Political and Lobbying Restrictions on Tax Exempt Religious Organizations
Religious organizations that wish to accept tax-exempt donations from their supporters must continually be cautious of restrictions on their political and lobbying activities. Certain activities will bar a religious organization from qualifying as a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code. The loss of exempt status can cause unexpected tax liability to an organization and its supporters, result in penalties, and cause a significant loss of revenue to the organization.
Indeed, the prominent Christian Coalition recently was forced to withdraw its petition before the IRS for tax-exempt status because of political activity. Last June, the IRS reportedly informed the Coalition that its petition would be denied because the organization was engaged in political activities. The Coalition withdrew, and now is undertaking a major reorganization to address the problem.
As a presidential election year approaches, politics in the nation will intensify. Religious organizations, and their representatives, will undoubtedly feel the pull to get involved. In doing so, however, tax-exempt organizations must be mindful of two important restrictions governing their participation in the political process. First, to retain their exempt status, exempt organizations may not make legislative or lobbying activity a substantial part of their overall activities. Second, they may not participate in or intervene in political campaigns on behalf of or in opposition to specific candidates for public office. These restrictions are summarized below.
Legislative or Lobbying Activity
Tax-exempt organizations may not make legislative or lobbying activity a "substantial part" of their overall activities. These restrictions apply to both traditional lobbying as well as efforts to urge individuals to contact their elected representatives (i.e., "grass roots lobbying").
The federal courts are split on how to determine what is a "substantial part" of an organization's activities. One line of cases focuses on the exempt organization's percentage of lobbying activities, measured by the sum of the time, effort, and expenditures of financial resources the organization commits. It has been held that less than 5% of total time, effort, and expenditures is "insubstantial"; while more than 15% is "substantial." Another line of cases focuses on the organization's lobbying activities in relation to its exempt objectives.
Certain exempt organizations, other than churches, may elect under the Code to have their level of allowable lobbying activity determined solely by reference to the amount of money they spend on lobbying. Under this election, a complex formula based on the organization's size is used to determine the amount of allowable expenditures for lobbying activities. Lobbying expenditures in excess of the allowable amount are generally subject to a special excise tax of 25%, and if an organization consistently exceeds its allowance of lobbying expenditures its exemption may be revoked. "Aggregation rules" apply if two or more exempt organizations are members in an affiliated group and at least one of the organizations makes this election.
Political Campaign Activity
In contrast to lobbying, the restrictions on campaign or "political" activity are absolute. Federal law provides that, to retain its exemption, a tax-exempt organization may not participate in or intervene in any political campaign on behalf of, or in opposition to, any candidate for public office. To publish or broadcast opinions of opposition or support of incumbents or challengers seeking public office is an impermissible political activity.
If an organization violates the political activities prohibition, the organization will lose its 501(c)(3) status, and contributions to the organization will no longer be tax deductible. In addition, a punitive two-tier excise tax may be placed on the exempt organization and certain of its managers.
Activities that educate voters or candidates, and which are not designed or implemented to influence legislation or endorse or oppose a particular candidate, are permissible. It may be prudent to include a disclaimer in these activities so that it is clear that the activities are intended for educational purposes only, and not to influence legislation or endorse/oppose any particular candidate. A disclaimer, however, will not always cure an otherwise impermissible publication or presentation.
The following may be considered permissible activities relating to campaigns:
| 1) Candidate Education. Exempt organizations generally may seek to educate candidates on their position on particular issues, and even urge the candidates to adopt the organization's positions. However, if the candidate is an incumbent, this may be considered a legislative or lobbying activity and the "substantial part" test applies. 2) Distribution of Voting Records. Exempt organizations may distribute the voting records of elected officials to interested persons, so long as: (a) the voting records of all incumbents are presented; (b) no indication is made as to which candidates are seeking reelection; (c) no comments are made on a particular individual's general qualifications for public office; (d) no express or implied endorsement or rejection of a particular individual is made; (e) the publication warns readers of the inherent limitations of judging the qualifications of an incumbent on the basis of a selected voting record alone; (f) no comparison of incumbents and other candidates is made; and (g) the distribution of the publication will not be targeted to a specific area in which an election is scheduled or timed to coincide with a particular election. 3) Candidate Questionnaires. Exempt organizations may issue and publish questionnaires to election candidates provided that the questionnaire is not designed or administered to elicit biased responses. The questionnaire must also cover a wide range of issues selected on the basis of their import to the electorate as a whole. The results of the questionnaire must be reported accurately and presented in an unbiased format with no editorial comment. 4) Nonpartisan Voter Registration Drives. Exempt organizations may generally sponsor drives to increase voter registration. Partisan literature may not be distributed at the event. It is permissible for an exempt organization to specifically target certain historically disadvantaged groups, provided that no bias for or against a particular candidate, party, or position is evidenced by such activity. 5) Nonpartisan Public Forums, Debates and Lectures. Exempt organizations may sponsor candidate debates or lectures, proved that: (a) the sponsoring organization does not comment on the answers given and does not express its views on the issues raised; (b) the moderator clearly states that the views of the candidates are not necessarily the views of the sponsoring exempt organization; (c) the program is not designed or administered to indicate a bias for or against a particular candidate, party or position; and (d) all bona fide candidates for a particular office are invited to attend. It may be permissible to limit the field of participating candidates to candidates who have attained significant standing in the polls, or to candidates who are officially on the ballot. 6) Moral Debate of Topical Issues. Exempt organizations may participate in debates over moral or policy issues, provided such debate does not focus on specific candidates or legislation. Care should be taken to avoid "wink and nod" debate which occurs near an election, and is technically focused on issues, but is actually aimed at endorsing or opposing a particular candidate. 7) Individual Political Action. This occurs when a representative of an exempt organization, such as an ordained minister of a church, attends a rally in support of a particular candidate. The representative's likeness and name are used in promotional material for the rally, but such materials do not mention his title, or his affiliation with the organization. This type of activity is generally acceptable so long as the utmost care is exercised to ensure that no misunderstanding arises as to whether the individual is acting on his own behalf as a citizen, and not on behalf of the exempt organization. In addition, the individual should not use any of the exempt organization's financial resources, facilities, personnel or goodwill in his individual political activities. The following activities are clearly prohibited: 1) Endorsement or Denunciation of Candidates. Exempt organizations may not endorse or denounce particular political candidates. This may occur, for example, by a minister denouncing an incumbent candidate during a sermon. 2) Financial and Other Support of Candidates. Exempt organizations may not solicit financial contributions that are to be forwarded to the campaign chests of a candidate, or any political action committee organized in support of a candidate, party, or issue. In addition, an exempt organization may not provide volunteers or a copy of its mailing list to political action committees or candidates. 3) Formation or Participation in Political Action Committees. A 501(c)(3) organization may not form or contribute to a PAC created to raise money for a candidate seeking election to office. 4) Publication and Distribution of Partisan Campaign Literature. Distribution by exempt organizations of partisan campaign literature is considered an impermissible intervention into a political campaign. |
Conclusion
While tax-exempt organizations are not prohibited from all forms of participation in the political process, they are subject to stringent restrictions. The endorsement or support of particular election outcomes, or substantial involvement in lobbying activities, will jeopardize an organization's tax status and can result in harsh penalties. Application of the above rules can often be complex. Any questions regarding these rules or their application may be directed to the Religious Institutions Practice Groupof Sidley & Austin.