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Charitable Organizations and Party Politics

It's a presidential election year, and with presidential politics comes increased scrutiny of nonprofits' lobbying and advocacy efforts. Unless they are careful, 501(c)(3) public charities that engage in political activities could find themselves endangering their tax-exempt status.

On April 28, 2004, the IRS released guidance on what charities are and are not allowed to do in relation to political campaigns. Public charities are absolutely prohibited from supporting or opposing particular candidates for office. Charities can encourage people to vote or sponsor political debates or educational forums, as long as those activities are offered in a bipartisan manner.

A charity can also engage in lobbying to a limited extent. Lobbying must not, however, make up a substantial part of the nonprofit's activities.

For more information, see the April 28 IRS release and February 2004 guidance on political and lobbying activities.

FEC considers expanding definition of "political committees"

In a related matter, the Federal Election Commission (FEC) has been considering action that could possibly affect 501(c)(3) and 501(c)(4) organizations. In early March, the FEC proposed classifying section 527 organizations as "political committees." As part of the proposal, the FEC asked if the political committee designation should be extended to 501(c)(3) and 501(c)(4) organizations as well.

The IRS defines a section 527 organization as "a party, committee, fund, association, etc., that directly or indirectly accepts contributions or makes expenditures for political campaigns." The term "527" refers to the section of the tax code under which these nonprofits operate.

Section  527 organizations have come under scrutiny lately as political parties accuse each other of using this type of organization to bypass limitations set by the Bipartisan Campaign Reform Act, also known as McCain-Feingold. Classifying section 527 nonprofits as political committees would make them subject to the fundraising regulations set forth by the campaign finance law.

McCain-Feingold imposes strict spending limits on political parties and affiliated political committees, but as "unaffiliated" third-party organizations, 527s have been considered exempt from these regulations. They are able to solicit money from corporations and can accept individual contributions in excess of $5,000, the "soft money" that the campaign finance law was designed to prevent.

Although 527s are required to be politically neutral and may not be affiliated with a political party, they make no secret of their political agendas, and a few have been financing multi-million dollar ad campaigns.

Reaction to the FEC proposal

The FEC proposal alarmed some nonprofit leaders. They were concerned that the regulations would limit get-out-the-vote drives, voter education efforts, and similar activities permitted under current regulations.

May's Question of the Month asked GuideStar Newsletter subscribers if they were concerned that the proposed regulations would affect 501(c)(3) and 501(c)(4) organizations. Three-quarters of the respondents said they were.

Several participants stated that they believed the proposals were politically motivated. A number described the proposals as censorship.

Some respondents were concerned about how the regulations would be implemented. "It would be easy under this law for the FEC to label a nonprofit as a 'political committee' based upon arbitrary or partisan criteria," said one. "Because there is a general lack of understanding of Section 527, there will be an impact due to confusion," commented another. "All it would take is one disgruntled employee or rival group to make a complaint about an innocent nonprofit and you're in a world of hurt with the IRS for months trying to defend yourselves,"" stated a third.

Other readers commented on the need for political leadership by nonprofit organizations: "There is a difference between advocating for our clients and getting involved in a political campaign of a candidate," an anonymous participant observed."

Another noted, "Big corporations and monied political action committees have major voices, but individuals and nonprofits don't. I am worried that even the small amount of democratic participation now permitted for nonprofits will be curtailed too. And nonprofit groups by and large are motivated by concerns for the public good, so they really should have a voice in public affairs."

"I believe nonprofits who are intimately involved in social issues need the unfettered right to make their needs known to politicians and the public," another reader said. "These social concerns are by definition political concerns. Nonprofit advocacy (not political action) organizations need the ability to express their and their clients' needs openly. Then, of course, there is the First Amendment."

FEC postpones action

In hearings on May 13, 2004, the FEC voted against a revised proposal sponsored by Commissioners Michael Toner (R) and Scott Thomas (D). The commission also decided to postpone any further action on the issue for 90 days. For more information on the FEC proposals, see the Independent Sector and Nonprofit Advocacy Web sites.

Suzanne E. Coffman and Patrick Ferraro, June 2004
© 2004, Philanthropic Research, Inc. (GuideStar)

Suzanne Coffman is GuideStar's director communications and editor of the Newsletter. Patrick Ferraro is a freelance writer and former editor of the Newsletter.
Topics: Law and Regulations