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The Internal Revenue Service (IRS) recently issued two private letter rulings (PLRs) that may be interesting for tax-exempt organizations that engage in political activity.

In the first ruling, the IRS held that a company could not deduct payments made to charity under a PAC matching contribution program as an “ordinary and necessary business expense.”  While the Internal Revenue Code already prohibits income tax deductions for political contributions, the company requested a PLR holding that the charitable contributions are deductible business expenses.  In rejecting the deduction, the PLR reasoned that “the contributions to [the] PAC and [the company’s] matching contributions are inextricably linked,” because the company would not have donated to the charity but for the employees’ contributions to the PAC.   Plus, the letter held, the matching program is intended to incentivize contributions to the PAC,  thus the charitable contributions are clearly “in connection with a political campaign” and not deductible.

The PLR comes on the heels of the FEC’s surprise approval of 2-to-1 corporate charitable PAC match programs this past January and provides some clarity into the tax implications of such matching programs. While campaign finance law now clearly allows corporations to grow their PACs by sponsoring charitable matching programs to incentivize giving, these programs should be viewed with eyes wide open: charitable contributions that help pad a corporate PAC’s coffers are not deductible business expenses.

In a separate ruling, the IRS issued a PLR late last year formally rejecting an organization’s qualification as a 501(c)(4) social welfare organization because it failed to adequately explain what social welfare activities it would undertake.  The organization  applied for (c)(4) status, claiming that its sole activity in the prior year was to hold a candidate forum and that it had no future activities planned.  The organization also acknowledged that it planned to spend money to influence elections, although that was not its primary purpose. The organization repeatedly ignored IRS requests for additional information to verify the social welfare activities of the organization.

Unlike 501(c)(3) charitable organizations, 501(c)(4) organizations may conduct some political activity as long as it is not the organization’s primary purpose.  501(c)(4)s are a common vehicle for lobbying activity, in the form of direct and grassroots advocacy, and some political expenditures; however, the PLR is an important reminder that a (c)(4) must engage in some social welfare activities, which do not include intervention in campaigns for or against candidates.

The PLR also emphasizes the importance of prospectively explaining to the IRS the exempt activities the organization plans to undertake.  While the letter acknowledged that “candidate forums” and similar activities “may meet the definition of social welfare by furthering voter education purposes,” it still faulted the organization for failing to describe its “planned activities for the future.”

Finally, the letter serves as a cautionary tale for (c)(4)s that failure to respond to questions by the IRS could result in the denial of tax-exempt status.  We note that the organization had the option to “self-declare” tax-exempt status as a 501(c)(4) organization rather than filing an application with the IRS.

Photo of Susan Leahy Susan Leahy

Susan Leahy advises tax-exempt and not-for-profit organizations on a wide variety of matters. She counsels clients on Internal Revenue Code, Treasury regulations, rules regarding private benefit, self-dealing, inurement, unrelated business income tax, intermediate sanctions, relationships with for-profit organizations, joint ventures, corporate sponsorship, lobbying…

Susan Leahy advises tax-exempt and not-for-profit organizations on a wide variety of matters. She counsels clients on Internal Revenue Code, Treasury regulations, rules regarding private benefit, self-dealing, inurement, unrelated business income tax, intermediate sanctions, relationships with for-profit organizations, joint ventures, corporate sponsorship, lobbying, and political activities.

Photo of Matthew Shapanka Matthew Shapanka

Matthew Shapanka draws on more than 15 years of experience from Capitol Hill, private practice, state government, and political campaigns to counsel clients significant legislative, regulatory, and enforcement matters. He develops and executes complex, multifaceted public policy initiatives for clients seeking actions by…

Matthew Shapanka draws on more than 15 years of experience from Capitol Hill, private practice, state government, and political campaigns to counsel clients significant legislative, regulatory, and enforcement matters. He develops and executes complex, multifaceted public policy initiatives for clients seeking actions by Congress, state legislatures, and federal and state government agencies, many with significant legal and political opportunities and risks. Matt also leads the firm’s state policy practice, advising clients on complex multistate legislative and regulatory policy matters and managing state advocacy efforts.

Matt rejoined Covington after serving as Chief Counsel for the U.S. Senate Committee on Rules and Administration, where he advised Chairwoman Amy Klobuchar (D-MN) on all legal, policy, and oversight matters before the Committee, including federal election and campaign finance law, Federal Election Commission nominations, and oversight of legislative branch agencies, U.S. Capitol security, and Senate rules and regulations. Most significantly, Matt led the Committee’s staff work on the Electoral Count Reform Act – a landmark bipartisan law enacted in 2022 to update the procedures for certifying and counting votes in presidential elections —and the Committee’s joint (with the Homeland Security Committee) bipartisan investigation into the security planning and response to the January 6, 2021 attack on the Capitol.

Both in Congress and at Covington, Matt has prepared dozens of corporate and nonprofit executives, academics, government officials, and presidential nominees for testimony at congressional committee hearings and depositions. He is also an experienced legislative drafter who has composed dozens of bills introduced in Congress and state legislatures, including several that have been enacted into law across multiple policy areas.

In addition to his policy work, Matt advises and represents clients on the full range of political law compliance and enforcement matters involving federal election, campaign finance, lobbying, and government ethics laws, the Securities and Exchange Commission’s “Pay-to-Play” rule, and the election and political laws of states and municipalities across the country.

Before law school, Matt worked in the administration of former Governor Deval Patrick (D-MA) as a research analyst in the Massachusetts Recovery & Reinvestment Office, where he worked on policy, communications, and compliance matters for federal economic recovery funding awarded to the state. He has also worked for federal, state, and local political candidates in Massachusetts and New Hampshire.