501(c)(3)s and the 2016 Federal Election: Do You Know What Your Employees Are Doing?

As the 2016 presidential primary season proceeds, we are quickly approaching the summer conventions and the November presidential election. With the political contests becoming more heated, this post is part of a new series on what different entities and groups need to know about their political activity as the 2016 election approaches.

There are many obvious benefits to earning the designation of a 501(c)(3) charitable organization—the organization is exempt from tax and donations are deductible. But the Internal Revenue Code places a key limitation on all 501(c)(3) organizations by prohibiting them from engaging in any political activity. Violation of this prohibition on political activity may lead the IRS to refuse or revoke 501(c)(3) status. A 501(c)(3) therefore must avoid any partisan activity that supports or opposes political candidates or political parties.

A 501(c)(3) generally MAY NOT:

  • Make political contributions (monetary or in-kind).
  • Issue a statement that supports or opposes a candidate (e.g., stand-alone statements, statements in newsletters, or material on a website).
  • Endorse a candidate.
  • Ask a candidate to sign a pledge on any issue.

However, a 501(c)(3) may generally engage in non-partisan activity that is related to the democratic process. Therefore, a 501(c)(3) generally MAY:

  • Engage in non-partisan election-related activities such as get-out-the-vote and voter registration drives.
  • Engage in limited lobbying (related to the mission of the organization), including ballot-measure advocacy.
  • Educate all candidates on issues within the purview of the organization.
  • Conduct non-partisan public-education and training sessions about participation in the political process.
  • Prepare and disseminate non-partisan candidate questionnaires and sample ballots.

However, the officers, directors, and employees of a 501(c)(3) retain the right to personally engage in political activity (just as we described in our recent post on political activity for corporations). A 501(c)(3) must simply be careful to avoid allowing organization resources (from mailing lists to letterhead) to be used for political activity or permitting individuals to engage in political activity that suggests the support or endorsement of the organization.

Explaining Jon Stewart’s Monologue on Campaign Finance

After more than 16 years at the helm of The Daily Show, Jon Stewart hosted his final episode last night. The hour-long show devoted most of its running time to Stewart saying farewell to the correspondents and staffers who have played a part in the show’s history. But Stewart found time to deliver a short monologue on how truth is often obscured in business, policy, and politics. (Because this is a family-friendly Corporate Political Activity Law Blog, we won’t mention the term Stewart repeated throughout the monologue.) One strategy, Stewart explains, is hiding the truth through complexity:

Hey, a handful of billionaires can’t buy our elections, right? Of course not. They can only pour unlimited, anonymous cash into a 501(c)(4) if 50% is devoted to issue education, otherwise they’d have to 501(c)(6) it, or funnel it openly through a non-campaign coordinated Super PAC.

Here’s a quick overview of the campaign-finance concepts that Stewart referenced, which also doubles as a handy primer on the different ways money is raised and spent on political activity.

  • For federal elections, the making of political contributions to a candidate or a political party is subject to both contribution limits and disclosure requirements. The FEC has jurisdiction over these issues.
  • Tax-exempt organizations are not subject to the FEC’s jurisdiction. Instead, the IRS ensures that 501(c) organizations do not engage in prohibited political activity. A 501(c)(3) organization, for example, may not engage in any political activity but may engage in limited lobbying expenditures. In contrast, a 501(c)(4) or a 501(c)(6) may carry on partisan political activity so long as political activity is a secondary—and not the primary—activity of the organization. The IRS has expressed an apparent tolerance of political activity by 501(c)(4)s and 501(c)(6)s, so long as the political activity is less than 50% of the organization’s total activity. A 501(c)(4) or a 501(c)(6) may also engage in unlimited lobbying expenditures. There are no limits on the money that may be donated to 501(c) organizations and the donations are not subject to disclosure.
  • As we’ve discussed here on the blog, a Super PAC is a political organization that may only make independent expenditures, which means that they are not coordinated with candidates. A Super PAC may raise unlimited funds but it is required to disclose its contributors.

Stewart is right. The world of campaign finance can be complicated. Although he will no longer be around to explain the complexities of campaign-finance law, we will!

What is a Super PAC?

The Wall Street Journal’s Washington Wire has reported that in the first half of 2015, presidential Super PACs have raised a total of $211,457,755. This money is in addition to money raised directly by presidential candidate committees and does not include money raised by 501(c)(4) entities that might be involved in the political process.

Since Citizens United was decided in 2010, Super PACs have been a hot topic. Despite all of the press and discussion, it seems that confusion still surrounds Super PACs. So, we decided to go back to the basics:

  • A Super PAC is an independent-expenditure-only committee, which means that it can only spend its money on expenditures that are not coordinated with candidates.
  • A Super PAC may not make contributions to candidate committees.
  • A Super PAC may raise unlimited funds.
  • A Super PAC is required to disclose its donors.
  • A Super PAC may be registered with the IRS, the FEC or a state election commission (depending on the nature of the Super PAC’s focus and activities).
  • A Super PAC may be required to file reports with more than one government entity (depending on the nature and timing of its activities).

 

IRS Changes the Game?

On Wednesday November 26, 2013, the US Department of Treasury and Internal Revenue Service issued proposed guidance, subject to a comment period, that would limit the scope of permissible political activities of 501(c)(4) social welfare groups. Under the new guidance, the IRS will move away from the “facts and circumstances” test long-employed in evaluating 501(c)(4) political activity and instead use bright-line rules.

The Treasury and the IRS plan to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).

As there is a comment period, any new rules will not likely be in place until after the 2014 elections.

IRS Issues Initial Report on 501(c)(4) Controversy

This week the Internal Revenue Service issued a report to assess the scandal that has been plaguing the agency ever since a Treasury Inspector General Report came out that, as the report cites, found that:

The IRS used inappropriate criteria that identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention. Ineffective management: 1) allowed inappropriate criteria to be developed and stay in place for more than 18 months, 2) resulted in substantial delays in processing certain applications, and 3) allowed unnecessary information requests to be issued.

The report is meant to provide “an initial set of conclusions and action steps, along with an explanation of the additional review and investigatory activities underway.”

Interestingly, the report establishes a new voluntary process for organizations that have been subject to a backlog for more than 120 days to gain expedited approval to operate as a 501(c)(4) through self-certifying to certain thresholds and limits to political and social welfare activities.  Specifically, organizations can self-certify if:

  1. The organization has spent and anticipates that it will spend less than 40% of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on direct or indirect participation or intervention in any political campaign on behalf of (or in opposition to) any candidate for public office (within the meaning of the regulations under Section 501(c)(4)); and
  2. The organization has spent and anticipates that it will spend 60% or more of both the organization’s total expenditures and its total time (measured by employee and volunteer hours) on activities that promote the social welfare (within the meaning of Section 501(c)(4) and the regulations thereunder).

The IRS notes that the “thresholds reflected in the representations are criteria for eligibility for expedited processing rather than new legal requirements.”

The report also spells out additional criteria as to what constitutes “direct or indirect participation or intervention in any political campaign”:

  1. Any public communication within 60 days prior to a general election or 30 days prior to a primary election that identifies a candidate in the election.
  2. Conducting an event at which only one candidate is, or candidates of only one party are, invited to speak; and
  3. Any grant to an organization described in Section 501(c) if the recipient of the grant engages in political campaign intervention.