Courts Revisit The Rules For Section 501(c)(4) Political Activity And Exempt Status

Key Takeaways:

• Two recent federal court decisions have unsettled the legal landscape governing political activity and exemption for Section 501(c)(4) organizations.
• In Freedom Path, Inc. v. IRS (D.D.C. 2025), the court questioned whether the IRS's facts-and-circumstances test for political activity is unconstitutionally vague, and in Memorial Hermann Accountable Care Organization v. IRS (5th Cir. 2024), the court applied a stricter standard for exempt purpose, signaling tighter scrutiny of organizations that confer private or mixed benefits.
• This uncertainty makes it important for Section 501(c)(4) organizations to review their programs, budgets and documentation; clarify mission-driven activities; and document political and lobbying efforts with care.

The law concerning federal limits on political advocacy by nonprofit organizations continues to evolve. For Section 501(c)(4) social welfare organizations, two federal court decisions, issued nearly a year apart, have unsettled both the constitutional footing and practical rules governing their activities. These decisions suggest that the IRS's rules for political activity may be too vague to survive constitutional scrutiny, even as courts redefine "social welfare" in narrower terms.

The resulting tension could force significant changes in how these organizations engage in lobbying, advocacy and political activity. Until it is resolved, Section 501(c)(4) organizations operate in a narrowing corridor, caught between constitutional limits on the government's ability to regulate political speech and tax limits on exempt status.

Section 501(c)(4) is silent about the political activity of social welfare organizations. It simply provides that such organizations must operate "exclusively for the promotion of social welfare" and without inurement of net earnings to "any private shareholder or individual." The Treasury Regulations interpreting the statute, however, stipulate that "[t]he promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office."¹ Perhaps the reason such obvious censorship has survived in administrative interpretations of the statute for so long is that the Treasury Regulations also interpret the word "exclusively" to mean "primarily." As a result, a social welfare organization may engage in noncompliant activity, including political campaign intervention, provided that it continues to engage primarily in social welfare activity.

The IRS currently determines whether a Section 501(c)(4) organization is "primarily" engaged in promoting social welfare through a facts-and-circumstances analysis of the organization's activities rather than through a fixed formula. Neither the Internal Revenue Code nor the Treasury Regulations impose a numeric or percentage limit on political activity, but IRS guidance and historical practice suggest that such activity should not exceed 40 percent of the organization's total expenditures in a given year.

In Freedom Path, Inc. v. IRS (D.D.C. 2025), the district court held that this facts-and-circumstances framework for judging permissible political activity, which the IRS used to deny Freedom Path's application for exemption under Section 501(c)(4), was unconstitutionally vague as applied to that organization. While the court's decision did not strike down the IRS's existing framework in general, similar as-applied challenges could follow until the IRS or Congress provides a clearer rule explaining where the line lies.

By contrast, Memorial Hermann Accountable Care Organization v. IRS (5th Cir. 2024) addressed the scope of the social welfare exemption itself. In that case, the U.S. Court of Appeals for the Fifth Circuit held that an organization did not qualify for exemption under Section 501(c)(4) because its activities primarily benefited health care providers and insurers rather than the public. In reaching this conclusion, the court applied the "substantial nonexempt purpose" doctrine from Better Business Bureau v. United States, a 1945 Supreme Court case holding that an organization can be denied exemption if it engages in even one significant nonexempt activity. That approach departs from the more flexible "primary purpose" test found in the Treasury Regulations, under which an organization may still qualify for exemption so long as its social welfare mission predominates. By adopting the stricter standard, the court effectively aligned the rules governing Section 501(c)(4) organizations with those governing Section 501(c)(3) charities and expanded the IRS's authority to deny exemption.

These decisions deepen uncertainty in the law of tax-exempt advocacy. Freedom Path calls the IRS's standards for evaluating political activity into question, while Memorial Hermann tightens the substantive limit on nonexempt activities. This tension is compounded by current IRS practice. Although Section 501(c)(4) organizations have, since 2016, only needed to notify the IRS of their formation rather than seek formal recognition, many still pursue determination letters to reduce future risk. In reviewing those submissions, the IRS continues to rely on the same facts-and-circumstances approach that Freedom Path criticized. With no updated regulations or safe harbors, these determinations remain highly fact-specific and potentially inconsistent.

These rulings may also force the IRS to reckon with how it defines and enforces standards for exemption under Section 501(c)(4). If the agency revises its regulations to cure the constitutional vagueness identified in Freedom Path, it may also need to reconcile them with the Fifth Circuit's stricter reading of the permissible threshold for nonexempt activity in Memorial Hermann.

The result is a compliance environment that is both unpredictable and demanding. For organizations, the near-term priority is risk mitigation. Boards should revisit their governing documents, purpose statements and program budgets to confirm that public benefit, not private advantage or political activity, remains their primary objective. Political activity and lobbying efforts should be clearly separated from operational programs and supported by contemporaneous documentation linking them to the organization's public welfare mission. Counsel should also monitor where IRS determinations arise, as courts in different jurisdictions may interpret Freedom Path and Memorial Hermann differently until higher courts clarify the standard.

BakerHostetler's Political Law and Tax-Exempt Organizations teams advise clients across the country on compliance, structure and advocacy strategy for Section 501(c) entities. We help organizations evaluate whether their program mix and governance practices align with evolving federal standards, prepare determination letter submissions and design internal safeguards for lobbying and political engagement. We also provide risk assessments for issue advocacy and election-related communications. For clients navigating the intersection of Freedom Path and Memorial Hermann, we can assist with developing policies, documenting programmatic purpose and anticipating how future IRS or judicial actions may affect exemption eligibility.

Footnote

1. Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.