Question

Your client, Richie Rich, as come to you for advice. Richie is interested in many social welfare issues, such as welfare reform, abortion rights, and access to higher education. He wants to use his great wealth to educate the general public on these issues, and to influence related legislation, including helping finance the campaigns of political candidates who reflect his views. Richie’s butler, Stu, suggested that he organize a §501(c)(4) organization, because such organizations are not only tax-exempt, but they do not have to disclose the names of their donors so Richie could participate anonymously. From his reading, Richie believes such an organization must be operated exclusively for the “promotion of social welfare” which would seem to preclude the lobbying and political campaigning support that he desires. Is a §501(c)(4) organization appropriate for Richie’s plans? Research and summarize your findings here. What is your recommendation for Richie?

Answer 1

In the give case , Richie rich wants to apply his great weath in promotion of social welfare issues like welfare reforms , abortion rights , access to higher education etc so he wants to organise section 501 (c)(4) organisations.

Section 501(c)(4) of Internal revenue code (IRS) says that organisation must not be organised to earn profit & it should promote for social welfare of public.

As per statute , IRC 501(c)(4) provides for exemption of: (a)Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.

(b)Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

Therefore it is clear about motive of section 501 (c)(4).

When a person wants to open section 501 (c)(4) organisations then section 506 requires an organisation to notify internal revenue service (IRS) of its intent to operation under section 501 (c)(4). Form 8976 is used to notify this information.

Now if an organisation wants to apply for exemption then in Form 1024-A & its instructions with compete details and fee in application for tax exemption. Tax exempt organisations are available for public inspections and required to make available all documents & last 3 annual information returns.

So above guidelines needs to be followed by Richie Rich for exemption of his section 501 (c)(4) organisation.

Richie rich should use benefits arising from this organisation for any private individual. All the benefits are meant to be used for promotion of social welfare of public.

If such organisations misuses the benefits then it will not qualify for tax exemption.

and any tax exemption organisation does not disclose the name & addresses of its donors or contributors in annual return if its a public organisation. This may not apply to private foundations and even when a donor contributes more than $200, then his name shall be disclosed in schedule A of Form 8872.

Therefore,

This organisation is appropriate for Richie's plans if he is ready to fulfill all conditions and follow all do's and don't.

Even these section 501(c)(4) organisations are allowed to participate in political activities so long as such activities do not become their primary focus.

Promotion of social welfare under section 501 (c)(4) does not include the lobbying and political campaigning activities or support so he cannot take support of such activities as its primary activity.

Conclusion, Mr Richie Rich may open such organisation under section 501 (c)(4) , for promotion of social welfare issues of public and it will be a tax exempt organisations & his name will also not be disclosed if he fulfills conditions regarding it.