Limitation on Political Activities for a 501(c)(3) Organization (Sep00)

501(c)(3) tax-exempt nonprofit corporations are absolutely prohibited from participating in political campaigns for or against any candidate for public office. Participation in or contributions to political campaigns can result in the revocation of 501(c)(3) tax-exempt status and the assessment of special excise taxes against the organization and its managers (see IRC §§ 4955, 6852 and 7409).

Voter Education Exception: Certain voter education activities conducted in a non-partisan manner may be undertaken by 501(c)(3) groups-see IRS Revenue Ruling 78-248 at your local county law library and consult an attorney for recent developments on this issue if you want to engage in this type of political activity. Your organization may request an IRS letter ruling on its voter education activities by writing to the address listed in IRS Publication 557, Chapter 3, section on "Political Activity."

Influencing Legislation: Tax-exempt 501(c)(3) nonprofit organizations are also prohibited, "except to an insubstantial degree," from acting to influence legislation. In the past, courts have said that the expenditure of more than 5% of the corporation's budget, time or effort for political activity was "substantial"--more recently, the courts have tended to look at the individual facts of each case. Generally, if a nonprofit corporation contacts, or urges the public to contact, members of a legislative body, or if it advocates the adoption or rejection of legislation, the IRS considers it to be acting to influence legislation.

Also, under IRS regulations, lobbying to influence legislation includes:

• any attempt to affect the opinions of the general public or a segment of it; and 
• communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of legislation.

However, lobbying to influence legislation does not mean:

• making available the results of nonpartisan analysis, study or research; 
• providing technical advice or assistance to a government body, or to its committee or other subdivision, in response to a written request from it, where such advice would otherwise constitute the influencing of legislation; 
• appearing before, or communicating with, any legislative body with respect to a possible decision that might affect the organization's existence, powers, tax-exempt status or the deduction of contributions to it; or 
• communicating with a government official or employee, other than for the purpose of influencing legislation.

Also excluded from the definition of lobbying efforts are communications between an organization and its members with respect to legislation (or proposed legislation) of direct interest to the organization and the members, unless these communications directly encourage members to influence legislation.

EXAMPLE: A Housing Information Exchange keeps its members informed of proposed legislation affecting low income renters. This should not be considered legislative lobbying activity unless members are urged to contact their political representatives in support of, or in opposition to, the proposed legislation.

In determining whether a group's legislative activities are substantial in scope, the IRS looks at the amount of time, money or effort expended on legislative lobbying. If they are substantial in relation to other activities, 501(c)(3) tax status may be revoked and, again, special excise taxes can be levied against the organization and its managers (see IRC § 4912).

The Alternative Political Expenditures Test: Since it is impossible to know ahead of time how the IRS will assess the "substantiality" of a group's legislative activity, the IRC allows 501(c)(3) public charities (as you'll see in Chapter 4, we assume you will qualify for public charity classification), to elect an alternative "expenditures test" to measure permissible legislative activity. This expenditures test and its provisions for lobbying and grassroots expenditures are not available to churches, to an integrated auxiliary of a church, to a member of an affiliated group of organizations which includes a church or to private foundations.

EXAMPLE: If your nonprofit corporation plans to do considerable lobbying activity, carried on primarily by unpaid volunteers, then electing the expenditures test might be a good idea. Why? Because the minimal outlay of money to engage in these activities will probably keep you under the applicable expenditure limits. If you didn't make this election, your 501(c)(3) tax exemption might be placed in jeopardy if the IRS considered your political activities to be a substantial part of your overall purposes and program.

POLITICAL EXPENDITURES TEST

Under the political expenditures test in IRC § 501(h), limitations are imposed on two types of political activities: lobbying expenditures and grassroots expenditures.

Lobbying expenditures are those made for the purpose of influencing legislation, while grassroots expenditures are those made to influence public opinion.

For examples of activities within these categories, read the section on Lobbying Expenditures in IRS Publication 557. The monetary limits are different for each category, and the formulas for computing them are somewhat complicated.

If your 501 (c)(3) nonprofit elects the political expenditures test, you must file IRS form 5768, Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, within the tax year in which you wish the election to be effective. This election is also available under similar rules at the state level.

If you plan to engage in more than a minimum amount of political lobbying or legislative efforts, you need to decide whether it is to your advantage to elect the expenditures test based on the facts of your situation. If you find that these alternative political expenditures rules are still too restrictive, you might consider forming a social welfare organization or civic league under IRC Section 501(c)(4)-this exemption requires a different federal exemption application, IRS Form 1024, and does not carry with it all the attractive benefits of 501(c)(3) status (access to grant funds, tax deductible contributions, etc.). See Table 3.1 above and IRS Publication 557 for further information on 501(c)(4) organizations. [Note that 501(c)(4) social welfare organizations and civic leagues, like 501(c)(3) nonprofits, are considered public benefit corporations under California law.]

Political Action Organizations: Another way the IRS can challenge a 501(c)(3) group's political activities is to determine that it is an action organization, one so involved in political activities that it is not organized exclusively for a 501(c)(3) tax-exempt purpose, and then revoke its tax-exempt status. Intervention in political campaigns or substantial attempts to influence legislation, as discussed above, are grounds for applying this sanction. In addition, if a group has the following two characteristics, it will be classified as an action organization and lose its 501(c)(3) status:

1. its main or primary objective or objectives not incidental or secondary objectives-may be attained only by legislation or defeat of proposed legislation; and
2. it advocates or campaigns for the attainment of such objectives rather than engaging in nonpartisan analysis, study or research and making the results available to the public. In determining whether a group has these characteristics, the IRS looks at the surrounding facts and circumstances, including the group's Articles and activities, and its organizational and operational structure.

Note: Unlike the penalties mentioned earlier for excess political expenditures, a group classified as an action organization may apply for and qualify as a 501(c)(4) social welfare group.

The point here is to be careful not to state your exempt purposes in such a way that they seem only attainable by political action. Even if you indicate that your activities will not be substantially involved with legislative or lobbying efforts, the IRS may decide otherwise and invoke this special classification to deny or rescind 501(c)(3) status.

EXAMPLE: A group that has a primary purpose of "reforming the judicial system in the United States" will likely sound like a political action organization to the IRS, since this sounds like a political goal which must be accomplished mostly by political means. However, if the group rephrases its primary purpose as "educating the public on the efficacy of mediation, arbitration and other alternative non-judicial dispute resolution mechanisms," it stands a better chance of having the IRS approve its application, even if it lists some political activity as incidental to its primary educational purpose.

source: Mancuso, A. How to Form a Nonprofit in California. - 9th ed. Nolo Press, Berkeley. (2000)
Mindfully.org Note: We highly recommend this book. Visit the NOLO website for details.