I. ELECTION YEAR ISSUES by Judith E
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I. ELECTION YEAR ISSUES by Judith E. Kindell and John Francis Reilly 1. Introduction In a presidential election year, many exempt organizations become more active in what has been loosely termed "political activity". Some exempt organizations use this opportunity to encourage people to participate in the electoral process. Others increase their advocacy activity to take advantage of the heightened awareness given to many issues during the course of a campaign. This advocacy activity may be to raise public awareness of particular issues, to influence the passage of legislation concerning particular issues (lobbying), or to elect candidates based upon their position on particular issues (electioneering). The Internal Revenue Code distinguishes between these types of activities, potentially resulting in differing tax consequences. This article focuses on the federal tax rules applicable to exempt organizations concerning electioneering activities.1 Questions frequently arise regarding the interplay of political campaign activities and exemption from federal income tax. This article addresses many of these questions in three areas: the prohibition on political campaign activities of IRC 501(c)(3) organizations, the taxation of political organizations under IRC 527, and the political campaign activities of IRC 501(c) organizations other than those described in IRC 501(c)(3). Much has happened since the publication of this article's predecessor, "Election Year Issues," in the Exempt Organizations Continuing Professional Education Technical Instruction Program for Fiscal Year 1993 (hereinafter 1993 CPE Text). A development of singular importance occurred on July 1, 2000, when President Clinton signed Public Law 106-230, which amends the treatment of political organizations under IRC 527. The new law, which became effective immediately, imposes three different reporting and disclosure requirements on IRC 527 organizations: (1) an initial notice, (2) periodic reports on contributors and expenditures, and (3) modified annual returns. Included in this article is a description of the provisions of Public Law 106-230 and the steps that the Service is taking to implement the law. This article also takes into consideration comments that were generated by the 1993 CPE Text. Of particular importance has been the "Commentary on IRS 1993 Exempt Organizations Continuing Professional Education Technical Instruction Program Article on 'Election Year Issues,' prepared by individual members of the Subcommittee on Political and Lobbying Activities and Organizations of the Committee on Exempt Organizations of the Section on Taxation, American Bar Association" (Feb. 21, 1995), reprinted in 11 Exempt Organization Tax Review 854 (Apr. 1995), 1 For an overview of the federal tax rules concerning political and lobbying activities by exempt organizations, see "Appendix B: Present-Law Rules Governing Political and Lobbying Activities of Tax-exempt Organizations," Staff of the Joint Committee on Taxation, 106th Cong. 2nd Sess., Report of Investigation of Allegations Relating to Internal Revenue Service Handling of Tax-Exempt Organization Matters 122 (Joint Comm. Print 2000)(hereinafter 2000 Joint Committee Report). For a detailed description of the federal tax rules applicable to lobbying activities of exempt organizations, see "Lobbying Issues," Exempt Organizations Continuing Professional Education Technical Instruction Program for Fiscal Year 1997 (hereinafter 1997 CPE Text). Election Year Issues (hereinafter 1995 ABA Comments). Where we have agreed with the 1995 ABA Comments and, where feasible, we have used such comments to update or modify treatment of issues in the 1993 CPE Text. However, some issues mentioned and positions proposed in the 1995 ABA Comments are not discussed here because of the nature of this article. This article is a training document and, as the introduction to all of the Exempt Organization CPE texts states: "The text is for educational use only. It is not authority, and may not be cited as such. It may be used as a research tool, but not as a substitute for analysis and research of citable legal authority." Consequently, where, as in some instances, the 1995 ABA Comments request additional guidance, the Service can be responsive only in a precedential document, and this article is not a document of that type. Like the 1993 CPE Text, this article employs a question and answer format. A listing of the subjects appears at the end of this article. A word of warning, though -- many questions, particularly respecting IRC 501(c)(3) organizations and the political campaign prohibition, do not admit of a bright-line answer. In these areas, the facts and circumstances of a particular situation will control; therefore, some "answers" will instead consist of a description of the factors to be evaluated in reaching a determination. 2. IRC 501(c)(3) Organizations and the Political Campaign Prohibition A. History of the Statutes (1) Enactment of the Prohibition Prior to 1954, there was no statutory provision absolutely prohibiting organizations described in the antecedents of IRC 501(c)(3) from engaging in political campaign activities.2 The political campaign prohibition does have a vague and unenacted antecedent, however. What eventually became the Revenue Act of 1934, under which the lobbying restriction of IRC 501(c)(3) was first enacted, at one time contained a provision extending the prohibition to "participation in partisan politics." S. Rep. No. 73-558, 73d Cong., 2d Sess. 26 (1934). The provision, however, was deleted in conference, so that only the lobbying restriction remained. H.R. Conf. Rep. No. 73-1385, 73d Cong., 2d Sess. 3-4 (1934). In explaining its deletion, Representative Samuel B. Hill stated: "We were afraid this provision was too broad." 78 Cong. Rec. 7,831 (1934). During Senate consideration of what became the Revenue Act of 1954, Lyndon Johnson, then Senate Minority Leader, added a floor amendment to provide that IRC 501(c)(3) organizations may not "participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office." Johnson stated ". [t]his amendment seeks to extend the provisions of section 501 of the House bill, denying tax-exempt status to not only those people who influence legislation but also to those who intervene in any 2 For a discussion of the common law treatment of charities and political activity, see Debra Morris, "Political Activity and Charitable Status at Common Law: In Search of Certainty," in Political Activities: Nonprofit Speech, New York University School of Law National Center on Philanthropy and the Law Conference (1998) reprinted in 23 Exempt Organization Tax Review, 247 (Feb. 1999). 336 Election Year Issues political campaign on behalf of any candidate for public office." 100 Cong. Rec. 9,604 (1954). The amendment was accepted; no debate or discussion took place. The Conference Report (H.R. Conf. Rep. No. 83-2543, 83d Cong., 2d Sess. (1954)) contains no further discussion of the amendment. There is an obvious disconnect between the language of the provision and the stated intent of its author. The 1954 amendment prohibits political campaign activities by IRC 501(c)(3) organizations while the provision to which it is analogized only restricts attempts to influence legislation by those organizations. This is a knot no one has been able, or even attempted, to untangle.3 (2) Private Foundations and Electioneering Activities In 1969, a number of provisions were enacted concerning the treatment of private foundations. Under one provision, an initial tax in an amount equal to 10 percent of each taxable expenditure and an additional 100 percent tax on each taxable expenditure previously taxed and not corrected within the taxable period is imposed on the private foundation. In addition, taxes are imposed on foundation managers who agreed to the making of the taxable expenditure. IRC 4945. A taxable expenditure includes any amount paid or incurred by a private foundation to influence the outcome of any specific public election or to directly or indirectly carry on any voter registration drives, unless certain requirements are met. IRC 4945(d)(2). Thus, due to the Tax Reform Act of 1969, a private foundation that participates in a political campaign not only risks losing its exemption, it also is subject to tax on the amounts it expends for such participation. Taxes on private foundation expenditures to influence the outcome of any specific public election or to carry on voter registration drives did not seem likely when the House Committee on Ways and Means began its hearings on private foundation activities -- the Chairman's press release, which outlined the hearings' agenda, made no mention of this kind of activity. Tax Reform 1969: Hearings Before the House Comm. on Ways and Means, 91st Cong., 1st Sess. 3-11 (1969) (press release of Chairman Wilbur D. Mills). However, testimony given almost at the outset of the hearings raised the specter of private foundation involvement in the electoral process. First, in a rather scathing manner, an incumbent congressman testified that a private foundation had been used against him in a primary election. Id. at 213-237 (statement and testimony of Representative John J. Rooney).4 Soon thereafter, the President of the Ford Foundation became embroiled in a lengthy and often acrimonious discussion with various Committee members over both the 3 Hypotheses as to why Johnson proposed enactment of the prohibition are discussed in Appendix I. 4 Subsequent to Representative Rooney's testimony, his primary opponent (and, oddly enough, eventual successor in Congress) appeared before the committee and denied all of Rooney's allegations. Id. at 1036-1056 (statement and testimony of Frederick W. Richmond). Wherever the truth lay, however, was not critical -- Rooney's words, ". this political gimmick is a threat to every officeholder, in Congress or elsewhere, who does not have access to a fat bankroll or to a business or to a private foundation" (id. at 213), spoke to what could happen, whether or not it actually occurred in the particular case.