(a) Permissible Campaign Involvement

The amount of permitted campaign involvement for certain categories of exempt organization is different. The basic guidelines are as follows:

• 501(c)(3): An organization qualified as charitable, either a public charity or a private foundation, is absolutely prohibited from participation or intervention in a political election campaign.⁸
• 501(c)(4): A civic welfare organization must be exclusively devoted to social welfare (not a 100 percent test), and the regulations simply state that political activity does not promote social welfare. There is not a complete ban. The IRS has ruled that supporting candidates cannot be a primary purpose of a (c)4, but can be a secondary one.⁹
• 501(c)(5): A labor organization will not “be disqualified merely because it engages in some political activity.”¹⁰ Traditionally, unions have been significantly involved in political elections.
• 501(c)(6): A business league's permissible political activity is not mentioned in the code, regulations, or handbook. Rulings indicate that, like (c)(5)s, business leagues may have political involvement if they devote their primary attention and resources to their exempt purposes.¹¹
• 527: A political organization can spend unlimited amounts to influence an election or appointment of officials because such activity is considered an exempt function.¹²

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

(b) Impact on Exempt Status

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

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.”

(c) Actions of Organizational Officials

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.

• EXAMPLE 1 Church P, a Section 501(c)(3) organization, maintains a website that includes biographies of its ministers, times of services, details of community outreach programs and activities of members of its congregation. B, a member of Church P's congregation, is running for a seat on the town council. Shortly before the election, Church P posts the following message on its website, “Lend your support to B, your fellow parishioner, in Tuesday's election for town council.” Church P has intervened in a political campaign.
• EXAMPLE 2 Church N, a Section 501(c)(3) organization, maintains a website that includes staff listings, directions to the church and descriptions of its community outreach programs, schedules of services and school activities. On one page of the website, Church N describes a particular type of treatment program for homeless veterans. This section includes a link to an article on the website of O, a major national newspaper, praising Church N's treatment program for homeless veterans. The page containing the article on O's website doesn't refer to any candidate or election and has no direct links to candidate or election information. Elsewhere on O's website, there is a page displaying editorials that O has published. Several of the editorials endorse candidates in an election that hasn't yet occurred. Church N has not intervened in a political campaign by maintaining a link on O's website because the link is provided for the exempt purpose of educating the public about its programs; the context for the link, the relationship between Church N and O and the arrangement of the links going from Church N's website to the endorsement on O's website don't indicate that Church N was favoring or opposing any candidate.
• EXAMPLE 3 Church M, a Section 501(c)(3) organization, maintains a website and posts an unbiased, nonpartisan voter guide. For each candidate covered in the voter guide, Church M includes a link to that candidate's official campaign website. The links to the candidate websites are presented on a consistent neutral basis for each candidate, with text saying “For more information on Candidate X, you may consult [URL].” Church M has not intervened in a political campaign because the links are provided for the exempt purpose of educating voters and are presented in a neutral, unbiased manner that includes all candidates for a particular office.

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.

(d) Attribution Between Categories of Exempt Organizations

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

(a) Voter Education

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

• A preexisting commitment to promoting awareness of the issue outside the election context.
• Statements by officers or directors (including board resolutions) indicating the organization's nonelectoral purpose and intent not to endorse or oppose any candidate or party.
• Records of research and analysis by the organization consistent with its asserted nonelectoral purpose (for example, studies showing a low level of public awareness of an issue, thus indicating a need for public education on the topic).
• Where appropriate, explicit and credible public disclaimers of any endorsement (positive or negative) of any candidate during the conduct of an activity.
• Limitation of the content of the communication to the substance of the issue, avoiding any characterization of persons who favor or oppose the organization's position on the issue.

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:

• Can the discussions be tied to a candidate running for election?
• Are the voting records of government officials reported, compared, or criticized?
• Is there an attempt to affect voter acceptance or rejection of a candidate?
• Are materials distributed only to the membership or to the public?
• Do the evaluations relate directly to the organization's exempt purpose?
• Are the reports based on scientific studies or research?
• Do the comments include “full and fair exposition” of all facts about the issue, or will they be construed as biased opinion?³⁵

The following criteria are used to judge whether publication of congressional representatives' voting records on selected issues constitutes political action:³⁶

• Voting records of all incumbents are presented.
• Candidates for reelection are not identified.
• No comment is made on any individual's qualification for public office.
• No candidate is endorsed or rejected.
• No comparison of the candidates is made.
• A statement is included pointing out the inherent limitations of judging a candidate on the basis of selected votes, and stating the need to consider such unrecorded matters as performance on subcommittees and constituent service.
• The organization does not distribute the report widely, but distributes it only to members.
• Publication is not targeted toward particular areas in which elections are occurring, nor timed to concur with elections.

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:

• Whether inviting all legally qualified candidates is impractical.
• Whether the organization adopted reasonable, objective criteria for determining which candidates to invite.
• Whether criteria were applied consistently and to all candidates.
• Whether all candidates are treated fairly and impartially without promoting or advancing a candidate over another.

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

(b) Examples of Permissible Political Education

The IRS has issued the following guidance regarding campaign involvement that is considered educational:

• Public television and radio stations can provide airtime to political candidates as long as they do so equally to candidates.³⁹ The Federal Communications Commission also has procedures for neutral debates or forums that allow candidates to explain their views to the public.
• Publishing a newsletter containing voting records and grading the votes according to the organization's ideals, without any expression of endorsement for or opposition to the candidates themselves, is educational. The newsletter's circulation must be directed at constituents and must not be aimed at affecting an election.⁴⁰
• Disseminating information concerning campaign practices, furnishing teaching aids to political science and civic teachers, and publicizing proposed codes of fair campaign practices without soliciting the signing or endorsement of the code by candidates constitute qualified political education.⁴¹
• As a part of a political science program, a university can require students to participate in political campaigns for candidates of their choice.⁴²
• A student newspaper's coverage of political campaigns and student editorial opinions about such elections are not considered to be university political activity.⁴³
• An exempt organization established to collect and collate campaign speeches, interviews, and other materials of a candidate for a historically important elective office to be placed in a university or public library was engaged in permissible political education.⁴⁴

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?

(c) Impermissible Voter Activity

The IRS found political activity that constituted impermissible electioneering for a (c)(3) organization in the following examples:

• Attempting to improve a public school system by campaigning on behalf of candidates for election to the school board is political campaign activity.⁴⁷
• A bar association that published a rating system for elective judicial candidates was also deemed to be intervening in a political campaign.⁴⁸
• Assisting a governor-elect was held to be involvement in a political campaign. The organization interviewed and screened applicants for appointive offices and prepared the legislative message to reflect a party's platform and budget.⁴⁹

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

(d) Penalty Tax on (c)(3) Political Expenditures

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

(a) What Is a Political Organization?

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

• A prospective candidate's expenses to travel throughout a state to rally support for an intended race.
• Voice and speech lessons taken to improve the candidate's skills.
• An officeholder's and candidate for reelection's purchase of tickets to attend a testimonial dinner.
• Between-election activities to train staff members, draft party rules, implement party reform proposals, and sponsor a party convention.
• Conducting seminars and conferences intended to influence persons who attend to support individuals to public office whose political philosophy is in harmony with that of the organization.
• Payment of debts and other expenses, such as reasonable cash awards to campaign workers,⁶⁸ incurred after the conclusion of a candidate's campaign.

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

• Nonpartisan educational programs.⁷⁵
• An incumbent's office expenses.
• Nonpartisan voter registration or get-out-the-vote efforts.
• Committee to support an initiative or referendum measure.

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.

(b) Taxable Income

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

• Gross income for the year (not including exempt function).
• Less deductions directly connected to production of such income, excluding exempt function expenses, but including an allocable part of dual-use facilities or personnel.
• Less a modification (reduction) of $100 (except for newsletter funds).

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:

• Contributions of money or other property.
• Membership dues or assessments.
• Proceeds of fund-raising or entertainment events, including sales of political campaign materials not sold in a commercial manner.⁸²
• Raffle income received in connection with a political event.⁸³

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.

(c) Segregated Funds (Political Action Committees)

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.

(d) Public Disclosure Reports: Forms 8871 and 8872

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.

A qualified state or local political organization (QSLPO) is a political organization that meets the following criteria:

• All of its political activities relate solely to state or local public office (or office in a state or local political organization).
• It is subject to state law that requires it to report (and it does report) to a state agency information about contributions and expenditures that is like the information that the organization would otherwise be required to report to the IRS.
• The state agency and the organization make the reports publicly available.
• No federal candidate or officeholder controls it or materially participates in its direction, solicits contributions for it, or directs any of its disbursements.

Form 8871 must be filed electronically within 24 hours of formation and contain the following:⁸⁸

• The name and both the physical mailing and electronic addresses of the organization.
• The purpose of the organization.
• The names and addresses of its officers, highly compensated employees (more than $50,000 annually), contact person, custodian of the records, and members of the board of directors.
• The names and addresses of, and relationships to, any related entities.

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:

1. The related entity and the organization have significant common purposes and substantial common members or substantial common direction or control, whether direct or indirect.
2. The related entity or the organization owns, directly or indirectly through one or more entities, at least 50 percent capital or profits interest in the other.

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.

(e) IRS Guidance on Political Activity

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:

• The candidate's position on the issue is not mentioned, thereby not indicating that one candidate or another should be supported (Situation 1).
• The communiqué is part of an ongoing series of substantially similar advocacy communications (Situations 1 and 5).
• The timing of publication coincides with a legislative vote or action on the issue and the candidate is in a position to take action on the issue (Situations 2 and 5).

Factors indicating political intervention include:

• The candidate's position is mentioned (Situations 3 and 6).
• The communiqué is not part of an ongoing series of substantially similar advocacy communications (Situations 3, 4, and 6).
• The timing of publication does not coincide with a legislative vote on the issue (Situations 3, 4, and 6).

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.

(a) Substantial-Part Test: Nonelecting EOs

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

• Contacts or urges the public to contact members of a legislative body for the purpose of proposing, supporting, or opposing legislation.
• Advocates the adoption or rejection of particular legislation.¹⁰²

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:

• The desirability of the legislation (such as protecting the environment, animals, or children, or other issues unquestionably serving the public good) does not influence the classification of an activity as lobbying.¹⁰⁶
• Legislation can include zoning matters if the decisions are under the jurisdiction of a local council or legislative representatives.¹⁰⁷ (Actions by executive, judicial, or administrative bodies are specifically not legislative matters under §4911.)¹⁰⁸
• Legislation includes proposals for making laws in other countries.¹⁰⁹ Only acts undertaken by the organization itself, not by its members or constituents as individuals, are constrained.¹¹⁰

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

(b) The §501(h) Election

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.

(c) Definition of Lobbying

Lobbying is defined in IRC §4911 as either one of the following:

• Any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segments thereof.
• Any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of specific legislation.

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.

(d) What Is Legislation?

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

(e) What Lobbying Is Not

IRC §4911(d) excludes the following activities from the meaning of the term influencing legislation:

• Dissemination of the results of nonpartisan analysis, study, or research.
• Provision of technical advice or assistance in response to a written request by a governmental body.
• Appearances before, or communications to, any legislative body with respect to a possible decision by that body that might affect the existence of the organization, its powers and duties, its tax-exempt status, or the deduction of contributions to it (self-defense).
• Communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to them, unless the communications directly encourage the members to influence legislation or urge members to contact nonmembers to influence legislation.
• Routine communications with government officials or employees, including the executive branch and agencies.¹²⁸

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:

1. It refers to specific legislation (including legislation that has already been introduced in a legislative body and specific legislative proposals that the exempt organization either supports or proposes).
2. It reflects a view on such legislation.
3. It encourages the recipient of the communication to take action with respect to the legislation.¹³³

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

1. The communication states that the recipient should contact legislators, their employees, or other governmental representatives who may participate in the formulation of the legislation.
2. The address, telephone number, or similar information facilitating contact is furnished on the notice, letter, or other form of communication.
3. A petition, tear-off postcard, or the like is provided for the recipient to communicate views to the appropriate governmental party.
4. One or more legislators who will vote on the legislation are specifically identified as opposing it or undecided, are the recipient's representatives, or are members of the committee considering the legislation.

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 advertisement is placed within two weeks prior to a vote by a legislative body or a committee (but not a subcommittee).
• The advertisement offers a view on the general subject of the legislation and either refers to the legislation or encourages the public to communicate with legislators on the general subject of the legislation.¹³⁵

The presumption that an advertisement fits these conditions can be rebutted if the organization can show one of the following:

• It regularly publishes such communications without regard to the timing of legislation.
• The timing of the particular advertisement is unrelated to the legislative action. In other words, if the organization can prove that it placed the advertisement without any knowledge that the vote would occur within two weeks, it may escape its classification as grassroots lobbying.

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:

• The communication is directed only at members.
• The communication refers to and reflects a view on specific legislation that is of direct interest to the organization and its members.
• Members are not encouraged to engage in direct lobbying.
• Grassroots lobbying is not encouraged.

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

(a) Making the Election

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.

(b) Mechanical Test

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

• 20 percent of the first $500,000 of the exempt organization's exempt purpose expenditures, plus
• 15 percent of the next $500,000 of EPEs, plus
• 10 percent of the next $500,000 of EPEs, plus
• 5 percent of the rest, up to a maximum total lobbying allowance of $1 million for any one organization.

Exempt purpose expenditures¹⁴⁰ include the following:

• Amounts paid to accomplish one or more charitable purposes, including grants paid for charitable projects, program expenses, employee compensation (including deferred), and administrative and general expenses, and depreciation on assets used for exempt purposes.
• Lobbying expenditures, including grants to a non-charity earmarked for lobbying.
• Amounts paid for nonpartisan analysis, study, or research, and for examination of broad social, economic, and similar problems.
• Expenses for responding to requests for technical advice, self-defense efforts, and member nonlobbying communications.

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.

(c) Penalty Tax and Revocation

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

(d) Pros and Cons of Election

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:

• Volunteers' time and influence are not counted; only actual expenditures count.
• The revocation of exemption calculation is based on a four-year average, not on an ongoing annual test.
• Mathematical limits are specific.
• The degree of certainty provided by specific tests applied to electing organizations is preferable to the subjective and untested standards for nonelecting ones. IRC §501(h) allows examining agents to use the definitive rules only for electing organizations, not for nonelecting ones.
• Some practitioners expect the IRS to scrutinize nonelecting organizations.
• The membership communications exclusion does not classify as lobbying the “objective reporting on the contents and status of legislation” to members.
• Record-keeping requirements may be less because volunteer time need not be recorded.

Advantages of Not Electing. The advantages of not making the election under IRC §501(h) include the following:

• Grassroots lobbying limit is not separately limited to a percentage of lobbying expenditures.
• Record-keeping requirements may be less if the organization need not distinguish between direct lobbying and grassroots efforts. However, the information furnished on Forms 990 may have to be more detailed.
• Drawing attention to the organization by making the election is thought by some to possibly trigger an IRS audit. The IRS disavows this view, and the author is unaware of such a case.
• Directors and officers can be personally liable for penalties for excess lobbying.
• Affiliated organizations' lobbying activities must be consolidated or combined to measure limitations under the election that are otherwise measured on a per-entity basis.
• The maximum amount of expenditures for an electing organization is $1 million. For an exempt organization with a $50 million annual budget, for example, the maximum of $1 million equals 2 percent of the budget, a de minimis amount in relation to the 5 to 10 percent considered permissible by some for a nonelecting exempt organization.
• It may be preferable to avoid the uncertainty caused by the multiple proposed regulations and the controversy surrounding the allocation of indirect expenses.