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Political Activities and Lobbying Update

September 2000
By Harry J. Friedman, Greenberg Traurig, Miami Office

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Political and lobbying activities of Section 501(c)(3) organizations have been a frequent issue, particularly in presidential election years. The IRS recently issued an advisory for Section 501(c)(3) organizations that are engaging in educational activities for voters. Also, the IRS recently issued a letter to a Washington, D.C. trade association discussing the rules for lobbying activities applicable to Section 501(c)(3) organizations. We believe that a review of these rules will be useful for Section 501(c)(3) organizations and their managers.

Political Activities Prohibited

The Internal Revenue Code is clear that Section 501(c)(3) organizations may not "participate in, or intervene in (including publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office." There is no de minimus test or incidental test; supporting a candidate for public office in any manner is forbidden. This prohibition is applicable to all Section 501(c)(3) organizations without exception. Revocation of exempt status is a possible penalty for engaging in political activities.

Recently, the U.S. Court of Appeals for the District of Columbia decided in favor of the IRS in connection with an IRS decision to revoke the tax exempt status of a church because of the church’s involvement in political activities. The church had co-sponsored ads in The Washington Times and USA Today criticizing then-Governor Clinton’s position on homosexuality, abortion and other issues. The statement also urged people to make tax-deductible donations to the church.

The IRS revoked the church’s exempt status, ruling that the ads violated the Code prohibition on political activity. The fact that the Section 501(c)(3) organization was a church did not affect the outcome: The First Amendment did not allow it to ignore rules applicable to other Section 501(c)(3) organizations.

Section 501(c)(3) organizations that wish to influence election campaigns do have alternatives. A Section 501(c)(3) organization can establish a subsidiary to engage in activities that the Section 501(c)(3) organization itself would not be permitted to do. As a general matter, the IRS recognizes the separate corporate existence of corporations for a variety of purposes. The separateness of the organization will be recognized unless it is a sham or is merely acting as an agent for the Section 501(c)(3) organization. An agency relationship is not created simply because the affiliate organization has a similar name and goals as the Section 501 (c)(3) organization.

As a result, a Section 501(c)(3) organization can establish and control an organization described in Section 501(c)(4), an exempt organization that is permitted to engage in substantial lobbying or political activities (although, that cannot be the only purpose of the Section 501(c)(4) organization). It is important that the two organizations observe the formalities of their separate status and deal with each other at arm’s length. Maintenance of separate bank accounts and separate records is a must. Overlapping officers, directors, or employees must allocate their time between the organizations. It is important to demonstrate that the political activities (including any lobbying activities) engaged in by the Section 501(c)(4) organizations are not accomplished by the use of the Section 501(c)(3) organization’s funds. The Section 501(c)(4) organization can establish a political action committee to conduct exempt functions under Section 527 of the Code so long as political activities are not the primary activity of the organization.

A Section 501(c)(3) organization may engage in voter educational activities. These activities may include controversial issues, "so long as [the organization] presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion." Section 501(c)(3) organizations may also conduct voter registration drives or publish voter guides as long as the activity does not support a particular candidate. A candidate forum is permissible if all candidates are permitted to participate, although some limitation may be acceptable if the criteria is applied in a non-arbitrary manner.

Limited Lobbying Activities

While Section 501(c)(3) organizations may not engage in political activity, lobbying to influence legislation may be undertaken if it is not a substantial part of the organization’s activities. (Note, however that private foundations may not engage in any lobbying activities; permission is only available to public charities).

A Section 501(c)(3) organization desiring to lobby can follow two courses. It can simply rely on the statutory provision that "no substantial part" of its activities is to influence legislation or the organization can make an election under Section 501(h) to apply a "safe harbor" that a specified amount of expenditures will not constitute a "substantial part." An organization making an election under Section 501(h) and complying with the rules contained in the Code will not lose its exempt status because of its lobbying activities. Generally, the amount of lobbying expenditures permitted is a sliding scale based on the organization’s exempt expenditures (up to $1,000,000 on total lobbying activities and up to $250,000 on grassroots lobbying). Grassroots lobbying is lobbying the public with respect to proposed legislation; e.g., requesting the public to call to make their views known.

Certain activities are not deemed to be lobbying, including making available the results of non-partisan analysis study and research; providing technical advice or assistance to a government body or to a committee in response to a request; appearances before any legislative body with respect to decisions which might affect the existence of its organization; and communications between the organization and its members with respect to direct interest legislation.

We generally recommend that organizations look to electing the optional sliding scale. While the dollar limitations should be considered when making the election, the safety of employing specific limitations may be beneficial. Frequently, organizations are concerned that making a Section 501(h) election may expose the organization to an increased risk of IRS audit. The Internal Revenue Manual specifically states that IRS examination personnel should not use making a Section 501(h) election as a basis for initiating an examination. IRS representatives in speeches have confirmed this fact.

* * * * *

Election year campaigning and lobbying presents many dangers for Section 501(c)(3) organizations. An organization engaging in support for a political candidate places its exempt status in jeopardy. Further, the Code imposes an excise tax on the organization and its managers if a political expenditure is made by the organization. A Section 501(c)(3) organization intending to engage in any political activity should review the proposed activity with its tax advisor before commencing any actions. The distinctions between educational activities and political activities are difficult to apply in practice. Prior precedents will be helpful in characterizing an activity.

Similarly, consultation with a tax advisor should precede lobbying expenditures by a Section 501(c)(3) organization. The organization should consider whether an election under Section 501(h) is appropriate. As with political activity, lobbying can endanger the exempt status of the organization and should be dealt with accordingly.


© 2000 Greenberg Traurig

Additional Information:

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This GT ALERT is issued for informational purposes only and is not intended to be construed or used as general legal advice. Greenberg Traurig attorneys provide practical, result-oriented strategies and solutions tailored to meet our clients’ individual legal needs.