Political Activities of Section 501(c)(3) Organizations
When dealing with Section 501(c)(3) organizations and the issue of political activities, the Internal Revenue Code (the “Code”) separates political activities into two separate components: attempts to promote or defeat a candidate for public office; and attempts to influence legislative acts.
Absolute Prohibition - Political Campaign Activities
Section 501(c)(3) tax-exempt organizations are prohibited from participating in, or intervening in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office. The prohibition of political campaign activities is absolute.
Whether an organization violates the ban on political intervention depends on all the facts and circumstances of each case. The Internal Revenue Service (the “IRS” or “Service”) has broad discretion to determine whether violations have occurred and, if so, what penalties to apply. Violations of the ban on political activity can result in serious consequences including the revocation of an organization’s tax exempt status or the imposition of an excise tax.
“Candidate for public office” is described in regulations as “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.” “Candidate” does not include a person who seeks an appointive office, and the IRS has ruled that a person nominated for the federal judiciary is not made a candidate by virtue of Senate confirmation hearings.
“Campaign” is not explicitly defined in law or regulations. However, there are generally two possible interpretations of the term “campaign.” First, the term can be defined as a fixed period of time beginning with the formal initiation of a campaign and culminating on the election of a person. Second, the term can be defined with reference to the activities of a candidate, which means that even activities conducted prior to the beginning of a formal campaign would be included. The IRS has shown some support for the fixed period of time definition in a private letter ruling.
The following activities are examples of impermissible political activities and, accordingly, should be avoided completely:
Making direct or indirect contributions to a PAC or a candidate’s campaign committee (even if otherwise permitted under applicable election laws);
Reimbursing employees or executives, directly or indirectly, for their contributions to a candidate or their PAC;
Endorsing or opposing, directly or indirectly, a candidate for public office;
Purchasing tickets to political fundraisers or reimbursing employees for their attendance at political fundraisers;
Transferring or loaning funds to another entity, either related or unrelated, then having the entity make a political contribution;
Providing non-financial support to a candidate or their PAC;
Providing space, sponsoring an event or permitting a Section 501(c)(3) organizations ’s name to be used to solicit contributions;
Providing use of a mailing list to a candidate; and
Rating candidates for public office.
The following activities are permissible activities:
Conducting programs to educate voters on issues;
Get-out-the-vote efforts;
Inviting candidates to speak at events;
Providing or participating in candidate forums; and
Voter registration drives.
Permissible Activities - Limited Lobbying Efforts
Section 501(c)(3) provides that “no substantial part of the activities” of an exempt organization may be devoted to “carrying on propaganda, or otherwise attempting, to influence legislation.” This is not an outright prohibition on influencing legislation. Rather, no “substantial part” of an organization’s activities can be devoted to influencing legislation.
“Legislation” includes “action by 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.” An organization will be treated as attempting to influence legislation if it “(a) contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or (b) advocates the adoption or rejection of legislation.”
The Code provides two regimes to determine whether lobbying activities are being conducted on an insubstantial basis. The organization may seek protection under: (i) the facts and circumstances test, or (ii) Section 501(h).
Facts and Circumstances Test:
In determining whether the lobbying activities are conducted on an insubstantial basis, the Service will review all of the relevant facts and circumstances. For purposes of the facts and circumstances test, the term “lobbying” includes “attempting to influence legislation by propaganda or otherwise” and “proposing, supporting, or opposing legislation.”
“Substantial part” is not defined in law or regulations. Thus, it is unclear whether “substantial part” is measured by level of activity (such as time spent) or simply upon expenditures. The test is purely based on facts and circumstances. This creates a very risky environment for the tax-exempt organization because the IRS has broad discretion to revoke an organization’s exempt status for any lobbying expenditures it deems to be substantial.
Section 501(h) Test:
Section 501(h) provides a bright-line expenditures test for eligible electing organizations. Under this test, the actual amount of an organization’s charitable expenditures are measured against its lobbying expenditures to determine whether its lobbying expenditures are “substantial.” The election is made by filing Form 5768, and it is made effective from the beginning of the taxable year in which the election is made. In addition, an organization may later voluntarily revoke the election.
Organizations which are eligible to make the election are:
Educational institutions described in Section 170(b)(1)(A)(ii);
Hospitals and medical research organizations described in Section 170(b)(1)(A)(iii);
Organizations supporting government schools described in Section 170(b)(1)(A)(iv);
Organizations publicly supported by charitable contributions within the meaning of Section 170(b)(1)(A)(vi);
Organizations publicly supported by fee income within the meaning of Section 509(a)(2); and
Certain Section 509(a)(3) supporting organizations.
Excluded from the list of eligible organizations are churches and private foundations.
Section 501(h) limits lobbying expenditures to the lesser of $1,000,000 or the amount determined from the following table:
Lobbying expenditures in excess of the limits set forth above are called “excess lobbying expenditures.” A 25% excise tax is imposed on excess lobbying expenditures in any year. A total loss of exemption results if an organization “normally” spends more than 150% of the permissible amounts.
“Lobbying” for purposes of Section 501(h) includes (i) direct lobbying and (ii) grass roots lobbying.
Direct lobbying refers to attempts to influence a legislative body through communication with a member or employee of a legislative body, or with a government official who participates in formulating legislation.
Grass roots lobbying refers to attempts to influence legislation by attempting to affect the opinion of the public with respect to the legislation and encouraging the audience to take action with respect to the legislation. Grass roots lobbying occurs when the public is encouraged to contact legislators and contact information is provided.
In either direct lobbying or grass roots lobbying, the communication must refer to and reflect a view on the legislation. The following activities are exempt from the definition of lobbying:
Technical Advice: If requested in writing by a legislative body for technical advice on pending legislation, the 501(c)(3) is not lobbying when it responds to such request.
Self-Defense Activity: Contacting legislators on matters that may affect the 501(c)(3)’s existence, tax-exempt status, or similar matters is not considered lobbying.
Executive Branch Lobbying: Contacts with executive branch employees or legislators in support or of opposition to proposed regulations are not considered lobbying.
Member Communications: A 501(c)(3)’s communications to its members on legislation is not lobbying so long as the nonprofit does not encourage its members to lobby.
Nonpartisan Analysis: A 501(c)(3) has not engaged in lobbying if it makes results of nonpartisan analysis, study or research available that sufficiently present a full and fair exposition of the relevant facts to enable a reader to form an independent opinion.
Broad Issues: A 501(c)(3)’s discussion of broad social, economic and similar policy issues that require legislation is not lobbying if the merits of the legislation are not addressed.
Many organizations shy away from the 501(h) test in fear that it will increase their audit risk, when in actuality, the opposite is true. The Service generally looks favorably at the Section 501(h) test as opposed to the squishy “facts and circumstances” test.
Penalties
Tax on Political Campaign Activities:
A Section 501(c)(3) organization that engages in political campaign activity will risk exposure to monetary sanctions or exempt status revocation. Section 4955 authorizes the Service to levy a tax on any “political expenditure” by a Section 501(c)(3) organization. A “political expenditure” is a payment or promise to pay money to influence the selection, nomination or appointment of anyone to public office.
The initial tax on the organization is 10% of the political expenditure. There is also a 2.5% tax on managers who know that the expenditure was improper. If the expenditure is not corrected, there is an additional tax equal to 100% of the amount of the expenditure. Correction means recovery of the expenditure, if possible, and implementation of procedures to prevent recurrence.
In the case of flagrant violations of the prohibition against political expenditures, Section 6852 authorizes the Service to make “termination assessments.” Such an assessment results in the tax payable by the organization or any manager under Section 4955 of the Code. Section 7409 also authorizes, upon recommendation from the IRS Commissioner, a civil action to be brought in the name of the United States to seek an injunction to prevent flagrant political expenditures by Section 501(c)(3) organizations. Fortunately, the Service in general uses these draconian remedies sparingly.
Tax on Disqualifying Lobbying Expenditures:
Section 4912 imposes a tax on disqualifying lobbying expenditures when an organization loses its exemption under Section 501(c)(3) as a result of excess lobbying expenditures. The rate of tax is 5% of the expenditures. A separate tax of 5% is imposed on an organization manager where that manager knew such expenditures would likely result in disqualification of the organization’s exempt status. This separate tax on the manager does not apply if an election under Section 501(h) is in effect.