Jennifer A. Gniady

At the height of an election year, it is a good time to remind nonprofits under Section 501(c)(3) of the Internal Revenue Code about the rules on political campaign activities tied to their tax exemption ― one of the trade-offs that go hand in hand with the benefit of being exempt from income taxes. Usually, by the presidential conventions in the summer, we have moved past some of the vague questions about who qualifies as a candidate and on to what activities are permitted and prohibited. However, given the changes in this election cycle, it’s worth a second look at those questions as well. While the current presidential election is remarkable so far, it’s important not to lose sight of the fact that the same rules apply to lower-profile elections. These include those ranging from either house of Congress, state gubernatorial offices and municipal governance to mayors, council members, sheriffs and dogcatchers. Potential Implications The rules for 501(c)(3) organizations place conditions on various types of political speech, including limits on the amount of lobbying that can be done by the organization and an absolute prohibition on political campaign activity. The prohibition in Section 501(c)(3) is commonly referred to as a prohibition against “political activity,” “political campaign intervention” or “electioneering.” In short, any activity that endorses or opposes a political candidate could result in the organization losing its tax-exempt status. The resulting loss would not only subject all income to corporate-level taxation but would cost donors to the organization their charitable deductions for gifts. Short of losing the exemption completely, the IRS can levy a tax on the political expenditure of the organization and, in serious cases, may impose both a tax and revoke the exemption. What Counts as Electioneering? Given these high stakes, it’s important to understand what constitutes electioneering and know how to keep it from jeopardizing an organization’s exemption. In general, political campaign intervention includes actions related to any candidate, political party or political action committee, such as: Statements of support or opposition in any medium. Providing or soliciting financial support. Providing or soliciting in-kind support. Distributing biased voter education materials. Conducting biased public forums, debates or lectures. Conducting biased voter registration or get-out-the-vote drives.   Who counts as a candidate and when an organization’s actions become support or opposition can be complex in primary season as candidates enter and leave races or tease their participation. The term “candidate” refers to any individual who enters the contest for an elected public office or is proposed by others to run for office at any level of government, whether national, state or local. The timing of when a person becomes a candidate isn’t always clear-cut and must be determined based on all relevant facts and circumstances. Simply being a political figure doesn’t automatically make someone a candidate without more — usually a connection to an election that is close in time. Permitted and Prohibited Activities Not everything to do with the political process is off-limits. Organizations are permitted to provide nonpartisan information about voting processes, monitor or recommend changes to election procedures, and broadly encourage citizens to vote. Most activities focused on the process and not the person or party are likely to be permitted. Clear statements that voters should cast or withhold a vote for a candidate are entirely prohibited. Fortunately, those are easy to spot (and to avoid). However, endorsements also come in many other forms, including statements that support or oppose a political party in general or distinguish a group of candidates running for office. The flipside of opposition is support, and prohibited support can come in monetary or in-kind contributions. It’s not just writing a check but also providing resources (such as copiers, paper, office supplies, vehicles, etc.), the organization’s space, or staff time and publicity that count as promoting a candidate or opposing his or her opponents. For example, organizations with substantial spaces may be asked to rent facilities to candidates or political parties for partisan activities, such as party conventions or caucuses, candidate rallies, or local community gatherings. An organization’s first-ever rental of its space likely should not be to a candidate or political party. Putting appropriate policies in place could make the difference between prohibited support and nonpartisan (and permitted) activity. For example, policies may require that a fair market rate be charged rather than providing the facility for free or at a nominal cost, demonstrating that the facility is equally available to all candidates or parties with no preference for one over another. Candidate Events Many nonprofits in the civic area may naturally want to focus on voter education and access to candidates as part of their mission. Others may have an independent reason why a politician would normally be invited to address the group. Any candidate event can present issues of both actual and perceived electioneering. In the case of an independent purpose for the candidate being present at an event, it should be clear that the candidate is invited to speak in his or her capacity as a public figure, expert or celebrity. If the purpose is more to provide access to the candidates and issues in an election, then it must invite and provide equal access to the event to all candidates in the race. It cannot just be a perfunctory invitation, as the IRS has indicated that an organization that invited two opposing candidates knowing and expecting that one would not accept the invitation to the event because of well-known opposing viewpoints would likely not be considered to have provided equal access and could be engaging in electioneering. If a candidate attends a non-political event sponsored by an exempt organization that is open to the public and no political intervention is automatically assumed, the organization should ensure that no political campaigning occurs, such as letting the candidate distribute literature or speak about the campaign. Individual Capacity What about the political opinions of individuals associated with an organization, whether board members, senior leadership or other employees? While they don’t give up their right to participate in the political process and voice opinions on the candidates, it is important that they only do so while acting in their individual capacities. If they identify themselves as being in connection with the organization, they should make it clear they are acting in their individual capacities and not on behalf of the organization. Statements or actions in their individual capacity should never be in the context of an employee’s scope of employment or the organization’s publications, websites or organizational events. Actions of employees within the scope of their employment will generally be treated as having been conducted with the organization’s authorization. Inadvertent Electioneering A frequent issue is when an organization identified inadvertent prohibited political campaign intervention; for example, through an unauthorized statement made by an employee on the organization’s official social media accounts. Even individual actions will be attributed to an organization if the organization either ratifies those acts or fails to disavow the individual actions performed under its apparent authority. In such an example, the organization should immediately delete and clearly announce that the statement was not authorized or ratified by the organization. The disavowal should be communicated in the same medium as the original prohibited action. If the inadvertent activity includes the expenditure of funds (including the use of resources), that activity should be corrected and safeguards established to prevent a similar problem from occurring. This might include refunding or restoring money spent, implementing policies, or conducting staff or board training. Inquiries into Political Activities When considering what a potential inquiry into prohibited political activities would look like, keep in mind the standard applied by the IRS is one of “facts and circumstances” considered in the totality of the activity’s context. While it may seem reassuring on its face that all the factors would be considered, since an actual or alleged infraction may only be understood in hindsight, this test provides little certainty or opportunity to document those facts and circumstances contemporaneously in the event of a future inquiry. With a few more months to go before this election season wraps up, it is not too late to make sure your organization understands and is protected from electioneering violations. Available Resources IRS, Revenue Ruling 2007-41: Complete official guidance regarding election participation. IRS, Political Campaigns and Charities: The Ban on Political Campaign Intervention: Video presentation on prohibited campaign activities for 501(c)(3) organizations.

The search for value often requires turning over a lot of stones and thinking creatively about structures and capital. In the search, an entrepreneur or investor often comes across an array of tax-exempt entities and considers whether they might be untapped potential resources. Whether it’s a new business idea that might fill a social need or a valuable opportunity to associate with a trusted brand, the nonprofit sector can present appealing options, even while investors lack an understanding of the real limitations of these entities. But while the strictures on public charities and private foundations (the Internal Revenue Code Section 501(c)(3) class of entities) are fairly well known, other tax-exempt forms are less well understood. Specifically, the entities qualifying under Section 501(c)(4) have drawn a lot of attention as social welfare organizations – those civic leagues and organizations described as “operated exclusively for the promotion of social welfare” and for “the general welfare of the people of the community” under Treasury regulations. What attracts the attention of both for-profit and nonprofit (i.e., 501(c)(3)) organizations is the ability of 501(c)(4) organizations to engage in some practices that are prohibited for 501(c)(3) entities, such as conducting an unlimited amount of lobbying and engaging in political campaign activities. In both cases, the activity is permitted to 501(c)(4)s provided that it’s not the primary purpose of the organization. However, identifying the primary purpose of an organization’s activities remains an inquiry that is based on all the facts and circumstances, and popular perception often overlooks this requirement. Similar to the wider allowance of political and lobbying activity, the 501(c)(4) form has also historically had more flexibility in what qualified as a purpose that promoted social welfare and the good of the community. Once a qualifying community benefit is established, its exemption, for the most part, is not jeopardized by undertaking other activities as long as that social welfare purpose is the primary function of the organization. Much of this is predicated on the lack of a firm definition of “social welfare” and the broad explanation that these organizations provide for “common good and general welfare” and “civic betterments and social improvements” along the lines described in regulations. While the standard for tax-exempt status is to operate “exclusively” for the promotion of social welfare, the practice has been to define “exclusively” as being met when the organization is primarily engaged in activities that promote the common good and general welfare of people in the community. As a result, some organizations take a liberal interpretation of what is covered by the social welfare umbrella for purposes that would otherwise most likely fail to qualify as tax-exempt under Section 501(c)(3), and then they cobble together other activities that are generally beneficial but sometimes overly narrow in those they benefit. In fact, this broad construction approach needs to be closely examined if a component of a proposed or existing business relationship is based on a 501(c)(4) relationship where the benefit to the community resembles activities that would normally be the domain of non-tax-exempt (i.e., for-profit) businesses. One common example comes from organizations claiming a social welfare purpose because they serve the “promotion of health” by offering healthcare, pharmaceutical or health-related services outside an organization that otherwise qualifies as a 501(c)(3). Other examples might be the provision of services to members, even members that are nonprofits, and to individuals who resemble a customer base more closely than the community as a whole. A hypothetical example might include an entrepreneur who develops a database and tracking system to manage the maintenance and upkeep of real estate holdings. The entrepreneur decides to put the software services in a 501(c)(4), making it available to low- and moderate-income housing units, many of which are maintained and operated by nonprofit organizations. He or she reasons that the organization benefits the community because it makes it possible to improve the maintenance and upkeep of low-income housing. Maybe our entrepreneur also licenses the services to for-profit real estate managers for a higher fee, funneling the licensing profits back into the development of more features that benefit both nonprofit and for-profit housing managers. While the purpose of the organization may be meritorious, the facts, only slightly embellished here, mirror a revenue ruling explicitly determining that the organization did not qualify for 501(c)(4) status. Unlike in the for-profit sector, what makes a purpose or activity one that serves the community goes beyond just meeting a market need. The key principle is that the organization’s activities provide a benefit to the community at large, as opposed to a group of members or select individuals. As a result, many goods and services that provide a market benefit to those individuals whose needs are met by those things being provided will not meet the threshold set for a community benefit in the context of a tax-exempt organization. Recent tax determinations and court cases have rejected tax-exempt organizations when the benefit included providing healthcare coordination services, pharmaceuticals, management consulting and software services. In many of these cases, the IRS has increasingly taken the position that the “exclusive” requirement more closely resembles the standard applied to 501(c)(3) organizations than the more-malleable popular perception that 501(c)(4) organizations have gained. In the run-up to an election year, the usual focus for 501(c)(4) organizations is on the amount of political activity these organizations engage in. While these organizations’ political activities have recently drawn the attention of the House Committee on Ways and Means, business investors should also be aware that these organizations also crop up in conjunction with organizations and individuals interested in the seemingly greater capacity of these organizations to engage in activities that are tangential to or only loosely qualify as a social welfare purpose. This trend in recent denials and decisions against 501(c)(4) organizations because they represent typical business purposes may signal increased attention to the social welfare purposes of 501(c)(4)s. As always, business transactions that involve or relate to tax-exempt entities require both close scrutiny and assistance from counsel with significant tax-exempt experience.