Temp. Reg. § 53-4958-3T(d)(2)—Section 501(c)(4) organizations
The temporary regulations exclude from disqualified person status certain types of individuals and entities not deemed to have substantial influence with respect to an applicable tax-exempt organization. Temp. Reg. § 53.4958-3T(d). Section 501(c)(4) organizations are deemed not to have substantial influence, but "[o]nly with respect to an applicable tax-exempt organization described in section 501(c)(4)" that has applied for section 501(c)(4) status, filed information returns claiming section 501(c)(4) status, or has otherwise held itself out as described in section 501(c)(4). Temp. Reg. § 53.4958-3T(d)(2). The preamble notes that comments were received requesting that section 501(c)(4) organizations be excluded from disqualified person classification but does not contain any explanation as to why the temporary regulations limit this treatment only to transactions with respect to other section 501(c)(4) organizations. 66 Fed. Reg. 2148.

As noted in the Proposed Regulation Comments, the Taxpayer Bill of Rights 2, the same legislation that introduced section 4958, also added the private inurement proscription (in language identical to that contained in section 501(c)(3)) to the definitional requirements of an organization described in section 501(c)(4). Both section 501(c)(3) and section 501(c)(4) organizations are thus subject to the same inurement prohibition. Indeed, as recognized by the regulations under section 501(c)(4), organizations formed under section 501(c)(4) to promote the social welfare also generally could be classified as section 501(c)(3) organizations, unless the organization is an "action" organization or participates in campaign activities. See Treas. Reg. § 1.501(c)(4)-1(a)(2).

It is inappropriate to classify section 501(c)(4) organizations as disqualified persons when such organizations are, like section 501(c)(3) organizations, equally subject to the private inurement proscription at which section 4958 was directed. Many section 501(c)(4) civic organizations are affiliated with charitable and educational section 501(c)(3) organizations, and it would be administratively burdensome for such organizations to have to evaluate all transactions between the organizations for compliance with the rebuttable presumption of reasonableness. We thus continue to recommend that all section 501(c)(4) organizations be excluded from classification as disqualified persons. Thus, we suggest that Temp. Reg. § 53.4958-2T(d)(2) be amended to eliminate all language prior to the phrase "this category," and to provide that "this category includes any organization described in section 501(c)(4) and exempt from tax under section 501(a)."