Limits on political expenditures by sec. 501(c) (3) organizations.

• Author: Huismann, Lynne M.

Tax-exempt organizations often become involved in the political process by providing financial support to promote legislation or candidates favorable to their objectives. When this occurs, the question arises as to what effect the political expenditures may have on an organization's exempt status. The answer depends on the type of organization involved, as well as the nature and extent of the expenditures. Sec. 501(c)(3) organizations are bound by certain limitations; an organization making excess political expenditures can lose its exempt status and may face stiff excise taxes, which can be imposed on the organization as well as its manager.

Sec. 501(c)(3) defines the most common class of tax-exempt organizations, including, among others, those organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. There are two primary restrictions (contained in Sec. 501(c)(3) itself) that limit the political activities of a Sec. 501(c)(3) organization.

First, "no substantial part" of the organization's activities can involve "carrying on propaganda, or ... attempting to influence legislation." Regs. Sec. 1.501(c)(3)- 1(c)(3)(ii) provides that "attempting to influence legislation" includes contacting (or urging the public to contact) members of a legislative body for the purpose of proposing, supporting or opposing legislation, as well as advocating or opposing legislation. The second restriction precludes a Sec. 501(c)(3) organization from participating or intervening in "any political campaign on behalf of (or in opposition to) any candidate for public office." Each of these restrictions has a direct effect on the nature and amount of permissible political expenditures. -

Sec. 501(c)(3) organizations must proceed cautiously when dealing in the political arena, because of the vagueness of the "no substantial part" standard. The meaning of "substantial" in this context is not defined in either the Code or regulations, and the IRS currently relies on the "subjective balancing test" set out in Haswell, 500 F2d 1133 (Ct. Cl. 1974). The Haswell court provided little guidance as to when an exempt organization's political activities become substantial, providing only that the organization's political efforts "must be balanced in the context of the objectives and circumstances of the organization." The Court of Claims did suggest that one possible measure of an activity's substantiality is the relative amount...