Public charities described under Section 501(c)(3) of the Internal Revenue Code (“Code”) that wish to engage in politically related speech must consider several important questions:
May Section 501(c)(3) organizations engage in political campaign activity at all?
Just what is “political campaign activity”?
Who or what determines whether speech is political?
Since 1954, 501(c)(3) organizations have been prohibited from engaging in certain politically-related speech, with the possible penalty of the loss of tax-exempt status. This has been historically problematic, since what constitutes political speech can be hard to determine, and the IRS uses a vague “facts and circumstances” test in its assessments. However, Congress is considering a newly proposed law that would make it permissible for c(3)s to engage in limited politically-related speech.
The Free Speech Fairness Act of 2016 (“Act”) was introduced in Congress on September 28, 2016, as H.R. 6195. This bill would allow public charities to make political campaign-related statements, so long as they are “made in the ordinary course of the organization’s regular and customary activities” and involves no more than “de minimis incremental expenses.” The new law would apply to all Section 501(c)(3) organizations, including churches and other worshipping bodies. Does the Act make good sense, particularly to advance the free speech interests of nonprofits?
To answer this question, a little tax background is first in order. Section 501(c)(3) organizations are legally required to be exclusively organized and operated for religious, charitable, educational, or certain other tax-exempt purposes. In contrast, organizations formed exclusively for political campaign activity may be tax-exempt under Section 527 of the Internal Revenue Code, as a political action committee or “PAC.” Organizations which are tax-exempt under Section 501(c)(4) of the Code, may engage in political campaign activities, so long as they are primarily engaged in social welfare activities. 501(c)(4)s are typically also involved extensively in legislative lobbying. Contributions to Section 527 and Section 501(c)(4) organizations are not eligible for a charitable tax deduction. Gifts to a Section 501(c)(3) organization are deductible.
Why the Political Campaign Ban is Troubling, in a Nutshell
A price tag for the charitable deduction for contributions to Section 501(c)(3) status has been an absolute ban on political campaign activity. Various tax policy rationales exist for the ban, most notably that tax-deductible charitable contributions should not be used indirectly to advance political campaigns. Regardless of tax policy, the ban gives rise to at least three significant problems.
First, since the country’s founding, churches and other nonprofits have spoken out about political candidates and related political issues. For many charitable organizations, their sincerely held beliefs require their adherents to speak out on political issues. In this way, political speech is linked to the First Amendment’s free speech protections.
Second, many issues have increasingly become politicized, as our country’s government has grown larger. The environment, abortion or pro-life issues, family values, trade policy – you name it, politicians want to address it. Talking about these issues within the context of political campaigns is often unavoidable for many 501(c)(3)s carrying out their exempt purposes, which may be directly related to one or more of these now politicized issues.
Third, the IRS is charged with enforcement responsibility, and therein lies a more serious problem. The IRS is first and foremost a revenue collection agency, not an arbiter of free speech rights and values. The agency was never designed or equipped to monitor and regulate what communications impact political campaign activities.
Is the Proposed Legislation a Good Solution?
The proposed Act’s approach is attractive in several ways. Currently, the consequence of violating the ban on political campaign-related statements is complete loss of tax-exempt status. This penalty is severe, particularly within our highly politicized culture, considering the strain that many organizations feel under the ban, related First Amendment implications, and the inherent problems involved with IRS enforcement. Notably, there is the problem of inconsistent enforcement. The IRS reportedly has abdicated its enforcement responsibility, particularly against churches that have taken a stand against the ban. Law-abiding organizations comply with the ban, while others flout it freely.
On the other hand, Section 501(c)(3) organizations should be focused on their tax-exempt mission, not on politics. And most organizations are focused; they just want freedom to engage in some political campaign activities as they relate to the organization's mission.
The proposed legislation is commendable because it seeks to allow organizations to make “statements” in the “ordinary course” of their activities and at a “de minimis level.” But what do these parameters mean in application? It is fairly easy to envision a church or other religious organization that is primarily engaged in worship and similar religious activity, in which a pastor or other religious leader makes statements about candidates for public office in passing. On the other hand, it is not difficult to envision churches and other 501(c)(3) organizations making frequent and extensive political statements “in the ordinary course of their activities,” while deeming such statements as “de minimus.” Or consider an environmental organization that seeks to engage in extensive picketing outside of a candidate’s headquarters, with substantial financial expenditures for such activity. Is picketing the same as “statements”? Is this activity “ordinary,” and/or “de minimis”? These concerns apply equally well with many other organizations that engage in advocacy.
The latter example points out serious flaws with the proposed Act’s language. On balance, while the Act may be warranted, it needs to be developed more fully to address these serious definitional deficiencies. Or, alternatively as some argue, perhaps the ban should be overturned wholesale. Advocates of a wholesale removal of the ban argue that the removal would better protect free speech rights, would be more consistent with our constitutional values, and would allow organizations (and their supporters) to sort out whether and to what extent political campaign activity is part of their agenda.
How Then Shall We Live?
What should responsible Section 501(c)(3) organizational leaders do with respect to the political campaign activity ban, while it still exists in its present form?
First, stay focused on the organization’s tax-exempt mission. Many organizations are tempted to engage in political campaign activity, when educating others about their compelling mission may be far more effective. For c(3)s, under present law, political campaign activities may be distracting and may polarize and alienate listeners along politically drawn lines. Instead c(3)s can draw supporters closer to the organization’s cause through educational issue advocacy. (E.g., “Let’s protect the environment through [________] actions”; not “Let’s protect the environment by electing [Candidate].”)
Second, understand the current legal limitations. The political campaign activity ban can be complex in application, especially in light of the IRS’s elusive “facts and circumstances” multi-factor test. Context and specific language used are key, and experienced legal counsel may be needed to address questionable situations.
Third, if engaging in political campaign activity becomes important to your organization, consider whether it is time to develop a Section 527 PAC or Section 501(c)(4) social welfare organization. These organizations are often formed as outlets for desired political engagement. Accompanying fundraising and accounting protocols will be needed to maintain appropriate separation between related organizations.
Fourth and finally, be thankful that this year’s election cycle is almost over!