One possible detriment to achieving §501(c) exempt status is a limitation on an organization's participation in political campaigns and the legislative processes of governments. The amount and extent of the political and legislative activity allowed for an exempt organization is limited by both the Internal Revenue Code (IRC) of 1986 and the Federal Election Campaign Act (FECA). For organizations exempt under §501(c)(3), there is an absolute prohibition against participation in a political campaign on behalf of a candidate for public office. IRC §4955, added to the Tax Code in 1987, imposes a penalty tax on a (c)(3) organization and its managers who approved of any prohibited political activities.1 The penalty enables the IRS to punish the organization short of revoking its exempt status when the campaign activity is a minor part of its activities. Private foundations are, in addition, strictly prohibited from conducting either legislative or campaign activity, and a taxable expenditure penalty can be imposed.2 A (c)(3) organization that loses its exempt status due to excessive electioneering or lobbying activities cannot thereafter qualify to obtain exemption as a (c)(4) organization.3
The regulations pertaining to many types of nonprofits that are exempt under IRC §501, including charities, civic associations, social clubs, cemetery companies, fraternal societies, and others, specifically require that the organization devote itself exclusively to achieving its defined purpose. Exclusively for this purpose does not necessarily mean 100 percent. Whether political campaign and legislative activities further the exempt purpose of an organization is a question based on its particular facts and circumstances.
To understand the morass of rules and regulations that pertain to public policy activities, it is important to distinguish politically oriented activity that constitutes electioneering, or attempts to influence an election of someone to public office. Attempts to influence the decisions of a legislature body is called lobbying. Electioneering involves intervention in the electoral process and lobbying activity involves attempts to influence those persons once they have been elected or appointed to a legislative body. Both types of activities are commonly referred to as “political activity.” The specific definition of political campaign activity found in the regulations says that an organization has political activity if it
participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. The term candidate for public office means an individual who offers himself, or is proposed by others, as a contestant for an elective public office, whether such office be national, state, or local.4
A nonearmarked general-support grant to one public charity by another public charity should logically be treated the same as a nonearmarked grant from a private foundation to a public charity; such a grant is not treated as impermissible lobbying by the granting organization.5
Efforts to create a new party or to stop a candidate's nomination certainly are treated as influencing the choice of candidates for public office, and an effort to impeach someone in office might well be. Those officials who occupy public office must be identified. Public office includes any position that is filled by a vote of the people at the federal, state, or local level. It is useful to clarify whether an appointment is, in fact, an election under the applicable local election laws. The answers vary from state to state. Not only is the person nominated by a political party a candidate, but also someone being drafted to run for office.
The absolute ban on spending money for political purposes by a charitable organization exempt under IRC §501(c)(3) is contained in both the organizational and the operational tests for qualification.6 Most other nonprofit organizations exempt from income tax are not similarly constrained from participating in political campaigns. All Form 990–filing exempt organizations are asked to submit the amount of their “political expenditures, direct or indirect.” If any amount is reported, they are further directed to file Form 1120-POL. A (c)(3) organization answering this question with an amount is subject to a penalty.7 The 990 instructions define a political expenditure as one intended to influence the selection, nomination, election, or appointment of anyone to a federal, state, or local public office, or office in a political organization, or the election of presidential or vice presidential electors. The IRS notes that it does not matter whether the attempt succeeds. An expenditure for this purpose includes a payment, distribution, loan, advance, deposit, gift of money, or gift of anything of value. It also includes a contract, promise, or agreement to make an expenditure, whether legally enforceable or not.
The amount of permitted campaign involvement for certain categories of exempt organization is different. The basic guidelines are as follows:
When political involvement is permitted, the percentage of the annual budget expended on the campaign should be quantified to analyze whether the activity is substantial. Any amount of money in excess of $100 spent on political activity by a §501(c) organization—to the extent of its investment income—is taxed under IRC §527(f) with the filing of Form 1120-POL.13 Federal election laws also make it unlawful for a corporation to make a contribution or expenditure in a federal election. To avoid both tax on an organizational level and controversy regarding the extent of political activity, a §501(c)(4), (5), or (6) or other exempt (but not a (c)(3)) can create a separate political action committee (PAC). Exhibit 23.1 illustrates these important rules.
The IRS has said it is possible for a relationship to exist between a (c)(3) organization and a political organization, as long as the political one is not established by, administered by, solicited for, or funded by the charitable organization.14 For example, a political organization could rent space from the charity at its fair market value or purchase its materials.15
The absolute ban against participation by (c)(3) organizations in political campaigns has inspired refinements and distinctions among actual campaign intervention, voter education, and other activities. Organizations have unexpectedly lost exempt status for involvement in school board, water commission, and other local campaigns. The IRS found that an organization would lose its exempt status due to involvement in political party precinct elections.16 An analysis of relevant local election laws indicated to the IRS that the precinct committee position possessed the characteristics of public office. The organization's counsel had advised it that the positions were administrative, not political. In another important distinction, appointed members of the federal judicial system are not considered to be elected public officials. Attempts to influence the U.S. Senate confirmation of a nominee to the Supreme Court do not constitute intervention in a political campaign, but, instead, constitute influencing, or attempting to influence, legislation.17
EXHIBIT 23.1 Permissible PAC Involvement
(c)(3) | (c)(4) | (c)(5) or (6) | |
Establish the PAC | No* | Yes | Yes |
Pay administrative costs | No† | Yes | Yes |
Control PAC's board | No* | Yes | Yes |
Allow PAC to solicit funds from exempt's members | No† | Yes | Yes |
Use exempt's name (ABC Charity's PAC) | No‡ | Yes | Yes |
Use exempt's mailing list | If PAC pays | Yes | Yes |
* The PAC cannot be created by the (c)(3) itself. Individual board or staff members can establish the PAC if they act in their individual capacities. The PAC essentially must be a “nonconnected committee” in relation to the (c)(3).
† Election laws, which are generally more lenient than the tax rules, permit a charitable organization to create a PAC, pay for the PAC's overhead and administration, and raise funds from the exempt organization's constituents.
‡ Use of name implies support or endorsement of the campaign and also represents a donation of the (c)(3)'s intangible asset—its goodwill. State and federal laws conversely require the PAC name to include the name of its corporate, union, or other organizational sponsor.
The Fund for the Study of Economic Growth and Tax Reform is a good example to study. The fund was formed to conduct a project eventually known as the Kemp Commission. It was established by then-Senate Majority Leader Bob Dole and House Speaker Newt Gingrich, who appointed members of the Republican Party as its officials. It studied ideas for reforms to create economic opportunity through tax reduction. Though it conducted no overt lobbying, its creators and members were widely quoted making statements such as, “Tax reform is, of course, political [partisan].” The court found it to be an action organization that conferred substantial private benefit on the Republican Party and did not qualify for tax exemption under §501(c)(3).18 The IRS found, and the courts agreed, that its purposes could be accomplished only by adoption of a flat tax.19 The court did not address the parallel issue advanced by the IRS that its activities constituted political intervention on behalf of the Republican Party.
In another political intervention case, a church's exempt status was revoked. Running full-page advertisements in the Washington Times and USA Today four days prior to the presidential election cost The Church at Pierce Creek its tax-exempt status. The ad said, “Christian Beware. Do not put the economy ahead of the Ten Commandments,” and went on to criticize then-governor Clinton for his stand on a number of issues.20
Though Branch Ministries' tax exemption was revoked, the court said it might regain its exempt status simply by refraining from intervention in political campaigns.21 It was also noted that the church was entitled to create a §501(c)(4) organization that could in turn create a political action committee to conduct the very same political activity that had caused loss of its exemption.
The Christian Coalition's application for qualification as a §501(c)(4) civic welfare organization failed to receive IRS approval after 10 years of discussions. The coalition withdrew Form 1024 and chose to operate as a business corporation with freedom to endorse political candidates and make financial contributions to support candidates of its choice. Although the facts are not known, it is likely the coalition's voter guides and other election-related activities represented too high a portion of its overall activities.22 Some commentators question why the organization had sought (c)(4) status in the first place rather than classification as a political organization.23
Legislative proposals to expand permissible election activity have been discussed. Frances R. Hill24 examined the validity of the prohibition against certain exempt organizations' participation in elections and concluded that the current system prohibiting campaign involvement for charities should continue. The primary flaw that she suggests ought to be corrected is the creation of §501(c)(3) organizations by wealthy donors and political parties to further their platforms. The article looks extensively at the four different forms of political money—hard money, soft money, softer money, and independent expenditures—and concludes that the “deconstruction of political money has brought with it the fragmentation of political structures.”
Questions may arise when organizational officials are involved in electioneering activity. Endorsements of political candidates or other electioneering statements by an organization's officials in their individual capacities should not be attributed to the nonprofit organization itself. However, such endorsements will be imputed to the organization and can endanger the exempt status of a (c)(3) organization, if the organization directly or indirectly authorized or ratified these officials' actions.25 It is very important for such persons to clearly disclose the actions as their own. IRS Publication 1828, Tax Guide for Churches and Religious Organizations,26 contains examples to define the fine line between speaking on behalf of the organization and on behalf of oneself.
Publication 1828 contains detailed guidance concerning allowing candidates to speak at church functions, voter education and registration drives, rental of church facilities by candidates, and displays on the church's website.
Related exempt organizations, particularly those recognized under §§501(c)(3) and (c)(4), and certainly those controlled by common board members, must address the differing limitations on their lobbying and electioneering activity. The issues that require careful attention involve shared publicly disseminated information—the newsletter and the website—and shared administrative expense, such as staff and occupancy. How expenses of such functions are allocated between the entities should be based on actual statistics about programs conducted, hours devoted to respective activity by personnel, and other evidence of the reasonableness of the cost allocations between the entities.27 The IRS examined a shared website and found that the (c)(3) had intervened in a political campaign when the Web pages of both entities contained the (c)(3) entity's name banner. Although it was intended that the pages containing candidate questionnaires and endorsements represent only the activity of the (c)(4), the common banner and website caused the IRS to attribute the electioneering to the (c)(3).28
Activities focused on public policy issues, such as allowing permits to emit chemicals suspected of depleting the ozone layer and the officials who decide such issues, may also be classified as prohibited political activity. Express advocacy in favor of the election or defeat of a candidate is unquestionably intervention in a political campaign. Discussion or comment on an elected official's actions may or may not, however, be treated as express advocacy. When a tax-exempt organization addresses issues involving election of persons to public office, its activity is governed not only by federal tax rules but also by the Federal Election Commission (FEC) rules. Organizations using the Internet to disseminate voter information should seek advisors familiar with the FEC rules.29
Voter registration drives do not constitute intervention in a political campaign when conducted in a nonpartisan manner.30 Drives that are targeted at members of a particular party, or that are in support of or against named candidates, are likely to be classified as political activity.31 Partisan language on materials handed out to potential voter registrants that implies endorsement of a political persuasion can cause the campaign to be classified as political activity. Private foundations may finance multistate voter registration drives under very specific rules.32
Factors that the IRS suggests will show that an organization's advocacy communications serve no electoral purpose, and therefore are voter education, include:33
The IRS retroactively revoked an ostensibly educational organization's exemption due to a variety of political activity. It found the following language to be incriminating:34
Conservatives in the U.S. Senate and House of Representatives are giving us economic prosperity, reducing government intervention and instilling pride in America and our way of life. All of this will be lost if Conservatives like you and me do not head off the huge voter registration drive by the liberals.
The ruling contains a broad analysis of voter education and campaign workshops and is mandatory reading for any organization participating in similar activities. If an organization publishes materials that discuss and, particularly, criticize governmental policies and officials, it is important that the information be nonpartisan. The following questions should be asked in evaluating whether the analysis constitutes participation in a campaign:
The following criteria are used to judge whether publication of congressional representatives' voting records on selected issues constitutes political action:36
The IRS provided the following standards used to judge a permissible a voter education project.37 Charity M sponsored candidate forums and issued candidate evaluations. A scientifically selected group of voters chosen to reflect the demographics of the state evaluated the candidates, picked those eligible to debate, and issued their personal opinions on the candidates. The ruling outlined the following factors to consider whether the method used to choose candidates invited to debate was aimed at voter education or at influencing the campaign:
The holding of press conferences and publication of the opinions of its voter groups were considered impermissible. The content of an organization's fund-raising letters was deemed to violate the prohibition against political intervention and resulted in taxable expenditures under §4955; the letters encouraged readers to imagine certain political candidates as defeated and said that “together we can change the shape of American politics.”38
The IRS has issued the following guidance regarding campaign involvement that is considered educational:
The IRS took a surprisingly lenient position regarding peace promotions run during the 1984 presidential campaign.45 Advertisements urged readers: “Think about it when you vote this November,” and “Choose leaders who will lead us away from a nuclear nightmare, not into one.” The IRS “reluctantly concluded that the organization probably did not intervene in the campaign,” apparently because the ads did not overtly support a candidate (even though everyone knew that the peace candidate was Democratic nominee Walter Mondale).
Use of an organization's website to disseminate voter education, including links to political party sites, is permissible under rules applicable to print and broadcast media: the motivation for posting the information and its educational nature is determinative. Does the information displayed attempt to educate voters or to influence their vote? The standards for compiling a vote scorecard outlined in Rev. Rul. 80-28246 can be studied for a partial answer. The ruling discusses a scorecard that reflected votes on a broad range of issues, was released after the close of a legislative session, was not timed to coincide with elections, and was distributed only to the organization's members. Posting the same scorecard on a website accessible only by members with a password certainly should be permissible. The unanswered question is why should access to the information be limited only to members? What is the rationale for that position?
The IRS found political activity that constituted impermissible electioneering for a (c)(3) organization in the following examples:
A school to train political campaign workers was found to operate for partisan purposes because all of its graduates were affiliated with the Republican Party, it operated for a substantial nonexempt (political) purpose, and it provided private inurement to the party.50
Until 1987, the only tool the IRS had to punish a (c)(3) organization for participation in an election campaign was revocation of its exempt status. While making it clear that such activity continued to be absolutely prohibited, Congress believed a penalty was a suitable sanction for minor violations of the rule prohibiting political involvement. To avoid loss of its exempt status, an EO is expected to correct a political expenditure by recovering the money to the extent possible and adopting safeguards to prevent future political expenditures.51 If the violation is due to reasonable cause and not to willful neglect, the tax may be abated.52
A first-tier excise tax of at least 10 percent (up to 100 percent) is imposed on political campaign expenditures of a (c)(3) organization, in addition to a 2½ percent tax on the manager(s) involved in the activity.53 Managers subject to the tax are those officers, directors, trustees, or other individuals with authority or responsibility to make the expenditure in question.54 The initial tax is not imposed if the organization and its managers can prove that the political expenditure was not willful and flagrant, that the funds have been recovered, and that the organization has established safeguards to prevent future political expenditures.55 The tax is reported on Form 4720. Managers who, after full disclosure of relevant facts, relied on the advice of counsel in approving the activity, are not ordinarily considered as willfully approving of the expenditure.56
Until 1968, the tax status of political organizations and political expenditures was uncertain, except for the absolute prohibition against participation by a charitable (c)(3) organization. In that year, the IRS announced that the investment income of a political organization was to be taxed by filing a fiduciary income tax return on Form 1041. Political contributions received would continue to be untaxed as gifts and not deductible for the giver.
Effective in 1975, IRC §527, entitled “Political Organizations,” was enacted, and Form 1120-POL was introduced for reporting the taxable income. Essentially, an organization that spends money for political (called in what can be a confusing manner exempt function) purposes is taxed on its investment income.57 A political organization with no more than $100 of investment income need not file. The tax applies to nonprofits devoted solely to political activity and to §501(c) exempt organizations that expend their own funds for political purposes. The definitions and constraints are found in both IRC §527 and the Federal Election Campaign Act.
Any amount paid in connection with or for participation in or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office is not deductible for income tax purposes.58 Further, the gain inherent in any property donated to a political organization is considered a taxable sale of the property.59 Such gifts, however, are not taxable for gift tax purposes.60 Effective July 1, 2000, certain political organizations that intend to be tax exempt must notify the IRS no later than 24 hours from their creation and provide specific information evidencing their qualification for exemption.61 The recognition will be effective only prospectively from the date of notification. A committee that fails to give this notice will have to pay tax not only on net investment income but also on its campaign contributions.62
The Internal Revenue Code defines a political organization as63
A party, committee, association, fund, or other organization (incorporated or not) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function.
The exempt function for a political organization (PAC) is:64
The function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, or local public office or office in a political organization, or the election of presidential or vice-presidential electors, whether or not such individual or electors are selected, nominated, or appointed.
A qualifying campaign group can function in favor of or in opposition to candidate(s).
The definition of an office for this purpose is “based upon the facts and circumstances applying the principles consistent with the private foundation rules, which essentially mean the candidate must seek to become a government official.”65 This includes elected federal executive or legislative officials, appointed federal executive or judicial officers, elected or appointed officials in any branch of the government in any state who receive pay of more than $20,000, and certain other government workers listed in the regulations. The distinction between a public officeholder and a public employee is based on whether the individual's activities include performing independent policy-making functions.66
A political organization's exempt activities focus on what the regulations refer to as the selection process. Any amounts spent to advance an individual's campaign for public office or to defeat another, including unannounced candidates, is treated as exempt function. The following examples of qualifying expenditures are provided in the regulations:67
Exempt function expenditures include the cost of conducting public opinion polls and voter canvasses,69 election night parties,70 direct mail campaigns,71 and grassroots lobbying focusing on opinions of candidates on selected issues targeted in a geographic area and timed to coincide with an election. Indirect expenses that are necessary to support the directly related activities of the political organization are also treated as exempt function expenditures. The legal and accounting costs associated with the program; fund-raising expenses, such as polling; focus groups; acquisition and enhancement of voter lists to target distribution of materials; and telephone calls to voters to determine their attitudes on issues for targeting purposes are considered indirect exempt function costs.
A political organization need not engage exclusively in activities that are exempt functions, although campaign-related activities should be primary. The distinction between exempt and nonexempt expenses is important because any funds spent for nonexempt functions lose their tax-free status. Exempt function expenses include anything that supports candidates seeking election.72 The activities need not focus on any one particular candidate or race, though they must involve the selection process.73 Examples of expenses treated as nonexempt function (because they do not involve choosing a candidate) include:74
Permissible expenditures by political campaign committees may include certain lobbying efforts, although such expenses may be treated as nonexempt function expenses. In a situation where a candidate was named and pictured on the flyer of a statewide referendum on fiscal responsibility, the expense was an exempt function because the candidate was identified as the leader of the effort. Even though the candidate had not yet filed to run for governor, the ruling found that the piece was packaged to identify him as a potential candidate for governor, and was therefore an exempt function expense for the campaign committee.76
A political organization must be organized for the primary purpose of carrying on the exempt function of influencing the selection, nomination, or election of public officeholders. Formal articles of incorporation, association, or trust are acceptable, but are not required. “Consideration is given to statements of the members as to how they intend to operate the political organization primarily to carry on one or more exempt functions.”77 An officeholder's newsletter fund is taxed as a political organization, but funds cannot be expended for campaign, personal, or any other purposes. Special distinctions, affecting tax rates and permissible activities, apply to segregated funds and to the principal campaign committee of any office seeker. The regulations and legislative history should be studied for those types of organizations.
Both a §501(c) exempt organization and a political organization that spends any amount directly for a political expenditure as defined by IRC §527 is taxed on such expenditure or its net investment income (interest, dividends, rents, royalties, and capital gains), whichever is lower. A grant from one exempt organization to another exempt organization to be used specifically for political purposes will also be taxed to the granting exempt organization. Both organizations exempt under §501(c) that make political expenditures and political organizations file Form 1-120-POL, whereby a tax is essentially imposed on investment income. The highest corporate income tax rate applies as a rule.78 A designated principal campaign committee of a congressional candidate is taxed at the appropriate corporate rate for its level of income.79
Taxable income is taxed at the highest corporate tax rate (currently 21 percent) and is defined to include the following:80
No net operating loss or dividend-received deductions are allowed.81 Only those exempt function revenues expended for exempt functions are excluded from taxable income. Exempt function revenues for this purpose consist solely of the following:
A transfer of political contributions or dues collected by an organization to a segregated fund is not treated as a political expenditure.84 The interest an organization earns by temporarily keeping PAC funds in a general interest-bearing checking account was found to provide administrative efficiency and did not constitute prohibited investment of the funds by the organization.85 For ease of collection, a professional association and a labor union issued billings for normal dues and PAC contributions together to its membership. Moneys were collected continually throughout the year. For the organizations' convenience, PAC funds were periodically transferred (in one case twice a month and in the other once a month) to the PAC. The “negligible” amount of interest that was earned by the exempt organization on funds it temporarily held was not taxed.
A segregated fund, usually called a political action committee (PAC), can be created by a §501(c) exempt organization, or by any individual, that plans to engage in political activity and wishes to ensure proper identification of the funds subject to tax.86 A segregated fund is treated as a political organization for tax purposes. Thus, when funds are collected from the members or employees of the exempt organization and are paid directly into the segregated fund, the conduit exempt organization can prove that it has not made a political expenditure on its own behalf.
An exempt organization's indirect expenses, such as its accounting department, attributable to the creation of and management of a PAC are not necessarily treated as political expenditures. The regulations direct that they are exempt function expense “to the extent provided” in a reserved, or unissued, section. Thus, though they mention the issue, the regulations provide no guidance. The legislative history indicates that Congress intended that indirect expense not be allowed as deductions against taxable investment income.87 A prudent organization can ask its PAC to reimburse its expense of soliciting and paying over the funds to avoid this issue.
The Federal Election Campaign Act specifically permits labor unions and business leagues to spend money for internal communications involving support of particular candidates with members and their families, but not with the general public. They are also permitted to establish, administer, and solicit contributions for PACs.
After a flurry of demands for disclosure of campaign contributors, effective July 1, 2000, Congress imposed enhanced reporting rules on certain §527 organizations. The rules are designed to require reporting for those so-called “soft money” organizations not previously required to report donor and expenditure information to either the IRS or the FEC. Such PACs receive unlimited donations used to support political parties or legislation rather than individual candidates. The rules also apply to congressional leadership PACs that are not required to make FEC reports. Tax legislation in October 2002 and subsequent Revenue Ruling 2003-49, issued in January 2003, removed some of the filing requirements for state and local political organizations. The following chart lists the current filing requirements and the exceptions to them.
Form | When Filed | Exceptions to Filing Requirement |
8871 | Within 24 hours of establishment or within 30 days of any material change, including termination at www.irs.gov/charities-non-profits/political-organizations |
|
8872 | At organization's option; quarterly/semiannually or monthly, on same basis for entire calendar year |
|
1120-POL | Due the 15th day of the 3rd month after the close of the year |
|
990 OR 990EZ | Due the 15th day of the 5th month after the close of the tax year |
|
A qualified state or local political organization (QSLPO) is a political organization that meets the following criteria:
Form 8871 must be filed electronically within 24 hours of formation and contain the following:88
An amended Form 8871 must be filed within 30 days if the organization has a material change in any of the information reported on the original Form 8871. The IRS must make information submitted by political organizations available at its offices and on the Internet no later than five business days after it receives the notice. The political organization itself must make Form 8871 available for public inspection under the same rules applicable to Form 990 and 1023 availability.89
The term related entity is defined to include one of two types:
Form 8872 is to be filed periodically.90 In nonelection years (any odd-numbered year), the political organization may choose to file monthly or semiannually. The monthly filer must submit the form electronically by the 20th day after the close of each month, except that the December report can be included in the annual report due January 31. Semiannual filers submit a report for the first half of the year by July 31 and for the second half by January 31. Why organizations were given the choice of a more frequent monthly filing option is not stated. The monthly reports would be shorter and would inspire regular attention to record-keeping.
During election years (any even-numbered year), reports may be filed monthly or quarterly. In addition, a pre-election report is filed 12 days before the election and a post–general election report 30 days after the election. An election is defined for this purpose to include a general, special, primary, or runoff election for a federal office, a convention or caucus of a political party with authority to nominate a candidate for federal office, a primary election to select delegates to a national nominating convention, or a primary election to express a preference for the nomination of an individual for election to the office of president. Local and state elections are not included for filing requirement purposes. These forms are available at www.irs.gov.
For donors giving $200 or more and for vendors paid $500 or more during the calendar year, the name, address, and (if an individual) the occupation and employer of any person must be reported. Independent expenditures made without the authorization, suggestion, or request of a candidate need not be reported. Form 8872 is filed with the Ogden Service Center physically or electronically. The penalty for failure to file is a tax equal to the amount not disclosed multiplied by the highest corporate tax rate. Form 8872 must be made available for public inspection.91 Also, organizations that are tax exempt under §§501(c)(4), (5), and (6) are now required to disclose all assistance they provide to §527 organizations. Those that spend $10,000 or more on political expenditures must also disclose the names of contributors of $1,000 or more.
After examinations of election activity, the IRS issued welcomed guidance to provide examples of electioneering by tax-exempt organizations. It is important for readers to be alert to the evolution of this issue from the growing use of social media activities beyond the organization's website, including Facebook, Twitter, LinkedIn, and the like.92
Beginning in 2004 with six examples, the IRS provides guidance to aid in identifying advocacy communications that constitute political intervention when they discuss the positions of candidates for public office on public policy issues.93 This ruling applies to §501(c)(4), (5), and (6) exempt organizations and looks at “all of the facts and circumstances of six situations.” An expenditure is “clearly for an exempt function under §527(e)(2)”94 when an advocacy communication explicitly advocates the election or defeat of an individual candidate for public office. In each example, an advertisement appears “shortly before an election and targets voters in the election.” The factors that cause a communiqué to constitute lobbying rather than political intervention include:
Factors indicating political intervention include:
The IRS website contains a good list of the rulings and other guidance published in the last few years. Despite it not being listed on the IRS site, a Google search locates IRS Fact Sheet 2006-17, Prohibited Political Campaign Activities of EOs, which compares and contrasts permissible issue advocacy and prohibited campaign intervention with 21 examples. The IRS addressed the issue of website disclosures and stated that an organization that links to the site of another entity bears a responsibility for content of the linked site. They say:95
The web site is a form of communication. If an organization posts something on its web site that favors or opposes a candidate for public office, the organization will be treated the same as if it distributed printed material, oral statements or broadcasts that favored or opposed a candidate. An organization has control over whether it establishes a link to another site. When an organization establishes a link to another web site, the organization is responsible for the consequences of establishing and maintaining that link, even if the organization does not have control over the content of the linked site. Because the linked content may change over time, an organization may reduce the risk of political campaign intervention by monitoring the linked content and adjusting the links accordingly.
Ironically, a branch of the federal government posts the following Disclaimer for External Links on its website:
The appearance of external links on this World Wide Web site does not constitute endorsement or editorial control by the Department of Defense/U.S. Navy/U.S. Naval Observatory of external web sites or the information, products or services contained therein.96
A prudent organization might add such a disclaimer to its website.
Carrying on propaganda or otherwise attempting to influence legislation, commonly referred to as lobbying activity, cannot be a substantial part of the activities of a §501(c)(3) organization and is prohibited for a private foundation, supporting organizations, and others.97 A (c)(3) organization must devote itself exclusively to one or more charitable objectives and primarily conduct activities that advance its mission.98 An organization that conducts excessive lobbying whose purposes can be accomplished only through the passage of legislation is considered an action organization that cannot qualify for (c)(3) exempt status.99 For (c)(3) exempt organizations, different rules apply for organizations falling into the following categories:
The definitions and numerical tests applied to measure the permissible amount of lobbying under the first two tests listed are very different. The rules applied for an organization electing to calculate its permissible lobbying expenditures under §501(h) are very clear and specific. The range of public affairs activities excluded from the definition of lobbying for an electing organization is much broader. It is for that reason that the Exempt Organizations Committee of the American Bar Association and the Internal Revenue Service recommend that charities involved in public affairs file a §501(h) election. The IRS has confirmed that charities that elect the optional sliding-scale approach do not run an increased risk of audit.100 The IRS 1996 training manual contains a 107-page chapter, entitled “Lobbying Issues,” that is a must-read for any tax-exempt organization planning to conduct any more than an inconsequential amount of lobbying activity.101
A charitable organization exempt under §501(c)(3) that chooses not to make a §501(h) election to govern its lobbying activity is subject to the basic exemption criteria requiring that no substantial part of its activities consist of attempting to influence legislation by propaganda or otherwise. The definitions and other rules applicable to electing organizations cannot be used to identify and define its lobbying activity. A (c)(3) organization is regarded as attempting to influence legislation if it
Legislation is defined generally for (c)(3) purposes to include “actions by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure.”103 In this context, administrative bodies are not considered as governing.104 After the Senate hearings on Robert Bork's nomination to the Supreme Court, the IRS issued notice that the U.S. Senate's action of advising and consenting to a judicial appointment is legislative activity.105 In interpreting the congressional mandate to limit exempt organization lobbying, the IRS has adopted the following clarifying rules:
Supporting activities of an educational nature—study, research, preparation of papers—that concern subjects of legislation may be considered lobbying expenditures.111 The time spent discussing public issues, formulating and agreeing upon positions, and studying them preparatory to adopting a position must be taken into account as legislative activity. Information gathered prior to the moment the EO makes a legislative appeal can be associated with the later act of lobbying, although there is no specific test for making the connection.112 Nonpartisan analysis, study, or research of matters pertaining to legislation will not constitute attempts to influence legislation if reports of the work do not advocate the adoption or rejection of the legislation.113 Because nonpartisan analysis is oriented to issues, a fair exposition of both sides of the issue is expected to be presented.114 It is these vague standards that the §501(h) election seeks to replace, as explained in §23.4(b).
The amount of lobbying expenditures includes directly attributable expenses, and a portion of an organization's operating budget that is allocable to the lobbying activity, making a detailed allocation of organizational costs necessary. Nonelecting exempt organizations should carefully study the IRS recommendations for making such allocations to calculate costs associated with lobbying activity.115 In several instances, the IRS suggests such an organization be guided by provisions governing those organizations that elect §501(h).
There is no precise mathematical test for the substantial-part test. One court opined that using “a percentage test to determine whether activities were substantial obscures the complexity of balancing the organization's activities in relation to its objectives and circumstances.”116 Nevertheless, a common measure of substantial is the actual dollars expended by the organization on lobbying efforts. No specific limit is provided, and as little as 5 percent of an organization's budget has been questioned.117 Moreover, the efforts of volunteers, the amount of research and discussion to formulate a position on a legislative matter, the continuous rather than intermittent attention to the matters, and the whole context in which the activity is conducted may also be considered.118 In a more precise fashion, only actual dollars spent by the organization are considered for an exempt organization electing to use the expenditure test.
For business expense deduction purposes, goodwill advertising or institutional pieces intended to bring the organization's name before the general public by presenting views on economic, financial, social, or other subjects of a general nature are not lobbying if the material does not directly or indirectly propose, support, or oppose legislation.119 When the information published has some connection to pending legislation, potentially limited grassroots lobbying may be found.120
Congress has enacted specific numerical parameters and definitions within which (c)(3)s can conduct lobbying efforts when the organization makes an election provided for in IRC §501(h). The tax-exempt status of an electing organization can be revoked only if the exempt organization normally has expenditures to carry on propaganda, or otherwise attempts to influence legislation, that exceed prescribed limits. It is important to emphasize that these rules apply only to charities electing their application. The regulations under IRC §501(h) and the parallel penalty provision, IRC §4911, total 57 pages and were proposed and reproposed three times over a four-year period before the final version became effective on August 31, 1990. The rules are surprisingly lenient for public charities. Churches and their integrated auxiliaries, private foundations, supporting organizations of business leagues, unions, and civic associations are not permitted to make the election.121
The regulations interact with a number of other provisions: regulations under IRC §501 (conversion of a (c)(3) to a (c)(4)); §501(h); §504 (revocation of exempt status due to excessive lobbying); §4911 (excise tax on excessive lobbying); §4945 (nonpartisan analysis by private foundations); §§170, 2055, and 2522 (limitations on charitable donations); and §162(e) (nondeductible dues due to lobbying by business and civic leagues and unions). The following material only skims the surface. A comprehensive treatment of the subject can be found in Charity, Advocacy, and the Law,122 a good reference book for any organization conducting more than an insignificant amount of lobbying.
Lobbying is defined in IRC §4911 as either one of the following:
The regulations contain eight pages of examples on direct and grassroots lobbying alone that should be studied. The facts and circumstances of each communication should be examined.
Legislation is defined to include action with respect to acts, bills, resolutions, or similar items by the Congress, any state legislature, any local council, or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar item.123 Legislative bodies do not include executive, judicial, or administrative bodies such as school boards, housing authorities, sewer and water districts, and zoning boards, whether they are appointive or elective.
Specific legislation, as the name implies, includes both legislation that has already been introduced in a legislative body and a specific legislative proposal that the organization either supports or opposes. A referendum or ballot initiative becomes specific legislation when the petition seeking signatures is first circulated among voters.124 Before a bill is formulated, debate about an issue that may become the subject of legislation is not lobbying.
A similar item, according to examples in the regulations, includes confirmation of a cabinet-level appointee and a Supreme Court nominee.125 A proposed treaty subject to Senate approval is a legislative matter from the time when treaty negotiations start.126 Referenda and ballot initiatives are legislative actions in which the members of the general public constitute the legislature, so an attempt to influence a referendum vote is direct lobbying.127
IRC §4911(d) excludes the following activities from the meaning of the term influencing legislation:
Nonpartisan Analysis. An independent and objective exposition on a particular subject that advocates a viewpoint on legislation is not considered lobbying if it qualifies as nonpartisan analysis, study, or research.129 Sufficiently fair and full exposition of the pertinent facts on the subject, not merely unsupported opinion, must be communicated to the general public to enable the public to form an independent opinion or conclusion. Preparing a paper on a state issue and sending the study to members of the state legislature when there is no legislation pending is not legislative lobbying.130
The information can be communicated in any form, whether visual or auditory: radio, television, public forums, magazines, publications, or newspapers. No direct encouragement to “take action” may be contained in the materials. If the research material is subsequently used for lobbying purposes, the expense of preparing the research paid within six months of such use is reclassified as a lobbying expense.131 The regulations contain 11 pages of examples.
Grassroots Lobbying. Contacting the public (instead of the legislators themselves) is classified as grassroots lobbying.132 More restrictive limitations apply to this indirect lobbying method, so the distinction between direct and grassroots is important. Grassroots expenditures cannot constitute more than 25 percent of an electing organization's overall lobbying expenditures. The portion of a member's dues attributable to grassroots (and direct) lobbying is not deductible under IRC §162.
This issue has been the focal point of much controversy between the IRS and the exempt community. The regulations somewhat narrowly define grassroots lobbying to include only communications that contain all of the following three elements:
Mass media communication may be classified as lobbying even if it does not meet the three-part definition. When a press release or advertisement sponsored by the exempt organization and taking a position on legislation is published within two weeks before the vote is scheduled, such a publication is considered grassroots lobbying if it either refers to the highly publicized legislation or encourages the public to lobby about the legislation.
A requisite characteristic of a lobbying communication is that it directly urges the public to take action. If any one of the first three elements in the following list is present, action is urged. The fourth attribute, taken alone, does not constitute a call to action.134
Attempts to influence highly publicized legislation, such as paid advertisements placed in mass media (television, radio, billboards, and general-circulation newspapers and magazines) that do not contain one of the take-action elements may still be grassroots lobbying if:
The presumption that an advertisement fits these conditions can be rebutted if the organization can show one of the following:
Member communications are governed by additional standards. The member rules were substantially altered each time the proposed regulations were issued (in 1980, 1986, and again in 1988), becoming more lenient with each new version. Under the following specific conditions, information sent to members is not treated as lobbying:
Direct lobbying occurs when the third requirement is failed; grassroots lobbying occurs when the fourth one is failed. A member is one who pays dues or contributes more than a nominal amount of money, contributes more than a nominal amount of time, or is one of a limited number of “life or honorary” members. Prospective members are not considered members. A member of one of an affiliated group of organizations is treated as a member of each of the exempt organizations in the group.136
Nonelecting 501(c)(3)s must prove that their lobbying activities do not represent a substantial part of their activities. The portion is measured largely, though not entirely, by expenditures. Not only is the cost of time expended by paid staff counted, the value of volunteer board members and others can also be considered. For example, an organization that uses its prestige to influence legislation, achieving a high degree of success with a minimal expenditure of money, could be found to conduct excessive lobbying. Regarding the amount of actual expenditures, 5 to 10 percent of an organization's overall budget is generally considered a permissible expenditure level.137 IRC §4912 places an excise tax on nonelecting 501(c)(3)s and their managers when excessive lobbying causes the exempt organization to lose its exemption. When lobbying activities are insignificant and an exempt organization wishes to avoid the increased record-keeping and scrutiny presumed to be caused by a §501(h) election, this nonelective method may be preferable.
A (c)(3) organization that elects to monitor its lobbying expenditures under IRC §501(h) buys a safe harbor and removes the discretionary factors used in the substantial-part test. Under this election, the EO agrees to a mathematical limit based on a percentage of its exempt purpose expenditures (EPEs) to prove that legislative efforts are not substantial. Unless lobbying expenditures exceed 150 percent of the prescribed amounts over a four-year period, exempt status remains intact.138
Form 5768 is filed to make the election. It can be filed with Form 1023 or with an annual Form 990. The election is effective until it is revoked and can be voluntarily revoked at any time, effective for the next tax year. A new election is effective for the following year after at least one intervening nonelection year. For example, if a revocation is in effect for 2020, an exempt organization can elect for 2022 anytime between January 1, 2022, and December 31, 2022. Private foundations, churches, and supporting organizations cannot make the election.
Overall lobbying expenditures, including direct and grassroots efforts combined, cannot exceed the sum of the following amounts. Grassroots lobbying expenditures (contacting the general public rather than contacting legislators directly) cannot exceed 25 percent of the total lobbying limits, as follows:139
Exempt purpose expenditures140 include the following:
Exempt purpose expenditures do not include expenses incurred for the production of income, including managing an endowment or other investments and an unrelated business activity. Expenses incurred by a separate fund-raising unit are also excluded.
Affiliated organizations are consolidated for application of the lobbying tests, to prevent the creation of new entities to avoid the spending limits. An exempt organization that is bound under its governing instrument by the decisions of another exempt organization regarding legislative issues is affiliated. Interlocking directorates also create affiliation.141
Accounting for lobbying involves identifying expenditures directly connected with specific legislation, as opposed to matters that are subjects of legislation. It is critical to isolate costs of associated research on issues and review of pending legislation until the exempt organization decides to support or oppose the legislation.
Mixed-purpose expenditures involving both direct and grassroots lobbying activities are presumed to be grassroots, except to the extent that the organization can demonstrate a reasonable allocation between the two types of lobbying.142 Likewise, the expense of publications or communications sent to members or to the public must be allocated among the various elements of lobbying, fund-raising, and education. The portion of telephone, fax, computer, staff, and other costs attributable to lobbying efforts must be documented with time sheets and usage records.
A 25 percent tax is imposed under IRC §4911(a)(1) on excess lobbying expenses of public charities electing to limit their lobbying expenses by IRC §501(h). The taxable excess is the higher of excessive overall lobbying expenditures (including grassroots) or excessive grassroots lobbying expenses. If an organization's lobbying expenses normally rise above 150 percent of the permissible amounts, exempt status is denied.143 The calculation year and the three preceding years are combined to arrive at the normal amount. A newly electing organization's status will not be revoked until the end of the base period.
A charitable organization reports the amount of its lobbying expenditures each year on Form 990, Schedule C. Organizations electing to measure permissible lobbying by applying the “expenditure test” of §501(h) complete Part II-A with detailed information about direct and grassroots lobbying. The applicable percentages are applied to total expenditure and the results compared to the actual amounts. If the limits are exceeded, Form 4720 is filed to pay a penalty tax.
An organization using the “substantial-part test” to limit its lobbying completes Part II-B, which presents lobbying expenditures only in generic categories. The form does not indicate whether the amounts were excessive. If the IRS subsequently determines that excessive lobbying occurred, the organization's exempt status can be revoked. In such a case, Part H of Form 4720 is completed. A 5 percent penalty is imposed on the organization and, possibly, its managers. Independent Sector sells a useful book entitled Nonprofit Lobbying Guide that can serve as a useful tool to monitoring satisfaction of these limits on lobbying activity.144
Although the elective lobbying provisions were expected to eliminate confusion about the consequences of lobbying, the three sets of regulations proposed over the years contain radically different interpretations of the terms. Although there are those who propose that the rules should be unified and those who propose that all (c)(3) organizations elect 501(h),145 uncertainty exists. Due partly to the confusion, organizations are sometimes reluctant to make the election. The following pros and cons may be useful.
Advantages of Electing. The advantages of making the election under IRC §501(h) include the following:
Advantages of Not Electing. The advantages of not making the election under IRC §501(h) include the following:
There is no specific numerical lobbying limit for most recognized tax-exempt organizations except a Taxable Expenditures occurs if a private foundation spends its fund to lobby. The facts of each case will determine whether the entity is focused on accomplishing its primary exempt purpose when lobbying or political activities are carried on alongside more traditional activities.146 In some situations, an EO's purposes can be accomplished only through the passage of legislation. For example, a 1961 ruling allowed a business league to spend all of its money on lobbying as long as the legislation was germane to its specific exempt purpose.147
The income tax deduction for member dues is limited under IRC §162. To the extent that dues finance political campaigning, grassroots lobbying, or direct lobbying, they are not deductible. An association must inform its members of the portion of their dues expended for lobbying or, instead, may choose to pay a proxy tax on such expenditures at the rate of 21 percent.148
Lobbying activities are also restricted by the U.S. Postal Service, which denies second- and third-class mailing permits to nonprofits whose primary purpose is lobbying. Registration of lobbying activities is also required in many states and by federal election laws.
When the organization's lobbying efforts involve a discussion of the positions of public officials who are also candidates for public office, the associated expenditures may be treated as political campaign intervention rather than lobbying. If so, the expense constitutes an exempt function within the meaning of IRC §527(e)(2) and is taxable.149 Organizations that make any mention of elected officials in their lobbying communications will benefit from studying the six situations described in Rev. Rul. 2004-6.150 When the communiqué is issued during an election period and notes that a candidate does or does not support the issues discussed in the advocacy information, the activity is treated as political intervention.
In addition to the tax rules, the Lobbying Disclosure Act of 1995 requires, effective beginning in 1996, certain exempt organizations to register to conduct lobbying activities and subsequently to file semiannual reports.151 Organizations subject to this registration requirement are those that perform both of the following functions:
Many nonprofit groups are focused on issues with political overtones that are the subject of legislation and positions taken by seekers of public offices. An organization whose mission can be accomplished only by the passage of legislation is treated as an action organization not qualified for exemption under §501(c)(3). However, part of the rationale for granting tax exemption is that nonprofits relieve the burdens of government by performing socially useful activities, so opinions change over the years regarding the types of actions that exempt organizations can properly take. Stopping commercial development in the national forests may or may not be a concern of a particular administration in the White House and may or may not be accomplished only by the passage of legislation. A nationwide boycott campaign against Exxon in response to its oil spill may or may not primarily serve to preserve the environment. A U.S. district court allowed the exempt status of the Infant Formula Action Coalition, whose only activity was relieving starving children by boycotting Nestlé, a company that manufactures baby formula for sale in underdeveloped countries.152
IRS policies may change according to the current political climate. The following subjects may present problems with the determination and field representatives of the IRS:
Pursuing one of these subjects with activities that encourage the passage of legislation can jeopardize exempt status. The regulations describe three different possibilities for classification as an action organization:153
The most troublesome provision is the third action category. An exempt organization involved in controversial subjects must be able to clear the following hurdles:
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