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Limits on political expenditures by sec. 501(c)(3) organizations.

Tax-exempt organizations often become involved in the political process by providing financial support to promote legislation or candidates favorable to their objectives. When this occurs, the question arises as to what effect the political expenditures may have on an organization's exempt status. The answer depends on the type of organization involved, as well as the nature and extent of the expenditures. Sec. 501(c)(3) organizations are bound by certain limitations; an organization making excess political expenditures can lose its exempt status and may face stiff excise taxes, which can be imposed on the organization as well as its manager.

Sec. 501(c)(3) defines the most common class of tax-exempt organizations, including, among others, those organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. There are two primary restrictions (contained in Sec. 501(c)(3) itself) that limit the political activities of a Sec. 501(c)(3) organization.

First, "no substantial part" of the organization's activities can involve "carrying on propaganda, or ... attempting to influence legislation." Regs. Sec. 1.501(c)(3)- 1(c)(3)(ii) provides that "attempting to influence legislation" includes contacting (or urging the public to contact) members of a legislative body for the purpose of proposing, supporting or opposing legislation, as well as advocating or opposing legislation. The second restriction precludes a Sec. 501(c)(3) organization from participating or intervening in "any political campaign on behalf of (or in opposition to) any candidate for public office." Each of these restrictions has a direct effect on the nature and amount of permissible political expenditures. -

Sec. 501(c)(3) organizations must proceed cautiously when dealing in the political arena, because of the vagueness of the "no substantial part" standard. The meaning of "substantial" in this context is not defined in either the Code or regulations, and the IRS currently relies on the "subjective balancing test" set out in Haswell, 500 F2d 1133 (Ct. Cl. 1974). The Haswell court provided little guidance as to when an exempt organization's political activities become substantial, providing only that the organization's political efforts "must be balanced in the context of the objectives and circumstances of the organization." The Court of Claims did suggest that one possible measure of an activity's substantiality is the relative amount of money devoted to political versus nonpolitical activities. The court declined, however, to adopt a percentage test, so that this measure of relativity will not be helpful in many situations.

Due to this uncertainty, organizations that devote more than a negligible amount of time, money or other resources to the influencing of legislation must be concerned with the possibility of losing their tax-exempt status. There may, however, be a safe harbor available. If an organization makes an election under Sec. 501(h), it can spend up to certain prescribed amounts to influence legislative activity without jeopardizing its exempt status. Under Sec. 501(h), if lobbying expenditures do not exceed certain "ceiling" amounts (determined under Sec. 4911), the "substantial" limitation on political activities will not be violated. On the other hand, if lobbying expenditures exceed the ceiling amounts during a four-year base period, the organization will lose its exempt status, and will be subject to a 25% excise tax on the excess amounts.

The Sec. 501(h) election is certainly worth considering, and the Service is increasing its pressure on organizations to make this election, most recently by requiring information on lobbying expenditures to be reported by nonelecting organizations on Form 990, Return of Organization Exempt From Income Tax, for 1992,

The second restriction under Sec.,501(c)(3) prevents an organization from participating in a political candidate's campaign or making any form of public statement about, or on behalf of, any candidate for public office. Unlike the "no substantial part" test for legislative activities, this restriction is an absolute prohibition. Any direct or indirect involvement in a campaign will cause the organization to lose its exempt status. In addition, stiff excise taxes may be imposed on both the organization and its manager. (Note: The concept of what constitutes campaigning activities is generally straightforward, but has on occasion been the subject of litigation.)

The regulations under Sec. 501(c)(3) provide an additional limitation on political activities by providing that an organization will not be exempt if it is organized as or operates as a political "action" organization. There are three types of activities that could cause this result, two of which mirror the lobbying and campaigning restrictions discussed earlier. The third restriction applies if the organization's primary objective may be attained only by legislation or the defeat of proposed legislation, and the entity "advocates, or campaigns for, the attainment of such ... objective" (Regs. Sec. 1.501(c)(3)-1(3)(iv)).

It should be noted that exempt organizations other than Sec. 501(c)(3) organizations are generally subject to significantly fewer restrictions on political activities in relation to their Sec. 501(c)(3) counterparts.


A thorough understanding of the complex restrictions that limit political expenditures by Sec. 501(c)(3) organizations is a necessity for practitioners advising these organizations. Running afoul of the myriad restrictions can result in the loss of the organization's tax-exempt status, as well as the imposition of substantial excise taxes on both the organization and its manager.
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Author:Smigelski, G. Todd
Publication:The Tax Adviser
Date:Dec 1, 1992
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