[S]ection 501(c)(4) organizations are required to primarily engage in the promotion of social welfare in order to obtain tax exempt status. Court decisions have established that in order to meet this requirement, section 501(c)(4) organizations cannot engage in more than an insubstantial amount of any non-social welfare activity, such as directly or indirectly participating or intervening in elections. Thus, the claim made by some political operatives and their lawyers that section 501(c)(4) organizations can spend up to 49 percent of their total expenditures on campaign activity and maintain their tax exempt status has no legal basis in the [Internal Revenue Code] and is contrary to court decisions regarding eligibility for tax-exempt status under section 501(c)(4). An expenditure of 49 percent of a group’s total spending on campaign activity is obviously far more than an insubstantial amount of non-social welfare activity. The IRS applies the “primarily engaged” test on the basis of the “facts and circumstances” of an organization’s formation and operations. Here, we believe, the “facts and circumstances” show that each organization has engaged in far more than an insubstantial amount of participation or intervention in elections and that the overriding purpose of each organization is to influence elections. Thus, under the IRC and court decisions interpreting the IRC, these organizations are not eligible to receive section 501(c)(4) tax exempt status.

Leading campaign finance reform groups have sent a letter to the IRS challenging the tax-exempt status of Karl Rove's Crossroads GPS and three other groups The 23-page letter goes on to detail the significant level of electoral activity for each organization involved.

So why does this matter? Beyond any immediate penalties, such organizations would instead have to register themselves as 527 organizations or, even, PACs or SuperPACs. And once you get into that space, donors have to be disclosed—and these groups do not want that. As the opening section of the letter concludes:



Absent timely and appropriate action by the IRS, widespread abuses of the tax code by groups organized under section 501(c)(4) are likely to become commonplace in the 2012 presidential and congressional races. These abuses will come at the expense of the integrity and credibility of the tax laws and of the right of the American people to know the identity of the donors providing money to influence elections.