers social welfare organizations and local employee associations."

In the tax code, Wilson explains, these groups must benefit the whole community, "The volunteer fire department would be a 501(c)(4), because its purpose is to benefit the community as a whole, whereas a police benevolent society, which has a purpose of benefitting its members, would not."

Even if you try to go by the book though, there's gray area here.

Wilson notes Tea Party groups are likely to claim they're educating the whole community, and that's how they claim the status.

Some high-ranking IRS officials have already admitted that these groups faced extra scrutiny, but don't be fooled into thinking there's not already a ton that goes into these applications.

Wilson lists the requirements as, "You have to report your prior contributions, how long you've been in business, how long you've been accepting money, where it's going, what your compensation is to your officers, and where your funds are being directed."

There's a lot of tax law to pin you down, but it can also be used to find justifications.

Wilson adds, "There are a series of cases that have come out in which the motivation is to educate the public, and I imagine that's the provision they're riding on, that an informed public is a better, more knowledgable public."

It turns out, even in the definitions, there's plenty of grey area.

Wilson elaborates, "I know there's a case involving a radio station where they qualified as 501(c)(4), because they devoted x-amount of time to promoting political issues.  They may have been biased one way or another, but the courts felt like they were doing a benefit to the community."

So it's possible that in the letter of the law there's room for a politically minded organization to claim community benefit.

And the benefit of filing with the IRS as a 501(c)(4)?  Wilson says tax exemption is the obvious one, but with it comes more flexibility in filing returns.

So buried in the tomes of tax law, there may be justification for the tax exempt for these types of groups.

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