Source: https://www.everycrsreport.com/reports/R40141.html
Timestamp: 2018-02-24 23:54:39
Document Index: 747278338

Matched Legal Cases: ['§501', '§501', '§501', '§501', '§4955', '§4945', '§4955', '§501', '§509', '§6852', '§1', '§501', '§4945', '§501', '§501']

501(c)(3)s and Campaign Activity: Analysis Under Tax and Campaign Finance Laws - EveryCRSReport.com
September 10, 2013 R40141
September 10, 2013 (R40141)
This report examines the restrictions imposed on campaign activity by Section 501(c)(3) organizations under the tax and campaign finance laws. For a discussion limited to the ability of churches and other houses of worship to engage in campaign activity, see CRS Report RL34447, Churches and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by [author name scrubbed] and [author name scrubbed].
Charities, houses of worship, and private schools are among the organizations that qualify for tax-exempt status as organizations described in Section 501(c)(3)1 of the Internal Revenue Code (IRC).2 Benefits that arise from this status include exemption from federal income taxes and eligibility to receive tax-deductible contributions.3 One restriction that arises is that these organizations are prohibited under the tax code from engaging in campaign activity. Separate from the tax code's prohibition, the Federal Election Campaign Act (FECA) may also restrict the ability of Section 501(c)(3) organizations to engage in such activity.
The tax laws prohibit Section 501(c)(3) organizations from "participat[ing] in, or interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office."4 An organization that engages in any amount of campaign activity may lose its Section 501(c)(3) status and eligibility to receive tax-deductible contributions. It may also be taxed on its political expenditures,5 either in addition to or in lieu of revocation of Section 501(c)(3) status.6 The tax equals 10% of the expenditures, with an additional tax equal to 100% of the expenditures imposed if the expenditures are not corrected (i.e., recovered and safeguards established to prevent future ones) in a timely manner. The organization's managers may also be subject to tax.7 Other consequences for the flagrant violation of the prohibition include the IRS immediately determining and assessing all taxes due and/or seeking injunctive and other relief to enjoin the organization from making additional political expenditures and to preserve its assets.8
The prohibition on campaign intervention was introduced by then-Senator Lyndon Johnson as a floor amendment to the Revenue Act of 1954. He analogized it to the lobbying limitation, enacted in 1934, under which "no substantial part" of a Section 501(c)(3) organization's activities may be lobbying; however, he mischaracterized the limitation by saying organizations that lobbied were denied tax-exempt status, as opposed to only those that engaged in substantial lobbying.9 It appears that the act's legislative history had no further discussion of the provision. It has been suggested that then-Senator Johnson proposed it either as a way to get back at an organization that supported an opponent or as an alternative to a controversial proposal denying tax-exempt status to organizations making donations to subversive entities and individuals.10
Thus, the statute and regulations do not offer much insight as to what activities are prohibited. Clearly, Section 501(c)(3) organizations may not do such things as make statements that endorse or oppose a candidate, publish or distribute campaign literature, or make any type of contribution, monetary or otherwise, to a political campaign.
On the other hand, Section 501(c)(3) organizations are allowed to conduct activities that are political in nature but are not related to elections, such as lobbying for or against legislation13 and supporting or opposing the appointment of individuals to nonelective offices. Additionally, Section 501(c)(3) organizations may engage in certain election-related activities so long as the activities do not indicate a preference for or against any candidate. Whether such an activity is campaign intervention depends on the facts and circumstances of each case. The following examples show some of the ways in which the IRS has indicated that an activity might be biased. As will be seen, some biases can be subtle and it is not necessary for the organization to expressly mention a candidate by name.
Other factors that may be important include the timing of the guide's distribution and to whom it is distributed. For example, the IRS ruled that a Section 501(c)(3) organization could include a compilation of members' voting records on issues important to it and its position on those issues in the edition of its monthly newsletter published after the close of each Congress.18 The newsletter was sent to the usual small number of subscribers and not targeted to areas where elections were occurring. In this specific situation, the IRS stated that the publication was permissible because it was not timed to an election or broadly distributed.
A Section 501(c)(3) organization may invite a candidate to speak at its functions without it being prohibited campaign activity. According to the IRS, factors that tend to indicate the event was permissible include the organization provided an equal opportunity to speak at similar events to the other candidates; the organization did not indicate a preference for or against any candidate; and no fund-raising occurred at the event.20 Section 501(c)(3) organizations may also invite candidates to speak in their non-candidate capacity.21 Factors indicating that no campaign intervention occurred include (1) the individual was chosen to speak solely for non-candidacy reasons; (2) the individual spoke only in his or her non-candidate capacity; (3) no reference to the upcoming election was made; (4) no campaign activity occurred in connection with the individual's attendance; (5) the organization maintained a nonpartisan atmosphere at the event; and (6) the organization's communications announcing the event clearly indicated the non-candidate capacity in which the individual was appearing and did not mention the individual's candidacy or the election.22
Under certain circumstances, Section 501(c)(3) organizations may sell or rent goods, services, and facilities to political campaigns. This includes selling and renting mailing lists and accepting paid political advertising. According to the IRS, factors that tend to indicate the activity is not biased towards any candidate or party include the following:
A Section 501(c)(3) organization could engage in campaign activity by linking its website to another website that has content showing a preference for or against a candidate.28 Whether the linking is campaign intervention depends on the facts and circumstances of each case. Factors the IRS will look at include the context of the link on the organization's website, whether all candidates are represented, whether the linking serves the organization's exempt purpose, and the directness between the organization's website and the page at the other site with the biased material.29
Members, managers, leaders, and directors of Section 501(c)(3) organizations may participate in campaign activity in their private capacity. The organization can not support the activity in any way.30 For example, these individuals may not express political views in the organization's publications or at its functions (this is true even if the individual pays the costs associated with the statement),31 and the organization may not pay expenses incurred by the individual in making the political statement. Individuals may be identified as being associated with an organization, but there should be no intimation that their views represent those of the organization.32
Concerns about violations of the campaign intervention prohibition by Section 501(c)(3) organizations led the IRS to develop the Political Activity Compliance Initiative.33 It has two parts: the IRS performed educational outreach to Section 501(c)(3) organizations about the prohibition and used a fast-track process for reviewing possible violations. The initiative was used during the 2004, 2006, and 2008 election cycles, although the data from 2008 have not yet been released. The initiative was not used during the 2010 and 2012 election cycles.34
The 2004 initiative involved the expedited review of 110 cases in which Section 501(c)(3) organizations were alleged to have violated the campaign intervention prohibition. The IRS issued a written advisory in 69 of these cases, which meant that the agency determined the organization engaged in campaign activity but mitigating factors led to the organization not being penalized. Mitigating factors included that the activity was of a one-time nature or shown to be an anomaly, the activity was done in good faith reliance on advice of counsel, or the organization corrected the conduct (e.g., recovered any funds that were spent) and established safeguards to prevent future violations. The IRS revoked the tax-exempt status of five organizations (one for issues not related to campaign activity) and proposed two more revocations. The IRS did not find substantiated campaign activity in 23 of the cases, and found non-political violations of the tax laws in six other cases. The remaining five cases were still open as of the last IRS update in 2007.
While the 2004 initiative was proceeding, there were reports in various media outlets that raised the question of whether the IRS had been politically motivated in investigating the Section 501(c)(3) organizations so close to the 2004 election.35 In response, the IRS Commissioner asked the Treasury Inspector General for Tax Administration (TIGTA) to investigate whether the IRS had engaged in any improper activities while conducting the project. In 2005, TIGTA released its report, which concluded that the IRS had used appropriate, consistent procedures during the initiative.36
The 2006 initiative involved 100 cases selected for examination. As of the last IRS update in 2007, 60 of these cases remained open. In the 40 closed cases, the IRS issued written advisories in 26 of them, and did not find substantiated political intervention in the other 14 cases. The IRS also identified 269 instances of Section 501(c)(3) groups apparently making direct contributions to political candidates.
The Federal Election Campaign Act (FECA),37 which regulates the raising and spending of campaign funds, is separate and distinct from the tax code. FECA prohibits corporations from using general treasury funds to make contributions in connection with federal elections.38 While FECA does not prohibit unincorporated Section 501(c)(3) organizations from making such contributions, the IRC prohibits all Section 501(c)(3) organizations, regardless of corporate status, from making such contributions, as discussed above.
In its recent ruling in Citizens United v. FEC,39 the Supreme Court invalidated the prohibitions in FECA on corporations and labor unions using their general treasury funds to make "independent expenditures," which are communications "expressly advocating the election or defeat of a clearly identified candidate" that are not coordinated with any candidate or party,40 and "electioneering communications," which are broadcast, cable or satellite transmissions that refer to a clearly identified federal candidate and aired within 60 days of a general election or 30 days of a primary.41 The Court determined that these prohibitions constitute a "ban on speech" in violation of the First Amendment.42 Due to the tax code prohibition discussed above, Section 501(c)(3) organizations are generally not permitted to engage in the activities regulated by FECA, and thus the Citizens United decision does not appear to impact them in a significant manner.
I.R.C. §501(c)(3) describes organizations "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition ... or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation ... and 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."
See I.R.C. §§501(a), 170(c)(2).
I.R.C. §501(c)(3). Separate from the campaign intervention prohibition, an organization that operates for the benefit of private interests, such as members and entities of one political party, on a more than insubstantial basis may not qualify for §501(c)(3) status. See American Campaign Academy v. Comm'r, 92 T.C. 1053 (1989).
See I.R.C. §4955. A similar tax is imposed on the political expenditures of private foundations under §4945, but it is not assessed if the §4955 tax is assessed. Private foundations are §501(c)(3) organizations that receive contributions from limited sources. See I.R.C. §509.
See I.R.C. §§6852, 7409.
Treas. Reg. §1.501(c)(3)-1(c)(3)(iii).
However, "no substantial part" of a §501(c)(3) organization's activities may be lobbying. For more information, see CRS Report RL33377, Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements, by [author name scrubbed].
See IRS FS-2006-17 (February 2006).
See IRS FS-2006-17 (February 2006); Rev. Rul. 78-248, 1978-1 C.B. 154.
See id. Private foundations making expenditures for these activities may be subject to tax. See I.R.C. §4945.
See 2002 EO CPE Text, supra note 10, at 379.
See id.; see also 2002 EO CPE Text, supra note 10, at 376-77. But note, depending on timing, such a communication might trigger regulation under FECA, discussed in the "Campaign Finance Law" section, infra.
See Rev. Rul. 2007-41, 2007-1 C.B. 1421; see also, 2002 EO CPE Text, supra note 10, at 383-84.
See Rev. Rul. 2007-41, 2007-1 C.B. 1421. Due to possible constitutional concerns stemming from the Supreme Court's decision in Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983), the IRS indicated that it would not pursue cases involving a link between the website of a §501(c)(3) organization and the home page of a related §501(c)(4) organization. See Memorandum For All Revenue Agents, from Marsha A. Ramirez, Director, Exempt Organizations, Examinations, dated July 28, 2008, available at http://www.irs.gov/pub/irs-tege/internetfielddirective072808.pdf.
See id.; see also 2002 EO CPE Text, supra note 10, at 363-65.
It has been suggested that one reason for this and the lack of 2008 data is a 2009 case that held the IRS was not following the statutory procedure required in church tax inquiries and which led the IRS to suspend such inquiries. See Simon Brown, IRS Quiet About Election Cycle Enforcement, Says Former Director, 128 Tax Notes 935 (August 30, 2010) (reporting statements by Marcus Owens, a former IRS EO director, about the impact of United States v. Living Word Christian Center, 2009 U.S. Dist. LEXIS 6902 (D. Minn. January 30, 2009)).
See, e.g., Mike Allen, NAACP Faces IRS Investigation, Wash. Post (October 29, 2004); Vincent J. Schodolski, Political sermons stir up the IRS: Effort to enforce tax-exempt rules or bid to bully pulpits? Chi. Trib. (November 20, 2005).
TIGTA Report 2005-10-035 (February 2005).