501(c)(3)

The purpose of this post is to provide supplemental information to Aiden's most recent article. Any comments should be made to his post in order to keep this discussion organized.


According to Wikipedia:

501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, promote the arts, or for the prevention of cruelty to children or animals.

The following is found on the IRS website under a heading, Exemption Requirements 501(c)(3) Organizations:

Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. For a detailed discussion, see Political and Lobbying Activities. For more information about lobbying activities by charities, see the article Lobbying Issues; for more information about political activities of charities, see the FY-2002 CPE topic Election Year Issues.

Based on this statement one obviously must further read into Political and Lobbying Activities to clarify what is meant “restricted”:

Political activities and legislative activities (commonly referred to as lobbying) are two different things and are subject to two different sets of rules. The rules depend on several issues:
• The type of tax-exempt organization (different rules apply to private foundations than to other section 501(c)(3) organizations),
• The type of activity (political or lobbying) at issue,
• The scope or amount of the activity conducted, and
• The consequences of exceeding the given set of limitations.

Now let’s look under Political Activities:

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.

. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity.

Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

However, certain activities are not prohibited. Persuading citizens to participate in the voting process is allowed, but this must be done in a non-partisan manner. Any activity that favors or opposes any particular violates the prohibitions of this tax code.

Lobbying is defined differently:

In general, no organization may qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation (commonly known as lobbying). A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks loss of tax-exempt status.

Legislation is also defined, but I will let that go. It is pretty straightforward. However, the following is not so clear. Enter the grey area:

Organizations may, however, involve themselves in issues of public policy without the activity being considered as lobbying. For example, organizations may conduct educational meetings, prepare and distribute educational materials, or otherwise consider public policy issues in an educational manner without jeopardizing their tax-exempt status.

Furthermore, there are two tests that measure lobbying activity:

The first regime, which applies to IRC 501(c)(3) public charities, permits these
organizations to lobby so long as they do not devote a substantial part” of their activities to attempting to influence legislation. This system has two subsets, which employ different tests of substantiality. The older, enacted in 1934, applies facts and circumstances criteria to determine substantial part.” The newer was introduced in 1976, by the enactment of IRC 501(h) and IRC 4911. IRC 501(h) provides that certain public charities may make an election and have their lobbying activities governed by expenditure tests in lieu of being subject to the IRC 501(c)(3) substantial part” test. If the expenditure limits are exceeded, a tax under IRC 4911 will be imposed or, if the limits are exceeded by 150 percent over a defined period, exempt status will be lost.

One test is more qualitative while the other is more quantitative. According to the substantial part test:

Whether an organization’s attempts to influence legislation, i.e., lobbying, constitute a substantial part of its overall activities is determined on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial.

Under the substantial part test, an organization that conducts excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax. In addition, section 501(c)(3) organizations that lose their tax-exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption.

Further, a tax equal to five percent of the lobbying expenditures for the year may be imposed against organization managers, jointly and severally, who agree to the making of such expenditures knowing that the expenditures would likely result in the loss of tax-exempt status.

Private foundations are subject to a different set of taxes on their lobbying expenditures; churches are not subject to excise taxes on excessive lobbying.
Did you notice the last sentence? If not, back up and read it. Plainly written, churches are not subject to excise taxes. However, it does not say that churches are permitted to violate prohibitions against this code. It only implies that if they do they may not be required to pay back taxes.

The second test is an expenditure test. According to this test:

Organizations other than churches and private foundations may elect the expenditure test under section 501(h) as an alternative method for measuring lobbying activity. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000…

In an attempt at disambiguation the IRS published a 32 page document, “A Tax Guide For Churches and Religious Organizations. In the section entitled, “Jeopardizing Tax Exempt Status” answers are provided (http://www.irs.gov/pub/irs-pdf/p1828.pdf ). The following rules are outlined:

■ their net earnings may not inure to any private
shareholder or individual,

■ they must not provide a substantial benefit to private
interests,

■ they must not devote a substantial part of their
activities to attempting to influence legislation,

■ they must not participate in, or intervene in, any
political campaign on behalf of (or in opposition to)
any candidate for public office, and

■ the organization’s purposes and activities may not be illegal or violate fundamental public policy.

What if a church is engaged in “substantial lobbying activity”? Just as previously stated a church may lose its tax exempt status. Consider this:

A church or religious organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.

Remember previously when I stated that churches were exempt from excise taxes but can lose their status:

Under the , a church or religious organization that conducts excessive lobbying activity in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax. In addition, a religious organization is subject to an excise tax equal to five percent of its lobbying expenditures for the year in which it ceases to qualify for exemption. Further, a tax equal to five percent of the lobbying expenditures for the year may be imposed against organization managers, jointly and severally, who agree to the making of such expenditures knowing that the expenditures would likely result in loss of tax-exempt status.

It should also be mentioned that a distinction is made between churches and religious organizations. Churches are not allowed to use the expenditure test but religious organizations are. A table that explains their allowances is found at the IRS website, http://www.irs.gov/charities/article/0,,id=163394,00.html. Consider :

Under the , a religious organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess.

There is also a section outlining appropriate political campaigning. Several examples of inappropriate behavior are given. Here is one of those examples:

Example 4: Minister D is the minister of Church M, a section 501(c)(3) organization. During regular services of Church M shortly before the election, Minister D preached on a number of issues, including the importance of voting in the upcoming election, and concluded by stating, “It is important that you all do your duty in the election and vote for Candidate W.” Because Minister D’s remarks indicating support for Candidate W were made during an official church service, they constitute political campaign intervention by Church M.

If a violation is discovered:

When it participates in political campaign activity, a church or religious organization jeopardizes both its tax-exempt status under IRC section 501(c)(3) and its eligibility to receive tax-deductible contributions. In addition, it may become subject to an excise tax on its political expenditures. This excise tax may be imposed in addition to revocation, or it may be imposed instead of revocation. Also, the church or religious organization should correct the violation.

You are probably wondering about the contradiction with regard to excise taxes. The assumption I make is that it applies to a violation of political campaigning but not to a violation of lobbying.