Election-year focus on lobbying and political activities of public charities.

Political and lobbying activities undertaken by some charities have drawn recent scrutiny from the IRS, Congress and the media. According to a recent IRS report, political intervention by charities noticeably increased during the 2004 election season, with nearly 75% of the completed examinations revealing that the charities under examination had engaged in some degree of prohibited political activity.

The IRS's findings are especially relevant during this election year. Charities need to monitor closely their activities to avoid engaging in prohibited political or lobbying activities, which can trigger a variety of IRS sanctions. The rules for political and lobbying activities of public charities vary depending on the type, scope and amount of activity conducted.

Lobbying Activity

Lobbying activities include attempts to influence legislation. Legislation includes action by Congress, state legislatures, local councils or similar governing bodies with respect to acts, bills, resolutions or similar items. Legislation does not include actions by executive, judicial or administrative bodies. An organization attempts to influence legislation by contacting, or urging the public to contact, members or employees of a legislative body for the purposes of proposing, supporting or opposing legislation, or by advocating the adoption or rejection of legislation.

Public charities may engage in lobbying as long as it does not constitute a "substantial part" of their total activities. The Code uses one of two tests to determine whether a charity engages in a permissible level of lobbying: the "substantial part" test or the elective expenditure test.

Under the "substantial part" test of Sec. 501(c)(3), the IRS considers both quality and quantity. If it determines a public charity has engaged in excessive lobbying activities, it may revoke the charity's tax-exempt status. Also, with the exception of churches, the Service may impose excise taxes on both the organization and its managers.

On the other hand, Sec. 501(c)(3) organizations (other than churches and private foundations) can elect the expenditure test under Sec. 501(h). This election provides an alternative mechanical method, under which the charity's lobbying activities will not jeopardize its tax-exempt status as long as its expenditures do not exceed certain limits. If the charity exceeds its lobbying expense limit in any one year, it becomes subject to a 25% excise tax on the excess expenditures. The charity may lose its tax-exempt status if it engages in excessive lobbying activity over a four-year period.

An organization may become involved in issues of public policy without engaging in lobbying activities. Activities that do not constitute lobbying include conducting (on a nonpartisan basis) educational meetings, preparing and distributing educational materials or considering public policy issues in an educational manner.

Political Activity

Political activities by charitable organizations are absolutely prohibited. Sec. 501(c)(3) organizations may not directly or indirectly participate, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office. The prohibition applies to campaigns at the Federal, state and local levels. According to the IRS's report, a charity that violates these restrictions may be subject to written warnings, denial or revocation of tax-exempt status, or excise taxes. Examples of prohibited political activities include contributions to political campaign funds, public statements of position (either verbal or written) that favor or oppose a candidate, distributing statements prepared by others that favor or oppose a candidate, and allowing a candidate to use a charity's assets or facilities if other candidates are not given an equivalent opportunity.

A charity may invite political candidates to speak at its events without necessarily jeopardizing its tax-exempt status. The candidates may speak in their capacity as individuals or as candidates. For instance, a candidate might be a celebrity, a military leader or an expert in a nonpolitical field. In such a case, the charity could ask the candidate to speak about personal experiences. If, however, the candidate intends to speak on issues regarding a current political campaign, the charity must ensure that (1) it provides an equal opportunity to other political candidates seeking the same office, (2) it does not indicate any support of, or opposition to, the candidates (which should be stated explicitly in the introductions) and (3) there is no political fundraising.

Sec. 501(c)(3) charitable organizations can engage in "issue advocacy" by taking a position on public policy issues, but they must avoid issue advocacy that functions as political campaign intervention. The differentiating factor generally hinges on whether the organization expressly or implicitly encourages voters to vote for or against a specific candidate. Communications must be considered in context before a determination can be made as to whether they constitute acceptable issue advocacy or prohibited political campaign intervention.

There are no bright-line tests to determine whether a charity is involved in prohibited political campaign intervention. A charity might engage in several different activities, none of which constitutes political activity on its own. When viewed as a whole, however, the activities may indicate that the organization has engaged in political activity. When making its determination of whether a charity has violated the political campaign intervention rifles, the IRS will consider all relevant facts and circumstances.

FROM GRETCHEN KURHAJETZ, CPA, WASHINGTON, DC