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Most of the charitable,
educational and scientific organizations in the United
States have received a letter from the Internal Revenue
Service ("IRS") granting them tax-exempt
status pursuant to Section 501(c)(3) of the Internal
Revenue Code (the "Code"). In addition to
being exempt from federal income taxation, these organizations
are able to attract donors because their donors qualify
for charitable deductions on their income tax returns.
Thus it is no surprise that most museums, churches,
scientific organizations, social service agencies,
colleges, universities, foundations and hospitals
have 501(c)(3) designation letters in their files.
Because this is an election
year, candidates for political office are aggressively
canvassing for votes wherever voters gather, including
at charitable events, fund raisers and churches. What
better forum for a candidate to appear than at an
organization held in high esteem for doing good works?
Election news stories frequently report candidate
appearances in such places. However, there are limits
to participation by 501(c)(3)s in the political arena,
and violating the law can cause serious consequences
for a charitable organization. The specific Code section
states an organization exempt from federal income
taxation under section 501(c)(3) is:
". . .organized and operated exclusively for
religious, charitable, scientific, testing for public
safety, literary, or educational purposes. . . which
does not participate in, or intervene in (including
the publishing or distributing of statements), any
political campaign on behalf of (or in opposition
to) any candidate for public office."1
Where did the prohibition
against political campaign activity originate? It
was added to the Code in 1954 as an amendment proposed
by then Senator Lyndon B. Johnson during a Senate
floor debate. On July 2, 1954, Senator Johnson was
recognized from the Senate floor and the following
colloquy occurred:
Mr. JOHNSON of Texas:
Mr. President, I have an amendment at the desk, which
I should like to have stated.
The PRESIDING OFFICER:
The Secretary will state the amendment.
The CHIEF CLERK: On page
117 of the House bill, in section 501(c)(3), it is
proposed to strike out "individuals, and"
and insert "individual," and strike out
"influence legislation." And insert "influence
legislation, and which does not participate in, or
intervene in (including the publishing or distributing
of statements), any political campaign on behalf of
any candidate for public office."
Mr. JOHNSON of Texas:
Mr. President, this amendment seeks to extend the
provisions of section 501 of the House bill, denying
tax-exempt status to not only those people who influence
legislation but also to those who intervene in any
political campaign on behalf of any candidate for
any public office. I have discussed the matter with
the chairman of the committee, the minority ranking
member of the committee, and several other members
of the committee, and I understand that the amendment
is acceptable to them. I hope the chairman will take
it to conference, and that it will be included in
the final bill which Congress passes.2
Because of the manner
in which the prohibition against political campaign
activity was added to the Code, there is no legislative
history to clarify its meaning. The regulations state
the "action organizations," which are defined
as organizations that participate or intervene, directly
or indirectly, in any political campaign on behalf
of, or in opposition to, any candidate for public
office, are not operated exclusively for exempt purposes
and cannot qualify for the exemption under Section
501(c)(3).
This article focuses
on the impact of the political campaign activity prohibition
of Section 501(c)(3) on the activities of charitable
institutions. There are a number of other restrictions
that might affect participation by charitable organizations
in the political process, including state and local
laws regulating various political activities, as well
as the Federal Election Campaign Act, but they are
not covered here.
Section 501(c)(3) of
the Code curtails both the lobbying and political
activities of tax-exempt organizations. Lobbying is
merely limited. Political campaign activity is strictly
prohibited. Political campaign activity includes participating
or intervening, directly or indirectly, in any political
campaign on behalf of or in opposition to any candidate
for elective public office.3 Charitable organizations
may not make statements, either oral or written, supporting
or opposing any candidate for elective public office,
any slate of candidates, political party or PAC. This
includes statements made in speeches, bulletins, or
editorials in charitable organization periodicals,
and the distribution of filled-in sample ballots.
In addition, charitable organizations should avoid
statements that indirectly support or oppose
a particular candidate, e.g., labeling a candidate
as pro-life or anti-family, using plus (+) or minus
(-) or similar signs that indicate candidates' agreement
(or lack thereof) with the organization's positions
on the issues.
The IRS has taken the
position, which has been upheld by the courts, that
even nonpartisan rating of elective judicial candidates
as "approved," "not approved,"
or "approved as highly qualified," on the
basis of experience, professional ability, and character,
constituted prohibited political campaign activity,
even though in certain cases all candidates were "endorsed"
as qualified.4
A charitable organization
may not provide financial support to any candidate,
PAC, or political party. Likewise, it may not provide
or solicit in kind support, such as free or selective
use of volunteers, paid staff, facilities, equipment,
mailing lists, etc. Further, a charitable organization
may not solicit financial support for or in opposition
to any candidate, PAC or political party, e.g.,
by taking a collection or passing the basket at an
organizational activity, or by using the organization's
letterhead to solicit contributions.
Providing mailing lists
to candidates, political parties, or PACs on a preferential
basis or without charge, or lending such lists to
candidates, political parties, or PACs violates the
political campaign activity prohibition. However,
the IRS has indicated that a section 501(c)(3) organization
that regularly sells or rents its mailing list to
other organizations will not violate the political
campaign prohibition if it sells or rents the list
to a candidate on the same terms that the list is
sold or rented to others, provided the list is equally
available to all other candidates on the same terms.
To insure that the list is equally available to all
candidates, the IRS advises that the organization
inform candidates of the availability of the list.
Prudence dictates that if a charitable organization
has never rented its mailing list, its first rental
should not be to a political campaign, party, or PAC.
Further, the rental of mailing lists to a non-section
501(c)(3) organization, including to candidates, PACs,
or political parties, generally gives rise to unrelated
business income tax.5
However, the political
activity prohibition does not restrict issue discussions
that are not linked to support for or opposition to
candidates. Charitable organizations need not restrict
or alter their discussion of issues during election
campaign periods. The fact that candidates may align
themselves on one side or another of an issue does
not adversely affect the ability of charitable organizations
to engage in discussions of that issue.6 That being
said, a charitable organization may nonetheless violate
the political activity prohibition if it communicates
preferences for or against particular candidates as
part of its issue discussion.7
What about protections
afforded 501(c)(3) religious organizations by the
First Amendment to the United States Constitution?
The First Amendment
provides that "Congress shall make no law respecting
an establishment of religion or prohibiting the free
exercise thereof . . ." Although the Internal
Revenue Code prohibition against political activity
does burden exercise of religion in that it requires
a religious organization to choose between receiving
the benefits of tax exemption and intervening in a
political campaign on the basis of its religious beliefs,
not every burden on religious exercise is constitutionally
prohibited. Courts generally have been unsympathetic
to First Amendment challenges to the political activity
prohibition. In 2000, the Court of Appeals for the
D.C. Circuit upheld the constitutionality of the political
activity prohibition as applied to a church, concluding
that the prohibition did not violate either the establishment
clause or the free exercise clause of the First Amendment.
Four days before the
1992 presidential election, the Church at Pierce Creek
(the "Church") in Binghamton, New York,
placed a full-page advertisement in USA Today
and The Washington Times. The ad began with
the heading: "Christians Beware: Do not put the
economy ahead of the Ten Commandments." The ad
cited biblical passages and stated that Governor Bill
Clinton supported abortion on demand, homosexuality,
and the distribution of condoms to teenagers in public
schools. The ad concluded with the question: "How
then can we vote for Bill Clinton?" At the bottom
of the ad, in fine print, the following notice appeared:
"This advertisement was co-sponsored by The Church
at Pierce Creek, Daniel J. Little, Senior Pastor,
and by churches and concerned Christians nationwide.
Tax-deductible donations for this advertisement gladly
accepted. Make donations to: The Church at Pierce
Creek."
Following the special
church audit procedures, the IRS revoked the Church's
section 501(c)(3) tax exemption on the grounds that
it violated the political activity prohibition. The
Church challenged the IRS in court, claiming that
revocation of its tax-exempt status violated section
501(c)(3), both the free speech and free exercise
clauses of the First Amendment, and the Religious
Freedom Restoration Act. The Church also claimed that
it was singled out for prosecution among other churches
on account of its political views. The district court
dismissed the case, concluding that the IRS had authority
under the Internal Revenue Code to revoke the Church's
tax exempt status, and that revocation of the Church's
tax-exempt status did not violate the Religious Freedom
Restoration Act or the free speech or free exercise
clauses of the First Amendment. The court also concluded
that, in revoking the Church's tax-exempt status,
the IRS had not engaged in selective prosecution or
viewpoint discrimination.
The Church appealed
the decision of the district court. The Court of Appeals
for the D.C. Circuit affirmed the district court's
decision on every count. The court of appeals noted,
among other things, that the Church had an alternative
means of engaging in political activity because the
Church could establish a related, separately incorporated
organization under section 501(c)(4)* of the Code
that could express opinions about candidates and even
establish a PAC through which political contributions
might be made. Of course, no tax-deductible Church
funds could be used to support the political activities
of the section 501(c)(4) organization or its PAC.8
Working for or against
ballot measures, including referenda, initiatives,
constitutional amendments, and bond measures, is classified
as lobbying activity for purposes of the Code. Thus,
involvement by section 501(c)(3) organizations in
ballot measures is merely limited, not prohibited.
The following activities will not jeopardize the tax-exempt
status of charitable organizations, provided they
are conducted in accordance with the rules outlined
below.
Lobbying.
Lobbying includes contacting (direct lobbying) or
urging the public to contact (grassroots lobbying)
members of a legislative body, whether federal, state,
or local, for the purpose of proposing, supporting,
or opposing legislation or advocating the adoption
or rejection of legislation.9 Legislation is defined
to include any action (1) by Congress, a state or
local legislative body or (2) by the public in a referendum,
initiative, constitutional amendment or similar procedure.10
The section 501(c)(3) lobbying limitation applies
both to lobbying that is germane to an organization's
tax-exempt purposes and to lobbying that is not.11
Educating
Candidates on Issues. During election campaigns,
charitable organizations may educate candidates about
the issues and attempt to change candidates' positions
on these issues. If a candidate is an incumbent legislator,
whether federal, state, or local, such activity could
constitute lobbying activity subject to the general
substantiality limits of section 501(c)(3) or, if
applicable, the limits of sections 501(h) and 4911.
Educating
Voters. During election campaigns, charitable
organizations may educate voters about the issues.
In addition, they may educate voters about candidates'
positions on the issues, through presentation of candidate
forums and distribution of voter education materials,
including incumbents' voting records, results of candidate
polls or questionnaires, and candidates' statements.
Such activities, if unbiased, will not violate the
political campaign activity prohibition. Although
the Code does not define "bias," activities
or publications generally would be considered biased
if they indicate or imply (1) that a candidate agrees
or disagrees with the organization's position, or
(2) that an organization agrees or disagrees with
the candidate's position. Whether an activity or publication
is biased depends upon all the facts and circumstances,
including format, content, and manner of conduct or
publication. All voter education publications and
activities should include a statement of their educational
purpose and a disclaimer of any intent to endorse
or oppose any candidate or political party.
Incumbents'
Voting Records. Whether the publication
and distribution of incumbents' voting records violate
the political activity prohibition depends on all
the facts and circumstances, including: (1) whether
incumbents are identified as candidates; (2) whether
incumbents' positions are compared to the positions
of other candidates; (3) whether incumbents' positions
are compared to the organization's positions; (4)
the timing, extent, and manner of distribution; and
(5) the breadth or narrowness of the issues presented
in the voting record. The IRS has concluded that a
section 501(c)(3) organization that published and
distributed, during an election campaign, the voting
records of all members of Congress on a wide range
of subjects did not violate the political activity
prohibition. The organization conducted this activity
annually, whether there was an election or not. The
voting records contained no editorial opinions and
did not indicate approval or disapproval of incumbents'
votes.12
Candidate
Questionnaires. Polling or submitting to
candidates questionnaires designed to elicit their
positions on issues is a neutral activity. It is only
when the results are disseminated during an election
campaign that the political campaign activity prohibition
becomes a potential issue. The IRS has identified
the following criteria for determining whether publication
of questionnaire results violates the political campaign
activity prohibition: (1) whether the questionnaire
is sent to all candidates; (2) whether all responses
are published; (3) whether the questions indicate
bias toward the organization's preferred answer; (4)
whether the responses are compared to the organization's
positions on the issues; (5) whether the responses
are published as received, without editing by the
organization; and (6) whether a wide range of issues
is covered. The IRS has concluded that an organization
that published the positions of all candidates in
a particular race on a wide variety of issues selected
solely on the basis of their importance to the electorate
as a whole did not violate the political campaign
activity prohibition, where neither the questionnaire
nor the voter guide evidenced bias or preference in
content or structure.13 However, publication of responses
to a candidate questionnaire that evidenced bias on
certain issues did violate the political campaign
activity prohibition.14 Questionnaires should be distributed
to all candidates, and all candidates should be encouraged
to respond. Failure of all candidates to respond may,
in certain circumstances, require re-evaluation of
the propriety of disseminating questionnaire responses.
When only one candidate in a particular race responds,
the questionnaire responses may not be useable.
Nonpartisan
Voter Registration/Get-Out-the-Vote Drives.
Both the IRS and the Federal Election Commission15
("FEC") permit organizations exempt under
section 501(c)(3) to sponsor voter registration drives
and to encourage citizens to exercise their right
to vote, provided that no bias for or against any
candidate or political party is evidenced. Such bias
could be evidenced by distributing partisan literature
or literature describing the organization's positions
at voter registration sites, or by targeting registration
or get-out-the-vote drives toward individuals who
support the organization's positions or a particular
candidate or party. Voter registration or get-out-the-vote
drives should not be conducted (1) in cooperation
with any political campaign, (2) according to the
identity of the incumbent, or (3) based upon a candidate's
agreement or disagreement with the sponsoring organization's
positions. The FEC requires that all materials prepared
for distribution to the general public in connection
with a voter registration drive include the full name
of all sponsors.16
Nonpartisan
Public Forums Debates Lectures. Charitable
organizations may sponsor unbiased public forums,
debates, and lectures in which candidates explain
their views to the public. The sponsoring organization
may not indicate its views on the issues being discussed,
comment on candidates' responses, or in any other
way indicate bias for or against a particular candidate,
party or position.17 The IRS has identified the following
factors as important to a favorable determination
on candidate forums: (1) all legally qualified candidates
are invited to participate; (2) the questions are
prepared and presented by an independent nonpartisan
panel; (3) the topics discussed cover a broad range
of issues of interest to the public; (4) each candidate
has an equal opportunity to present his or her views
on the issues discussed; and (5) the moderator does
not comment on the questions or otherwise make comments
that imply approval or disapproval of any of the candidates.18
Candidates
Speaking at Events. The IRS has indicated
that whether a charitable organization can invite
a candidate to speak at one of its events depends
upon all the facts and circumstances of the invitation
and whether the candidate is invited in her capacity
as a candidate or in her individual capacity. If the
individual is invited as a candidate, the criteria
for public forums, debates, etc., identified above,
apply. The IRS has indicated that the nature of the
events to which candidates are invited will be considered
in determining whether candidates are given equal
access. For example, if a charitable organization
invites one candidate to speak at its annual convention,
and invites the opposing candidate to speak at a breakfast
meeting attended by only a handful of people, it will
likely be found to have violated the political campaign
prohibition, even if the manner of presentation for
both speakers is otherwise neutral. A similar result
will obtain if a religious organization invites two
opposing candidates with the knowledge and expectation
that one will not accept the invitation because of
well-known opposing viewpoints.
The actions of an organization's
employees (other than organizational officials) and
members also may be attributed to the organization,
where there is real or apparent authorization of their
actions by the organization. The IRS has indicated
that agency principles will be applied in determining
authorization issues. Actions of employees within
the scope of their employment generally will be considered
to have been authorized by the organization. In addition,
individual actions will be attributed to an organization
if the organization ratifies those actions or fails
to disavow individual actions performed under apparent
authorization by the organization.
Penalties for Violating Prohibition
The political campaign
activity prohibition of section 501(c)(3) has been
interpreted as absolute. Accordingly, any violation
of the restriction may result in revocation of exempt
status and consequent loss of deductible contributions.
The IRS may also impose additional penalties,
as outlined below. However, there are circumstances
in which the IRS may decide to impose the excise tax
penalty in lieu of revocation, based on all the facts
and circumstances, including the nature of the political
intervention if steps have been taken to prevent a
recurrence.
The Revenue Act of 1987
imposed a two-tier excise tax on exempt organizations
and their management for political expenditures made
in contravention of section 501(c)(3). The exempt
organization is subject to an initial 10% tax on each
political expenditure,19 which may be imposed in
addition to revocation of exemption. If the expenditure
is not corrected, an additional tax equal to 100%
of the expenditure will be imposed on the exempt organization.20
The initial tax may be abated if the organization
establishes that the political expenditure was not
willful and flagrant.
In addition, a 2.5%
tax will be imposed on an organization manager
who knowingly agrees to a political expenditure, unless
such agreement is not willful or is due to reasonable
cause.21 If the manager refuses to agree to correction,
an additional 50% tax is imposed.22 For any single
political expenditure, the first-tier tax on managers
may not exceed $5,000 and the second-tier tax may
not exceed $10,000.23 "Manager" is defined
as an officer, director or trustee, or another individual
with comparable responsibilities, and includes an
employee of the organization having authority or responsibility
with respect to the political expenditure. 24
The Act also provides
the IRS with additional sanctions against organizations
making flagrant political expenditures. The IRS may
seek immediate determination and assessment of income
and excise taxes due on account of flagrant political
expenditures.25 The IRS also may bring action in United
States District Court seeking an injunction barring
further political expenditures.26 The IRS first must
notify the organization of its intention to seek an
injunction unless the organization immediately ceases
making political expenditures. The IRS also must determine
that there has been a flagrant violation of the political
activity prohibition and that injunctive relief would
be appropriate to prevent further political expenditures.27
At this time of year,
it is advisable to leave politics to the politicians
and good works to the charitable institutions. While
there is no prohibition from politicians doing good
works, there are restrictions on charitable institutions
involving themselves in politics.
Postscript
On Friday, June 4, 2004,
Representative Bill Thomas of California, Chairman
of the House Ways and Means Committee, introduced
a measure to make it easier for churches to support
political candidates, just days after the Bush campaign
came under fire from liberal groups for inviting church
members to distribute campaign information at their
houses of worship. The provision, called Safe Harbor
for Churches, would allow religious organizations
a limited number of violations of the existing rules
against political endorsements without jeopardizing
their tax-exempt status.
ENDNOTES
1. I.R.C. § 501(c)(3) (emphasis added).
2. 100 Cong. Rec. 9604 (1954). An interesting account
of the reason Lyndon Johnson
proposed the amendment is found in Patrick L. O'Daniel,
More Honored in the Breach:
A Historical Perspective of the Permeable IRS Prohibition
on Campaigning by Churches, 42 B.C.L. Rev. 733 (2001).
3. Treas. Reg. § 1.501(c)(3)-1(c)(3)(iii) (1990).
4. See Gen. Couns. Mem. 39, 441 (September 27, 1985);
Association of the Bar of
the City of New York v. Commissioner, 858 F.2d 876,
877 (2d Cir. 1988), cert denied,
490 U.S. 1030 (1989)
5. See I.R.C. § 513(h)(1)(B) (2002).
6. Judith Kindell and John Reilly, Election Years
Issues, IRS Exempt Organization
Technical Institution Program for Fiscal Year 2002,
p. 448-451 at [http://www.irs.gov/pub/irs-tege/topici02.pdf].
7. Branch Ministries v. Rossetti, 211 F.3d 137 (D.C.
Cir. 2000).
8. Id. At 143.
9. Treas. Reg. § 1.501(c)(3)(ii) (1990).
10. Treas. Reg. § 1.501(c)(3)-1(c)(e)(iii) (1990).
11. See Rev. Rul. 67-293, 1967-C.B. 185.
12. Rev. Rul. 78-248, 1978-1 C.B. 154.
13. Rev. Rul. 78-248, 1978-1 C.B. 154.
14. Rev. Rul. 78-248, 1978-1 C.B. 154.
15. 11 C.F.R. § 114.4(c)(4) (2004).
16. 11 C.F.R. § 114.4(c)(5) (2004).
17. See Rev. Rul. 66-256, 1966-2 C.B. 210.
18. See Rev. Rul. 86-95, 1986-2 C.B. 73.
19. I.R.C. § 4955(a)(1) (2002).
20. I.R.C. § 4955(b)(1) (2002).
21. I.R.C. § 4955(a)(2) (2002).
22. I.R.C. § 4955(b)(2) (2002).
23. I.R.C. § 4955(e)(2) (2002).
24. I.R.C. § 4955(f)(2) (2002).
25. I.R.C. § 6852 (2002).
26. I.R.C. § 7409(a)(1) (2002).
27. I.R.C. § 7409(a)(2) (2002).
* Section 501(c)(4) organizations are exempt
from taxation, but contributions to them are not deductible.
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