THE TAX ATTIC with Jerry Coon

Should nonprofits participate in political campaigns, lobbying?

Last week, I discussed the advantages of a nonprofit, charitable organization qualifying for 501(c)(3) status. There are specific activities, however, such as political and lobbying, in which these qualifying organizations should be very careful if they choose to participate. The penalty for participation is the potential loss of the entity’s 501(c)(3) status. Participating in political campaigns is potentially big trouble for nonprofits.

I attended a seminar recently and the instructor used a visual aid to illustrate how much leeway a nonprofit has when it comes to political activity. Imagine having your hands bound together quite tightly in front of you and then bound quite tightly to your body. There isn’t too much activity that you can partake in when you can’t separate your hands and you can’t move them away from your body. If you try to stretch, you might break a finger or sprain a wrist.

If the nonprofit stretches into the political arena, it takes the chance of losing its status. Nonprofits just don’t have much leeway when it comes to political activity. They can promote a voter registration drive as long as it’s conducted in a non-partisan manner. If they promote registering to vote for a particular candidate or party, that is not allowable. They can participate in a get-out-to-vote drive. However, if they promote getting out to vote for a particular candidate or party, that is not allowable. They can publish voter guides, but it must include all candidates and all issues to be voted upon. The voter guide can contain a comparison chart as long as it is non-biased. If the voting guide appears to be biased in favor of one candidate or party, there could be trouble. These are small exceptions to the rule that says nonprofits should stay out of the world of politics.

However, what about lobbying? Apparently, a nonprofit can stretch a little bit into the lobbying arena. They do have to report the lobbying activity as part of their annual tax return filing. They have to allocate their income and expenses between lobbying and non-lobbying activities, and may have to pay an excise tax on the lobbying income.

This paragraph comes from the Internal Revenue Service’s Publication: “In general, no organization may qualify for 501(c)(3) status if a substantial part of its activities is attempting to influence legislation (commonly known as lobbying). A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks loss of tax-exempt status.”

So, according to the IRS, “some lobbying” is okay, but “too much lobbying activity” is risky and “a substantial part” is definitely not allowed. The trouble with this quote is that there is no black-and-white definition of “some,” “too much” or “substantial.” For that matter, there really doesn’t appear to be a strict definition of “lobbying.” This makes it somewhat difficult to stay within the rules when the rules are defined so vaguely.

As so often happens in the world of taxation, the rules get defined through court cases. The IRS audits a nonprofit and finds that the nonprofit has been conducting “some” lobbying activities. The auditor determines the “some” is “too much” or “substantial” and disallows the organization’s tax-exempt status. A court case ensues between the IRS and the nonprofit. At this point, all of the information becomes public and all of us can see what all of the facts and circumstances of the audit and the court case.

These court cases are very insightful. They can show us exactly what the IRS is thinking when they say “some,” “too much” and “substantial.”

In one particular case, Seasongood versus Commissioner 227 F.2d 907 (6th Circuit 1955), a nonprofit estimated they were spending five percent of their time, efforts and money on lobbying. The IRS’ auditor found that was “substantial” and disallowed their nonprofit status. The court, however, agreed with the nonprofit and ruled that five percent was not substantial and restored their nonprofit status.

Other cases have ruled that even though very little money was spent on lobbying but since a substantial amount of its time and effort was spent on lobbying, this was grounds for losing nonprofit status, Haswell versus United States, 500 F.2d 1133 (Court of Claims 1974).

Nonprofits just have to be very careful when they venture into the political arena or engage in lobbying activities. Forays into either of these two activities can cost the nonprofit its license. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service in Rockford. Contact Jerry at www.actiontaxservice.com.


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