arrowSection 3.5 - Tax-Exempt Organizations

This topic is monitored by Moritz Law Professor Donald B. Tobin

Print Page

Permissible Election Activities of 501(c)(3) Organizations

In recent months, non-profit charitable organizations have been warned by the IRS that they risk losing their tax-exempt status if they engage in political activities. This memo discusses the political dos and don'ts facing charitable organizations recognized under section 501(c)(3) of the Internal Revenue Code. 1

Most Americans are familiar with 501(c)(3) organizations. They are our religious institutions, our private universities, our nursery schools, and our humanitarian organizations. They preach to the masses, help the hungry, educate our children, and generally promote societal well-being.

Because of this "charitable" purpose, 501(c)(3) organizations are generally exempt from tax. In addition, the Internal Revenue Code provides that donations to a 501(c)(3) organizations are tax deductible by the donor. 2  Thus, 501(c)(3) organizations receive a dual tax benefit. Their income is not taxed, and donations to the organizations are deductible by the donor. These tax benefits are considered a subsidy by society of 501(c)(3) organizations.

In order to ensure that this subsidy is not abused or misused, the tax code provides for very strict regulation of 501(c)(3) organizations. One such restriction is that 501(c)(3) organizations may not "intervene in . . . any political campaign on behalf of (or in opposition to) any candidate for public office." 3  This prohibition is absolute, and even a smidgen of campaign activity is prohibited and can result in an organization losing its exempt status. Moreover, the code also specifically provides that a donor may not take a deduction for contributions to an organization that fails to qualify as a 501(c)(3) because it participates in any political campaign.

But what does it mean to intervene in a political campaign and what activities may be engaged in by a 501(c)(3) organization?

The IRS has concluded that the determination whether an organization has engaged in a prohibited activity is determined based on all the facts and circumstances of the case. There are, however, two very important considerations. The first is whether the activity, often a public communication, is biased, partisan, or clearly designed to influence voters in an election, and the second is the timing of the activity. For example, the IRS has determined that 501(c)(3) organizations may conduct voter registration, get-out-the-vote activities, or distribute voter guides as long as they are nonpartisan in nature and show no preference for a candidate or party. 4

The IRS has also indicated that the timing of ads are one factor in determining whether the ads are an intervention in a political campaign. In a case involving a groups ads right before the 1984 election, the IRS noted "[t]he timing of the release of the ads so close to November vote" was troublesome. 5  The timing of an ad close to an election, however, is not necessarily determinative. In the same case noted above, the IRS ultimately concluded that the organization "probably did not intervene in a political campaign." 6

The prohibition on election activities relates only to the 501(c)(3) organizations. Individual members of the organization, including its leaders, may still exercise their First Amendment rights. They can speak out against a particular issue or politician, and/or actively support a candidate for public office. These activities, however, must be in their personal capacity. They cannot use their organization as a means of "amplifying" their speech. Thus, the individual cannot intervene in an election through sermons, letters in the organization's publications, or use the organization's resources to promote or oppose a candidate. 7

An organization that runs afoul of these rules, may lose its tax exemption, may be subject to an excise tax on the amount spent on the activity, and the board members of the organization may also be subject to a penalty on the amount spent on the activity. 8

Although the IRS's statements have been fairly stringent regarding what an organization may or may not do, the reported cases and rulings rarely provide for revocation of an organization's exempt status. The IRS typically revokes an organization's exempt status when it is blatantly engaged in electioneering.

For example, the IRS successfully revoked a church's tax-exempt status because the church ran newspaper ads urging Christians to vote against then candidate Governor Clinton. 9  Similarly, it also revoked the exempt-status of a church that attacked liberal politicians and endorsed conservative ones. 10

It declined, however, to seek revocation of an organization that funded an advertising campaign to coincide with the 1984 presidential debates, even though the ads urged audiences to "'think about [nuclear proliferation] when they vote in November;'" "'This November . . . Vote. . . . Our future depends on it;'" and "'Choice is ours this fall. . . . Something has to change." 11  The IRS concluded that the advertisements presented a "close call because, while the ads could be viewed as focusing attention on the issue of war and peace during the 1984 election campaign, individuals listening to the ads would generally understand them to support or oppose a candidate in an election campaign." 12  It "reluctantly" concluded, however, that the organization "probably did not intervene in a political campaign." 13

What may a 501(c)(3) organization do?

1. Candidate invitations

An organization may invite candidates to speak to the organization, but the organization may not show preference for one candidate over another, and must provide an equal opportunity to other candidates seeking the same office. Finally, no fund-raising may occur at the event. 14

A candidate may be invited to speak in his official (incumbent) capacity or what the IRS refers to as "speaking as a non-candidate." 15  This occurs when the candidate is also a public figure and is speaking in his official role. When a candidate speaks in a "non-candidate" capacity, the institution is not required to provide equal opportunity to other candidates. But, the individual must only speak in his non-candidate role, no mention may be made of his candidacy, and no campaign activity may occur at the event. 16

2. Voter Education drives

Charitable organization may engage in non-partisan voter education drives including voter guides, get-out-the-vote campaigns and voter registration drives. Whether an activity is partisan or not is determined by the facts and circumstances of the case. For example, in the context of voter guides, the service has ruled that a charitable organization may distribute guides listing all the major votes of members of Congress. 17  Charitable organizations may not, however, widely distribute a voter guide which is a compilation of "an incumbent's voting record on a particular topic." 18

In order for a voter registration and/or 'get-out-the-vote' campaign to be non-partisan, the campaign must not be identified with any specific candidate or political party. 19  Moreover, the IRS has indicated that it will consider several factors in determining whether a voter registration or get-out-the-vote drive runs afoul of the political intervention restriction. These factors include: 1) whether a candidate's name is mentioned in the material; 2) whether a political party is mentioned in the material in addition to the party affiliation of the candidates; 3) whether the communication is limited to urging people to register or to vote; 4) whether all material and services are made available to everyone. 20

3. Educational Activities

Section 501(c)(3) organizations may engage in educational activities. After all, one of major reasons for forming a 501(c)(3) organization is to engage in educational activities. Educational activities are defined as "the instruction of the public on subjects useful to the individual and beneficial to the community." 21  An organization may be educational even if it promotes a specific viewpoint as long as it presents a fair exposition of the relevant facts as to allow the public to form an independent opinion. 22  The IRS has identified several factors for determining whether an activity is education. Factors indicating an activity is not educational include: 1) presentation of views unsupported by facts; 2) distorted facts; 3) use of disparaging terms that evoke emotional feelings rather than objective evaluations; 4) the communication does not serve an educational function because it does not consider the knowledge or experience of the audience with the subject matter. 23

Is there another way?

Compared with other categories of tax-exempt organizations, section 501(c)(3) organizations are subject to the strictest prohibitions on political activities. Other exempt organizations included social welfare organizations, labor unions, and business leagues can engage in some political advocacy. Political organizations, which are granted tax-exempt status under Section 527 of the Code, by definition, can have influencing elections as their primary purpose. They are, however, subject to strict disclosure requirements. Moreover, unlike 501(c)(3)s, donations to (c)(4)s and 527s are not tax deductible to the donor.

These various classifications of tax-exempt organizations serve different purposes and therefore have different restrictions on whether they can attempt to influence elections. In some circumstances, 501(c)(3)s are affiliated with 501(c)(4)s, and some 501(c)(4)s are associated with 527s. As tax-exempt organizations seek a greater role in influencing elections, we are seeking organizational structures that will allow them to maximize the benefits of tax-exempt status while still allowing them to engage in political advocacy. Although people do not usually associate the tax code with election law, the tax code is becoming an important component of campaign finance regulation.

Notes

1. Section 501(c)(3) provides an exemption to: Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific . . . educational purposes . . . or for the prevention of cruelty to animals . . .

2. I.R.C. 170.

3. I.R.C. 501(c)(3).

4. See I.R.S. Publication 1828 ; Rev. Rul 78-248 (voting records that show no bias or preference are allowed); Rev. Rul. 86-95 (forum for educating and informing voters which is fair and impartial and does not promote or advance one candidate over another is allowed).

5. T.A.M. 8936002

6. In what is hardly a ringing endorsement the IRS concluded "[t]aking into account all facts and circumstances, especially that it is arguable that the ads could be viewed as nonpartisan, we reluctantly conclude A, through its C project, probably did not intervene in a political campaign on behalf of or in opposition to candidate for public office." T.A.M. 8936002.

7. IRS Publication 1828 , at 7, Tax Guide for Churches and Religious Organizations.

8. Id . at 11; I.R.C. § 4955.

9. Branch Ministries v. Rossotti, 40 F.Supp. 2d 15, 18 (D.D.C. 1999), aff'd 211 F.3d 137 (D.C. Cir. 2000).

10. Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849, 856 (10th Cir. 1973). According to the Tenth Circuit, Christian Echoes National Ministry attacked President Kennedy, Johnson, and Senator Humphrey, urged supporters to defeat Senator Fulbright, and supported Senator Strom Thurmond, Congressmen Bruce Alger, Page Belcher.

11. T.A.M. 8936002 .

12. Id.

13. Id.;; For an in-depth discussion 501(c)(3) organizations and political advocacy see Ann M Murphy, Campaign Signs and the Collection Plate - Never the Twain Shall Meet, 1 Pitt. Tax Rev. 35 (Fall 2003).

14. IRS Publication 1828 , at 8.

15. Id. at 9.

16. Id. at 9.

17. Rev. Rul. 78-248.

18. Id.

19. Treas. Reg. § 1.527-6(b)(5).

20. Judith E. Kindell and John Francis Reilly, Election Year Issues , FY 2002 IRS Exempt Organizations Technical Instruction Program at 379, available at http://www.irs.gov/pub/irs-tege/topici02.pdf.

21. Treas. Reg. 1.501(c)(3)-1(d)(3)(b).

22. Id.

23. Rev. Proc. 86-43.