Legal Limitations on the Political Activities of Tax-Exempt Organizations
Nancy Yanofsky & Laurie Rockett
ProChoice Resource Center, Inc.
Mamaroneck, New York
This article provides a brief overview of three different kinds of tax- exempt, public interest organizations 501(c)(3) organizations, 501(c)(4) organizations and political action committees (PAC's) and some of the major legal and political differences among them. It is important to note, however, that nothing presented on the following pages is intended to serve as legal advice; that is, this information must not take the place of consulting with your own counsel on the desirability of establishing the various organizations described and the activities in which they may lawfully engage.
There are three kinds of tax-exempt organizations which address a range of
educational and/or political activities.1 They fall into the following
three categories: Educational and Charitable Organizations (501(c)(3))
Social Welfare Organizations (501(c)(4)) Political Action Committees (527)
With some technical exceptions, none of these organizations is required to pay federal corporate income tax and each of them is permitted to carry out a range of educational activities. However, the political activities of all three types of organizations are limited under the Internal Revenue Code (IRC) and the Federal Election Campaign Act (FECA).
If these organizations are all tax-exempt, how are they different?
Educational and Charitable/501(c)(3) Organizations. A defining characteristic of a 501(c)(3) organization is that all contributions to such organizations are tax deductible. This means that all contributors to 501(c)(3) organizations may claim their contributions as charitable deductions. And private foundations may make grants to 501(c)(3) organizations without administrative supervision or the risk of substantial legal penalties.
On the other hand, by definition, the political activities of such organizations are severely limited. A 501(c)(3) organization:
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;
is not permitted to devote a substantial part of its activities to carrying on propaganda, or otherwise attempting to influence legislation.
These restrictions must be adhered to; the penalty for violating them is loss of tax-exempt status. Moreover, if a 501(c)(3) organization loses its exemption for engaging in excessive lobbying or participating in electoral activities, it may not reorganize at any time as a 501(c)(4) organization.
Social Welfare/501(c)(4) Organizations. These tax-exempt organizations are permitted to engage in a broader range of political activities, provided that their primary focus is to promote "social welfare." However, contributions to these "social welfare" organizations are not tax deductible as charitable contributions. Moreover, private foundations are required to impose restrictions limiting the use of any grants made to social welfare organizations to 501(c)(3) activities and must monitor the use of these funds. Private foundations, as a result, prefer not to make grants to social welfare organizations.
Political/527 Organizations. Organizations exempt under this section are established for the express purpose of engaging in electoral activities (which must constitute their primary purpose). Although political organizations may legally engage in non-electoral, political and non- partisan election-related activities, expenditures made for such purposes are subject to income tax.
How are the organizational activities of these groups limited by their tax- exempt status?
Lobbying Activities. There are two kinds of lobbying direct and grassroots. Direct lobbying is contact with a member or employee of a legislative body, or member of the executive branch in connection with formulating legislation (but not regarding regulatory or enforcement functions which are not considered lobbying). Grassroots lobbying, on the other hand, attempts to influence the attitudes of the general public regarding legislation.
Lobbying and 501(c)(3) Organizations. Organizations exempt under section 501(c)(3) may engage in lobbying if the lobbying activities are insubstantial in relation to the general educational or charitable activities of the organization. (The term "substantial" has never been defined, although it is generally believed that a safe limitation on lobbying is 5% of overall expenditures.) And, since 1976, organizations can elect, under section 501(h), to spend a certain percent of their operating budgets their "exempt purpose expenditures" on lobbying activities, without penalty.
The limits are up to a maximum of 20% of the expenses of an organization with total expenses of $500,000 with percentages declining thereafter to an overall cap of $1 million. Only 25% of this limit may be spent on grassroots lobbying.
Activities which do not constitute lobbying (and which may be engaged in by a 501(c)(3) organization without limitation so long as they are charitable or educational) include:
making available the results of nonpartisan analysis, study or research;
testifying before or providing technical assistance to a governmental body or committee in response to its written request;
communications affecting the existence of the organization, contributions to it or its tax-exempt status;
conducting training on how to lobby effectively, so long as participants are not urged to lobby on any particular legislation;
communications with its members which inform them about legislation, but do not urge them to lobby.
Lobbying and 501(c)(4) Organizations. There are no restrictions on the amount of lobbying, whether direct or grassroots, in which 501(c)(4) organizations may engage.
Lobbying and Political Organizations. There are no restrictions on the amount of lobbying, whether direct or grassroots, in which PACs may engage, but the money expended on such activities is subject to income- tax.
Electoral Activities. Participating or intervening in a political campaign, or directly or indirectly influencing an election to benefit a candidate, a party or a ballot measure is considered electoral activity. This is not to be confused with non-partisan voter education activities that enhance the public's awareness of social and political issues.
The Internal Revenue Code
Electoral Activities and 501(c)(3) Organizations. A 501(c)(3) organization is absolutely prohibited from engaging in any electoral activities. Electoral activities do not include such non-partisan, educational activities as voter registration drives or other "Get-Out-the-Vote" activities or, for example, conducting seminars or training sessions on the importance of becoming involved in the political process and how to do so. Such activities must be strictly non-partisan and, in most cases, not even issue-oriented. All activities in this area should be cleared by legal counsel.
Electoral Activities and 501(c)(4) Organizations. The Internal Revenue Service has ruled that an organization exempt under 501(c)(4) may engage in electoral activities, but only if such activities do not constitute its primary activity. Some apply a rule of thumb that electoral activities must constitute less than 50% of the organization's overall activities; the smaller the percentage, the less the risk of loss of tax-exempt status. Note that, if the organization is incorporated, restrictions on these activities are imposed under the Federal Election Campaign Act, discussed below.
Electoral Activities and Political Organizations. Under the IRC, political organizations may legally endorse, make expenditures and otherwise make contributions intending to influence the selection, nomination or appointment of any individual to public office.
The Federal Election Campaign Act (FECA). Section 441(b) of FECA prohibits a corporation, including a tax-exempt corporation, from making a contribution or expenditure in connection with any election to federal office except through a separately segregated fund (which may solicit contributions only from its members). Contributions and expenditures are broadly defined to include anything of value other than the value of services or some in-kind contributions by individuals. Excluded from this prohibition are independent endorsements of candidates made by tax- exempt, public interest organizations which do not receive any funds from corporations or labor unions.
FECA also provides for the organization of PACs (exempt as political organizations under section 527 of the IRC) that are established specifically to make contributions and expenditures in connection with federal elections.
There are two kinds of PACs, separately segregated funds which may be established by 501(c)(4) organizations, and independent PACs. A separately segregated fund may receive contributions only from members of the parent organization, while an independent PAC is not so restricted.
Please note that there are also regulations on state election campaigns and contributions which vary from state to state. Again, legal counsel should be consulted to determine what restrictions exist under state law.
How can a tax-exempt organization maximize its allocation of time and resources? To maximize both fund-raising and the range of political activities in which tax-exempt organizations may engage, it is desirable to organize all three forms of organizations: a 501(c)(3); a 501(c)(4); and a PAC.
Under the IRC, a 501(c)(3) organization may establish and control a 501(c)(4) organization, and a 501(c)(4) organization may establish and control a 501(c)(3) organization, either as a separately segregated fund or as a separate corporation. Under either structure, activities which are considered educational or charitable or within the section 501(h) limits for 501(c)(3) organizations may be carried out using tax deductible contributions. Lobbying in excess of these limits and the political activities permitted a 501(c)(4) organization should be done through the 501(c)(4) organization.
It is important to understand that no 501(c)(3) funds may be used indirectly through the 501(c)(4) organization to conduct activities the 501(c)(3) organization could not itself conduct. The 501(c)(4) organization may make contributions to the 501(c)(3); however, there is ordinarily no benefit in the 501(c)(3) organization making any contribution to the 501(c)(4) organization, because the contribution would have to be used solely for activities the 501(c)(3) organization could itself carry out. If staff, space or equipment is shared, separate books must be kept, and resources and time carefully allocated between the two organizations.
While the 501(c)(4) organization may establish and pay the administrative costs of a separately segregated fund to conduct electoral activities, it is generally preferable to establish a separate, independent PAC so that fund-raising may extend beyond the membership of the 501(c)(4) organization. A 501(c)(3) organization should not be in any way affiliated with a PAC or make any direct or indirect contributions to one (except in the limited case of influencing judicial appointments).
Coalitions with unaffiliated organizations may also be an effective way to pool resources, but again, an organization may not do through a coalition what it cannot do itself.
Summary of Permissible Activities
The following is a general summary of the activities in which 501(c)(3)'s, 501(c)(4)'s and PACs may engage. It is not intended to be comprehensive. There are many legal limitations on the conduct of such activities and legal counsel should be sought regarding them.
501(c)(3) Organizations may:
lobby within IRC limits
conduct public education activities on public interest issues
hold public education and training sessions about participation in the political process
educate candidates on public interest issues
publish voting records
prepare candidate questionnaires
canvass the public on issues
sponsor candidates debates
lobby in connection with party platform issues
lobby with respect to judicial appointments
rent mailing lists and facilities to other organizations, legislators and candidates at fair market value
prepare voter identification lists
conduct Get-Out-the Vote and registration drives
establish a controlled 501(c)(4) organization
All of the above activities must be conducted in a non-partisan manner and, in most cases, should not target elections in terms of timing or location. (An obvious exception is voter registration.) Under no circumstances may a 501(c)(3) organization endorse or in any way support any individual candidate for elective office.
501(c)(4) Organizations may:
engage in all of the 501(c)(3) activities without limitation
make independent endorsements of candidates or expenditures on their behalf
allow candidates to address their members
restrict the rental of their mailing lists or facilities to certain candidates
establish and pay the administrative costs of a PAC
urge their members to vote for certain candidates in federal elections
PACs may:
engage in all of the 501(c)(3) and 501(c)(4) activities, but are subject to income tax if not within the primary electoral purposes of the PAC
mail voting that rate candidates to the general public
make direct campaign contributions
run ads in support of candidates
provide mailing lists to candidates without charge.
1 The term "political activities" as used in this article encompasses two legally distinct kinds of activities: lobbying activities attempts to influence the passage or defeat of legislation; and electoral activities activities to affect the election or defeat of an individual to public office. (There are some hybrids, such as the nomination of an individual to judicial office, which are beyond the scope of this article.)