A (Partial) Defense of Section 501(C)(4)\u27s “Catchall” Nature

Internal Revenue Code section 501(c)(4) provides exemption from federal income tax for “social welfare” organizations. The vagueness of this term and the failure of the Treasury Department and Internal Revenue Service to interpret it in a manner that would significantly limit that vagueness has led some commentators to criticize this section’s “catchall” nature. While much scholarly attention has been paid to this criticism with respect to the most visible section 501(c)(4) organizations, particularly those involved in political campaign activity and lobbying, almost no attention has been paid to the many less common types of section 501(c)(4) organizations that illustrate that section’s catchall nature. This article fills that gap by considering these less prominent organizations and whether their qualification for exemption under this section is problematic.More specifically, after briefly reviewing the very limited legislative history of this provision I survey these other types of organizations and, as best as can be determined, why they have claimed this status and how they have managed to do so successfully. I will then critique these myriad uses of section 501(c)(4). Based on this review, I conclude that not only is the “catchall” nature of section 501(c)(4) not inconsistent with its language and limited legislative history, but that nature is generally defensible as the appropriate tax classification for these various entities. The only exceptions are the relatively rare instances where Congress intended to create a different, exclusive exemption category for a particular type of organization with specific restrictions. In those situations, allowing that type of organization to instead qualify for exemption under section 501(c)(4) permits it to avoid the restrictions Congress intended to place on that type as a condition for exemption. This appears to be the case with respect to two types of entities: charitable organizations that federal tax law would classify as private foundations if they were exempt under Internal Revenue Code section 501(c)(3); and electric and water cooperatives that Congress intended to receive exemption exclusively under section 501(c)(12)