Political Campaign and
Lobbying Activities

  1. Political Campaign Activity by Section 501(c)(3) Organizations
    1. Outright Prohibition
      1. Absolute, Unqualified Prohibition. One of the requirements for exemption under Section 501(c)(3) is that an organization may 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 political office."
      2. Who is a Candidate? Under Treasury Regulation § 1.501(c)(3)-1(c)(3)(iii), a candidate is any "individual who offers himself, or is proposed by others, as a contestant for an elective public office, whether such office be national, state or local." The definition clearly applies to candidates who have announced their candidacy, but it is far less clear to what extent it applies to individuals whose names are mentioned, by the media, by supporters, or by others, as possible candidates.
      3. What is Elective Office? There is no definition in the regulations as to what constitutes a public office. The Service has, however, interpreted the term as including elective positions within the political parties. See General Counsel Memorandum 39811 (June 30, 1989) (elected state precinct committee person).
      4. What Activities Constitute Intervention in a Campaign?
        1. Distributing statements
        2. Fundraising
        3. Rating candidates. See Association of the Bar of the City of New York v. Comm'r, 858 F.2d 881 (2nd Cir. 1988) (rated judges running for reelection).
        4. Motivation is irrelevant.
        5. Churches have frequently entangled themselves in political campaigns.
          1. For example, on the day on which this outline was completed, the Associated Press reported that John Kerry had held a private meeting with the Archbishop of Washington, D.C., who is chairing a task force created by the U.S. Conference of Catholic Bishops to determine what actions should be taken against Catholic politicians who support positions that conflict with church teachings.
          2. On April 24, 2004, John Kerry attended services at the African Methodist Episcopal Church, whose pastor, according to the Boston Globe, introduced him with "We say, God, bring him on, the next President of the United States...."
          3. 1n 1992, the Church at Pierce Creek, in Binghamton, New York, purchased full-page advertisements in the Washington Times and USA Today stating that Bill Clinton supported abortion on demand, homosexuality, and the distribution of condoms to teenagers in public schools and asked "How then can we vote for Bill Clinton?" Revocation of the church's exempt status was affirmed on appeal to the Court of Appeals for the D.C. Circuit. Branch Ministries v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000).
          4. Churches may invite candidates to attend their services and speak to their congregations, but should extend similar invitations to all realistic candidates (which may be on successive Sundays) and provided that the introduction of candidates does not involve ay form of endorsement or disapproval.
          5. imilar rules, concerning objectivity, equal treatment of all candidates, and the absence of any indications of approval or disapproval, apply to accepting paid advertisements in religious publications, voter registration or get out the vote drives, and the like. See Kindell & Reilly, Election Year Issues, FY 2002 IRS Exempt Organizations Technical Instruction Program 448 (August 2001).
    2. Voter Education Activities
      1. Unbiased, Comprehensive Compilations. Revenue Ruling 78-248, 1978-1 C.B. 154, holds that efforts to inform the electorate in a nonpartisan manner about candidates' positions must be analyzed on the basis of all the applicable "facts and circumstances" to determine whether there is an "bias or preference" towards or against any one or more candidates. The ruling described an organization that distributed annually a voter guide that compiled, without editorial comment, the voting records of members of Congress, as well as the responses to questionnaires sent to all candidates for a particular office seeking their positions with respect to a wide range of issues of interest to the electorate as a whole.
      2. Selective Information Sent to Members. Revenue Ruling 80-282, 1980-1 C.B. 155, held that an organization that disseminated the voting records of incumbents on particular issues solely to the members of the organization shortly after the close of a legislative session, that did not identify those incumbents who intended to run for re-election, and that cautioned readers not to make decisions about incumbents based on such limited information, was not engaged in impermissible political campaign activity.
    3. Attribution of Individual Activities to the Organization
      1. Revenue Ruling 72-513, 1972-2 C.B. 246 held that a university would not lose its exemption because a student-run newspaper ran editorials endorsing particular candidates.
      2. Representatives of nonprofit organization may, in their individual capacities, endorse or oppose political candidates, so long as they indicate that their actions are not being undertaken in their official capacities and so long as their actions are taken outside the context of any organization function or publication.
    4. Voter Registration Drives
      1. The IRS appears to have adopted the FEC's rules to determine whether a voter registration drive or get-out-the-vote campaign conducted by a public charity is nonpartisan. Factors that support the conclusion that a voter registration drive is conducted in a nonpartisan manner include —
        1. either that no candidate is named or that all candidates are named without favoring any one over the other
        2. either that no political parties are named or that the party affiliation of all candidates are identified
        3. materials distributed to potential voters are limited to encouraging them to vote or to register to vote or describe the hours and places where they may vote or register to vote
        4. all services are provided without regard to the voter's political preferences
      2. In contrast, an IRS Technical Advice Memorandum, TAM 9117001, held that an organization that circulated materials designed to encourage voters to register and vote for conservative candidates for President did in fact engage in impermissible intervention in a political campaign. While the organization's registration materials did not name any particular candidate, they did identify "liberal" groups and politicians who were described as threatening the conservative agenda and contained a questionnaire seeking the names of other friends and relatives who might not have registered, but who could be expected to vote for conservative candidates.
    5. Excise Tax on Campaign Expenditures
      1. ection 4955 imposes penalty taxes on both an organization (10 percent) and any manager (2-1/2 percent) who agreed to such an expenditure, if a Section 501(c)(3) organization engages in impermissible political expenditures.
      2. For these purposes, an impermissible political expenditure includes not only any amount that would violate Section 501(c)(3), but also any amount paid by an organization formed for the primary purpose of supporting a campaign, to the extent it is paid for speeches or other services, for travel expenses, or for the expense of conducting polls, surveys, studies, and the like.
    6. Abraham Lincoln Opportunity Foundation
      1. One of the more bizarre episodes in the administration of Section 501(c)(3) concerned the Abraham Lincoln Opportunity Foundation and the Howard H. Callaway Foundation.
      2. In 1994, Newt Gingrich's opponent for re-election to the House of Representatives filed a complaint with the House Ethics Committee suggesting that Gingrich had caused two Section 501(c)(3) organizations to sponsor a partisan college course that he taught. In 1996, a House subcommittee concluded that Gingrich had impermissibly used the two charities for the benefit of his personal political action committee, GO-PAC. By then, however, the Abraham Lincoln Opportunity Foundation had already dissolved.
      3. In spite of its dissolution, the IRS, in 1998, issued a revocation of the Abraham Lincoln Opportunity Foundation's Section 501(c)(3) status retroactively to 1990. Abraham Lincoln Opportunity Foundation v. Comm'r, T.C. Memo 2000-261, aff'd 2001 TNT 125-10 (11th Cir. 2001), upheld that revocation and held that it was valid since there was no existing taxpayer having the capacity to challenge the IRS's action. (State law required dissolved nonprofit corporations to file an action for any right or claim within two years from dissolution.)
      4. At the same time, the IRS revoked the Section 501(c)(3) status of the Callaway Foundation in 2000, and the Callaway Foundation paid the taxes due and filed a claim for refund, which the Service promptly paid. The Foundation then filed a refund suit in federal district court anyway, believing the refund to have been in error.
      5. In 2003, the IRS issued letters to both the Abraham Lincoln Opportunity Foundation and the Callaway Foundation stating that the Service was rescinding its revocation of their tax-exempt status. Harris, Talk with IRS Reps Offers More Insight into Review of Gingrich Groups, 41 Exempt Organizations Tax Review, No.1, p. 9 (July 2003).
  2. Lobbying Activities by Private Foundations
    1. Taxable Expenditures
      1. rivate foundations are subject to some special rules, one of which, Section 4945, imposes certain penalty taxes on the foundation and possibly on its management if the foundation makes any "taxable expenditures."
      2. Included among the definition of taxable expenditures are any amounts spent "to carry on propaganda, or otherwise to attempt, to influence legislation" and to "influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive."
    2. Grants to Charities that Lobby
      1. A general support grant by a private foundation to a public charity is not a taxable expenditure under Section 4945(d)(1) so long as it is not earmarked to be used for the purpose of influencing legislation.
      2. A grant for a specific project by a private foundation to a public charity will not be a taxable expenditure so long as [a] it is not earmarked to be used for the purpose of influencing legislation, and [b] the amount of all the grants by the foundation to that public charity do not exceed the amounts budgeted by the grantee for the year of the grant for all the costs of the project that do not constitute lobbying.
      3. "Earmarked" grants are those that are made pursuant to a verbal or written agreement that the grant will be used for specific purposes.
    3. Permissible Advocacy Activities
      1. Excluded from the lobbying prohibition applicable to private foundations are the following —
        1. making available the results of nonpartisan analysis, study, or research (whether communicated to the general public or legislative bodies),
        2. providing technical advice or assistance pursuant to a written request (in the case of direct communications with lawmakers), and
        3. communications with lawmakers with respect to matters that may affect the foundation's existence, powers and duties, tax-exempt status, or the deductibility of contributions to it.
      2. Excluded from the prohibition on voter registration drives are disbursements that are made —
        1. by a Section 501(c)(3) organization (whether the foundation itself or another organization to which it has made a grant),
        2. in connection with a nonpartisan effort that is not confined to one specific election period and that is carried on in five or more states,
        3. by an organization that spends more than 85 percent of its income directly for its charitable purposes,
        4. by an organization that is reasonably broadly supported by contributions from the general public or other charities,
        5. by an organization the contributions to which are not restricted by conditions that they be used for specific locations or a specific election.
  3. Lobbying Activities by Public Charities
    1. Traditional Section 501(c)(3) Rules.
      1. Section 501(c)(3) states "no substantial part" of an organization's activities can consist of "carrying on propaganda, or otherwise attempting, to influence legislation," if it is to qualify for tax-exemption.
      2. The difficulty with this rule is that it is so imprecise. Neither the Code nor the regulations define what is meant by "propaganda" or "influencing legislation." They also do not even clarify what is meant by substantial, that is, how much is too much, or even what should be taken into account and measured in that determination.
        1. Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955), held that an organization did not violate the substantiality test, based upon testimony from its founder that neither he nor its other volunteers devoted more than five percent of their time to lobbying on the organization's behalf.
        2. Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), discussed at considerable length the difficulties involved in apportioning such expenses as printing and duplication costs, travel and entertainment, and general administrative overhead between charitable activities and lobbying efforts and concluded that the organization involved committed between 16 and 20 percent of its financial resources to legislative activities and therefore engaged in substantial lobbying.
        3. Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1973), noted that "[t]he political activities of an organization must be balanced in the context of the objectives and circumstances of the organization to determine whether a substantial part of its activities was to influence or to attempt to legislation" and observed that the use of percentages altogether "obscures the complexity" making that determination. It thus rejected the use of any kind of percentage test, but failed to set forth any alternative standard.
    2. Section 501(h) Election. As an alternative to the general rule of Section 501(c)(3), certain Section 501(c)(3) organizations may make what is known as the Section 501(h) election. The election is available to certain public charities, other than churches and their affiliates. The election is made by filing Form 5768 and is effective for the year in which it is made until the close of the year in which it is revoked.
      1. For years, the Service has publicly, repeatedly stated that making the Section 501(h) election will not increase the likelihood of an organization's becoming subject to an audit. In 2003, however, the Alliance for Justice wrote to the Service to complain that six Minnesota charities had been selected for audit because they had made the election and had reported more than $10,000 of lobbying expenditures. Senior officials with the IRS Exempt Organizations Division denied that the audits were targeted to organizations that had made the election and reaffirmed that making the Section 501(h) election would not increase an organization's audit exposure. 40 Exempt Organizations Tax Review 256 (June 2003).
      2. When an organization makes the Section 501(h) election, its tax-exempt status may only be revoked if spends more money on lobbying than a "ceiling amount." If it spends more than a "nontaxable amount" but less than the ceiling amount, it will be subject to tax, but will not forfeit its exemption. The "ceiling amount" is 150 percent of the "nontaxable amount." The "nontaxable amount is in turn a specified percentage of the organization's annual expenditures. (The percentage starts at 20 percent of the first $500,000 and declines in stages to five percent of any expenditures in excess of $1,500,000, up to a maximum of $1,000,000 or lobbying expenditures.)
      3. The principal advantage of the Section 501(h) election is clarity and certainty. The Internal Revenue Service has published extensive regulations that define virtually all the relevant terms, set forth examples, and otherwise offer welcome guidance as to what is considered to be lobbying and what is not.
      4. A second significant advantage of the Section 501(h) election is that the scope of permissible lobbying activities is gauged solely by the amount of money spent on that activity. Lobbying efforts conducted by volunteers are unlimited.
      5. Grassroots and Direct Lobbying. One of the first distinctions the regulations make is between "grassroots lobbying" and "direct lobbying."
        1. Direct lobbying means an effort to influence legislation through a direct communication with a member or employee of a legislative body or with certain high-ranking executive branch officials who may participate in the formulation of legislation, but only if the purpose of the communication is to influence legislation.
          1. The communication must refer to specific legislation and
          2. must reflect a view on that legislation
        2. Grass roots lobbying means any effort to influence legislation by attempting to influence the opinions of the general public. The limits on expenditures for grass roots lobbying are 25 percent of those for direct lobbying.
          1. The communication must refer to specific legislation,
          2. must reflect a view on that legislation, and
          3. must encourage the recipient of the communication to take action with respect to the legislation.
        3. With respect to ballot initiatives, public referenda, and the like, the electorate is considered to be the legislature, and thus communications with the public at large are treated as direct lobbying communications.
      6. Legislation. The term "legislation" includes any "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."
      7. Specific Legislation. In order for communications to be lobbying, the legislation must also be "specific legislation," which 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 voters, an item becomes "specific legislation" when the petition is first circulated among voters for signature.
      8. Encouraging Recipients to Take Action. In the case of grass roots lobbying, a communication must encourage the recipients to take action on specific legislation. This is generally established only if a communication consists of one of the following:
        1. Encourages the recipient to contact a legislator or an employee of a legislative body (or any other government official who may participate in the formulation of legislation if the principal purpose of urging contact with the government official is to influence legislation);
        2. Identifies the address, telephone number, or similar information of a legislator or an employee of a legislative body;
        3. rovides a petition, tear-off postcard or similar material for the recipient to communicate with a legislator or an employee of a legislative body (or any other government official who may participate in the formulation of legislation if the principal purpose of urging contact with the government official is to influence legislation); or
        4. Specifically identifies one or more legislators who will vote on the legislation as: opposing the communication's view with respect to the legislation; being undecided with respect to the legislation; being the recipient's representative in the legislature; or being a member of the legislative committee or subcommittee that will consider the legislation. Identifying legislation by the name of its sponsor (i.e., the McCain-Feingold Bill) is not within the scope of this rule.
    3. Grants to Other Organizations that Lobby
      1. Non-earmarked grants to other Section 501(c)(3) organizations, whether they lobby or not, are not treated as lobbying expenditures.
      2. Transfers to other Section 501(c)(3) organizations, however, that are earmarked for grass roots lobbying are treated as grass roots lobbying expenditures. Treas. Reg. § 56.4911-3(c)(1).
      3. Transfers to other Section 501(c)(3) organizations that are earmarked for direct lobbying or for a combination of direct and grass roots lobbying are treated as grass roots lobbying expenditures of the transferor, except to the extent that the granting charity can establish that the grantee charity spent the amounts transferred for direct lobbying purposes. Treas. Reg. § 56.4911-3(c)(2).
      4. There is a subtle, but dangerous rule concerning transfers of any kind to non-Section 501(c)(3) organizations that lobby —
        1. The rule applies with respect to any transfer for less than fair market value to any organization other than one described in Section 501(c)(3), except for the sale or goods or services that are substantially related to the transferor's exempt purposes and that are actually purchased by a substantial number of wholly unrelated individual members of the general public at less than fair market value (for example, a wide-spread distribution of literature at below cost to the public, some of which are purchased by entities that lobby). Treas. Reg. § 56.4911-3(c)(3)(i)(D).
        2. Otherwise, any such transfer to a non-Section 501(c)(3) organization will be treated as a grass roots lobbying expenditure up to the amount of the transferee's grass roots lobbying expenditures. If the amount transferred exceeds the transferees grass roots lobbying expenditures, then any excess will be treated as a direct lobbying expenditure, up to the amount of the transferee's direct lobbying expenditures. Only to the extent that the amount transferred exceeds the transferee's grass root and direct lobbying expenditures will the transfer not be considered a lobbying expenditure. Treas. Reg. § 56.4911-3(c)(3)(ii).
        3. This rule becomes of significance, for example, if a Section 501(c)(3) organization makes a grant to its Section 501(c)(4) affiliate — the full amount of the grant will become a lobbying expenditure to the extent of the Section 501(c)(4) affiliate's own lobbying expenditures. A similar rule would apply of the Section 501(c)(3) organization and its Section 501(c)(4) affiliate share personnel or office space, and the Section 501(c)(3) pays less than its full share of the combined personnel and overhead costs.
        4. This "tainting" rule will not apply in the case of a "controlled grant," which is defined in Treas. Reg. § 56.4911-4(f)(3) as a grant by an organization eligible for the Section 501(h) election, where the granting charity limits the grant to a specific project of the recipient that furthers the charity's nonlobbying exempt purposes, and the granting charity maintains records to establish that fact.
  4. Activities Outside the Scope of Lobbying
    1. Nonpartisan Study
      1. Engaging in nonpartisan study, analysis, and research and making the results available either to the general public of to legislative bodies in not considered to be either grass roots or direct lobbying.
        1. "Nonpartisan study, analysis, and research" for these purposes means an independent and objective exposition of a particular subject matter. The analysis 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.
        2. The study, analysis, or research may be distributed in any fashion, through publications, conferences, and even broadcast media, and its distribution may be limited to persons who may be expected to share only one side of the issue.
        3. The study, analysis, or research may even take a view on specific legislation, as well as encourage recipient to take action on that legislation, so long as the communication does nor "directly encourage" the recipients to take action. A communication "directly encourages" recipients to take action if it only identifies legislators who will vote on the legislation, who may be opposed to the legislation, or who may be undecided.
    2. Discussions of Broad Social, Economic, and Similar Issues
      1. Discussions of broad social issues are neither grass roots nor direct lobbying, even if they relate to issues that might come before a legislative body, so long as they do not include references to specific legislation and do not encourage the recipient to take action.
      2. For example, an organization could testify before a congressional committee or include an article in its newsletter that considers federal tax and fiscal policy, as well as express an opinion on that policy, but could not take a position on a specific tax or budget bill and encourage others to support or oppose it.
    3. Invited Technical Advice and Assistance
      1. If a governmental body or committee extends a written invitation to provide technical advice or assistance, communications in response to that request are not considered direct lobbying.
      2. Thus, for example, an organization could testify before a congressional subcommittee that is considering or even marking up specific legislation and could express a view on the merits of that legislation, so long as the testimony had been the subject of a written invitation.
    4. Self Defense
      1. Direct lobbying does not include communications with lawmakers if it concerns any possible action by the body that might affect the charity's (or certain affiliated organizations') —
        1. existence,
        2. powers and duties,
        3. tax-exempt status, or
        4. the deductibility of contributions to it.
      2. The communications may occur with an entire legislative body, with committees or subcommittees, 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.
      3. Initiating legislation is within the scope of this section if the legislation concerns only the permitted matters listed above.
    5. Advocacy Before Administrative Agencies
      1. Agencies such as school boards, housing authorities, zoning commissions, and other special purpose bodies are not considered to be legislative in nature, even though their officials may be elected and even though they may engage in rule-making.
      2. Therefore, a Section 501(c)(3) organization that has made a Section 501(h) election can communicate freely and without limitation with representatives of administrative agencies.
      3. However, it is possible that assisting the agency with the preparation of proposed legislation, such as preparing a budget for the agency to be included in an appropriations bill, would constitute direct lobbying.
    6. Litigation
      1. There are no restrictions on a Section 501(c)(3) organization's initiating or participating in litigation, the objective of which is to challenge the constitutionality or other legitimacy of legislation.
  5. Social Welfare Organizations
    1. Permissible Activities. Section 501(c)(4) exempts civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, as well as local associations of employees, the membership of which is limited to the employees of a designated person or persons in a community, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
      1. An organization is "exclusively" engaged in the promotion of social welfare if it is "primarily" engaged in promoting in some way the common good and general welfare of the community, such as by bringing about civic betterments or social improvements. There is therefore a considerable overlap between Section 501(c)(4) social welfare organizations and Section 501(c)(3) charities, and the regulations in fact explicitly state that a social welfare organization will qualify as a charitable organization if its activities are charitable within the meaning of Section 501(c)(3) and it is not a political action organization. Treasury Regulation § 1.501(c)(4)-1(2)(i).
      2. Political campaign activities do not constitute the promotion of social welfare, and so a Section 501(c)(4) organization cannot have as its primary purpose the direct or indirect participation in political campaigns, such as rating candidates for office. Treasury Regulation § 1.501(c)(4)-1(a)(2)(ii); Revenue Ruling 67-368, 1967-2 C.B. 194. Nonetheless, so long as its primary activity consist of the promotion of social welfare, the organization may conduct political activities and retain its exempt status, although it will be taxable on its political expenditures under Section 527(f). Revenue Ruling 81-95, 1981-1 C.B. 332.
      3. The regulations acknowledge that legislative activities, or lobbying, are not a prohibited non-exempt purpose under Section 501(c)(4) organizations. Treasury Regulation § 1.501(c)(4)-1(a)(2)(ii). Thus, a social welfare organization may have as its sole purpose lobbying for the passage or repeal of legislation. Revenue Ruling 67-293, 1967-2 C.B. 185. This rule has been modified by Section 504, which prohibits an organization from qualifying under Section 501(c)(4) if it had been exempt under Section 501(c)(3) but lost that status by virtue of excessive lobbying.
      4. For these reasons, Section 501(c)(4) organizations are increasingly becoming a popular way for existing Section 501(c)(3) organization's to "encapsulate" their political campaign and lobbying activities in a separate organization without jeopardizing the Section 501(c)(3) organization's exemption. For example, it is perfectly permissible for a church to establish a Section 501(c)(4) affiliate, which could in turn establish a Section 527 PAC to raise and distribute money for political campaigns. Branch Ministries v. Rossotti, 211 f.3d 137 (D.C. Cir. 2000).
    2. Unresolved Issues. There are, however, several tax issues concerning the establishment and operation of Section 501(c)(4) organizations that are somewhat problematic.
      1. Application of Gift Tax. Section 2501 imposes a gift tax on every transfer by an individual by gift.
        1. Under Section 2501(a)(5), the gift tax does not apply to transfers to political organizations described in Section 527(e)(1).
        2. In Revenue Ruling 82-216, 1982-2 C.B. 220, the Service stated that it will continue "to maintain that gratuitous transfers to persons other than organizations described in section 527(e) of the Code are subject to the gift tax absent any specific statute to the contrary, even though the transfers may be motivated by a desire to advance the donor's own social, political or charitable goals."
        3. Every discussion of this issue has assumed that the $11,000 annual gift tax exclusion would apply, so that only contributions in excess of $11,000 could potentially attract a gift tax. However, Revenue Ruling 71-443, 1971-2 C.B. 337, holds that a gift to a corporation does not qualify for the annual gift tax exclusion. Its theory is that only transfers of a present interest (that is, an immediate right to the transferred property) qualify for the exclusion and that shareholders do not have the unilateral right to withdraw from a corporation, without the consent of the board of directors or other shareholders, property that has been transferred to or that is owned by the corporation.
      2. Determination of Primary Activity. As noted above, Revenue Ruling 81-95, 1981-1 C.B. 332, holds that an organization that engages in political campaign activity will qualify under Section 501(c)(4) so long as its "primary" activities consists of the promotion of social welfare.
        1. Many practitioners assume that "primary" means something on the order of 51 percent, so that political campaign activities may make up the remaining 49 percent.
        2. However, there is a dictionary definition of "primary" that refers to things that are "basic" and "fundamental." In that vein, Treas. Reg. § 1.501(c)(3)-1(c)(1) states that a Section 501(c)(3) organization must have as its "primary" purpose the carrying on of one or more exempt activities specified in Section 501(c)(3) and then further states that an organization will not be so regarded "if more than an insubstantial part of its activities is not in furtherance of an exempt purpose."
        3. In any event, there is no guidance as to how a Section 501(c)(4) organization's primary purpose is to be established, on whether general administrative, fundraising, and other such expenses must be allocated between political activities and social welfare activities.
  6. Section 527 Political Organizations
    1. General
      1. Section 527(a) states that a "political organization" shall be considered an organization exempt from tax for purposes of any law that refers to exempt organizations and that a political organization will be subject to tax only to the extent provided in Section 527.
      2. For these purposes, a "political organization" is defined as any "party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function." Section 527(e)(1).
      3. An "exempt function" is "the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed." Section 527(e)(2).
      4. Section 527(b) imposes a tax at the highest corporate tax rate (except in the case of a congressional candidate's principal campaign committee, in which case, the appropriate rate) on "political organization taxable income," which, under Section 527(c)(1), consists of the political organization's gross income (excluding "exempt function income") less corresponding deductions.
      5. "Exempt function income" (that is, the portion of a Section 527 organization's gross income that is not subject to tax) consists of contributions, membership dues, the proceeds from fundraising or entertainment events, and the proceeds from bingo games, to the extent that such amounts are segregated for the political organization's exempt function. Section 527(c)(3).
    2. Reporting and Disclosure
      1. Under Section 527(i), in order to be treated as a political organization under Section 527, an organization must give the Service electronic notice that it is to be so treated.
      2. The notice must be given within 24 hours after the date on which the organization is established and 30 days after any material change in the information required to be submitted. Section 527(i)(2).
      3. If the organization fails to give timely and proper notice, then it will be subject to tax on its exempt function income (taking into account all appropriate deductions). Section 527(i)(4).
      4. The notification requirement does not apply to Section 501(c) organizations that make political expenditures, political organizations that reasonably expect not to have gross receipts of $25,000 or more, and the political committees of state or local candidates or of state or local political parties.
      5. Section 527(j) states that political organizations must make periodic disclosure of the contributions it receives and the expenditures it makes. Failure to make the required disclosure subjects the organization to a tax at the highest corporate tax rate on the "amount to which the failure relates." A variety of organizations are excepted from the disclosure requirements, including those that are required to report as a political committee under the Federal Election Campaign Act, certain state and local entities, and organizations that reasonably expect not to have revenues of $25,000 or more.
      6. See www.irs.gov/polorgs for the electronic filing and searching of the forms required under Section 527(i) (Form 8871) and Section 527(j) (Form 8872).
      7. Sections 527(i) and (j) were added to the Code in 2000 as a response to so-called "stealth PACs" that financed "issues advertising," without explicitly supporting or opposing a political candidate. During 2000, for example, the Republicans for Clean Air paid for a series of broadcast ads that praised George Bush's and criticized John McCain's records on the environment. John McCain, of course, was one of the sponsors of the 2000 legislation that amended Section 527.
        1. In Buckley v. Valeo, 424 U.S. 1 (1976), the U.S. Supreme Court declared unconstitutional provisions in the Federal Election Campaign Act that required disclosure of issue advocacy. As a result, only ads that constituted "express advocacy," containing words like "vote for," "elect," or "vote against" could constitutionally be regulated under the Federal Election Campaign Act.
        2. In Regan v. Taxation With Representation, 461 U.S. 540 (1983), however, the Court held that Section 501(c)(3)'s prohibition against political activity was constitutional, since Section 501(c)(3) amounted to a tax subsidy whose availability could permissibly be conditioned upon compliance with certain requirements.
        3. Mobile Republican Assembly v. U.S., 2003 TNT 248-35 (11th Cir. 2003), the Eleventh Circuit Court of Appeals stated that the constitutionality of Sections 527(i) and (j) should be tested under a Regan analysis, and not a Buckley analysis, since the "section 527(j) disclosure requirements constitute conditions attached to the receipt of a tax subsidy."
        4. As a result, an organization is free to file the Section 527(i) notification, in which case it must also make the Section 527(j) contribution and expenditure disclosures or be subject to tax on those amounts. Alternatively, it may choose not to file the Section 527(i) notification, in which case all its exempt function income will be subject to tax.
        5. See, however, FSA 200037040, which concluded that Section 527 is not elective and that an organization that falls within the definition of a political organization will be subject to Section 527 whether the organization chooses to or not.
    3. Application to Section 501(c) Organizations
      1. ection 527(f) provides that any organization exempt under Section 501(c) that spends any amount, either directly or through another organization, for a exempt function will be subject to tax on the lesser of
        1. its net investment income, or
        2. the aggregate amount spent for the exempt function.
      2. This tax may be avoided by establishing a separate segregated fund from which to make the exempt function expenditures, but then that separate fund would be subject to Section 527 generally.
  7. Spending on Advocacy Advertisements
    1. Revenue Ruling 2004, 2004-4 I.R.B. 1, seeks to distinguish between communications that genuinely advocate a position on public policy issues, and those that indirectly advocate the election or defeat of a candidate for public office.
      1. The Ruling applies explicitly to Section 501(c)(4), (5), and (6) organizations that are permitted to support or oppose legislation, but it equally be applied to a Section 501(c)(3) organization to determine whether it is engaged in lobbying or an impermissible political campaign involvement.
      2. Factors, according to the Ruling, that tend to show that a communication is intended to influence the election of an individual to office include the following —
        1. The communication identifies a candidate for public office;
        2. The timing of the communication coincides with an electoral campaign;
        3. The communication targets voters in a particular election;
        4. The communication identifies that candidate's position on the public policy issue that is the subject of the communication;
        5. The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and
        6. The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue.
      3. Conversely, factors that the Ruling suggests would tend to show that a communication is intended to advocate a position on a public policy issue and not to support or oppose a candidate for office include the following —
        1. The absence of any one or more of the factors listed in (a) through (f) above;
        2. The communication identifies specific legislation, or a specific event outside the control of the organization, that the organization hopes to influence;
        3. The timing of the communication coincides with a specific event outside the control of the organization that the organization hopes to influence, such as a legislative vote or other major legislative action (for example, a hearing before a legislative committee on the issue that is the subject of the communication);
        4. The communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and
        5. The communication identifies the candidate solely in the list of key or principal sponsors.
    2. Example. The Ruling then sets forth six fact situations designed to illustrate the distinction.
      1. Situation 2 Not an Exempt Function (Political Campaign Activity): O, a trade association recognized as tax exempt under § 501(c)(6), advocates for increased international trade. Senator C represents State V in the United States Senate. O prepares and finances a full-page newspaper advertisement that is published in several large circulation newspapers in State V shortly before an election in which Senator C is a candidate for nomination in a party primary. The advertisement states that increased international trade is important to a major industry in State V. The advertisement states that S. 24, a pending bill in the United States Senate, would provide manufacturing subsidies to certain industries to encourage export of their products. The advertisement also states that several manufacturers in State V would benefit from the subsidies, but Senator C has opposed similar measures supporting increased international trade in the past. The advertisement ends with the statement "Call or write Senator C to tell him to vote for S. 24." International trade concerns have not been raised as an issue distinguishing Senator C from any opponent. S. 24 is scheduled for a vote in the United States Senate before the election, soon after the date that the advertisement is published in the newspapers.
      2. Situation 3 Exempt Function Activity: P, an entity recognized as tax exempt under § 501(c)(4), advocates for better health care. Senator D represents State W in the United States Senate. P prepares and finances a full-page newspaper advertisement that is published repeatedly in several large circulation newspapers in State W beginning shortly before an election in which Senator D is a candidate for re-election. The advertisement is not part of an ongoing series of substantially similar advocacy communications by P on the same issue. The advertisement states that a public hospital is needed in a major city in State W but that the public hospital cannot be built without federal assistance. The advertisement further states that Senator D has voted in the past year for two bills that would have provided the federal funding necessary for the hospital. The advertisement then ends with the statement "Let Senator D know you agree about the need for federal funding for hospitals." Federal funding for hospitals has not been raised as an issue distinguishing Senator D from any opponent. At the time the advertisement is published, a bill providing federal funding for hospitals has been introduced in the United States Senate, but no legislative vote or other major legislative activity on that bill is scheduled in the Senate.