National Taxpayer Advocate Nina Olson yesterday included in her mid-year report to Congress a recommendation for a clearer test for determining whether an organization seeking 501(c)(4) tax-exempt status is operating “primarily” for social welfare purposes.

Social welfare organizations could elect to use the same numerical test used by 501(c)(3) groups, which is based solely on their expenditures to determine whether they have engaged in excessive lobbying activities, Olson said in her report. Under the 501(h) election, the amount of time an organization spends on an activity is not relevant except to the extent it triggers an expenditure.

“The National Taxpayer Advocate believes organizations requesting the right to receive contributions exempt from tax should be evaluated on how they expend those contributions,” the report said.

The report said the proposed rules the IRS issued last fall on 501(c)(4) political activity do not provide a “bright line” ratio between social welfare and candidate-related political activity, and the agency’s proposed expansion of the definition of political activity to include nonpartisan activities such as voter registration drives and candidate forums is “unacceptably broad,” Olson said.

The IRS announced in May that, given the record number of comments it received on the issue, it would revise the proposed rules before proceeding with any public hearing. Those revised rules are not expected to be released until next year.

Olson said she intends to refine her proposal for determining 501(c)(4) status and include a legislative recommendation in her year-end report to Congress.

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