Charitable Organizations and Politics: Permitted, Restricted, and Prohibited Activities

Charitable Organizations and Politics: Permitted, Restricted, and Prohibited Activities

Article posted in Compliance on 1 December 2004| comments
audience: National Publication | last updated: 18 May 2011
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Summary

As some of the popular news programs report, it's only 1,430 days until the next presidential election! With that in mind, in this special report from Tax Analysts, Alan L. Kennard of the St. Louis office of Husch & Eppenberger LLC reviews the rules in the tax code governing political activity by public charities.

by Alan L. Kennard

I. Introduction

Although there has been a lot of media coverage related to "527 organizations" and "501(c)(4) organizations," little has been mentioned about the political activities of the typical "501(c)(3) organization," such as a church, school, local Boys and Girls Scouts, and even little league.

There is substantial guidance as to what types of political activities of charitable organizations are restricted or prohibited. Most recently, the IRS has stated that such organizations should be careful that their efforts to educate voters comply with the Internal Revenue Code of 1986 as amended, requirements concerning political campaign activities.1 Whether a charitable organization is engaging in prohibited political campaign activity depends on all the facts and circumstances in each case. "Political activity" (sometimes called "electioneering") is different from policy advocacy and lobbying. There is no prohibition against a charitable organization adopting positions on questions of policy. Direct efforts to influence the outcome of legislative action are permitted under certain restrictions.

 If the IRS finds a charitable organization is engaged in prohibited campaign activity, the organization could lose its tax-exempt status or, alternatively or in addition, it could be subject to an excise tax on the amount of money spent on that activity. Additionally, contributions to organizations that lose their tax-exempt status because of political activities are not deductible by their donors for federal income tax purposes. Moreover, certain individuals affiliated with such organizations can be subject to taxation.

In cases of a flagrant violation of the law, the IRS has specific statutory authority to make an immediate determination and assessment of tax. Also, the IRS can ask a federal district court to enjoin the organization from making further political expenditures. Generally, the restrictions and prohibitions relating to the political activities of a charitable organization that is exempt as described under section 501(c)(3) become stricter the more the federal income tax benefits to such organization and its donors increase.

Individuals associated with charitable organizations must be familiar with the permissible parameters of being involved in politics at both the organizational and individual levels. Each charitable organization should provide explicit restrictions to the involvement in politics in its corporate governing documents or at least in a written policy.


II. General Rules

Currently, there are 27 different types of organizations that qualify as tax-exempt for federal income tax purposes under section 501(c). The most common tax-exempt organization is a 501(c)(3) organization, which is the entity that is known for being "charitable" and to which this article relates. These organizations are generally not subject to federal income tax on contributions received, income from activities that are substantially related to their exempt purpose, or investment income. Such an organization may use the proceeds of tax-exempt financing and may also qualify for exemption from state and local taxes. If, however, such an organization engages in business activities that are unrelated to its exempt purpose, the organization may be subject to unrelated business income tax. Generally, 501(c)(3) donors are entitled to deduct their contributions for federal income, estate, and gift tax purposes. Recipients of charitable assistance may exclude the assistance from gross income as a gift.

A. Three Political Prohibitions

A 501(c)(3) organization includes certain entities that are both "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" only if:


1. no part of such entity's net earnings inures to the benefit of any private shareholder or individual;

2. no substantial part of such entity's activities of which it is carrying on propaganda, or otherwise attempting, to influence legislation (except with respect to the "substantial part test" and the "expenditure test," (discussed below)); and

3. such entity does not participate in, or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office, with certain exceptions.


These are referred to herein as the "three political prohibitions." The regulations provide that the term "charitable" is that of its generally accepted legal sense. The fact that a 501(c)(3) organization, in carrying out its primary purpose, advocates social or civic changes or presents opinions on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying as a 501(c)(3) organization as long as it is not an "action organization," as discussed below. Case law is abundant with examples of whether a religious purpose is present (e.g., religious proselytizing) or is not present (e.g., solely advocating political, social, or secular causes). Nevertheless, even if there is a religious purpose, such a fact is not sufficient to avoid classification as an "action organization," although if it is "insubstantial," there may be a permitted exception in practice.

In general, political activities that are educational are permitted. Educational activities are those that present "a sufficiently full and fair exposition of the pertinent facts," are not biased, and "permit an individual or the public to form an independent opinion or conclusion." Public charities also generally may provide a forum for debates by candidates, so long as the forum is fair and neutral and all qualified candidates are given equal time for debate. For example, "voter education" and publication of "voting records" are permitted if they are nonpartisan in implementation. Other forms of voter education, such as publication of voter guides, also may be permissible if certain guidelines are followed. However, the publication of statements on behalf of, or in opposition to, a candidate is prohibited, regardless of whether such publication is educational.2 Advocacy outside of education must be reasonably related to the achievement of an organization's charitable purpose.3

The intent of a 501(c)(3) organization's participation is irrelevant. The prohibition on political activity is not intended to restrict free expression on political matters by persons speaking for themselves as individuals and not as representatives of a charitable organization.

Public charities may engage in limited lobbying activities, provided that such activities are not substantial, without losing their tax-exempt status and generally without being subject to tax. In contrast, private foundations are subject to the restriction that lobbying activities, even if insubstantial, may result in the foundation being subject to penalty excise taxes.

B. Four Exceptions

Although the regulations to section 501(c)(3) do not provide any exceptions for activities that are not considered to be lobbying, the private foundation rules under section 4945 provide four exceptions that are generally considered applicable to public charities as well.4 These exceptions are:


1. Nonpartisan Analysis, Study, or Research

Lobbying does not include the conduct of nonpartisan analysis, study, or research, as long as the dissemination of such analysis does not advocate the adoption of legislation to implement its findings. "Nonpartisan analysis, study, or research" is defined as an independent exposition of a particular subject matter. The analysis may conclude that legislation is appropriate to achieve a particular objective if it contains a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion.

The results of nonpartisan analysis, study, or research must be made available to the general public or a segment or members thereof or to governmental bodies, officials, or employees. Such results may be distributed by any suitable means, including oral or written presentations, provided that the communications are not limited to or directed toward those interested in only one side of a particular issue. Examples of suitable means of distribution include (a) reprints of speeches, articles, and reports; (b) presentation of information through conferences, meetings, and discussion; and (c) dissemination to the news media -- including radio, television, and newspapers -- and to other public forums.


2. Examination of Broad Social, Economic, and
Similar Problems

Discussions of broad social or public policy issues that do not advocate a specific legislative proposal generally do not constitute attempts to influence legislation for purposes of section 501(c)(3). Specifically, lobbying communications do not include public discussion or communications with members of legislative bodies or governmental employees, the general subject of which is also the subject of legislation before a legislative body, so long as such discussion does not address itself to the merits of a specific legislative proposal and so long as such discussion does not directly encourage recipients to take actions with respect to legislation.


3. Requests for Technical Advice or Assistance

Lobbying does not include the provision of technical advice to a governmental body or committee in response to a written request. Likewise, responding to a governmental request for testimony is not treated as a lobbying activity. A request from an individual committee member or a subset of members will not fall within this exception. The offering of opinions or recommendations ordinarily will qualify under this exception only if such opinions or recommendations are specifically requested by the governmental body or committee, or are directly related to the materials requested.


4. Self-Defense Communications

There is an exception for direct lobbying with respect to proposed legislation that might affect a charity's existence, powers and duties, tax-exempt status, or the deductibility of contributions (so-called "self-defense lobbying"). Within these specific areas, an organization may communicate with legislators or their staff and may initiate legislation. However, this exception does not cover proposed legislation involving public policy issues that may be of importance to an organization in carrying out future charitable programs.


___________

For purposes of determining whether lobbying activities are a substantial part of a public charity's overall functions, a public charity may choose between two standards, the "Substantial Part Test" or the "Expenditure Test" discussed below.

If any one of the three political prohibitions is violated, the organization could lose its tax-exempt status. Nevertheless, the IRS has waived implementation of this revocation of tax-exempt status in cases where the prohibited activity was inadvertent, involved a nominal amount, was corrected, and was followed by procedures that prevent future prohibited activities. The excise taxes discussed below, although not an exception to the revocation of tax-exempt status per se, are alternative remedies that can be used by the IRS. Moreover, the three political prohibitions do not prohibit political activity by individuals and officers of the 501(c)(3) organization in their individual capacities as long as they do not use such organization's resources.

For organizations that engage in prohibited political activity, the code provides four penalties that may be applied either as alternatives to revocation of tax exemption or in addition to revocation of tax exemption:


1. a 25 percent tax on the amount of any "excess lobbying expenditures" (the 25 percent excise tax);

2. a 10 percent excise tax on "political expenditures" (the 10 percent excise tax);

3. a 100 percent excise tax on "political expenditures" if such expenditure is not corrected within the taxable period (the 100 percent excise tax);

4. termination assessment of all taxes due; and

5. an injunction against further "political expenditures."


Additionally, there are collateral penalties including:


1. a 2.5 percent excise tax on "political expenditures" is imposed on any "organization manager" who knowingly makes or permits such political expenditures (unless it is not willful and is due to reasonable cause) (the 2.5 percent excise tax); and

2. a 50 percent excise tax on "political expenditures" is imposed on an "organization manager" if the 100 percent excise tax is imposed (the 50 percent excise tax).


C. Organizational Test

One of the requirements to satisfy the organizational test is that an organization cannot be organized exclusively for one or more exempt purposes if its articles expressly empower such organization:


1. to devote more than an insubstantial part of its activities to attempting to influence "legislation"5 by propaganda or otherwise (the "prohibition against the influence of legislation");

2. to directly or indirectly 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; or

3. to have objectives and to engage in activities that characterize it as an action organization.


An organization's articles will not violate the first prohibition even though the organization's articles expressly empower it to make the election provided for in section 501(h) (the section 501(h) election) with respect to influencing legislation and, only if it so elects, to make lobbying or grass roots expenditures that do not normally exceed the ceiling amounts prescribed by section 501(h)(2)(B) and (D).

D. Operational Test

An organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in section 501(c)(3). Additionally, the following requirements must be satisfied:


1. the net earnings of the organization may not inure to the benefit of any person in a position to influence the activities of the organization;

2. the organization must operate to provide a public benefit, not a private benefit;

3. the organization may not be operated primarily to conduct an unrelated trade or business;

4. the organization may not engage in substantial legislative lobbying; and

5. the organization may not participate or intervene in any political campaign.


Because private foundations receive support from, and typically are controlled by, a small number of supporters, private foundations are subject to a number of antiabuse rules not applicable to public charities. For example, private foundations are required to make a minimum amount of charitable distributions each year, are prohibited from retaining excess holdings in a business, may not make jeopardizing business investments, and may not make certain expenditures (including expenditures for lobbying, political activities, grants to individuals without prior IRS approval, grants to organizations other than public charities and certain foundations unless special procedures are followed, and noncharitable purposes). Violations result in excise taxes on the private foundation and, in the case of jeopardizing business investments and taxable expenditures, the management of the private foundation. In addition, both public charities and private foundations generally are prohibited from engaging in certain transactions with disqualified persons. For public charities, an excise tax applies to organization managers and to disqualified persons with respect to an "excess benefit" transaction; for private foundations, foundation managers and disqualified persons are subject to an excise tax for acts of self-dealing. As described later, the applicable transactions, the definition of "disqualified person," and the tax structure relating to the excess benefit and self-dealing rules differ significantly.

If an organization is an "action organization," whether a public charity or a private foundation, such organization is not operated exclusively for one or more exempt purposes. There are no exceptions. Contributions to candidates and political entities are not deductible for federal income tax purposes and thus, donations to a 501(c)(3) organization, which are deductible, cannot then be used to contribute to candidates and political entities. An organization is an action organization if it satisfies any one or more of three scenarios.

First, a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. There is no statutory definition of "propaganda, or otherwise attempting" to influence legislation. However, an organization will be regarded as attempting to influence legislation if the organization:


1. contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or

2. advocates the adoption or rejection of legislation.6


An organization will not fail to meet the operational test merely because it advocates, as an insubstantial part of its activities, the adoption or rejection of legislation.

An organization for which the section 501(h) election is in effect for a taxable year will not be considered an action organization for that year if it is not denied exemption from taxation under section 501(a) by reason of the section 501(h) election. This is referred to herein as the "first type of action organization."

Second, an organization is an action organization if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any "candidate for public office."7 Activities that constitute participation or intervention in a political campaign on behalf of or in opposition to a candidate include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to such a candidate. This is referred to herein as the "second type of action organization." It is not necessary that such statements advocate the election or defeat of a candidate. Rather, the advocacy of issues may provide an opportunity to intervene in a political campaign in a rather surreptitious manner if used as an indirect way to endorse or not endorse a particular candidate (e.g., pro-choice, liberal etc.). The determination is based on the facts and circumstances, which can become murky if the prohibited activity also serves a nonpolitical and charitable purpose.

Third, an organization is an action organization if it has the following two characteristics: (a) its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and (b) it advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results available to the public. In determining whether an organization has such characteristics, all the surrounding facts and circumstances, including the articles of organization and all activities of the organization, are to be considered. This is referred to herein as the "third type of action organization."


III. Substantial Part Test

Unless the organization makes a section 501(h) election (i.e., to use the "expenditure test" as described below), exemption from taxation is denied if a substantial part of the activities of such organization consists of carrying on propaganda, or otherwise attempting to influence legislation (the "substantial part test"),8 but only if such organization normally makes:


1. "lobbying expenditures" in excess of the "lobbying ceiling amount"9 for such organization for each taxable year (the "prohibition against lobbying"); or

2. "grass roots expenditures"10 in excess of the "grass roots ceiling amount"11 for such organization for each taxable year.


Because there is no statutory or regulatory guidance clarifying this test, it is not clear whether the determination is based on the organization's activities, its expenditures, or both. A section 501(h) election, as discussed below, provides a more objective standard by using specific dollar limits.

"Lobbying expenditures" mean expenditures for the purpose of influencing legislation.12 Lobbying expenditures for a year are the sum of an organization's expenditures during that year for direct lobbying communications plus its expenditures during that year for grass roots lobbying communications. A direct lobbying communication is any attempt to influence any legislation through communication with (a) any member or employee of a legislative body, or (b) any government official or employee (other than a member or employee of a legislative body) who may participate in the formulation of the legislation, but only if the principal purpose of the communication is to influence legislation. A communication with a legislator or government official will be treated as a direct lobbying communication only if the communication (a) refers to "specific legislation,"13 and (b) reflects a view on such legislation. Where a communication refers to and reflects a view on a measure that is the subject of a referendum, ballot initiative, or similar procedure, the general public in the state or locality where the vote will take place constitutes the legislative body, and individual members of the general public are legislators. Accordingly, if such a communication is made to one or more members of the general public in that state or locality, the communication is a direct lobbying communication (unless it is nonpartisan analysis, study, or research).

A grass roots lobbying communication is any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof. A communication will be treated as a grass roots lobbying communication only if it (a) refers to specific legislation, (b) reflects a view on such legislation, and (c) "encourages the recipient of the communication to take action" with respect to such legislation.14

Only "advocacy communications or research materials" are potentially treated as grass roots lobbying communications. "Advocacy communications or research materials" are any communications or materials that both refer to and reflect a view on specific legislation but that do not, in their initial format, contain a direct encouragement for recipients to take action with respect to legislation. Where advocacy communications or research materials are subsequently accompanied by a direct encouragement for recipients to take action with respect to legislation, the advocacy communications or research materials themselves are treated as grass roots lobbying communications unless the organization's "primary purpose" in undertaking or preparing the advocacy communications or research materials was not for use in lobbying. In such a case, all expenses of preparing and distributing the advocacy communications or research materials will be treated as grass roots expenditures.

The characterization of expenditures as grass roots lobbying expenditures applies only to expenditures paid less than six months before the first use of the advocacy communications or research materials with a direct encouragement to action. The "primary purpose" of the organization in undertaking or preparing advocacy communications or research materials will not be considered to be for use in lobbying if, before or contemporaneously with the use of the advocacy communications or research materials with the direct encouragement to action, the organization makes a "substantial" nonlobbying distribution of the advocacy communications or research materials (without the direct encouragement to action). Whether a distribution is "substantial" will be determined by reference to all of the facts and circumstances, including the normal distribution pattern of similar nonpartisan analyses, studies, or research by that and similar organizations.

In the case of advocacy communications or research materials that are not nonpartisan analysis, study, or research, the nonlobbying distribution thereof will not be considered substantial unless that distribution is at least as extensive as the lobbying distribution thereof. Where the nonlobbying distribution of advocacy communications or research materials is not "substantial," all of the facts and circumstances must be weighed to determine whether the organization's primary purpose in preparing the advocacy communications or research materials was for use in lobbying. While not the only factor, the extent of the organization's nonlobbying distribution of the advocacy communications or research materials is particularly relevant, especially when compared to the extent of their distribution with the direct encouragement to action.

Another particularly relevant factor is whether the lobbying use of the advocacy communications or research materials is by the organization that prepared the document, a related organization, or an unrelated organization. Where the subsequent lobbying distribution is made by an unrelated organization, clear and convincing evidence (which must include evidence demonstrating cooperation or collusion between the two organizations) will be required to establish that the primary purpose for preparing the communication was for use in lobbying.

Generally, "expenditures for" means all costs of preparing a direct or grass roots lobbying communication that are included as expenditures for direct or grass roots lobbying. Expenditures for a direct or grass roots lobbying communication (i.e., "lobbying expenditures") include amounts paid or incurred as current or deferred compensation for an employee's services attributable to the direct or grass roots lobbying communication, and the allocable portion of administrative, overhead, and other general expenditures attributable to the direct or grass roots lobbying communication. For example, generally all expenditures for researching, drafting, reviewing, copying, publishing, and mailing a direct or grass roots lobbying communication, as well as an allocable share of overhead expenses, are included as expenditures for direct or grass roots lobbying.

Generally, lobbying expenditures for a communication that also has a bona fide nonlobbying purpose must include all costs attributable to those parts of the communication that are on the same specific subject as the lobbying message. All costs attributable to those parts of the communication that are not on the same specific subject as the lobbying message are not included as lobbying expenditures for allocation purposes. Whether or not a portion of a communication is on the same specific subject as the lobbying message will depend on the surrounding facts and circumstances. Generally, a portion of a communication will be on the same specific subject as the lobbying message if that portion discusses an activity or specific issue that would be directly affected by the specific legislation that is the subject of the lobbying message. Moreover, discussion of the background or consequences of the specific legislation, or discussion of the background or consequences of an activity or specific issue affected by the specific legislation, is also considered to be on the same specific subject as the lobbying communication.

In the case of lobbying expenditures for a communication that also has a bona fide nonlobbying purpose and that is sent only or primarily to members, an electing public charity must make a reasonable allocation between the amount expended for the lobbying purpose and the amount expended for the nonlobbying purpose. An electing public charity that includes as a lobbying expenditure only the amount expended for the specific sentence or sentences that encourage the recipient to take action with respect to legislation has not made a reasonable allocation. For this purpose, a communication is sent only or primarily to members if more than half of the recipients of the communication are members of the electing public charity making the communication as discussed below under "C.3. Communications With Members."

If a communication (subject to the rules discussed in "communications with members") is both a direct lobbying communication and a grass roots lobbying communication, the communication will be treated as a grass roots lobbying communication except to the extent that the electing public charity demonstrates that the communication was made primarily for direct lobbying purposes, in which case a reasonable allocation can be made between the direct and the grass roots lobbying purposes served by the communication.

A transfer is a grass roots expenditure to the extent that it is "earmarked"15 for grass roots lobbying purposes and is a transfer of a "nonexempt purpose expenditure."16

A transfer that is earmarked, and is not a transfer of a nonexempt purpose expenditure for direct lobbying purposes or for direct lobbying and grass roots lobbying purposes, is treated as a grass roots expenditure in full, except to the extent the transferor demonstrates that all or part of the amounts transferred were expended for direct lobbying purposes, in which case that part of the amounts transferred is a direct lobbying expenditure by the transferor.

For transfers for less than fair market value from an electing public charity to any "noncharity" (the "less-than-fair-market-value rule") that makes lobbying expenditures, the electing public charity must transfer to a noncharity more in value than it receives in return. For example, the less-than-fair-market-value rule does not apply to an electing public charity's fair market value payment of rent to a landlord. However, the less-than-fair-market-value rule does apply where an electing public charity and a noncharity share office space and the electing public charity pays more than fair market value rent to the noncharity. Similarly, the less-than-fair-market-value rule applies where an electing public charity sells goods or services to a noncharity for less than fair market value.

There are four exceptions to the less-than-fair-market-value rule where:


1. an electing public charity makes a grant to a noncharity that is a controlled grant;17

2. an electing public charity makes a grant to a noncharity that is a nonexempt purpose expenditure;

3. an electing public charity, in the course of an activity that is substantially related to the accomplishment of the electing public charity's exempt purposes, makes goods or services widely available for less than fair market value to individual members of the general public and those goods or services are actually purchased (or consumed for no charge) by a substantial number of wholly unrelated individual members of the general public for less than fair market value;18 and

4. an electing public charity receives nothing of value in return for its transfer, the amount of the transfer is the greater of the fair market value, or the cost of the goods or services transferred to the noncharity.19


A transfer is treated in whole or in part as a direct and/or grass roots lobbying expenditure by the transferor in accordance with the less-than-fair-market-value rule and the first two exceptions. In applying this rule and the two exceptions, the expenditures of the transferee will be determined as if the rules discussed herein applied to the transferee.

First, the transfer is treated as a grass roots expenditure to the extent of the lesser of two amounts: (a) the amount of the transfer and (b) the amount of the transferee's grass roots expenditures. Second, if the transfer is greater than the transferee's grass roots expenditures, the excess is treated as a direct lobbying expenditure, but only to the extent of the transferee's direct lobbying expenditures. If, however, the transfer is less than the transferee's grass roots expenditures, none of the transfer is a direct lobbying expenditure. Third, if the transfer is greater than the sum of the transferee's direct and grass roots lobbying expenditures, the excess of the transfer over those lobbying expenses is not a lobbying expenditure.

"Influencing legislation" is generally defined as: (a) any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof (the "general public opinion prohibition");20 and (b) any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation (the "communication with legislative body prohibition").21 "Influencing legislation" does not include (a) making available the results of nonpartisan analysis, study, or research; (b) providing technical advice or assistance (where such advice would otherwise constitute the influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be; (c) appearances before, or communications with, any legislative body with respect to a possible decision of such body that might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization; (d) generally communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members; and (e) any communication with a government official or employee, other than (i) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or (ii) a communication the principal purpose of which is to influence legislation.


IV. Section 501(h) Election (the Expenditure Test)

The rules discussed under this subheading apply to any 501(c)(3) organization (a) that has made a section 501(h) election and (b) that for the taxable year which includes the date the section 501(h) election is made is a "qualified organization"22 and not a "disqualified organization."23 The substantial part test uses a facts and circumstances approach to measure the permissible level of lobbying activities. Because there is no statutory or regulatory guidance clarifying this standard, it is not clear whether the determination is based on the organization's activities, its expenditures, or both. An arithmetical percentage test (e.g., looking only at the percentage of the budget, or employees' time spent on lobbying), while relevant, has been held not determinative. If public charities exceed the substantial part test, they risk losing their tax exemption. In addition, excise taxes may be imposed if a public charity (other than a church) ceases to qualify for tax-exempt status as an organization described under section 501(c)(3) due to its substantial lobbying activities.

A section 501(h) election permits the use of the "expenditure test" rather than the substantial part test, and is effective for all taxable years of such organization that end after the date the section 501(h) election is made, and begin before the date the section 501(h) election is revoked by such organization. In contrast to the substantial part test, the expenditure test imposes no limit on lobbying activities that do not require expenditures, such as certain unreimbursed lobbying activities conducted by bona fide volunteers. With respect to any 501(c)(3) organization for a taxable year for which such organization is a disqualified organization, or a section 501(h) election is not in effect for such organization, none of the rules discussed under this subheading may be construed to affect the interpretation of the phrase, "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation," for purposes of qualifying as a 501(c)(3) organization.

The Treasury regulations provide that public charities may elect to use the expenditure test as a substitute for the substantial part test.24 A public charity that makes a section 501(h) election may make lobbying expenditures within specified dollar limits. If an electing public charity's lobbying expenditures are within the dollar limits determined under section 4911(c) of the code, the electing public charity will not owe tax under section 4911 nor will it lose its tax-exempt status as a charity by virtue of the substantial part test or the expenditure test. If, however, that electing public charity's lobbying expenditures exceed its section 4911 lobbying limit, the organization is subject to an excise tax on its excess lobbying expenditures, as discussed below. Further, if an electing public charity's lobbying expenditures normally are more than 150 percent of its section 4911 lobbying limit, the organization will cease to be a charity described in section 501(c)(3). A public charity that elects the expenditure test may nevertheless lose its tax-exempt status if it is either the second or third type of action organization as described above. A public charity that does not elect the expenditure test remains subject to the substantial part test.

Generally, the section 501(h) election to use the expenditure test may be made by an "eligible organization"25 for any taxable year of the organization other than the first taxable year for which a voluntary revocation of the section 501(h) election is effective. The section 501(h) election is made by filing a completed Form 5768 (Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation). The section 501(h) election is effective with the beginning of the taxable year in which the form is filed. Once made, the section 501(h) election is effective (without filing any additional Form 5768s) for each succeeding taxable year for which the organization is an eligible organization and that begins before any notice of revocation is filed.

A newly created organization may submit Form 5768 to elect the expenditure test before it is determined to be an eligible organization and may submit Form 5768 at the time it submits its application for recognition of exemption (Form 1023). If the newly created organization is determined to be an eligible organization, the section 501(h) election will be effective with the beginning of the taxable year in which the Form 5768 is filed by the eligible organization. However, if a newly created organization is determined by the IRS not to be an eligible organization, the organization's section 501(h) election will not be effective and the substantial part test will apply from the effective date of its section 501(c)(3) classification.

An organization may voluntarily revoke a section 501(h) election by filing a notice of voluntary revocation. A voluntary revocation is effective with the beginning of the first taxable year after the taxable year in which the notice is filed. If an organization voluntarily revokes its section 501(h) election, the substantial part test will apply with respect to the organization's activities in attempting to influence legislation beginning with the taxable year for which the voluntary revocation is effective. If an organization's section 501(h) election is voluntarily revoked, the organization may again make the section 501(h) election, effective no earlier than for the taxable year following the first taxable year for which the revocation is effective.

If, while a section 501(h) election made by an eligible organization is in effect, the organization ceases to be an eligible organization, its section 501(h) election is automatically revoked. The revocation is effective from the beginning of the first full taxable year for which it is determined that the organization is not an eligible organization. If an organization's section 501(h) election is involuntarily revoked but the organization continues to be a 501(c)(3) organization, the substantial part test will apply with respect to the organization's activities in attempting to influence legislation beginning with the first taxable year for which the involuntary revocation is effective.

Under section 501(h) an organization that has elected the expenditure test and that normally makes expenditures in excess of the corresponding ceiling amount will cease to be exempt from tax under section 501(a) of the code as a 501(c)(3) organization if:


1. the sum of the organization's lobbying expenditures for the "base years"26 exceeds 150 percent of the sum of its "lobbying nontaxable amounts" for the base years; or

2. the sum of the organization's grass roots expenditures for its base years exceeds 150 percent of the sum of its grass roots nontaxable amounts for the base years.


Thereafter, the organization is not exempt from tax under section 501(a) as a 501(c)(3) organization unless the organization reapplies for recognition of exemption and is recognized as exempt, as discussed below.

For the first, second, or third consecutive determination year for which an organization's first section 501(h) election is in effect, no determination is required as described in the previous paragraph, and the organization will not be denied exemption from tax if, taking into account as base years only those years for which the section 501(h) election is in effect:


1. the sum of the organization's lobbying expenditures for such base years does not exceed 150 percent of the sum of its lobbying nontaxable amounts for the same base years; and

2. the sum of the organization's grass roots expenditures for those base years does not exceed 150 percent of the sum of its grass roots nontaxable amounts for such base years.


If an organization does not satisfy these requirements, the rules of the previous paragraph apply.

An organization that is denied exemption from taxation under section 501(a) by reason of the rules discussed herein may apply on Form 1023 for recognition of exemption as a 501(c)(3) organization for any taxable year following the first taxable year for which exemption is so denied. Such an application must:


1. demonstrate that the organization would not be denied exemption from taxation under section 501(a) by reason of the rules discussed herein if the section 501(h) election had been in effect for all of its last taxable year ending before the application is made by providing the calculations discussed above, that would have applied to the organization for that year; and

2. include information that demonstrates to the satisfaction of the IRS that the organization will not knowingly operate in a manner that would disqualify the organization for tax exemption as an organization described under section 501(c)(3) by reason of attempting to influence legislation.


If an organization is denied exemption from tax for a taxable year by reason of the rules discussed herein, and thereafter is again recognized as a 501(c)(3) organization pursuant to this paragraph, it may again elect the expenditure test in accordance with the rules described herein.

The expenditure test sets specific dollar limits, calculated as a percentage of a charity's total "exempt purpose expenditures,"27 on the amount a charity may spend to influence legislation. The test establishes two expenditure limits: one restricts the total amount of lobbying expenditures the public charity can make; the other restricts grass roots lobbying expenditures as a subset of total lobbying expenditures. A public charity's total lobbying expenditures for a year are the sum of its expenditures for direct lobbying and its expenditures for grass roots lobbying. The allowable amount of lobbying expenditures that can be made for any tax year is determined under a sliding-scale formula. In no event can the allowable amount of lobbying for a charity electing the expenditure test exceed $1 million for any year. A charity wishing to be subject to the expenditure test must affirmatively elect to do so; charities that do not file a section 501(h) election (and churches) are subject to the substantial part test.


V. Adverse Results

The five excise taxes, discussed below, do not affect the substantive standards for tax exemption under section 501(c)(3) of the code under which an organization is described in section 501(c)(3) only if it does not participate or intervene in any political campaign on behalf of any candidate for public office.

A. Loss of Tax-Exempt Status

As previously discussed, if any one of the three political prohibitions is violated, the organization could lose its federal tax-exempt status pursuant to federal income tax law. This in turn would prohibit donors from receiving a deduction for contributions to such an organization for federal income tax purposes. Nevertheless, the IRS has waived implementation of this revocation of tax-exempt status in cases where the prohibited activity was inadvertent, involved a nominal amount, was corrected, and was followed by procedures that prevent future prohibited activities. The excise taxes discussed below, although not an exception to the revocation of tax-exempt status per se, are alternative remedies that can be used by the IRS. Moreover, the three political prohibitions do not prohibit individuals and officers of the 501(c)(3) organization from participating in political campaigns in their individual capacities as long as they do not use such organization's resources.

B. Status as 501(c)(4) Organization

Section 501(c)(4) provides tax exemption to civic leagues and organizations not organized for profit but operated exclusively for the promotion of social welfare or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.

An organization cannot at any time be classified as a 501(c)(4) organization if such organization ceases to qualify as a 501(c)(3) organization by reason of:


1. carrying on propaganda, or otherwise attempting to influence legislation;

2. participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office; or28

3. is either the first or third type of action organization described above.


Such prohibition does not apply to any organization that is a disqualified organization (e.g., relating to churches, etc.) for the taxable year immediately preceding the first taxable year for which such organization is described in 2. Additionally, such an organization may not be treated as an organization described in section 501(c) other than as a 501(c)(3) organization.

Under section 504(b) of the code, certain transfers29 to a tax-exempt organization may result in loss of exemption by the transferee30 unless the IRS determines, as described below, that the original transfer did not effect an avoidance of section 504(a) of the code.

The first type of transfer (the "first transfer") relates to situations in which the transferor and the transferee are commonly controlled and satisfy the following requirements:


1. a transfer is from an organization that (a) is or was a 501(c)(3) organization, but not a disqualified organization, and (b) is determined to be a first or third type of action organization, or is denied exemption from tax by reason of the application of the substantial part test or the expenditure test, as applicable;

2. at the time of the transfer or at any time during the transferee's 10 taxable years following the year in which the transfer was made, the transferee is controlled31 directly or indirectly by the same person or persons who control the transferor;

3. after the date that is 24 months before the earliest of the effective date of the determination, using the substantial part test or the expenditure test, as applicable, that the transferor is not exempt, the effective date of the IRS's determination that the transferor is either a first or third type of action organization, or the date on which the IRS proposes to treat such organization as other than a 501(c)(3) organization, and before the transferor again is recognized as an organization described in section 501(c)(3); and

4. the amount of the transfer exceeds the lesser of 30 percent of the net fair market value of the transferor's assets or 50 percent of the net fair market value of the transferee's assets, computed immediately before the transfer.


With respect to the transferor, the amount of the transfer by a transferor is the sum of the amounts transferred to any number of transferees in any number of transfers, all of which are described above, and the time of the transfer is the time of the first transfer so taken into account. With respect to the transferee, the amount of the transfer is the sum of the amounts transferred by a transferor to the transferee in any number of transfers, all of which are described above, and the time of the transfer is the time of the first transfer so taken into account.

The second type of transfer is one that would be described in the previous paragraph except that (a) the amount of the transfer is less than the amount determined in 3 of the second paragraph (the "first test"); (b) the transferor and transferee are not commonly controlled (the "second test"); or (c) the transferee is a 501(c)(3) organization and a qualified organization (the "third test").

The transferee of either of these types of transfers will cease to be exempt from tax under section 501(a) of the code, except as discussed below. If the IRS determines that the first type of transfer did not effect an avoidance of section 504(a), the transferee will not be denied exemption from tax. In determining whether a transfer effected an avoidance of section 504(a), the IRS may consider whether the transferee engages, or has engaged, in attempts to influence legislation and may also consider any of the following factors:


1. whether enforceable and effective conditions on the transfer preclude use of any of the transferred assets for any purpose that, if it were a substantial part of an organization's activities, would be inconsistent with exemption as a 501(c)(3) organization;

2. in the absence of conditions described in 1, whether thetransferred assets are used exclusively for purposes that are consistent with the transferor's exemption as a 501(c)(3) organization;

3. whether the assets transferred would be described in reg. section 53.4942(a)-2(c)(3) (i.e., assets held for more than one year) before, as well as after, the transfer if both the transferor and transferee were private foundations;

4. whether and to what extent the transfer would satisfy the provisions of reg. sections 1.507-2(a)(7) (i.e., distribution of net assets) and (8) (i.e., effect of restrictions and conditions upon distributions of net assets) if the transferor were a private foundation;

5. whether all of the transferred assets have been expended during a period when the transferee was not controlled, directly or indirectly, by the same person or persons who controlled the transferor; and

6. whether the entire amount of the transferred assets were in turn transferred, before the close of the transferee's taxable year following the taxable year in which the transferred assets were received, to one or more organizations described in section 507(b)(1)(A) of the code (i.e., certain public charities) none of which are controlled, directly or indirectly, by the same persons who control either the original transferor or transferee.


A transferee of a first transfer or a second transfer, if it meets either the first test or second test, will cease to be exempt from tax under section 501(a) of the code on the date of such first transfer or second transfer, as applicable, unless the IRS determines otherwise. A transferee of a transfer that satisfies the first test will cease to be exempt from tax under section 501(a) on the date of the last transfer preceding notification of the transferee that the IRS proposes to treat the transferee as other than an exempt organization.

C. 25 Percent Excise Tax

The 25 percent excise tax does not apply to all tax-exempt organizations. It applies only to organizations that are described in section 501(c)(3). Section 501(c)(3) generally describes charitable, educational, and religious organizations. Therefore, for example, the tax does not apply to such tax-exempt organizations as social welfare organizations (section 501(c)(4)), labor unions (section 501(c)(5)); or business leagues, chambers of commerce, or trade associations (section 501(c)(6)).

There are two kinds of section 501(c)(3) organizations: private foundations and public charities. Private foundations generally are funded by a small number of individuals or corporations while public charities are generally funded by contributions from the general public and payments for services. The 25 percent excise tax does not apply to all organizations described in section 501(c)(3); it applies only to electing public charities.

If a public charity does not have a valid section 501(h) election in effect during a given year, that nonelecting public charity's lobbying activities and expenditures during that year are not covered by sections 501(h) and 4911, but are instead covered by the substantial part test. In other words, sections 501(h) and 4911 do not apply to or affect nonelecting public charities. In fact, section 501(h)(7) provides that nothing in sections 501(h) and 4911 (or the applicable regulations) may be used to interpret the meaning of, or the rules and definitions under, the substantial part test.

Private foundations' lobbying expenditures are taxed under section 4945(d) rather than under section 4911. Unlike section 4911, which taxes only excessive lobbying expenditures, section 4945(d) taxes any lobbying expenditure by a private foundation. Even though the 25 percent excise tax does not apply to private foundations, portions of the regulations under section 4911 are nonetheless relevant to private foundations because the definition of what is and is not a lobbying expenditure is generally the same under section 4911 as under section 4945.

It is important to note that the 25 percent excise tax applies only to lobbying expenditures, as opposed to political expenditures or activities. In contrast to lobbying, all charities are absolutely prohibited from intervening in a political campaign on behalf of or in opposition to any candidate for an elective public office. Public charities may engage in some lobbying but they must not intervene in a political campaign at all. If a charity does intervene in a political campaign, it would jeopardize both its tax-exempt status and its ability to receive tax deductible charitable contributions under section 170. It (and in certain cases its managers) may also be liable for tax under section 4955. Finally, under certain circumstances, the charity may also be subject to tax imposed on a political organization under section 527(f).

If a public charity makes a section 501(h) election (the electing public charity), there is a tax imposed on the excess lobbying expenditures of such organization equal to 25 percent of such amount for the taxable year. For this purpose, excess lobbying expenditures means, for a taxable year, the greater of (a) the amount by which the lobbying expenditures made by the organization during the taxable year exceed the lobbying nontaxable amount for such organization for such taxable year, or (b) the amount by which the grass roots expenditures made by the organization during the taxable year exceed the grass roots nontaxable amount for such organization for such taxable year.

An electing public charity's annual limit on expenditures for influencing legislation (i.e., the amount of lobbying expenditures on which no tax is due) is the lobbying nontaxable amount or, on expenditures for influencing legislation through grass roots lobbying, the grass roots nontaxable amount.

Reg. section 56.4911-2(b)(v) provides that, even though certain communications or research materials are initially not grass roots lobbying communications, subsequent use of the communications or research materials for grass roots lobbying may cause them to be treated as grass roots lobbying communications. This does not cause any communications or research materials to be considered direct lobbying.

There are four scenarios when a communication is not a direct or grass roots lobbying communication. First, engaging in nonpartisan analysis, study, or research32 and making available to the general public or a segment or members thereof or to governmental bodies, officials, or employees the results of such work constitute neither a direct nor a grass roots lobbying communication.

Second, examinations and discussions of broad social, economic, and similar problems (general political activities) are neither direct lobbying communications nor grass roots lobbying communications even if the problems are of the type with which the government would be expected to deal ultimately. Thus, lobbying communications do not include public discussion, or communications with members of legislative bodies or governmental employees, the general subject of which is also the subject of legislation before a legislative body,33 so long as such discussion does not address itself to the merits of a specific legislative proposal and so long as such discussion does not directly encourage recipients to take action with respect to legislation. For example, grass roots lobbying does not include an organization's discussions of problems such as environmental pollution or population growth that are being considered by Congress and various state legislatures, but only where the discussions are not directly addressed to specific legislation being considered, and only where the discussions do not directly encourage recipients of the communication to contact a legislator, an employee of a legislative body, or a government official or employee who may participate in the formulation of legislation.

Third, a communication is not a direct lobbying communication if the communication is the providing of technical advice or assistance to a governmental body, a governmental committee, or a subdivision of either in response to a written request by the body, committee, or subdivision.

Fourth, a communication is not a direct lobbying communication if:


1. the communication is an appearance before, or communication with, any legislative body with respect to a possible action34 by the body that might affect the existence of the electing public charity, its powers and duties, its tax- exempt status, or the deductibility of contributions to the organization;

2. the communication is by a member of an affiliated group of organizations, and is an appearance before, or communication with, a legislative body with respect to a possible action by the body that might affect the existence of any other member of the group, its powers and duties, its tax-exempt status, or the deductibility of contributions to it;

3. the communication is by an electing public charity more than 75 percent of the members of which are other 501(c)(3) organizations, and is an appearance before, or communication with, any legislative body with respect to a possible action by the body that might affect the existence of one or more of the section 501(c)(3) member organizations, their powers, duties, or tax-exempt status, or the deductibility (under section 170 of the code) of contributions to one or more of the section 501(c)(3) member organizations, but only if the principal purpose of the appearance or communication is to defend the section 501(c)(3) member organizations (rather than the nonsection 501(c)(3) member organizations); or

4. the communication is by an electing public charity that is a member of a limited affiliated group of organizations, and is an appearance before, or communication with, the Congress of the United States with respect to a possible action by Congress that might affect the existence of any member of the limited affiliated group, its powers and duties, tax-exempt status, or the deductibility of contributions to it.


Under the self-defense exception of 1, 2, 3, and 4, a charity may communicate with an entire legislative body, with committees or subcommittees of a legislative body, with individual legislators, with legislative staff members, or with representatives of the executive branch who are involved with the legislative process, so long as such communication is limited to the prescribed subjects. Similarly, under the self-defense exception, a charity may make expenditures to initiate legislation if such legislation concerns only matters that might affect the existence of the charity, its powers and duties, its tax-exempt status, or the deductibility of contributions to the charity.


1. Mass Media Advertisements

A mass media35 advertisement that is not a grass roots lobbying communication, as described above, may be a grass roots lobbying communication by virtue of the application of a special rule. This special rule generally applies only to a limited type of paid advertisements36 that appear in the mass media. Specifically, if within two weeks before a vote by a legislative body, or a committee (but not a subcommittee) thereof, on a "highly publicized"37 piece of legislation, an organization's paid advertisement appears in the mass media, the paid advertisement will be presumed to be a grass roots lobbying communication, but only if (a) the paid advertisement both reflects a view on the general subject of such legislation and (b) either (i) refers to the highly publicized legislation, or (ii) encourages the public to communicate with legislators on the general subject of such legislation. An organization can rebut this presumption by demonstrating that the paid advertisement is a type of communication regularly made by the organization in the mass media without regard to the timing of legislation (that is, a customary course of business exception) or that the timing of the paid advertisement was unrelated to the upcoming legislative action. Notwithstanding the fact that an organization successfully rebuts this presumption, a mass media communication is a grass roots lobbying communication if the communication would be a grass roots lobbying communication under the rules described above.


2. Exempt Purpose Expenditures

In determining an electing public charity's exempt purpose expenditures, no expenditure can be counted twice by an organization. Amounts paid or incurred by an organization that are exempt purpose expenditures include the following:


a. amounts paid or incurred to accomplish a purpose enumerated in section 170(c)(2)(B) of the code (i.e., religious, charitable, or educational purposes, etc.) (the section 170(c)(2)(B) purposes) including, but not limited to, the amount of any transfer made by the organization (other than a nonexempt purpose expenditure) to another organization to accomplish the transferor's exempt purposes, and including amounts expended by an organization out of transfers (other than a nonexempt purpose expenditure) for which the organization is the transferee;

b. amounts paid or incurred as current or deferred compensation for an employee's services for a section 170(c)(2)(B) purpose;

c. the allocable portion of administrative overhead, and other general expenditures attributable to the accomplishment of a section 170(c)(2)(B) purpose;

d. lobbying expenditures whether or not for a section 170(c)(2)(B) purpose;

e. amounts paid or incurred for activities that are exempt communications;

f. amounts paid or incurred for activities that are general public activities;

g. a reasonable allowance for exhaustion, wear and tear, obsolescence, or amortization of assets to the extent used for one or more of the purposes described in paragraphs (a) through (f), computed on a straight-line basis; and

h. fundraising expenditures (but see (c) and (d) of the next paragraph).


Exempt purpose expenditures do not include the following:


a. amounts paid or incurred that are neither expenditures to accomplish a section 170(c)(2)(B) purpose, lobbying expenditures, nor expenditures described in (e), (f) or (h) of the previous paragraph;

b. the amount of any transfer of a nonexempt purpose expenditure;

c. amounts paid to or incurred for a separate fundraising unit38 of an organization or of an affiliated organization;

d. amounts paid to or incurred for any person not an employee, or any organization not an affiliated organization, if paid or incurred primarily for fundraising,39 but only if such person or organization engages in fundraising, fundraising counseling, or the provision of similar advice or services;

e. amounts paid or incurred that are properly chargeable to a capital account, determined in accordance with the principles that apply under section 263 or, as applicable, section 263A of the code, with respect to an unrelated trade or business;

f. amounts paid or incurred for a tax that is not imposed in connection with the organization's efforts to accomplish a section 170(c)(2)(B) purpose, such as taxes imposed under sections 511(a)(1) and 4911(a) of the code (relating to unrelated business income and excess expenditures to influence legislation, respectively); and

g. amounts paid or incurred for the production of income.40


An organization's transfer will be treated as an exempt purpose expenditure if it:


a. is made to a 501(c)(3) organization in furtherance of the transferor's exempt purposes and is not earmarked for any purpose other than a section 170(c)(2)(B) purpose, or (b) is a controlled grant, but only to the extent of the amounts that are paid or incurred by the transferee that would be exempt purpose expenditures if paid or incurred by the transferor; and

b. is not a nonexempt purpose expenditure.

3. Communications With Members

Expenditures for certain communications between an organization and its members41 (membership communications) are treated more leniently than communications to nonmembers.

Expenditures for a communication that refers to, and reflects a view on, specific legislation are not lobbying expenditures if the communication satisfies the following requirements:


a. the communication is directed only to members of the organization;

b. the specific legislation the communication refers to, and reflects a view on, is of direct interest to the organization and its members;

c. the communication does not directly encourage the recipient to engage in direct lobbying42 (whether individually or through the organization);43 and

d. the communication does not directly encourage the recipient to engage individually or collectively (whether through the organization or otherwise).44


Expenditures for a communication that refers to, and reflects a view on, specific legislation and that satisfies the requirements of "a," "b," and "d," but does not satisfy the requirements of "c," are treated as expenditures for direct lobbying. Expenditures for a communication that refers to, and reflects a view on, specific legislation and that satisfies the requirements of "a" and "b," but does not satisfy the requirements of "d," are treated as grass roots expenditures (whether or not the communication satisfies the requirements of "c").

Generally, expenditures for any written communication (written communication) that is designed primarily for members of an organization (but not directed only to members) and that refers to, and reflects a view on, specific legislation of direct interest to the organization and its members, are treated as expenditures for direct or grass roots lobbying in accordance with the rules discussed in this paragraph. For such purpose, a communication is designed primarily for members of an organization if more than half of the recipients of the communication are members of the organization. If a written communication directly encourages members to engage in direct lobbying (whether individually or through the organization), but does not directly encourage the recipient to engage individually or collectively (whether through the organization or otherwise), the cost of the communication is allocated between expenditures for direct lobbying and grass roots expenditures in accordance with the next two paragraphs. The portion of the cost to be allocated includes all costs of preparing all the material with respect to which readers are urged to engage in direct lobbying plus the mechanical and distribution costs attributable to the lineage devoted to this material. The rules of this paragraph are referred to as the "designed-primarily-for-members rule."45

The amount allocable as a grass roots expenditure for a written communication is the amount calculated using the designed-primarily-for-members rule multiplied by the sum of the "nonmember subscribers percentage"46 and the "all other distribution percentage."47 Solely for purposes of this allocation, the nonmember subscribers percentage is treated as zero unless it is greater than 15 percent of the total distribution. The rules of this paragraph are referred to as the zero-or-15-percent rule.

The amount allocable as an expenditure for direct lobbying for written communication is the excess of the amount determined pursuant to the designed-primarily-for-members rule over the amount determined pursuant to the zero-or-15-percent rule.

If a written communication directly encourages the recipient to engage individually or collectively whether through the organization or otherwise (whether or not it also encourages the member to engage in direct lobbying (whether individually or collectively)), the grass roots expenditure includes all the costs of preparing all the material with respect to which readers are urged to engage in grass roots lobbying plus the mechanical and distribution costs attributable to the lineage devoted to this material. This is subject to the self-defense exception.

If a written communication does not directly encourage the recipient to engage in either direct lobbying (whether individually or collectively) or directly encourage the recipient to engage individually or collectively (whether through the organization or otherwise), expenditures for the communication are not lobbying expenditures. This is also subject to the self-defense exception.

In the case of lobbying expenditures for a communication that also has a bona fide nonlobbying purpose, and that is sent only to or primarily to members, an electing public charity must make a reasonable allocation between the amount expended for the lobbying purpose and the amount expended for the nonlobbying purpose.


4. Records

An electing public charity must keep a record of its lobbying expenditures for the taxable year. Lobbying expenditures of which an organization must keep a record include the following:


a. expenditures for grass roots;

b. amounts directly paid or incurred for direct lobbying, including payments to another organization earmarked for direct lobbying, fees and expenses paid to individuals or organizations for direct lobbying, and printing, mailing, and other direct costs of reproducing and distributing materials used in direct lobbying;

c. the portion of amounts paid or incurred as current or deferred compensation for an employee's services for direct lobbying;

d. amounts paid for out-of-pocket expenditures incurred on behalf of the organization and for direct lobbying, whether or not incurred by an employee;

e. the allocable portion of administrative, overhead, and other general expenditures attributable to direct lobbying;

f. expenditures for publications or for communications with members to the extent the expenditures are treated as expenditures for direct lobbying as discussed under the subheading "communications with members"; and

g. expenditures for direct lobbying of a controlled organization (within the meaning of reg. section 56.4911-10(c)) to the extent included by a controlling organization (within the meaning of reg. section 56.4911-10(c)) in its lobbying expenditures.


D. 10 Percent Excise Tax

A 501(c)(3) organization is subject to a 10 percent tax on each political expenditure by such organization. For this purpose, a political expenditure is any amount paid or incurred by a 501(c)(3) organization in any participation in, or intervention in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. In the case of an organization that is formed primarily for purposes of promoting the candidacy or prospective candidacy48 of an individual for public office (or which is effectively controlled by a candidate or prospective candidate49 and which is availed of primarily for such purposes), the term political expenditure includes any of the following amounts paid or incurred by the organization:


1. amounts paid or incurred to such individual for speeches or other services;

2. travel expenses of such individual;

3. expenses of conducting polls, surveys, or other studies, or preparing papers or other materials, for use by such individual;

4. expenses of advertising, publicity, and fundraising for such individual; and

5. any other expense that has the primary effect of promoting public recognition, or otherwise primarily accruing to the benefit, of such individual.


Any expenditure that would cause an organization that makes the expenditure to be classified as an action organization is a political expenditure.

E. 2.5 Percent Excise Tax

There is imposed on the agreement of any organization manager to the making of any expenditure, knowing50 that it is a political expenditure, a tax equal to 2.5 percent of the amount thereof, unless such agreement is not willful51 and is due to reasonable cause.52

If more than one person is liable for either the 2.5 percent excise tax with respect to the making of a political expenditure, all such persons are jointly and severally liable with respect to such expenditure. With respect to any one political expenditure, the maximum amount of tax cannot exceed $5,000.

The 2.5 percent excise tax is imposed only in cases where:


1. the 10 percent excise tax is imposed;

2. the organization manager knows that the expenditure to which the manager agrees is a political expenditure; and

3. the agreement is willful and is not due to reasonable cause.


Such tax is imposed only on those organization managers who are authorized to approve, or to exercise discretion in recommending approval of, the making of the expenditure by the organization and on those organization managers who are members of a group (such as the organization's board of directors or trustees) which is so authorized.

An organization manager agrees to the making of a political expenditure if the manager manifests approval of the expenditure which is sufficient to constitute an exercise of the organization manager's authority to approve, or to exercise discretion in recommending approval of, the making of the expenditure by the organization. The manifestation of approval need not be the final or decisive approval on behalf of the organization.

F. 100 Percent Excise Tax

In any case in which the 10 percent excise tax is imposed on a political expenditure and such expenditure is not corrected53 within the "taxable period,"54 there is imposed a tax equal to 100 percent of the amount of the expenditure. This tax is imposed on the organization.

G. 50 Percent Excise Tax

In any case in which the 100 percent excise tax is imposed, if an organization manager refused to agree to part or all of the correction, there is imposed a tax equal to 50 percent of the amount of the political expenditure. If more than one person is liable for either the 50 percent excise tax with respect to the making of a political expenditure, all such persons are jointly and severally liable with respect to such expenditure. With respect to any one political expenditure, the maximum amount of tax cannot exceed $10,000.

For this purpose, an organization manager is (a) any officer,55 director, or trustee of the organization (or individual having powers or responsibilities similar to those of officers, directors, or trustees of the organization), and (b) with respect to any expenditure, any employee56 of the organization having authority or responsibility with respect to such expenditure.

H. Determination of All Taxes Due

If the IRS determines that a 501(c)(3) organization has made political expenditures, and such expenditures constitute a flagrant violation of the prohibition against making political expenditures, the IRS will immediately make a determination of any income tax payable by such organization for the current or immediate preceding taxable year, or both, and will immediately make a determination of any 10 percent excise tax, 2.5 percent excise tax, 100 percent excise tax, or 50 percent excise tax by such organization or any organizational manager thereof with respect to political expenditures during the current or preceding taxable year, or both. Notwithstanding any other provision of law, any such tax becomes immediately due and payable. The IRS will immediately assess the amount of tax so determined (together with all interest, additional amounts, and additions to the tax provided by law) for the current year or the preceding taxable year, or both, and will cause notice of such determination and assessment to be given to the organization or any organizational manager thereof, as the case may be, together with a demand for immediate payment of such tax.

In the case of a current taxable year, the IRS will determine the taxes for the period beginning on the first day of such current taxable year and ending on the date of the determination under the previous paragraph -- as though such period were a taxable year of the organization -- and will take into account any prior determination so made with respect to such current taxable year.

Any amounts collected as a result of any assessments as previously described will, to the extent thereof, be treated as a payment of income tax for such taxable year, or 10 percent excise tax, 2.5 percent excise tax, 100 percent excise tax, or 50 percent excise tax with respect to the expenditure, as the case may be.

The rules discussed under this subheading do not authorize any assessment of tax for the preceding taxable year that is made after the due date of the organization's return for such taxable year (determined with regard to any extensions).

An organization is subject to an assessment of income tax only if the flagrant violation of the prohibition against making political expenditures results in revocation of the organization's tax exemption under section 501(a) of the code because it is not described in section 501(c)(3) of the code. An organization subject to such an assessment is not liable for income taxes for any period before the effective date of the revocation of the organization's tax exemption.

Where a district director of the IRS has made a determination of income tax, as described in the prior paragraph, notwithstanding any other provision of law, any tax will become immediately due and payable. The taxpayer is required to pay the amount of the assessment within 10 days after the district director sends the notice and demand for immediate payment regardless of the filing of an administrative appeal or of a court petition. Regardless of filing an administrative appeal or of petitioning a court, enforced collection action may proceed after the 10-day payment period unless the taxpayer posts the bond described in section 6863 of the code. For purposes of collection procedures such as section 6331 (regarding levy), assessments do not constitute situations in which the collection of such tax is in jeopardy and, therefore, do not suspend normal collection procedures.

I. Injunction Against Further Political Expenditures

A civil action in the name of the United States may be commenced at the request of the IRS to enjoin any 501(c)(3) organization from further making political expenditures and for such other relief as may be appropriate to ensure that the assets of such organization are preserved for charitable or other purposes specified in section 501(c)(3) if each of the following requirements is satisfied:


1. the IRS has notified the organization of its intention to seek an injunction if the making of political expenditures does not immediately cease; and

2. the IRS has determined that (a) such organization has flagrantly participated in, or intervened in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office, and (b) injunctive relief is appropriate to prevent future political expenditures.


Any such action must be brought in the district court of the United States for the district in which such organization has its principal place of business or for any district in which it has made political expenditures. The court may exercise its jurisdiction over such action separate and apart from any other action brought by the United States against the organization.

In any such action, the court may enjoin the organization from making political expenditures and may grant such other relief as may be appropriate to ensure that the assets of the organization are preserved for charitable or other purposes specified in section 501(c)(3) of the code if the court finds on the basis of clear and convincing evidence that (a) such organization has flagrantly participated in, or intervened in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office, and (b) injunctive relief is appropriate to prevent future political expenditures.

When the assistant commissioner (employee plans and exempt organizations) of the IRS concludes that a section 501(c)(3) organization has engaged in "flagrant political intervention"57 and is likely to continue to engage in political intervention that involves political expenditures, the assistant commissioner (employee plans and exempt organizations) will send a letter to the organization providing it with the facts based on which the IRS believes that the organization has been engaging in flagrant political intervention and is likely to continue to engage in political intervention that involves political expenditures. The organization will have 10 calendar days after the letter is sent to respond by establishing that it will immediately cease engaging in political intervention, or by providing the IRS with sufficient information to refute the IRS's evidence that it has been engaged in flagrant political intervention. The IRS will not proceed to seek an injunction until after the close of this 10-day response period.

If the organization does not respond within 10 calendar days to the letter -- as described in the prior paragraph -- in a manner sufficient to dissuade the assistant commissioner (employee plans and exempt organizations) of the need for an injunction, the file will be forwarded to the commissioner of the IRS. The commissioner of the IRS will personally determine whether to forward to the Department of Justice a recommendation that it immediately bring an action to enjoin the organization from making further political expenditures. The commissioner may also recommend that the court action include any other action that is appropriate in ensuring that the assets of the 501(c)(3) organization are preserved for section 501(c)(3) purposes. The authority of the commissioner to make the determinations described in this paragraph cannot be delegated to any other persons.


IX. Conclusion

If the IRS finds a charitable organization is engaged in prohibited campaign activity, the organization could lose its tax-exempt status or, alternatively or in addition thereto, it could be subject to an excise tax on the amount of money spent on that activity. Additionally, contributions to organizations that lose their tax-exempt status because of political activities are not deductible by the donors for federal income tax purposes. Moreover, certain individuals affiliated with such organizations can be subject to taxation.

In cases of a flagrant violation of the law, the IRS has specific statutory authority to make an immediate determination and assessment of tax. Also, the IRS can ask a federal district court to enjoin the organization from making further political expenditures.

In order to avoid potential adverse affects, each charitable organization should provide explicit restrictions to the involvement in politics in its corporate governing documents or at least as a written policy to avoid potential adverse consequences to such charitable organization, individuals affiliated therewith, and donees thereto. Such restrictions should be discussed with an organization's counsel to ensure complete and sufficient safeguards.


FOOTNOTES

1 See

I.R. 2004-59, April 28, 2004.

2 See Rev. Proc. 86-43, 1986-2 C.B. 729.

3 See Rev. Rul. 80-278, 1980-2 C.B. 175.

4 Although there is no precedential ruling from the IRS applying these four exceptions to nonelecting public charities, the IRS has stated that such exceptions apply to section 501(c)(3) as well because of a statement in the legislative history that the enactment of section 4945 was not intended to change to the substantive law of lobbying other than the "substantial part test." See Joint Committee on Taxation, "Description of Present-Law Rules Relating to Political and Other Activities of Organizations Described in Section 501(c)(3) and Proposals Regarding Churches," JCX-39-02, May 14, 2002, citing GCM 34289 (May 8, 1970); and Haswell v. United States, 500 F.2d 1133, 1141-44 (Ct. Cl.), cert. denied, 419 U.S. 1107 (1974).

5 Legislation includes action by the Congress, any state legislature, any local council, or similar legislative body, or by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure. Legislation includes a proposed treaty required to be submitted by the president to the Senate for its advice and consent from the time the president's representative begins to negotiate its position with the prospective parties to the proposed treaty.

6 Legislation includes action by the Congress, by any state legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. Section 4911(e)(3) provides that the term "action" is limited to the introduction, amendment, enactment, defeat, or repeal of Acts, bills, resolutions, or similar items.

7 Candidate for public office means an individual who offers himself or herself, or is proposed by others, as a contestant for an elective public office, whether such office be national, state, or local. This determination is based on the facts and circumstances and requires some action whether by the candidate or others. In the case of the latter, the consent of the candidate is not required. On the other hand, the fact that an individual is a prominent political figure is not sufficient to cause such individual to be a candidate.

8 "Substantial" has generally not been quantified by the IRS or the courts and the IRS and the courts have not held that a certain percentage is determinative.

9 "Lobbying ceiling amount" for any organization for any taxable year is 150 percent of the "lobbying nontaxable amount" for such organization for such taxable year. For this purpose, reg. section 1.501(h)-3(c)(2), cross-referencing reg. section 56.4911-2(a), defines "lobbying nontaxable amount" as the lesser of:


1. $1 million; or

2. one of the following: (a) 20 percent of the exempt purposes expenditures not above $500,000; (b) $100,000 plus 15 percent of the excess of the exempt purposes above $500,000; (c) $175,000 plus 10 percent of the excess of the exempt purposes expenditures above $1 million; or (d) $225,000 plus 5 percent of the excess of the exempt purpose expenditures above $1.5 million.


10

"Grass roots expenditures" are expenditures for the purpose of influencing legislation without regard to the communication with legislative body prohibition.

11 "Grass roots ceiling amount" for any organization for any taxable year is 150 percent of the "grass roots nontaxable amount" for such organization for such taxable year. For this purpose, "grass roots nontaxable amount" is 25 percent of such organization's lobbying nontaxable amount for that year.

12 In computing expenditures paid or incurred for the purpose of influencing legislation, amounts properly chargeable to a capital account are not to be taken into account. A reasonable allowance for exhaustion, wear and tear, obsolescence, or amortization is taken into account. Such allowance may be taken into account but can only be computed on the basis of the straight-line method of depreciation. For this purpose, a determination of whether an amount is properly chargeable to a capital account must be made on the basis of the principles that apply under subtitle A of the code to amounts that are paid or incurred in a trade or business.

13 "Specific legislation" includes both legislation that has already been introduced in a legislative body and a specific legislative proposal that the organization either supports or opposes. In the case of a referendum, ballot initiative, constitutional amendment, or other measure that is placed on the ballot by petitions signed by a required number or percentage of voters, an item becomes specific legislation when the petition is first circulated among voters for signature.

14 "Encouraging a recipient to take action with respect to legislation" means that the communication:


1. states that the recipient should contact a legislator or an employee of a legislative body, or should contact any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of urging contact with the government official or employee is to influence legislation);

2. states the address, telephone number, or similar information of a legislator or an employee of a legislative body;

3. provides a petition, tear-off postcard or similar material for the recipient to communicate with a legislator or an employee of a legislative body, or with any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of so facilitating contact with the government official or employee is to influence legislation); or

4. specifically identifies one or more legislators who will vote on the legislation as: (a) opposing the communication's view with respect to the legislation; (b) being undecided with respect to the legislation; (c) being the recipient's representative in the legislature; or (d) being a member of the legislative committee or subcommittee that will consider the legislation.


Encouraging the recipient to take action does not include naming the main sponsor(s) of the legislation for purposes of identifying the legislation. "Directly encourage the recipient to take action with respect to legislation" includes one or more of 1, 2, and 3. Communications described in 4, however, do not directly encourage the recipient to take action with respect to legislation. Thus, a communication would encourage the recipient to take action with respect to legislation, but not directly encourage such action, if the communication does no more than identify one or more legislators who will vote on the legislation as: (a) opposing the communication's view with respect to the legislation; (b) being undecided with respect to the legislation; (c) being the recipient's representative in the legislature; or (d) being a member of the legislative committee or subcommittee that will consider the legislation. Communications that encourage the recipient to take action with respect to legislation but that do not directly encourage the recipient to take action with respect to legislation may be within the exception for nonpartisan analysis, study, or research and thus not be grass roots lobbying communications.

15 A transfer, including a grant or payments of dues, is "earmarked" for a specific purpose to the extent (a) that the transferor directs the transferee to add the amount transferred to a fund established to accomplish the purpose, or (b) of the amount transferred or, if less, the amount agreed on to be expended to accomplish the purpose, if there exists an agreement, oral or written, whereby the transferor may cause the transferee to expend amounts to accomplish the purpose or whereby the transferee agrees to expend an amount to accomplish the purpose.

16 For this purpose a "nonexempt purpose expenditure" is any of the following:


1. a transfer made to a member of any affiliated group of which the transferor is a member;

2. a transfer for which the IRS determines that the transfer artificially inflates the amount of the transferor's or transferee's exempt purpose expenditures; or

3. a transfer that is not a controlled grant and is made to a non-501(c)(3) organization that does not attempt to influence legislation.


17

A "controlled grant" is a grant made by a qualified organization to a non-501(c)(3) organization that meets the following requirements:


1. the donor limits the grant to a specific project of the recipient that is in furtherance of the donor's (nonlobbying) exempt purposes; and

2. the donor maintains records to establish that the grant is used in furtherance of the donor's (nonlobbying) exempt purposes.


18

"Individual member of the general public" does not include any person or entity directly or indirectly affiliated with the electing public charity in question.

19 Where the noncharity transfers something of value to the electing public charity in return for the charity's transfer, but that payment is less than the fair market value of the charity's transfer to the noncharity, the amount of the transfer is the excess of: first, the greater of the fair market value or cost of the goods or services transferred to the noncharity over, second, the value of the amount transferred to the charity. For example, if an electing public charity transfers $10,000 of goods and services to a noncharity that makes lobbying expenditures in return for payment by the noncharity of $2,000, the amount of the transfer is $8,000.

20 For this purpose, a communication between an organization and any bona fide member of such organization to directly encourage such member to urge persons other than members to communicate as provided in the prior paragraph must be treated as a communication.

21 For this purpose, a communication between an organization and any bona fide member of such organization to directly encourage such member to communicate is treated as a communication described therein.

22 A "qualified organization" includes any one of the following: (a) section 170(b)(1)(A)(ii) (relating to educational institutions); (b) section 170(b)(1)(A)(iii) (relating to hospitals and medical research organizations); (c) section 170(b)(1) (A)(iv) (relating to organizations supporting government schools); (d) section 170(b)(1)(A)(vi) (relating to organizations publicly supported by charitable contributions); (e) section 509(a)(2) (relating to organizations publicly supported by admissions, sales, etc.); or (f) section 509(a)(3) (relating to organizations supporting certain types of public charities, with certain qualifications).

23 For this purpose, a "disqualified organization" includes any one of the following: (a) section 170(b)(1)(A)(i) (relating to churches); (b) an integrated auxiliary of a church or of a convention or association of churches; or (c) a member of an affiliated group of organizations if one or more members of such group is described in (a) or (b).

24 A public charity is any charity that is not a private foundation under section 509(a) of the code. Unlike a public charity, a private foundation may not make any lobbying expenditures. If a private foundation does make a lobbying expenditure, it is subject to an excise tax under section 4945 of the code.

25 An organization is generally an eligible organization for a taxable year if, for that taxable year, it is:


1. a 501(c)(3) organization (determined, in any year for which an election is in effect, without regard to the substantial part test);

2. a qualified organization; and

3. not a disqualified organization.


26

"Base years" are the "determination year" and the three taxable years immediately preceding the determination year. The base years, however, do not include any taxable year preceding the taxable year for which the organization is first treated as a 501(c)(3) organization. For this purpose, a determination year is a year for which the expenditure test election is in effect, other than the taxable year for which the organization is first treated as a 501(c)(3) organization.

27 "Exempt purpose expenditures" are the total of the amounts paid or incurred to accomplish purposes described in section 170(c)(2)(B) of the code (i.e., religious, charitable, or educational purposes etc.), including related administrative expenses and those used for the purpose of influencing legislation, but excluding those relating to a separate fundraising unit of such organization or one or more other organizations if such amounts are primarily for fundraising. In computing expenditures paid or incurred for the purpose of exempt purpose expenditures, amounts properly chargeable to capital account are not to be taken into account. A reasonable allowance for exhaustion, wear and tear, obsolescence, or amortization is taken into account. Such allowance may be taken into account but can only be computed on the basis of the straight-line method of depreciation. For this purpose, a determination of whether an amount is properly chargeable to capital account must be made on the basis of the principles that apply under subtitle A of the code to amounts that are paid or incurred in a trade or business.

28 A 501(c)(4) organization is a civic league or an organization not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. Such term does not include any entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.

29 A transfer includes any use by, or for the benefit of, the recipient of the transfer, but does not include any transfer made for adequate and full consideration.

30 A transferee is an organization that is exempt from tax under section 501(a) of the code but is neither a 501(c)(3) organization nor an organization described in section 401(a) of the code (i.e., qualified pension, profit-sharing, and stock bonus plans) to which the transferor contributes as an employer.

31 For this purpose, the transferor will be presumed to control any organization with which it (a) is affiliated, or (b) would be affiliated if both organizations are 501(c)(3) organizations, and the transferee will be treated as controlled, directly or indirectly, by the same person or persons who control the transferor if the transferee would be treated as controlled under reg. section 53.4942(a)-3(a)(3), for which purpose the transferor is treated as a private foundation.

32 Nonpartisan analysis, study, or research is an independent and objective exposition of a particular subject matter, including any activity that is "educational" within the meaning of reg. section 1.501(c)(3)-1(d)(3). Thus, nonpartisan analysis, study, or research may advocate a particular position or viewpoint so long as there is a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion. The mere presentation of unsupported opinion, however, does not qualify as nonpartisan analysis, study, or research. Normally, whether a publication or broadcast qualifies as nonpartisan analysis, study, or research will be determined on a presentation-by-presentation basis. However, if a publication or broadcast is one of a series prepared or supported by an electing organization and the series as a whole meets these standards, then any individual publication or broadcast within the series is not a direct or grass roots lobbying communication even though such individual broadcast or publication does not, by itself, meet these standards. Whether a broadcast or publication is considered part of a series will ordinarily depend on all the facts and circumstances of each particular situation. However, with respect to broadcast activities, all broadcasts within any period of six consecutive months will ordinarily be eligible to be considered as part of a series. If an electing organization times or channels a part of a series that is so described in a manner designed to influence the general public or the action of a legislative body with respect to a specific legislative proposal, the expenses of preparing and distributing such part of the analysis, study, or research will be expenditures for a direct or grass roots lobbying communication, as the case may be. An organization may choose any suitable means, including oral or written presentations, to distribute the results of its nonpartisan analysis, study, or research, with or without charge. Such means include distribution of reprints of speeches, articles, and reports; presentation of information through conferences, meetings, and discussions; and dissemination to the news media, including radio, television, and newspapers, and to other public forums. Such communications may not be limited to, or be directed toward, persons who are interested solely in one side of a particular issue. Even though certain analysis, study, or research is initially within the exception for nonpartisan analysis, study, or research, subsequent use of that analysis, study or research for grass roots lobbying may cause that analysis, study, or research to be treated as a grass roots lobbying communication that is not within the exception for nonpartisan analysis, study, or research. This does not cause any analysis, study, or research to be considered a direct lobbying communication. A communication that reflects a view on specific legislation is not within the nonpartisan analysis, study, or research exception if the communication directly encourages the recipient to take action with respect to such legislation. For this purpose, a communication directly encourages the recipient to take action with respect to legislation if the communication is described in one or more of the first three types of communication that constitutes encouraging a recipient to take action with respect to legislation. As described in the fourth type of communication, a communication would encourage the recipient to take action with respect to legislation, but not directly encourage such action, if the communication does no more than specifically identify one or more legislators who will vote on the legislation as: (a) opposing the communication's view with respect to the legislation; (b) being undecided with respect to the legislation; (c) being the recipient's representative in the legislature; or (d) being a member of the legislative committee or subcommittee that will consider the legislation.

33 A legislative body does not include executive, judicial, or administrative bodies. Administrative bodies include school boards, housing authorities, sewer, and water districts; zoning boards; and other similar federal, state, or local special purpose bodies, whether elective or appointive. Thus, for example, the term "any attempt to influence any legislation" does not include attempts to persuade an executive body or department to form, support the formation of, or to acquire property to be used for the formation or expansion of, a public park or equivalent preserves (such as public recreation areas, game, or forest preserves, and soil demonstration areas) established or to be established by act of Congress, by executive action in accordance with an act of Congress, or by a state, municipality, or other governmental unit described in section 170(c)(1) of the code, as compared with attempts to persuade a legislative body, a member thereof, or other governmental official or employee, to promote the appropriation of funds for such an acquisition or other legislative authorization of such an acquisition. Therefore, for example, an organization would not be influencing legislation if it proposed to a park authority that it purchase a particular tract of land for a new park, even though such an attempt would necessarily require the park authority eventually to seek appropriations to support a new park. However, in such a case, the organization would be influencing legislation if it provided the park authority with a proposed budget to be submitted to a legislative body, unless such submission is described by one of the four exceptions, discussed above.

34 Action is limited to the introduction, amendment, enactment, defeat, or repeal of acts, bills, resolutions, or similar items.

35 For this purpose, mass media means television, radio, billboards, and general circulation newspapers and magazines. General circulation newspapers and magazines do not include newspapers or magazines published by an organization for which the election to apply the expenditure test is in effect, except where (a) the total circulation of the newspaper or magazine is greater than 100,000 and (b) fewer than one-half of the recipients are members of the organization (as defined in reg. section 56.4911-5(f)).

36 Where an electing public charity is itself a mass media publisher or broadcaster, all portions of that organization's mass media publications or broadcasts are treated as paid advertisements in the mass media, except those specific portions that are advertisements paid for by another person.

37 Highly publicized means frequent coverage on television and radio, and in general circulation newspapers, during the two weeks preceding the vote by the legislative body or committee. In the case of state or local legislation, highly publicized means frequent coverage in the mass media that serve the state or local jurisdiction in question. Even where legislation receives frequent coverage, it is highly publicized only if the pendency of the legislation or the legislation's general terms, purpose, or effect are known to a significant segment of the general public (as opposed to the particular interest groups directly affected) in the area in which the mass media paid advertisement appears.

38 A separate fundraising unit of an organization must consist of either two or more individuals, a majority of whose time is spent on fundraising for the organization, or any separate accounting unit of the organization that is devoted to fundraising. Amounts paid to or incurred for a separate fundraising unit include all amounts incurred for the creation, production, copying, and distribution of the fundraising portion of a separate fundraising unit's communication. For example, an electing public charity that has a separate fundraising unit may not count the cost of postage for a separate fundraising unit's fundraising communication as an exempt purpose expenditure even though, under the electing public charity's accounting system, that cost is attributable to the mailroom rather than to the separate fundraising unit.

39 "Fundraising" includes soliciting:


1. dues or contributions from members of the organization, from persons whose dues are in arrears, or from the general public;

2. grants from businesses or other organizations, including 501(c)(3) organizations; or

3. grants from a governmental unit referred to in section 170(c)(1), or any agency or instrumentality thereof.


40

For this purpose, amounts are paid or incurred for the production of income if they are paid or incurred for a purpose or activity that is not substantially related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exercise or performance by the organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501. Fundraising expenditures are not, for this purpose, amounts that are paid or incurred for the production of income. Instead, the determination of whether fundraising costs are exempt purpose expenditures must be made with reference to the previous discussion.

41 A person is a member of an electing public charity if the person:


1. pays dues or makes a contribution of more than a nominal amount;

2. makes a contribution of more than a nominal amount of time; or

3. is one of a limited number of "honorary" or "life" members who have more than a nominal connection with the electing public charity and who have been chosen for a valid reason (e.g., length of service to the organization or involvement in activities forming the basis of the electing public charity's exemption) unrelated to the electing public charity's dissemination of information to its members.


A person not a member of an electing public charity may be treated as a member if the electing public charity demonstrates to the satisfaction of the IRS that there is a good reason for its membership requirements not meeting these requirements, and that its membership requirements do not operate to permit an abuse of the rules discussed under this subheading. For this purpose, a person who is a member of an organization that is a member of an affiliated group of organizations is treated as a member of each organization in the affiliated group. Additionally, a person who is a member of an organization that is a member of a limited affiliated group of organizations is treated as a member of each organization in the limited affiliated group, but only to the extent that the communication relates to a "national legislative issue." Reg. section 56.4911-10(g) provides that a "national legislative issue" means legislation, limited to action by the Congress of the United States or by the public in any national procedure. If an issue is both national and local, it is characterized as a national legislative issue if the contemplated legislation is congressional legislation.

42 A communication directly encourages the recipient to engage in direct lobbying (whether individually or through the organization) if the communication:


1. states that the recipient should contact a legislator or an employee of a legislative body, or should contact any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of urging contact with the government official or employee is to influence legislation);

2. states the address, telephone number, or similar information of a legislator or an employee of a legislative body; or

3. provides a petition, tear-off postcard, or similar material for the recipient to communicate his or her views to a legislator or an employee of a legislative body, or to any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of so facilitating contact with the government official or employee is to influence legislation).


43

This is subject to an exception. Specifically, a communication that directly encourages a recipient to engage in direct lobbying activities and that would not be attempts to influence legislation if engaged in directly by the organization is treated as a communication that does not directly encourage a recipient to engage in direct lobbying. This is referred to as the self-defense exception.

44 Communication directly encourages recipients to engage individually or collectively (whether through the organization or otherwise) if the communication:


1. states that the recipient should encourage any nonmember to contact a legislator or an employee of a legislative body, or to contact any other government official or employee who may participate in the formulation of legislation (but only if the principal purpose of urging contact with the government official or employee is to influence legislation);

2. states that the recipient should provide to any nonmember the address, telephone number, or similar information of a legislator or an employee of a legislative body; or

3. provides (or requests that the recipient provide to nonmembers) a petition, tear-off postcard, or similar material for the recipient (or nonmember) to use to ask any nonmember to communicate views to a legislator or an employee of a legislative body, or to any other government official or employee who may participate in the formulation of legislation, but only if the principal purpose of so facilitating contact with the government official or employee is to influence legislation. For purposes of "c," a petition is provided for the recipient to use to ask any nonmember to communicate views if, for example, the petition has an entire page of preprinted signature blocks. Similarly, where a communication is distributed to a single member and provides several tear-off postcards addressed to a legislator, the postcards are presumed to be provided for the member to use to ask a nonmember to communicate with the legislator.


45

The designed-primarily-for-members rule is subject to the self-defense exception.

46 A "nonmember subscribers percentage" means the percentage of total distribution that represents distribution to nonmember subscribers (including libraries). A person is a subscriber to a written communication if the person (a) is a member of the publishing organization and the membership dues expressly include the right to receive the written communication, or (b) has affirmatively expressed a desire to receive the written communication and has paid more than a nominal amount for the communication.

47 "All other distribution percentage" means 100 percent reduced by the sum of the "member percentage" and the "nonmember subscribers percentage." "Member Percentage" means the percentage of total distribution that represents distribution of a single copy to any member.

48 A determination of whether an organization is formed primarily for promoting the candidacy or prospective candidacy of an individual for public office is made on the basis of all the facts and circumstances. The factors to be considered include whether the surveys, studies, materials, etc. prepared by the organization are made available only to the candidate or are made available to the general public; and whether the organization pays for speeches and travel expenses for only one individual, or for speeches or travel expenses of several persons. The fact that a candidate or prospective candidate utilizes studies, papers, materials, etc. prepared by the organization (such as in a speech by the candidate) is not to be considered as a factor indicating that the organization has a purpose of promoting the candidacy or prospective candidacy of that individual where such studies, papers, materials, etc. are not made available only to that individual.

49 An organization is effectively controlled by a candidate or prospective candidate only if the individual has a continuing, substantial involvement in the day-to-day operations or management of the organization. An organization is not effectively controlled by a candidate or a prospective candidate merely because it is affiliated with the candidate, or merely because the candidate knows the directors, officers, or employees of the organization. The effectively controlled test is not met merely because the organization carries on its research, study, or other educational activities with respect to subject matter or issues in which the individual is interested or with which the individual is associated.

50 An organization manager is considered to have agreed to an expenditure knowing that it is a political expenditure only if the manager:


1. has actual knowledge of sufficient facts so that, based solely on these facts, the expenditure would be a political expenditure;

2. is aware that such an expenditure under these circumstances may violate the provisions of federal tax law governing political expenditures; and

3. negligently fails to make reasonable attempts to ascertain whether the expenditure is a political expenditure, or the manager is aware that it is a political expenditure.


Knowing does not mean having reason to know. However, evidence tending to show that an organization manager has reason to know of a particular fact or particular rule is relevant in determining whether the manager had actual knowledge of the fact or rule. Thus, for example, evidence tending to show that an organization manager has reason to know of sufficient facts so that, based solely on those facts, an expenditure would be a political expenditure is relevant in determining whether the manager has actual knowledge of the facts.

51 An organization manager's agreement to a political expenditure is willful if it is voluntary, conscious, and intentional. No motive to avoid the restrictions of the law or the incurrence of any tax is necessary to make an agreement willful. However, an organization manager's agreement to a political expenditure is not willful if the manager does not know that it is a political expenditure.

52 An organization manager's actions are due to reasonable cause if the manager has exercised his or her responsibility on behalf of the organization with ordinary business care and prudence. An organization manager's agreement to an expenditure is ordinarily not considered official or willful, and is ordinarily considered due to reasonable cause if the manager, after full disclosure of the factual situation to legal counsel (including house counsel), relies on the advice of counsel expressed in a reasoned written legal opinion that an expenditure is not a political expenditure (or that expenditures conforming to certain guidelines are not political expenditures). For this purpose, a written legal opinion is considered reasoned even if it reaches a conclusion that is subsequently determined to be incorrect, so long as the opinion addresses itself to the facts and applicable law. A written legal opinion is not considered reasoned if it does nothing more than recite the facts and express a conclusion. However, the absence of advice of counsel with respect to an expenditure does not, by itself, give rise to any inference that an organization manager agreed to the making of the expenditure knowingly, willfully, or without reasonable cause.

53 The terms correction and correct mean, with respect to any political expenditure, recovering part or all of the expenditure to the extent recovery is possible, establishment of safeguards to prevent future political expenditures, and where full recovery is not possible, such additional corrective action as is prescribed by applicable regulations. Correction of a political expenditure is accomplished by recovering part or all of the expenditure to the extent recovery is possible, and, where full recovery cannot be accomplished, by any additional corrective action that the IRS may prescribe. The organization making the political expenditure is not under any obligation to attempt to recover the expenditure by legal action if the action would in all probability not result in the satisfaction of execution on a judgment. Correction of a political expenditure must also involve the establishment of sufficient safeguards to prevent future political expenditures by the organization. The determination of whether safeguards are sufficient to prevent future political expenditures by the organization is made by the district director.

54 "Taxable period" means, with respect to any political expenditure, the period beginning with the date on which the political expenditure occurs and ending on the earlier of (a) the date of mailing a notice of deficiency under section 6212 of the code with respect to the 10 percent excise tax, or (b) the date that the 10 percent excise tax is assessed.

55 A person is an officer of an organization if (a) that person is specifically so designated under the certificate of incorporation, bylaws, or other constitutive documents of the foundation; or (b) that person regularly exercises general authority to make administrative or policy decisions on behalf of the organization. Independent contractors, acting in a capacity as attorneys, accountants, and investment managers and advisors, are not officers. With respect to any expenditure, any person as so described who has authority merely to recommend particular administrative or policy decisions, but not to implement them without approval of a superior, is not an officer.

56 An individual rendering services to an organization is an employee of the organization only if that individual is an employee within the meaning of section 3121(d)(2) of the code. With respect to any expenditure, an employee (other than an officer, director, or trustee of the organization) must have final authority or responsibility (either officially or effectively) with respect to such expenditure.

57 "Flagrant political intervention" is participation in, or intervention in (including the publication and distribution of statements), any political campaign by a 501(c)(3) organization on behalf of (or in opposition to) any candidate for public office in violation of the prohibition on such participation or intervention in section 501(c)(3) and the regulations thereunder if the participation or intervention is flagrant.


END OF FOOTNOTES

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