See IRS Rev. Rul 2007-41 providing 21 examples illustrating the application of the facts and circumstances considered in determining whether a § 501(c)(3) organization has participated in, or intervened in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. 9/21/07
Limitation on lobbying and campaigning
Section 501(c)(3) organizations must be organized and operated “exclusively for religious, charitable, scientific, … literary, or educational purposes … “, and if they have:
- more than an insubstantial involvement with lobbying (activities aimed at influencing legislation, whether or not pending) or
- any involvement with political campaigning on behalf of or in opposition to any candidate for public office,
they can lose both their exempt status and donors’ tax deduction for contributions (Regs. § 1.170A-1(h)(5)), even if undertaken for a clearly charitable purpose. If the organization’s “primary objective” may only be attained by legislative activity and it advocates or campaigns for that primary objective, the organization engages in proscribed lobbying activity. If its charter empowers it to advocate or campaign for the conclusion reached by its research or study, it cannot be a § 501(c)(3) organization even if it does not so act. Political activity inconsistent with the organization’s § 501(c) purpose could cause it to lose its exempt status, e.g., an educational organization that “advocates” a particular position involving legislative matters without giving a “full and fair exposition” is not “educational”, and objectivity is not a sufficient shield where the purpose or effect of the activity is to support or oppose a particular candidate.
There is little guidance for the definition of “substantial”. Even insignificant direct legislative contacts may be part of a substantial legislative program when considered together with the organization’s activities developing the program. To the extent of the “insubstantial part” or set § 501(h) election amount, § 501(c)(3) organizations can lobby with before-tax dollars. There is no de minimis rule for the campaign restriction.
Attempting to “influence legislation”
Attempting to “Influence Legislation” may be aimed directly at the legislators or indirectly through the “grass roots” public communication which:
- refers to specific legislation (introduced or not)
- reflects a view, and
- encourages action (this third element is not required for paid mass media communication within two weeks of a vote on highly publicized legislation).
Communication with members is generally not lobbying, but can be direct lobbying if it encourages members to directly lobby, or grass roots lobbying if they directly encourage members to encourage non-members to lobby. The bona fides of membership status and affiliations are carefully controlled by regulations because of the lower limits on grass roots lobbying under § 501(h). Activities that may be ignored or viewed as insubstantial include:
- Nonpartisan Analysis, Study or Research can result in being tested as an “action” organization where principal aims can be accomplished only by legislation or permissible political activity for organizations not having legislation as their principal aim;
- Providing Requested Technical Advice At the Written Request of the Legislature;
- Self-Protection where legislative contact relates directly to the organization’s own existence, powers, etc.; or
- Discussion of Broad Social Issues that does not address the merits of specific legislation.
A “candidate for public office”
A “candidate for public office” is an individual who offers himself, or is proposed by others, for an elective (but not appointive) public office (national, state or local), including one:
- created by statute;
- not occasional or contractual;
- which has a fixed term of office;
- which requires an oath of office.; and
- which carries more policy making functions than mere public employment.
The time when the status of candidate attaches depends: when the organization’s action supports selection of a named individual or if others propose the individual, even if they refuse to run; otherwise, there must be some indication from the individual they are a candidate. Actions not amounting to “express advocacy” of support for or opposition to a candidate can still violate the prohibition, e.g., medical society newsletter indicating certain candidates were members and opposed socialized medicine; use of “liberal” and “conservative” labels; or internal publications attacking some candidates and commenting favorably on others even without endorsement. Even activities unrelated to any particular candidate can imperil an organization’s exemption, e.g., encouraging members to become precinct committee persons for the purpose of ultimately supporting candidates favorable to the organization. While highly factual, an organization can probably provide balanced campaign news coverage in its publications if done on a regular basis and not timed to aid a particular candidate, and not focusing on a particular candidate. Presumably a charity may sell its mailing list to a candidate or political organization if facts and circumstances show the transaction was to make money and not to benefit the candidate, with arms length pricing and nondiscriminatory dealing being key to this issue.
Attribution of Activities
Attribution of activities of other entities and persons (Affiliates and PACs) to an organization depends on whether: 1) an officer’s acts are “official acts” within or condoned acts outside their authority; 2) members acts are directly or indirectly authorized or ratified; and 3) use of a separately organized entity is merely a guise for the charity’s political activity. The Service recognizes employees’ right to express political views as individuals, but cautions such expression should not occur in official publications or at official functions.
Election under § 501(h)
An election under § 501(h) permits § 501(c)(3) organizations to substitute a test based solely on amounts spent on lobbying (NOT political campaigns) for the substantial part test. An organization passing its non-taxable expenditure limit will not be disqualified under § 501(c)(3) even if it would otherwise violate the substantial part test, but could still lose its exemption by failing to be operated “exclusively” for charitable purposes, or if its lobbying or grass roots expenditures “normally” exceed the “ceiling” amounts. Regulations use the current and three preceding years for testing purposes. Organizations eligible to make the election include educational institutions, hospital and medical research organizations, organizations supporting government schools, publicly supported charities, support organizations for public charities and governmental units described in § 509(a)(3), but churches, integrated church auxiliaries and church conventions or associations are excluded. The “lobbying non-taxable amount” is a declining percentage of Exempt Purpose Expenditures: 20% of the first $500,000, 15% of the next $500,000, 10% of the next $500,000, and 5% of expenditures over $1,500,000, subject to a $1,000,000 cap. The “grass roots nontaxable amount” is 25% of the “lobbying nontaxable amount”. The “ceiling amounts” are 150% of the “non-taxable amounts”. Because the definitions are not exact, the harbor is not entirely “safe”, and electing organizations must be careful to provide for a margin of error.
§ 4911 imposes a 25% excise tax
Section 4911 imposes a 25% excise tax on lobbying expenditures exceeding the non-taxable amount. The manager may be liable for the excise tax only if he: 1) knew the expenditure was for lobbying and that it would likely cause loss of exempt status, and 2) failed to obtain an attorney’s opinion to the contrary. Other sanctions include:
- § 4955 excise tax for: (i) campaign expenditures and (ii) all amounts benefiting a person who is a candidate or prospective candidate if the organization either is formed primarily to promote his candidacy or is effectively controlled by him and is availed of primarily for such purposes. The penalty on:
- the organization is:
- 10%, maximum $10,000 per expenditure, and
- 100% if not corrected
- the management is:
- 2.5% (unless not willful and due to reasonable cause), $5,000 maximum per expenditure, and
- 50% for refusal to agree to correct, $10,000 maximum.
- A manager’s approval must be the final or decisive approval if they are not an officer, director, or trustee. Their agreement is not knowing or willful and is due to reasonable cause if in reliance on a written, reasoned opinion of counsel, after full disclosure of all relevant facts.
- the organization is:
- § 6684 penalty equal to the § 4955 tax for repeated or willful and flagrant violations.
- § 4912 – 5% excise tax on charities and managers for disqualifying lobbying expenditures by a charity that has lost its § 501(c)(3) status due to excessive lobbying; and
- § 6033(b)(9) required reporting of political expenditures to the IRS; and
- § 7409 permitting enjoining flagrant abuse of the political expenditure limits.
Section 501(c)(4) “social welfare organizations”
Section 501(c)(4) “social welfare organizations” which are primarily engaged in promoting the common good, general welfare, civic betterment or social improvement, but not including intervention in political campaigns, are specifically permitted to engage in substantial lobbying activities and some political campaign activities. These include:
- to lobby without limit as an activity ancillary to its main purpose, or
- to have as its primary purpose an aim that only can be accomplished by legislation and to lobby for that aim, Regs. § 1.501(c)(4)-1(a)(2)(ii).
Of course, any lobbying must be germane to the organization’s social welfare purpose. It also must not run afoul of the general requirement that a social welfare organization work for the common good and not for private gain. Dues and contributions to social welfare organizations can be deductible business expenses, but are limited if the organization engages in the forms of lobbying or political activities for which deduction would be denied to the donor. The Lobbying Disclosure Act of 1995 attempts to curtail the of § 501(c)(4) organizations lobbying activities by making an organization ineligible for federal awards, grants, contracts, loans, or other “Federal funds” if it lobbies, 2 USC § 1611.
While § 504 prevents charities from converting (or seeking to regain exempt status after loss of 501(c)(3) status to a § 501(c)(4) entity and continue lobbying, it may form a new arm that is exempt under § 501(c)(4) and that uses nondeductible contributions made to it for lobbying purposes, so long as the two organizations are separately incorporated and keep adequate records to show that the contributions made to the charity are not used for lobbying. Conversely, a § 501(c)(4), § 501(1)(5) (union) or § 501(c)(6) (business league) may wish to set up a § 501(c)(3) affiliate to receive tax deductible gifts. Affiliated organizations have used one mailing solicitation with a check-off system for deductible or nondeductible contributions, although the Service warns against it. The Service has particularly noted in an arrangement where a portion of a membership organization dues are designated for a § 501(c)(3) affiliate that develops research that is used by the membership organization to lobby and the charity probably will have made a lobbying expenditure, the membership organization must give a notice of § 162(e) non-deductibility, and the member is denied a charitable deduction by § 170(f)(9).
The Bipartisan Campaign Reform Act of 2002 (H. R. 2356) (BCRA) signed into law on March 27, 2002 is the first recent revision of laws regarding campaign financing for federal office in more than twenty years and has an impact on activities by charitable entities. This includes § § 501(c)(3) and 501(c)(4) entities. In an effort to curtail “issue advertisements” that may tend to influence federal elections, BCRA prohibits the use of corporate or union funds to support “electioneering communications” (Section 203(a)). Electioneering communications are defined as broadcast, cable or satellite advertisements that refer to a clearly identified federal candidate, made a within 60 days of a general election or 30 days of a primary election, and, if for House or Senate elections, are targeted to the relevant electorate (§ 201(a)). BCRA’s ban on the use of corporate funds to pay for electioneering communications applies to non-profit corporations described under § § 501(c)(4) and 501(c)(3), because most broadcast communications will be targeted within the meaning of the statute, regardless of whether the organization receives support from businesses or unions.
Various other federal and state laws restrict certain types of lobbying and political activities and expenditures, independent of the federal tax laws, e.g.:
- Lobbying Disclosure Act of 1995, 2 U.S.C. § 1601 et seq. requires lobbyists to register;
- Truth in Lobbying Act, 31 U.S.C. § 1352;
- Federal Election Campaign Act of 1971, 2 U.S.C. § 431 et seq. (FECA) (replicated to varying degrees at the state level) prohibits corporations, federal contractors, trade associations and labor unions from making contributions from their treasury funds in connection with federal election campaigns, but allows solicitation of non-deductible contributions from associated individuals into “separate segregated funds” for “political action committees” (PACs);
- U.S. House of Representatives and Senate rules on gifts;
to name a few.