Joint Committee on Taxation Report on Tax Treatment of Political Campaign and Lobbying Activities of Tax-Exempt Organizations
On April 29, 2022, the Joint Committee on Taxation published its 35-page report (the “Report”) relating to the federal tax treatment of political campaign and lobbying activities of tax-exempt organizations.
The Report provides an overview of the statutory and regulatory permissions and prohibitions applicable to the 28 different categories of organizations that generally are exempt from federal income tax pursuant to Section 501(c), Title 26 of the Internal Revenue Code (“Code”). See 26 U.S.C. § 501.
The Report separates the differing standards applicable for engaging in (1) political campaign activities and (2) lobbying, and the report likewise separates organizations that are exempt under Section 501(c)(3)—i.e., public charities, private foundations, and the like—and those organizations exempt under other subsections of Section 501, such as social welfare organizations that are exempt under Section 501(c)(4) and trade associations and chambers of commerce that are exempt under Section 501(c)(6).
Section 501(c)(3) and Participation in Political Campaigns for (or against) a Candidate—An Absolute Prohibition.
Under the Code, organizations that are tax-exempt pursuant to Section 501(c)(3) must be organized and operated exclusively for religious, charitable, educational, and other permitted qualified purposes, “. . . no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Id. at § 501(c)(3) (emphasis added).
The Treasury Regulations provide additional regulatory restrictions on both the organizational test and the operational test to enjoy tax-exemption under Section 501(c)(3) of the Code. See 26 C.F.R. § 1.501(c)(3)-1(b)(3)-(b)(3)(iii) (organizational requirements and prohibitions); id. § 1.501(c)(3)-1(c)(1)-(3) (operational requirements and prohibitions).
Pursuant to the Treasury Regulations, an organization is not entitled to tax-exemption pursuant to Section 501(c)(3) of the Code if the organization “participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office.” Id. § 1.501(c)(3)-1(c)(3)(iii) (emphasis added). That prohibition is, indeed, absolute.
Candidates for public office generally refers to a candidate who offers himself or herself as a contestant for an elective public office at the local, state, or national level. 26 C.F.R. § 1.501(c)(3)-1(c)(3)(iii) (flush language).
The Report addresses these political campaign matters, noting the absolute prohibition of intervening for or against any campaign of a candidate for public office:
Section 501(c)(3) expressly provides that tax-exempt organizations described in that section may not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office. This statutory prohibition is absolute and applies to both types of section 501(c)(3) organizations — that is, public charities and private foundations. In theory, no amount of political campaign activity is consistent with an organization retaining tax-exempt status under section 501(c)(3).
Report at pg. 6.
Section 501(c)(3) and Voter Education—Permissible, but be Careful…
The Report also addresses voter education and so called “get-out-the-vote” drives, noting that voter education activities generally do not constitute “participation or intervention” in a political campaign for or against a particular candidate. However, those activities must be carried on in a nonpartisan manner. For example, if a candidate is permitted to appear and speak to a public charity, the forum must be operated in a manner that does not show a bias or preference for or against another candidate. See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421; Report at pg. 9. In this regard, Revenue Ruling 2007-41 provides, in part, as follows:
When a candidate is invited to speak at an organization event in his or her capacity as a political candidate, factors in determining whether the organization participated or intervened in a political campaign include the following:
Whether the organization provides an equal opportunity to participate to political candidates seeking the same office;
Whether the organization indicates any support for or opposition to the candidate (including candidate introductions and communications concerning the candidate’s attendance); and
Whether any political fundraising occurs.
Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
Indeed, if a public charity endorses or evaluates the qualifications of a candidate for public office, then the organization has violated the requirements for tax-exemption, and the tax-exemption may be revoked or excise tax sanctions levied against the organization or its management, or both. See 26 U.S.C. § 4955 (Taxes on political expenditures of section 501(c)(3) organizations).
Private Foundations and Political Campaigns and Lobbying.
Other tax consequences will befall upon private foundations, even for voter registration drives, unless specific statutory criteria are satisfied. See Report at pg. 8-9. In addition to potential revocation of tax-exemption, a private foundation that engages in prohibited political campaign activity may be assessed an excise tax for the “taxable expenditure.” For additional information on private foundations and taxable expenditures, see Freeman Law attorney Cory Halliburton’s blog on Private Foundations, Taxable Expenditures, and Excise Taxes: IRS Issues Guidance.
Other Section 501 Organizations.
The Report also addresses the standards for permissible political campaign activities of organizations that are exempt under other subsections of Section 501, including subsections 501(c)(4), 501(c)(5), 501(c)(6), and political organizations that may enjoy different types of tax exemption benefits under Section 527 of the Code. See Report at pg. 11-20.
The Report provides an overview of the disclosure and filing requirements of tax-exempt organizations, which includes requirements applicable to expenditures and activities relating to involvement in any political campaigns for candidates for elective public office and any lobbying. See Report at pg. 22-27.
The Report concludes with statistical data. The Report indicates there are approximately 2 million organizations that are exempt pursuant to Section 501(c)(3), which represents about seventy-five percent of all tax-exempt organizations. See Report at pg. 29-30.
Insights: The tax-exempt sector is a major play in the global economy, with over 2 million organizations organized pursuant to Section 501 registered with the IRS. Before an exempt organization jumps into the political campaign or lobbying pool, the organization should have a good understanding of the statutory and regulatory guardrails that apply to the organization. Violations of the statutory or regulatory requirements could cost the organization its tax-exempt status, or result in excise taxes assessed against the organization or its management, or all of the above. The Joint Committee on Taxation Report is a decent arrow for any exempt organization to put in its regulatory quiver, but as these matters go, the taxes are in the details. Competent legal and tax counsel should be consulted where appropriate to ensure that one of the organization’s most valuable assets—tax exemption from federal income tax—is protected and maintained.
See also Freeman Law attorney Cory Halliburton’s blog on Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions