Organizations that are exempt from tax pursuant to sections 501(c)(4), 501(c)(5) and 501(c)(6) of the Internal Revenue Code (IRC) may engage in educating the public and advocating positions on legislative and policy issues that are important to their missions, so-called “issue advocacy” as well as in certain “political activity.” However, when these organizations engage in political activity, income in an amount equal to the lesser of the net investment income of the organization for the year or the amount expended on the activity is subject to federal income tax at the highest corporate tax rate.

The line is not always clear as to what constitutes issue or public policy advocacy and what constitutes political activity. This is particularly true when public policy advocacy also involves a candidate for public office. IRS has just published Rev. Rul. 2004-6, 2004-4 IRB 1 that attempts to distinguish between when an IRC 501(c) organization is engaged in exempt function issue advocacy and when it is involved in taxable political activity. While the revenue ruling does not address IRC 501(c)(3) organizations, the IRS guidelines may be helpful in advising 501(c)(3) s as to when they have crossed the line from allowable insubstantial lobbying activity into prohibited political activity.

Where political activity is considered to promote (or oppose) a person’s candidacy for federal office or is, otherwise undertaken in connection with a federal election, federal campaign finance laws impose certain restrictions and disclosures. The revenue ruling also serves as a reminder that IRC 501(c) organizations must comply with the rules of the Bipartisan Reform Act of 2002 (McCain-Feingold) in addition to the tax laws. Furthermore, the Federal Election Commission (FEC) has just issued Advisory Opinion 2003-37, which addresses situations in which issue advocacy and other types of activity by a political organization will trigger the application of the limitations and restrictions of the federal election law. Although the IRS ruling and the FEC opinion may currently apply to different groups, the positions are significant in that the agencies take substantially different approaches in defining political activity. The advisory opinion has just been issued. It is anticipated that there will be concurring and dissenting statements written by the individual commissioners on the opinion, and a rulemaking providing further guidance.

Background

IRC 501(c)(4) organizations may be organized for social welfare purposes but not for political purposes. Such organizations may engage in political activity if such activity is not the primary activity of the organization. Likewise, an IRC 501(c)(5) organization’s exempt purpose may be to better the conditions of those engaged in labor, agriculture, or horticulture. Organizations that are exempt from tax pursuant to IRC 501(c)(6) may be organized to promote a common business interest. These organizations may devote an unlimited amount of their resources to passing their legislative agendas regarding issues or causes of the organization. However, the Internal Revenue Code makes a distinction between promoting a public policy issue through advocating a legislative agenda and promoting or opposing a candidate, even if that support (or opposition) is because of the candidate’s position on an issue which is important to the organization’s exempt purpose, Although section 501(c)(4), 501(c)(5) or 501(c)(6) organizations may engage in both types of activities, the latter will trigger a tax to the organization under IRC 527(f). .

Political activity and political action committees

Where an organization clearly makes expenditures in support of or in opposition to a political candidate, this constitutes political activity and will be subject to tax if done directly by an IRC 501(c) organization. An IRC 501(c) organization (other than a 501(c)(3)) that wishes to be involved in political activities and not be subject to tax may establish a separate political arm, often called a “527 Organization” because of its place in the tax code. When a political organization’s activities rise to the level of making “contributions,” “expenditures,” “electioneering communications” or “express advocacy” for or against a federal candidate, then it will have to register as a “political committee” (or PAC) at the Federal Election Commission and will be subject to certain contributions limits and prohibition.

IRC 527 organizations (“political organizations and PACs”) accept contributions and make expenditures for political activity, that is, for the purpose of influencing the "selection, nomination, election, or appointment of any individual to any federal, state, or local public office or office in a political organization, or the election of presidential or vice-presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed.”

Political organizations need not be formally organized, and may be nothing more than a separately segregated fund of a 501(c)(4), 501(c)(5), or 501(c)(6) organization. In such situations the political organization or PAC is a “connected” PAC. A PAC also may be unconnected. The primary advantage of establishing a “connected committee” PAC is that the 501(c) organization may pay for the costs of operating and raising money for the PAC. However, a connected PAC may in general only solicit the members (and their families) of the connected organization (or in the case of a 501(c)(6) organization, shareholders and certain employees of the members. A political organization that is not connected to any other organization must pay for all its expenses from the political money it raises. It can, however, solicit anyone for a contribution. IRC 527 organizations have initial and continuing IRS reporting requirements.

Federal election laws

Certain political activity including “express advocacy” or "electioneering communication" is subject to the Federal Election Campaign Act of 1971, as amended (“FECA”), which is enforced by the Federal Election Commission. The scope of activities which is subject to that Act, was significantly expanded by the Bipartisan Campaign Reform Act of 2002 (BCRA) The FEC has jurisdiction over the financing of campaigns for the U.S. House, the U.S. Senate, the presidency, and the vice presidency. The federal campaign finance laws impose restrictions and public disclosure of funds raised and spent to influence federal elections.
The issue in conflict
The FEC issues advisory opinions (AOs) to persons seeking guidance on the application of the campaign finance law to their own specific activities. Most recently, advice was requested as to whether an unincorporated, nonconnected political committee that registered with the FEC must disclose and be restricted in its sources of funding when it makes expenditures for certain communications that refer to a clearly identified Federal candidate, but that do not expressly advocate the election or defeat of that candidate. The FEC advised that such activities would be subject to FECA’s disclosure requirements and funds used to pay for such activities would be subject to its restrictions.
The FEC has indicated that the Advisory Opinion only applies to those organizations that register as federal political committees, and that a separate FEC rulemaking process will address the same issue as it might apply to other IRC 527 and IRC 501(c) organizations. . The FEC ruling is significant in that it may extend the definition of candidate advocacy to communications that the IRS would not even consider to be political activity under Rev. Rul. 2004-6.

Advisory Opinion 2003-37

The Advisory Opinion responded to advice from Americans for a Better Country (“ABC”), a nonconnected PAC. The advice requested was whether certain expenditures would be subject to FECA because they involved a communication that “promotes, supports, attacks, or opposes” a candidate for federal office. The FEC held that the expenditures were subject to the federal campaign law restrictions as an “electioneering communication” even though the communication does not expressly advocate the election or defeat of the candidate.

The advisory opinion provides that:

An “electioneering communication” is a “broadcast, cable or satellite” communication that refers to a clearly identified candidate, is publicly distributed for a fee within 60 days of a general election or 30 days of a primary or preference election or nominating convention or caucus, and that is, in the case of a communication that refers to a Congressional candidate, “targeted to the relevant electorate”.

The black and white position of the FEC in the advisory opinion that is based on the number of days in which a communication coincides with an election, may in some cases, conflict with the IRS facts and circumstances approach taken in Rev. Rul. 2004-6, as illustrated below.

Rev. Rul. 2004-6

Regardless if an exempt organization has established a PAC, some of the public policy advocacy of the exempt organization may be considered taxable “political activity” when communication involves influencing the selection of any individual for public office. Whether a communication is for the purpose of influencing the "selection, nomination, election, or appointment of any individual to federal, state, or local public office or office in a political organization, or the election of presidential electors" is based on the particular facts and circumstances.

When an advocacy communication explicitly advocates the election or defeat of an individual
to public office, the expenditure is clearly a political expenditure. However, where the communication is not explicit, the facts and circumstances must be reviewed.

Rev. Rul. 2004-6 sets forth six factual situations that illustrate the distinction between public policy issue advocacy and political activity. All of the examples assume that a 501(c) organization, other than a 501(c)(3), solicits contributions through an advocacy communication. Also, the communication appears shortly before an election, “ targets the voters in that election,” and identifies a candidate for public office. Note that the IRS has indicated that a communication targets voters when it is directed at a group of individuals who can vote in an election in a particular location where a candidate is running for office.

The revenue ruling puts forth certain factors that are an indication of political activity. These factors include: the communication identifies a candidate running for public office; the communication coincides with an election; the communication targets voters in a particular election; the communication identifies a candidate’s position on a public policy issue; the position of the candidate on the public policy issue is raised in the communication or previously as a way of distinguishing the candidate from others in the election; and the communication is not part of an ongoing series of substantially similar communication by the organization on the same issue.

Factors that indicate that a communication does not constitute political activity include: the absence of any of the political factors listed above; the communication identifies specific legislation, or a specific event outside the control of the organization that the organization hopes to influence; the timing of the communication coincides with the specific event outside the control of the organization that the organization hopes to influence, for example, a legislative vote or major legislative action; the communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and the communication identifies the candidate solely in the list of key or principal sponsors of the legislation that is the subject of the communication.

Examples in the revenue ruling illustrate how the factors may be applied. Each situation assumes that political activity is not the primary purpose of the 501(c) organization. It also assumes that the organization has made the expenditure for the communication through its general treasury funds and that contributions are solicited in the communication.

In the first situation, an organization has a series of advertisements run throughout the year on increased spending for law enforcement. An ad run shortly before an election where Senator A (but not Senator B) is up for re-election asks the public to contact Senator A and Senator B about increased funding for law enforcement. The ad does not mention the position of either Senator A or Senator B on the issue, nor is there a legislative vote pending on the issue. The IRS concludes that because there was no distinction made between the position of the senators and because the ad had been run on a regular basis, the communication was not political activity, regardless of the fact that it was run in close proximity to an election.

In the second situation, a trade association advocates for increased international trade. A bill is pending in the senate on international trade and the vote on the bill coincides closely with the timing of elections. Senator C is up for re-election. The trade association runs an ad that specifically identifies the legislation that it supports and indicates that Senator C has opposed increased international trade. The communication asks individuals to write to Senator C to ask him to vote for the specific pending legislation. The IRS holds that this communication is not political activity regardless of the fact that it coincides with the election and targets voters in the election because the communication merely identifies Senator C as a public official who can take action on specific legislation important to the organization. In essence, the fact that the election and the vote on the bill happen to coincide was an event beyond the control of the exempt organization.

The third situation involves a case where a 501(c)(4) organization that promotes public health publishes an ad repeatedly in several large state newspapers shortly before an election in which Senator D is a candidate for re-election. The ad is not part of an ongoing series of ads. The ad states that a public hospital in the state cannot be built without federal assistance and asks the public to let Senator D know you agree about the need for federal funding for hospitals. The ad states that Senator D has voted for two bills in the past that have provided for federal assistance for hospitals. Although a bill has been introduced on the subject, no imminent legislative action on the bill exists. Under these facts and circumstances, IRS holds that the expenditure is taxed as political activity because the ad is run shortly before an election, is not part of a larger series of ads on the same issue, identifies Senator D, targets voters in the election, identifies Senator D’s position with the organization’s position, therefore no imminent legislative action is taken on the bill. This is the IRS position regardless of the fact that Senator D’s position is not distinguished from any other candidate running in opposition.

In the fourth situation, an IRC 501(c)(4) organization that advocates for improved public education finances an ad that is broadcast several times before a gubernatorial election calling for increased public school funding. The ad is not part of a series of similar advocacy statements. The ad cites statistics regarding the under-funding of schools in the state and requests that the public “Tell Governor E what you think about our under-funded schools.” The governor’s opponent had made school funding and the fact that the governor refused to raise taxes to support the schools a campaign issue. At the time of the broadcast, no legislative vote is pending regarding public school funding. Based on these facts, IRS holds that the expenditure is for political activity regardless of the fact that the ad did not explicitly identify the governor’s position on school funding because the governor’s opponent had raised the issue as a campaign issue. IRS further based its conclusion on the timing of the ad to coincide with the election and the lack of coincidence with any specific legislative activity.

Situation 5 involves a 501(c)(4) organization that advocates abolition of the death penalty in a specific state. The organization regularly finances television ads opposing the death penalty and runs the ads shortly before scheduled executions. One such ad is run shortly before the gubernatorial election that coincides with a scheduled execution. The ad, like all other ads by the organization, cites statistics about the death penalty and says, “Call or write Governor F to demand that he stop the upcoming execution of G.” IRS holds in this case that the ad does not constitute political activity because it is part of a series of ads that are run before scheduled executions that the organization is attempting to influence and the scheduling of the execution is outside the control of the organization. Furthermore, the governor is identified, not because he is a candidate, but rather, because he is in a position to take action on the public policy issue.

Situation 6, in contrast, involves an IRC 501(c)(4) organization that also advocates abolition of the death penalty. The ad that it runs is not part of a series of similar ads and it is not run coincident with a scheduled execution. Rather, the ad is run shortly before the gubernatorial election, and notes that the governor has supported the death penalty in the past and his opponent does not support the death penalty. The ad states, “Call or write Governor H to demand a moratorium on the death penalty in State Z.” Even though the ad states the same statistics on the death penalty as the ad in Situation 5, the ad appears shortly before the gubernatorial election, identifies the governor’s position as contrary to his opponent’s, does not coincide with a scheduled execution and is not part of a series of similar communication. On the basis of these factors, the IRS concludes that the ad is a political expenditure that is subject to tax.

Conclusion

The consequences of an IRC 501(c) organization engaging in political activity can be severe. IRS and the FEC have provided seemingly conflicting guidance in this area. Tax exempt organizations that make expenditures for public policy communications should review the rules of both agencies closely.