• Political Campaign Activities – Exempt organizations cannot participate or intervene in a political campaign on behalf of or in opposition to a candidate for public office; and
• Lobbying Activities – “No substantial part” of an exempt organization’s activities can consist of carrying on propaganda or otherwise attempting to influence legislation.

As the 2012 election campaigns kick into high gear, charities and other 501(c)(3) organizations need to be aware of the IRS guidelines on political campaign activities. This post will focus on the area of prohibited political campaign activities.  We will follow up with a separate post discussing the lobbying activity rules.

Political Campaign Intervention

Non-profit organizations cannot directly or indirectly participate or intervene in a political campaign.  Examples of prohibited activities include:

• Contributing to political campaigns of a candidate for public office;
• Making verbal or written statements on behalf of or in opposition to a candidate for public office;
• Commenting on specific statements or positions taken by a candidate for public office;
• Using the nonprofit’s resources to support a particular candidate for public office; or
• Sponsoring events that promote a promote candidate for public office.

Political campaign intervention is serious stuff.  Even one act of intervention or participation in a political campaign can cause loss of tax exemption and an excise tax on the nonprofit organization.

What constitutes intervention in a political campaign?

Although participation or intervention in a political campaign is prohibited, certain “voter education” activities are not. How do we distinguish between prohibited political campaign intervention and permissible voter education?  Here are a few guidelines to keep in mind:

• Activities that are done in election season are particularly dangerous.  The closer the election, the more likely the activity will be considered impermissible intervention in a campaign.
• Publication of Congressional incumbents’ voting records on selected issues in a nonpartisan manner has been held not to constitute intervention in political campaign.
• A forum held for the purpose of educating and informing voters, and which provides fair and impartial treatment of candidates, and does not promote or advance one candidate over another, does not constitute participation or intervention in any political campaign on behalf of or in opposition to any candidate for public office.

In each case, nonpartisan participation is key to a finding that the activity is voter education (as opposed to campaign intervention).  If a public forum is involved, all legally-qualified candidates should be invited and given equal opportunity and time to present their position.  The organization must be very careful to present the facts as impartially as possible.

Who is a candidate for public office?

Questions sometimes arise about who is a “candidate for public office” within the meaning of the political campaign activity rules.  IRS regulations define a candidate to include anyone offering himself or herself or proposed by others for national, state, or local public office.  IRS rulings and case law have added a few clarifications to this general definition:

• Candidacy does not depend on whether the election is contested (i.e., an unopposed candidate is still a candidate).
• Candidacy does not depend on whether the election involves political parties.
• “Candidate” includes incumbents who have not formally announced their candidacy but are likely to do so.
• Status as a prominent public figure does not make one a candidate, even if accompanied by public speculation about a future run for office.
• Judicial nominees are not candidates.

There is often a fine line between impermissible endorsement of a candidate and support of a prominent donor or other public figure.  As we near the 2012 elections, organizations should tread carefully in this area.

When will political campaign activities of leaders or members be attributed to the organization?

Sometimes the directors of an organization are themselves influential public figures who want to lend their support to a particular candidate.  In this situation, the director must make it clear that it is the director (and not the nonprofit organization) that is endorsing the candidate.  If the nonprofit organization is mentioned, it must only be for identification purposes.  There should be no doubt that the endorsement is the director’s individual capacity and does not represent the position of the nonprofit organization.

Next month, we will discuss lobbying activities by exempt organizations.

The law is only expected to affect 3,500 people, but could raise up to $100 million in this year alone.  The added revenue will bolster New York’s sagging budget, which is currently in a crisis.  But, as is often the case with the tax laws, the benefit to one group comes at a detriment to another.  In this case, nonprofits stand to lose when state law chips away at their donors’ tax incentive for giving. 

Heiress and philanthropist Abigail Disney, who seems to be becoming quite the tax policy expert, has decried the tax, believing that it will cause a significant decrease in charitable giving:

The last thing on earth charities need is a disincentive from the government to people who are their donors, especially their biggest donors. Because the biggest donors are the people who are least hurt by this economic downturn and more likely to be there every year with the kind of general- support money and reliable money that these organizations need.

Many charities and charity advocacy groups fear that the New York law could set a trend in states that are also dealing with budget shortfalls.  Congress might also follow suit to help finance President Obama’s health care initiatives. 

The Obama administration has defended proposed deduction caps, believing that they will have little real impact on charitable giving.  In a White House press briefing, Peter Orszag, director of the White House Office of Management and Budget, was asked whether the caps on charitable contributions would chill philanthropic giving.  His response:

I really don’t think so.  I think what drives charitable contributions is overall economic growth … It’s … not done for a tax incentive, but rather out of benevolence or some other related desire. 

Despite the White House’s dismissive tone, I believe that the concerns voiced by the charities are justified.  The White House’s view that American’s give purely out of disinterested benevolence can only come through rose-colored glasses.  And anyone who believes that tax incentives do not contribute to philanthropic giving has never worked in the charitable planning arena.  When estate planning clients are faced with a “give it to charity or give it to Uncle Sam” scenario, many chose the former.  The increasing popularity of charitable giving techniques like charitable lead trusts and charitable annuity trusts are driven primarily, though not exclusively, by tax incentives.  Any tinkering with this tax structure will have an effect.  The only question is: how much?

The so-called parsonage exclusion comes from Section 107 of the Internal Revenue Code.  It allows ministers to avoid taxes on income that is earmarked for their housing.  The statute provides that reasonable rental allowances are not included in the income of a “minister of the gospel.” 

Anti-religious groups claim that this exclusion favors churches by allowing its employees (ministers) to receive income that is free from tax.  It also allows churches to reduce their overall salary costs.  These same benefits are not available to secular nonprofits. 

The constitutional challenge was brought by the Freedom from Religion Foundation, a nonprofit organization that advocates for separation between church and state and promotes atheism.  The complaint claims that the exclusion promotes religious organizations and discriminates against secular organizations that “promote atheism, humanism, secularism, and other non-religious worldviews.” 

The complaint further claims that the exclusion promotes excessive entanglement of church and state by requiring the IRS to make fact-sensitive religious inquiries.  According to the complaint, these inquiries include:

Whether certain activities constitute “religious worship” or “sacerdotal functions;” whether a member of the clergy is “duly ordained, commissioned, or licensed,” or whether a Christian college or other organization is “under the authority” of a church or denomination. 

The lawsuit also challenges provisions of the California Revenue and Taxation Code that contain similar language to the Federal statute.

Judge Shubb of the Eastern District of California has declined to summarily dismiss the suit.  His language implies that he believes that the Foundation may have a good case: 

[P]laintiffs have alleged sufficient facts which, if accepted as true, ‘leave open the possibility’ that an objective observer would determine that §107 goes too far in aiding and subsidizing religion by providing ministers and churches with tangible financial benefits not allowed secular employers and employees . . . In sum, the court believes that plaintiffs have sufficiently alleged that a reasonable and objective observer would perceive §107 as endorsing religion and as having a predominately non-secular effect.

The issue was last before the courts in 2002, when the IRS disagreed with pastor and author Rick Warren’s claim that all of his housing should be free from tax under the parsonage allowance.  Before the Ninth Circuit could rule, Congress passed the Clergy Housing Allowance Clarification Act of 2002 to limit the parsonage exemption to “reasonable rental value.”  This made the Warren case moot and took the issue out of the spotlight for the past few years. 

Loss of the parsonage exclusion would be detrimental to churches and could cost clergy billions of dollars in tax breaks.  The Warren case provides a good roadmap for churches and religious organizations (CLS?) who want to support the exemption: be active, intervene, file amicus briefs.  You can bet that the other side will be doing the same. 

The case involved the Foundation for Human Understanding (Foundation), a religious organization whose teachings are “based upon Judeo-Christian beliefs and the doctrine and teachings of its founder, Roy Masters.”  The Foundation has been operating since 1963 and was first recognized as tax-exempt in 1965.

The IRS denied the Foundation’s church status in 1983, but later lost in Tax Court. The Tax Court’s decision emphasized the Foundation’s traditional church activities, which included regular services in Los Angeles and Oregon, a school to indoctrinate children in its beliefs, seminars and meetings on an off-site ranch, and regular religious services for established congregations. The Foundation has always devoted substantial resources to its radio broadcasts and print materials. But the Tax Court felt that these activities did not override other indications that the Foundation operated as a church.

In the 1990s, the Foundation changed its operational model. The Foundation moved the school into a separate nonprofit organization, sold the buildings that it used for worship, and began holding off-site seminars less frequently. The Foundation’s primary activities consisted of spreading its message through print materials and radio broadcasts.

In 2001, the IRS took another look at the Foundation’s activities and decided that, although the Foundation did qualify as a religious organization under section 501(c)(3), it was not a church. The Foundation challenged the IRS’s determination and lost at trial. On appeal, the Court of Appeals for the Federal Circuit had to determine whether the Foundation was a “church” within the meaning of the tax laws.

The distinction between religious organizations and churches isn’t always easy to draw, especially since the Internal Revenue Code does not define “religion” or “church.”  It is clear that not all religious organizations are churches, although all churches are religious organizations.  Because churches are generally subject to less stringent reporting requirements and are presumptively exempt from taxation, many religious organizations would prefer to be classified as churches.  

Applying the associational test for church status, the Court of Appeals looked for evidence that the Foundation conducted regular services with regular congregations. Although the Foundation continued to conduct seminars at the ranch, the seminars were infrequent and attended by different groups. The Court did not believe that these sporadic gatherings were enough to allow a defined group of congregants to establish a “community of worship.”

The Foundation argued that its “electronic ministry” was enough to qualify it as a church. This ministry involved worshipping as a “virtual congregation” by listening to regularly-scheduled sermons over the Internet and radio. The Court characterized these activities as dissemination of information, an activity that falls short of the association necessary to qualify an organization as a “church.”  Because it believed that these activities did not allow a true communal experience (regular worship by a regular congregation), the Court upheld the IRS’s determination that the Foundation did not qualify as a church

This decision should be taken as a warning to virtual churches (also called simchurches) that intend for virtual services to qualify it as a church under the Internal Revenue Code.  Traditional churches that operate an “internet campus” may not have much to worry about.   The Court of Appeals seemed to think that traditional worship coupled with internet activities would be enough.  As long as churches maintain traditional activities that involve regular meetings of an established group of worshippers, the existence of an online campus to supplement the traditional activities should be allowed. 

But an increasing number of churches are operating exclusively over the Internet.  These churches have sparked theological discussion about whether an online church is really a church.  And it appears that the IRS and courts are asking the same questions. 

Foundation of Human Understanding v. United States, No. 2009-5129 (Ct. App. Fed. Cir. 2010).  Get the full text of the opinion here.

The annual information return requirement for small organizations is a new provision, enacted as part of the Pension Protection Act of 2006.  Before that, small exempt organizations (with gross receipts of $25,000 or less) didn’t need to file informational returns. 

The PPA provides that organizations that fail to file a return for three consecutive years will automatically lose tax exempt status.  This would require organizations that lose tax-exempt status to reapply for exemption.  Any income earned in the interim between the loss of exemption and reinstatement of exemption could be taxable.  Churches and integrated auxiliaries of churches are not subject to the new requirement. 

Based on the 300,000 small nonprofits that are on the IRS’s revocation list, charity watchdog Guidestar.org estimates that the tax-exempt sector could shrink by up to 25 percent as a result of this new rule. As we near the end of the filing period for third year since the law’s enactment, many small mom-and-pop nonprofits are on the verge of losing tax exemption. 

The special filing relief program gives small nonprofit organizations that failed to file required returns for 2007-2009 until October 15, 2010, to file their returns.  The relief is not available to organizations with more than $25,000 in gross revenue. 

All small exempt organizations should check the list and, if listed, file all necessary returns as quickly as possible.  The informational returns are filed on Form 990.  Organizations with gross receipts of $25,000 or less (which will probably include most of the organizations at risk) only need to file the relatively short Electronic Notice Form 990-N.

Courts have long recognized that the First Amendment raises sensitive questions regarding the government’s ability to tax religious institutions.  Since colonial times, American churches have enjoyed exemption from taxes.  This exemption was later carried over into Section 501(c)(3) of the Internal Revenue Code. 

While both churches and religious organizations are exempt from Federal income taxes, only churches are presumptively exempt, without the need for applying for recognition of tax exemption or filing annual informational returns. This, along with a few other benefits, has created incentives for religious organizations to characterize themselves as “churches.”

The IRS generally treads cautiously in denying religious exemption to organizations that purport to be churches.  The Internal Revenue Code and regulations make no attempt to define terms like “religion” and “church.”  And the Supreme Court has warned fact-finders not to overstep their bounds in this area.  In a case involving mail fraud prosecution of a religious leader that who claimed to have supernatural powers, the Court warned:

Man’s relation to his God was made no concern of the state.  He was granted the right to worship as he pleased and to answer to no man for the verity of his religious views.  The religious reviews espoused by [the sect that followed the religious leader] might seem incredible, if not preposterous, to most people.  But if those doctrines are subject to trial before a jury charged with finding their truth or falsity, then the same can be done with the religious beliefs of any sect.  When the tries of fact undertake that task, they enter a forbidden domain.[1]

Because of these concerns, the courts and the IRS have avoided making value judgments about the truth or falsity of various religious beliefs.  This has created opportunity for exploitation, with some claiming to be a tax exempt church because of a commonly-held belief in doing what is right and staying within the confines of the law. 

Because of these abuses, the IRS and the courts have been forced to delineate some boundaries.  Courts have concluded that, when Congress used the word “church,” it intended a more restrictive definition than it did when it used the phrase “religious organization.”  While all churches are religious organizations, not all religious organizations are churches. 

Over time, two analytical tests have emerged for determining whether an organization is a “church” within the meaning of the tax laws.  The first test considers the following 14 criteria to determine whether an organization qualifies as a church:

1. A distinct legal existence;
2. Recognized creed and form of worship;
3. A definite and distinct ecclesiastical government;
4. A formal code of doctrine and discipline;
5. A distinct religious history;
6. A membership not associated with any other church or denomination;
7. An organization of ordained ministers;
8. Ordained ministers selected after completing prescribed studies;
9. A literature of its own;
10. Established places of worship;
11. Regular congregations;
12. Regular religious services;
13. Sunday schools for religious instruction of the young;
14. Schools for the preparation of its ministers.

It’s not hard to see that few organizations would meet all of these criteria.  The IRS has traditionally applied these factors in the disjunctive, emphasizing some of the characteristics over others.  Factors associated with the popular understanding of churches, including regular meetings and regular congregations, have been given greater weight than others. 

Some courts have expressed concern that these factors tend to favor some forms of legitimate religious expression over others and declined to apply it, relying instead on the “associational test” for church status.  Under the associational test, an organization is a church if it brings a body of believers together on a regular basis for communal worship.  The associational element is crucial.   Unless the congregants are associating with each other for shared worship, the organization is unlikely to qualify as a church. 

Traditional churches that meet for regular worship have little to worry about under either of these definitions.  And as more traditional churches begin to make use of the internet to conduct “virtual worship” services, it is likely that these tests will be further refined.  Until then, we are left with a variation of the duck test (if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck).  As far as the IRS is concerned, if it looks like a church and meets regularly like a church and has a regular congregation like a church, chances are that it’s a church.

[1] United States v. Ballard, 322 U.S. 78, 87, 64 S.Ct. 882, 886 (1944).