501(h) election

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A 501(h) election or Conable election is a procedure in United States tax law that allows a 501(c)(3) non-profit organization to participate in lobbying limited only by the financial expenditure on that lobbying, regardless of its overall extent. This allows organizations taking the 501(h) election to potentially perform a large amount of lobbying if it is done using volunteer labor or through inexpensive means. The 501(h) election is available to most types of 501(c)(3) organizations that are not churches or private foundations. It was introduced by Representative Barber Conable as part of the Tax Reform Act of 1976 and codified as 26 U.S.C.   § 501(h) , and the corresponding Internal Revenue Service (IRS) regulations were finalized in 1990.

Contents

Lobbying restrictions

The Internal Revenue Service (headquarters pictured) regulates lobbying by tax-exempt organizations. Most 501(c)(3) organizations may switch from a subjective "substantial part test" to an objective "expenditure test" by making a 501(h) election. IRS Building Constitution Avenue.jpg
The Internal Revenue Service (headquarters pictured) regulates lobbying by tax-exempt organizations. Most 501(c)(3) organizations may switch from a subjective "substantial part test" to an objective "expenditure test" by making a 501(h) election.

501(c)(3) organizations, named after the section of the Internal Revenue Code that defines them, are U.S. nonprofit organizations with principally charitable, educational, or religious missions. They make up 74% of all tax-exempt organizations as of 2013. [1]

By default, 501(c)(3) organizations are subject to a provision that "no substantial part of the activities [may be] carrying on propaganda, or otherwise attempting, to influence legislation". This test, called the substantial part test, is subjective and not precisely defined by the IRS, potentially making it difficult for organizations engaging in policy advocacy to determine whether they are in compliance with the law. For organizations that have made the 501(h) election, this test is replaced with an expenditure test which is based only on the annual financial expenditure, with no other limits on the extent of their lobbying activities. An organization may take the 501(h) election by filing a one-page form with the IRS, which remains in effect until revoked by the organization. [2] [3] The 501(h) election is not available to churches or to private foundations. [4]

Lobbying is defined as attempting to influence legislation, and is divided into two categories. The first, direct lobbying, occurs through communication with any member or staff of Congress, or of a state or local legislature, or any government official participating in the formulation of legislation. The second, grassroots lobbying, is attempting to affect the opinion of the general public on legislation, although some communications to an organization's own members are excluded from this classification. [3] [5] [6]

The limit on lobbying expenditure is calculated as a fraction of the organization's total tax-exempt expenditures. For organizations with $500,000 or less of total tax-exempt expenditures in a given year, no more than 20% of that amount may be spent on lobbying. Decreasing percentages are allowed for organizations with higher tax-exempt expenditures, with an absolute spending cap of $1,000,000 eventually being reached. Lobbying expenses above the allowed amount are subject to a 25% excise tax, and excessive lobbying over a four-year period may lead to loss of tax-exempt status. [4] This cap applies to the sum of direct and grassroots lobbying expenses. Grassroots lobbying is also subject to its own limit, which is one quarter of the total lobbying cap. [3] [5] Regardless of their 501(h) status, 501(c)(3) organizations may not participate in electoral campaigns or support specific candidates for office, a prohibition that has been in effect since the passage of the Johnson Amendment in 1954. Also, funds derived from federal government or private foundation grants or contracts may never be used for lobbying. [7] [8] [9]

Effects

The expenditure caps provide a safe harbor for non-profit organizations engaging in policy advocacy. Because the limitation is expressed solely in terms of dollar amounts, organizations can effectively perform a large amount of lobbying if it is done through volunteer labor or through inexpensive media such as email or websites. [10] However, the 501(h) election is not advantageous for very large non-profits whose lobbying expenditures exceed the $1,000,000 total cap or the $250,000 grassroots lobbying cap. These organizations may still be able to justify the expenditures as insubstantial if their operating budget is much larger, although it does entail increased risk. [2]

Multiple commentators have called non-profit lobbying beneficial because it balances lobbying by for-profit corporations. Tufts University political science professor Jeffrey Berry wrote in The Washington Post that, given that many non-profits are health care or social service providers, "they are the foot soldiers in a largely private system that delivers critical services to the disadvantaged. They are often closer to the problems—and the solutions—than the policymakers in city halls, state capitals and Washington." [11] In initially enacting the provision, Congress intended to increase the flow of information from non-profits to the legislative process. Senator Edmund Muskie said of an early version of a lobbying reform bill in 1971 that "it is fundamental to our constitutional system that [tax-exempt organizations] should have equal access along with business groups and others in presenting views to Congress." [10]

Nevertheless, as of 2009, only 1.3 percent of eligible 501(c)(3) organizations had taken the 501(h) election according to one count. [10] A 2003 survey of non-profits found a widespread but erroneous belief that non-profit organizations were banned from political advocacy of any sort, with little awareness of the 501(h) election. [11] This was attributed to the long gap between the provision's enactment by Congress in 1976 and the publications of final rules by the IRS in 1990 and the complexity of the 501(h) provisions, [10] as well as the IRS's lack of interest in publicizing the provision. [11]

A 2013 survey of executive directors of non-profit organizations in Boston found that the organizations were 6.3 times more likely to engage in policy advocacy if they had taken a 501(h) election than those who did not. [12]

History

Representative Barber Conable introduced the 501(h) election as part of the Tax Reform Act of 1976. Barber Conable.jpg
Representative Barber Conable introduced the 501(h) election as part of the Tax Reform Act of 1976.

Background

Lobbying restrictions on non-profits date to Department of the Treasury regulations in 1919. [11] These regulations denied tax-exempt status to organizations that engaged in "dissemination of controversial propaganda," which included political advocacy. In the influential 1930 case Slee v. Commissioner, the American Birth Control League's tax-exempt status was revoked due to its publication of a magazine supporting the repeal of birth control laws, despite its other charitable activities. [13]

The substantial part test was enacted as part of the Revenue Act of 1934. One justification given for this limitation was that donating money to influence legislation was "selfish" and not charitable if it enhanced the donors' personal interests, although the lack of a total ban on lobbying implied that non-selfish lobbying could be permitted. [14] Subsequent cases important to political advocacy by non-profits include Seasongood v. Commissioner, Speiser v. Randall , and Cammarano v. United States . In 1966, the Sierra Club's tax-exempt status was revoked in a high-profile case due to its publications of advertisements in The New York Times and The Washington Post opposing the construction of dams in the Grand Canyon. [15]

Enactment

The 501(h) election was enacted in the Tax Reform Act of 1976 which was introduced by Representative Barber Conable, after several attempts to introduce various similar provisions beginning in 1969. There were several justifications given for the mechanics of the new option: correcting the vagueness of the substantial part test; ensuring that small organizations were not more restricted than large ones; providing a tax penalty for initial infractions rather than immediate loss of tax-exempt status; and increasing the lobbying influence of non-profit organizations relative to for-profit ones, the later of which were at the time able to deduct their lobbying expenses. [16]

IRS regulations implementing the specifics of the 501(h) election were not finalized until 1990. [10] [11] An initial 1987 proposal of regulations was criticized for being overly broad in what constituted grassroots lobbying, such as including mention of legislation in a fundraising letter, or allowing audience members at public forums to publicly express opinions about legislation, which would cause the entire cost of these activities to be applied as lobbying expenses. The public reaction to the proposed regulations lead to a congressional hearing in the House Ways and Means Subcommittee on Oversight in March 1987, followed by the establishment of an advisory board within the IRS to revise the proposed regulations. The final 1990 regulations were less stringent, excluding fundraising communications from lobbying activities and establishing the four-year window for violations before tax-exempt status would be revoked. [17]

Related Research Articles

A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that operates as a business aiming to generate a profit for its owners. A nonprofit is subject to the non-distribution constraint: any revenues that exceed expenses must be committed to the organization's purpose, not taken by private parties. An array of organizations are nonprofit, including some political organizations, schools, business associations, churches, social clubs, and consumer cooperatives. Nonprofit entities may seek approval from governments to be tax-exempt, and some may also qualify to receive tax-deductible contributions, but an entity may incorporate as a nonprofit entity without securing tax-exempt status.

Charitable organization Nonprofit organization with charitable purpose

A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being.

United States non-profit laws relate to taxation, the special problems of an organization which does not have profit as its primary motivation, and prevention of charitable fraud. Some non-profit organizations can broadly be described as "charities" — like the American Red Cross. Some are strictly for the private benefit of the members — like country clubs, or condominium associations. Others fall somewhere in between — like labor unions, chambers of commerce, or cooperative electric companies. Each presents unique legal issues.

The Tax Reform Act of 1976 was passed by the United States Congress in September 1976, and signed into law by President Gerald Ford on October 4, 1976, becoming Pub.L. 94–455.

A 501(c) organization is a nonprofit organization in the federal law of the United States according to Internal Revenue Code Section 501(c) and is one of over 29 types of nonprofit organizations exempt from some federal income taxes. Sections 503 through 505 set out the requirements for obtaining such exemptions. Many states refer to Section 501(c) for definitions of organizations exempt from state taxation as well. 501(c) organizations can receive unlimited contributions from individuals, corporations, and unions.

A nonprofit corporation is any legal entity which has been incorporated under the law of its jurisdiction for purposes other than making profits for its owners or shareholders. Depending on the laws of the jurisdiction, a nonprofit corporation may seek official recognition as such, and may be taxed differently from for-profit corporations, and treated differently in other ways.

Laws regulating nonprofit organizations, nonprofit corporations, non-governmental organizations, and voluntary associations vary in different jurisdictions.

A 501(c)(3) organization is a United States corporation, trust, unincorporated association or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is one of the 29 types of 501(c) nonprofit organizations in the US.

Association law is a term used in the United States for the law governing not-for-profit corporations under various tax codes. This includes charitable organizations, which are generally classified under 501(c)3 in the IRS Tax Code, professional societies, guilds and trade associations, which are classified under 501(c)6, and homeowner associations, which are classified under 501(c)4. There are other classification types, but these are the primary ones.

Private foundation Type of charitable organization

A private foundation is a charitable organization that, while serving a good cause, might or might not qualify as a public charity by government standards. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets. Most private foundations are much smaller. Out of the 84,000 private foundations that filed with the IRS in 2008, approximately 66% have less than $1 million in assets, and 93% have less than $10 million in assets. In aggregate, private foundations in the U.S. control over $628 billion in assets and made more than $44 billion in charitable contributions in 2007.

Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 U.S.C. 501 organization that is not related to the tax-exempt purpose of that organization.

A foundation in the United States is a type of charitable organization. However, the Internal Revenue Code distinguishes between private foundations and public charities. Private foundations have more restrictions and fewer tax benefits than public charities like community foundations.

Until 1969, the term private foundation was not defined in the United States Internal Revenue Code. Since then, every U.S. charity that qualifies under Section 501(c)(3) of the Internal Revenue Service Code as tax-exempt is a "private foundation" unless it demonstrates to the IRS that it falls into another category such as public charity. Unlike nonprofit corporations classified as a public charity, private foundations in the United States are generally subject to a 1% or 2% excise tax or endowment tax on any net investment income.

Form 990 United States Internal Revenue Service form

Form 990 is a United States Internal Revenue Service form that provides the public with financial information about a nonprofit organization. It is often the only source of such information. It is also used by government agencies to prevent organizations from abusing their tax-exempt status. Certain nonprofits have more comprehensive reporting requirements, such as hospitals and other health care organizations.

Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983), was a case in which the United States Supreme Court upheld lobbying restrictions imposed on tax-exempt non-profit corporations.

Nonpartisanism in the United States is organized under United States Internal Revenue Code that qualifies certain non-profit organizations for tax-exempt status because they refrain from engaging in certain prohibited political activities. The designation "nonpartisan" usually reflects a claim made by organizations about themselves, or by commentators, and not an official category per American law. Rather, certain types of nonprofit organizations are under varying requirements to refrain from election-related political activities, or may be taxed to the extent they engage in electoral politics, so the word affirms a legal requirement. In this context, "nonpartisan" means that the organization, by US tax law, is prohibited from supporting or opposing political candidates, parties, and in some cases other votes like propositions, directly or indirectly, but does not mean that the organization cannot take positions on political issues.

American Crossroads is a US Super PAC that raises funds from donors to advocate for certain candidates of the Republican Party. It has pioneered many of the new methods of fundraising opened up by the Supreme Court's ruling in Citizens United. Its president is Steven J. Law, a former United States Deputy Secretary of Labor for President George W. Bush and the Chairman of the Board of Directors is former Republican National Committee chairman Mike Duncan. Advisers to the group include Senior Advisor and former White House Deputy Chief of Staff Karl Rove and former Mississippi Governor Haley Barbour.

The Johnson Amendment is a provision in the U.S. tax code, since 1954, that prohibits all 501(c)(3) non-profit organizations from endorsing or opposing political candidates. Section 501(c)(3) organizations are the most common type of nonprofit organization in the United States, ranging from charitable foundations to universities and churches. The amendment is named for then-Senator Lyndon B. Johnson of Texas, who introduced it in a preliminary draft of the law in July 1954.

H.Res. 565 (113th Congress)

The bill H.Res. 565, official title "Calling on Attorney General Eric H. Holder, Jr., to appoint a special counsel to investigate the targeting of conservative nonprofit groups by the Internal Revenue Service," was passed by the United States House of Representatives during the 113th United States Congress. The simple resolution asks U.S. Attorney General Eric Holder to appoint a special counsel to investigate that 2013 IRS scandal. The Internal Revenue Service revealed in 2013 that it had selected political groups applying for tax-exempt status for closer scrutiny based on their names or political themes.

Form 1023 is a United States IRS tax form, also known as the Application for Recognition of Exemption Under 501(c)(3) of the Internal Revenue Code. It is filed by nonprofits to get exemption status. On January 31st of 2020, the IRS abandoned the paper format of the form 1023. Those who used the paper version were given 90 days grace period and that ended on 30th of April 2020. Going forward, every application has to be filed online through Pay.gov portal.

References

  1. ↑ Sweeney, Deborah (April 23, 2014). "The 5 Most Popular Types of 501(c)". Business.com. Retrieved December 6, 2016.
  2. 1 2 "Taking the 501(h) election". National Council of Nonprofits. January 17, 2015. Retrieved December 3, 2016.
  3. 1 2 3 Sorrells, R. Michael (February 10, 2014). "Lobbying by Public Charities: The 501(h) Safe Harbor". Nonprofit Accounting Basics. Greater Washington Society of CPAs Educational Foundation. Retrieved December 3, 2016.
  4. 1 2 "Measuring Lobbying Activity: Expenditure Test". U.S. Internal Revenue Service. March 28, 2016. Retrieved December 3, 2016.
  5. 1 2 "Instructions for Schedule C (Form 990 or 990-EZ)" (PDF). U.S. Internal Revenue Service. 2016. Retrieved December 4, 2016.
  6. ↑ "Lobbying". U.S. Internal Revenue Service. March 4, 2016. Retrieved December 6, 2016.
  7. ↑ "The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations". U.S. Internal Revenue Service. September 13, 2016. Retrieved December 6, 2016.
  8. ↑ Vernick, Jon S. (1999). "Lobbying and Advocacy for the Public's Health: What Are the Limits for Nonprofit Organizations?". American Journal of Public Health. 89 (9): 1426–9. doi:10.2105/AJPH.89.9.1425. PMC   1508760 . PMID   10474565.
  9. ↑ Klapach, Joseph S. (1999). "Thou Shalt Not Politic: A Principled Approach to Section 501 (C)(3)'s Prohibition of Political Campaign Activity". Cornell Law Review. 84 (2): 510 – via Cornell University Law Library.
  10. 1 2 3 4 5 Manny, Jill S. (2012). "Nonprofit Legislative Speech: Aligning Policy, Law, and Reality". Case Western Reserve Law Review. 62 (3): 772–773, 780–781, 788 – via CWRU School of Law Scholarly Commons.
  11. 1 2 3 4 5 Berry, Jeffrey M. (November 30, 2003). "The Lobbying Law Is More Charitable Than They Think". The Washington Post. p. B1.
  12. ↑ MacIndoe, Heather; Whalen, Ray (2013). "Specialists, Generalists, and Policy Advocacy by Charitable Nonprofit Organizations". Journal of Sociology & Social Welfare. 40 (2): 129, 137 – via University of Western Michigan ScholarWorks.
  13. ↑ Sullivan, Thomas W. (1994). Defining the limits of lobbying activity for IRS Code 501 (c) (3) organizations (MPA thesis). University of Montana. pp. 7–9. Retrieved December 4, 2016.
  14. ↑ Manny, p. 765.
  15. ↑ Sullivan, pp. 16–19, 22.
  16. ↑ Manny, pp. 769–772, 776.
  17. ↑ Sullivan, pp. 39–50.
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