Charities, Advocacy, and Tax Law during a Time of Political Change

About the Authors:

Emily Robertson practices law through Robertson Law Office, LLC, which works primarily with small- to medium-sized nonprofits and tax exempt organizations on issues surrounding tax and regulatory compliance, governance, and other areas more unique to the nonprofit sector.

Introduction

Whether fighting for or against policy agendas, providing support to communities affected by policy changes, or fighting for their existence due to a lack of funding or legislative action specifically targeting an organization or its activities, charities often find themselves more engaged in advocacy activities during periods of significant political shifts. For some organizations, the change in political climate just means more or less advocacy activities in certain areas than normal. For other organizations, advocating for their communities means working to support their clients and communities in ways that require more attention to compliance in order to continue operating within the confines of their tax-exempt status. As a result, it is more important than ever that advisors to nonprofits understand the range of advocacy-related activities organizations can conduct, and the considerations organizations must take into account when conducting those activities. Charities will often avoid some types of advocacy activities, or at least do far less than is allowed by their tax-exempt status, because of the fear and misunderstanding that exists around the restrictions imposed on section 501(c)(3) organizations. This article provides an overview of the most common advocacy activities charities conduct, and the issues with those activities that could endanger an organization’s federal tax-exempt status.

Background

Charities receive significant levels of public subsidy, both in the form of tax deductibility for gifts and in exemption from tax on most forms of income. As a result, charities are subject to significant restrictions on their activities to ensure that they exist to benefit public rather than private interests. Those restrictions include an absolute prohibition on engaging in campaign intervention activities for or against a candidate, a requirement that a public charity can conduct only insubstantial amounts of lobbying, and a prohibition on private foundations conducting any lobbying activities. By comparison, other types of organizations that do not receive the same level of tax benefits, such as section 501(c)(4) social welfare organizations or section 501(c)(6) chambers of commerce and professional associations, can conduct political activities so long as those activities are not their primary activity, and they can conduct unlimited amounts of lobbying supporting their exempt purpose(s). Organizations exempt under sections 501(c)(4) and 501(c)(6) are also likely to get more involved in lobbying and other activities during periods of political shifts, although because the restrictions on these organizations are less stringent, they are less likely to cause problems for an organization’s tax-exempt status. For those seeking to fund or fundraise for advocacy activities, section 501(c)(3) organizations are often more desirable vehicles than other types of tax-exempt organizations because their activities can be funded with tax-deductible contributions. In addition to the funding advantages charities provide, they arguably should also have an even stronger drive to engage in policy and advocacy activities because the constituencies charities serve are often some of the least likely to have a voice in the policy arena.

Lobbying Activities

One of the most common types of advocacy activities that charities conduct is legislative lobbying. Lobbying is understood to occur when an organization contacts, or urges the public to contact, legislators in order to propose, support, or oppose legislation or otherwise advocates the adoption or rejection of legislation. Legislation includes an act, bill, resolution, or similar proposal before Congress, a state legislature, local councils, or similar governing bodies (including legislative bodies in foreign countries), or before the public in a referendum, constitutional amendment, or similar procedure. As mentioned above, whether a charity can lobby depends on its foundation status. Public charities can lobby, but the amount of lobbying they can conduct depends in large part on which lobbying test they are under (see below). Private foundations cannot engage in any lobbying.

The default test that all charities are subject to unless they affirmatively elect otherwise is the no-substantial-part test. There is no clear definition of “substantial,” but it is generally understood that, if lobbying activities are anywhere from five percent to 20 percent of an organization’s total activities, it may be determined to be substantial. It should also be understood, however, that the no-substantial-part test is not a pure percentage or expenditure test of an organization’s lobbying activities. The no-substantial-part test looks at other factors, including time spent on lobbying activities, physical space devoted to lobbying activities, volunteer labor used for lobbying activities, and other factors that help understand the scope of lobbying activities as compared to the organization’s other activities. For some types of public charities, such as governmental units and churches and their related organizations, the no-substantial-part test is the only test of lobbying activities that applies. If a public charity governed by the no-substantial-part test is determined to have exceeded its lobbying limits, the penalty is revocation of its tax-exempt status. Public charities under the no-substantial-part test may use certain exceptions found in the private foundation regulations to exclude certain activities from the definition of lobbying. Those exceptions are discussed in further detail below.

Other public charities may elect to be governed by the expenditure test under sections 501(h) and 4911 (and the associated Treasury Regulations), which provide a specific calculation of the total amount of lobbying activities that may be conducted, capped at $1 million, and with a separate limitation on expenditures for reaching out to the general public to urge them to lobby their legislators (grassroots lobbying). The expenditure test provides additional definitions that are not available under the no-substantial-part test that help to exclude a much broader array of activities from the definition of lobbying. A 25-percent excise tax is imposed on organizations that exceed the total or grassroots lobbying amounts, but the organization’s exempt status is not subject to revocation unless they “normally” exceed the limits. “Normally” in this context is looked at over a four-year period and requires exceeding the lobbying limits by at least 150 percent during any given four-year period.

Private foundations are prohibited from lobbying unless the activity falls under one of the specific exceptions provided in section 4945 and its associated regulations: nonpartisan analysis, study, or research provided to the public or legislative officials; examinations and discussion of broad social, economic, and similar problems; requests for technical advice or assistance to a requesting legislative body; and self-defense lobbying communications. Currently, the exception for self-defense communications has been relied upon by many of the private foundations involved in opposing any repeal or change to the prohibition against political activities by section 501(c)(3) organizations (commonly referred to as the Johnson Amendment). If a private foundation engages in lobbying activities, it has engaged in a taxable expenditure under the private foundation rules, which subjects it to excise taxes and a requirement to correct the taxable expenditure. In some circumstances, organization managers may also be subject to an excise tax. If the amount of the taxable expenditure is not corrected within a given time period, the private foundation may be subject to a second-tier tax, and it may have its private foundation status terminated.

Political Activities

Both public charities and private foundations are subject to an absolute prohibition on political campaign activities, which is enforced through excise taxes and the revocation of an organization’s tax-exempt status. The definition of “political campaign activities” (also frequently referred to as campaign intervention or electioneering) is much broader than the election law/campaign finance law definition of “political activities.” Unfortunately, despite recent efforts to clarify this arena, there is no clear statutory or regulatory definition of what qualifies as campaign intervention. The IRS will look at all of the facts and circumstances to determine whether the charity is signaling or implying support for a candidate or party through its communications and activities. This context-driven identification of prohibited political campaign activities often causes organizations to be overly cautious. Many activities not intended to result in campaign intervention could be viewed that way by the IRS. For example, campaign intervention can very easily arise, particularly in an election year, as a result of an organization’s lobbying and issue advocacy. However, it can also be found as a result of business transactions the organization enters into, such as selling advertising, or even via its website and social media communications. Given that the context of the communications or the activities controls the analysis, many activities of an organization not directly connected to its advocacy programs could still result in a finding that the organization engaged in impermissible campaign activities.

Concerns regarding this issue are significant for many organizations this year because Donald Trump filed a notice in early 2017 with the Federal Election Commission that his campaign committee had raised enough money for the 2020 election such that it was required to file. He has also already filed a trademark registration for his 2020 campaign: “Keep America Great!” Those filings have resulted in fear by organizations, fueled in part by misinformation in the media and blogosphere, that charities are now prohibited from criticizing Donald Trump’s acts and statements as president because he is already taking actions as Trump the candidate for 2020. In fact, such communications and actions by the charitable sector are analyzed in the same way they always are, which is with regard to all of the facts and circumstances surrounding the activity or communication. There are no factors that are determinative, and organizations are advised to obtain advice from qualified counsel on the subject. Some of the relevant factors specifically referenced by the IRS in guidance include (not an exhaustive list): whether the statement identifies a candidate by name (or any other identifier that clearly indicates it is referencing the candidate); whether it is delivered close in time to the election (clearly a factor that currently weighs in favor of an organization); whether the timing of the communication or action is related to specific legislation or policies; whether the communication or action is addressing the individual as an officeholder or a candidate; whether it is an issue the organization historically has worked on; and whether it relates to the organization’s mission. A communication or action that encourages voters not to re-elect Trump would likely be regarded as campaign intervention. In contrast, an action that is issue-focused in response to current legislative action, and does not reference Trump the candidate, would likely not be campaign intervention. However, there is enough gray area that can result between (and even potentially including) those examples that, depending on the facts and circumstances surrounding the criticism (or praise), an analysis of the actual planned action or communication is often required.

Illegal Activities

It is generally understood that a charitable organization that promotes violations of the law or public policy in order to achieve its charitable purposes cannot be operated in compliance with the requirements of section 501(c)(3). This restriction comes from the law regarding charitable trusts and has arisen for charitable organizations in a variety of circumstances, including: Medicare and Medicaid fraud; sponsoring nonviolent protest demonstrations as a primary activity at which members are encouraged to commit acts of civil disobedience; activities intended to support the cultivation and distribution of medical marijuana in a state in which such activities are legal; and university prohibition against interracial dating and marriage. Charitable organizations can, however, conduct activities such as strikes, economic boycotts, picketing, mass demonstrations, etc. as a means of furthering educational or charitable purposes so long as the activities are not illegal or contrary to clearly defined public policy.

Litigation as a Charitable Activity

Organizations may be able to conduct litigation as a means of advocacy and in furtherance of their charitable purpose without jeopardizing their tax-exempt status. Most commonly seen are organizations that litigate to enforce environmental legislation, consumer protection, and to defend human and civil rights secured by law. Therefore, it is not uncommon to see significant litigation during periods of political unrest and significant changes in public policy. In order to qualify as charitable, litigation must be conducted for a public, rather than a private, purpose. This does not mean that a nonprofit cannot represent individual plaintiffs; however, the litigation should be expected to have a significant impact beyond the interests of the specific plaintiffs represented by the nonprofit. Although well-recognized as a means to exemption, organizations seeking to operate as a public interest law firm are advised to review the IRS’s detailed guidance and restrictions regarding the firm’s operations, which are intended to ensure that that the operations further charitable purposes and are distinguishable from the operations of a for-profit law firm.

Attribution Issues

Charitable organizations must take precautions to prevent activities that could jeopardize exemption from being attributed to the charity as the result of the actions of individual staff or directors, members, or organizations with which the charity is affiliated or works in coalition. Individuals associated with charitable organizations do not lose their free speech rights when they are speaking outside of official organization functions and publications. However, attribution from staff member or director’s actions can occur when it could be inferred that speech from the individual is made under the authority of the organization or the action is ratified by the organization. Individuals associated with charities, particularly individuals who are generally viewed as speaking on behalf of an organization, should take care to clarify when they are speaking in their individual capacity. That care should be taken not just in more traditional modes of public communication such as speeches, op-eds, interviews, etc., but also in the individual’s social media communications (particularly if they use personal social media accounts to engage in organization-related or organization-endorsed speech).

Charities that organize their membership and supporters to engage in protests and other public demonstrations are not generally going to be held accountable for the unauthorized activities of individuals who engage in illegal activities as a part of a march or demonstration sponsored by the charity. However, if the organization encourages, authorizes, or otherwise ratifies the illegal activities of the individual members, such action may jeopardize the organization’s charitable status.

Similarly, organizations that work in coalition with other groups that are not 501(c)(3)s, including organizations that the charity may be closely affiliated with, must take care to ensure that activities of the coalition members that the charity cannot conduct itself are not attributed back to it. For example, if a 501(c)(3) has an affiliated 501(c)(4) or 501(c)(6), it must avoid the appearance of subsidizing the political campaign activities of the affiliated entity that the charity cannot itself conduct. In other situations, 501(c)(3) organizations may be working in coalition with a variety of organizations to advocate for an issue that is important to all involved groups. The charities involved in the coalition must take steps to ensure that activities that may be conducted by some coalition members, such as political campaign activity or excessive lobbying, are not attributed to the charity.

Conclusion

There are many ways, in addition to those discussed above, for charities to advocate for policies and positions that advance their charitable purposes and benefit their charitable constituency. All organizations engaging in advocacy activities should understand the compliance issues inherent in each type of activity, but particularly organizations that are newly engaging in a certain type of advocacy in response to political and public-policy changes. It is often necessary for charities to involve themselves in policy to ensure that communities lacking a voice (or a loud enough voice) in the political process are able to have their voices amplified and heard, particularly in these political times.

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