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Free Speech or Tax Exemption: Nonprofits Can’t Have It Both Ways
The First Amendment to the U.S. Constitution prohibits any law abridging freedom of speech. The 16th Amendment gives Congress the power to collect taxes on income. Increasingly, nonprofit organizations are finding themselves giving up some of their rights under the First Amendment in order to obtain or retain exemption from the 16th.
Is it a fair trade-off? The U.S. Treasury Department thinks so and has proposed new regulations that would place limits on political speech by some nonprofit groups. The issue gained increased attention following the recent IRS targeting controversy and the unprecedented amount of money flowing from politically active nonprofits in the 2012 national election. We expect that political spending by nonprofits will remain in the news through the upcoming mid-term elections.
Free speech and tax exemption
Of all the entities operating under Internal Revenue Code Section 501(c), public charities and private foundations (Section 501(c)(3)) give away the most free speech rights. In exchange for exemption from federal income tax and a charitable deduction for their donors, these organizations are absolutely prohibited from supporting or opposing the election of any candidate for public office.
Lobbying activities, defined differently than political activities, are limited for public charities and prohibited for private foundations. 501(c)(3)s must provide the names and addresses of their major donors when filing their annual tax returns, although the IRS does not require that the list be publicly disclosed.
Social welfare organizations (Section 501(c)(4)) are not considered charitable, but they must be primarily engaged in activities that promote civic betterment and community improvement. In exchange for exemption from federal income tax with no charitable deduction permitted for their donors, they do not have to provide the names of donors, and they may engage in limited lobbying and political activity as long as it does not become their “primary” activity.
The IRS examines the “facts and circumstances” to determine how much lobbying and political activity is too much, including the resources, funds, time, space, and equipment devoted to the activity. Many organizations assume they can spend up to 49.9 percent of their resources on politics without it being considered their primary activity.
The U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission broadly expanded, on First Amendment grounds, the ability of corporations to spend money in federal election campaigns. The Center for Responsive Politics estimates that election-related spending by 501(c)(4), (5), and (6) organizations rose from $5.2 million in 2006 to more than $300 million in 2012.
Already alarmed by this increased activity, the IRS found more and more conservative and progressive activist groups applying for tax exempt status as 501(c)(4) social welfare organizations in the months leading up to the 2012 election. Understaffed, overwhelmed, and concerned that these were political groups masquerading as social welfare organizations in order to avoid donor limits and disclosure requirements, the IRS began filtering applications that contained such terms as “Tea Party,” “freedom,” and “patriot,” setting them aside for more intensive examination and intrusive questioning. Evidence indicates that a disproportionate number of these “fact-intensive inquiries” may have affected groups opposed to the re-election of the president. The controversy that erupted during the summer of 2013 led to the resignations of several high-ranking IRS officials.
Attempts to define political activity
In response, new regulations have been proposed by the Treasury Department that it contends would provide clarity to the definition of political activity. In reality, by excluding “candidate-related political activities” from the definition of social welfare, the free speech rights of these groups would be significantly curtailed. Examples of candidate-related political activities include:
- Communications that advocate a clearly identifiable candidate or party
- Voter registration drives
- “Get-out-the vote” drives
- Distribution of materials prepared on behalf of a candidate
- Voter guides that refer to candidates or parties
- Candidate appearances within 60 days of a general election or 30 days of a primary election
- Grants to Section 527 political organizations and other tax-exempt organizations that may conduct political activities
In addition, the Treasury Department is considering whether there should be specific, measurable limits on activities that do not promote social welfare. Similar regulations are under consideration for Section 501(c)(5) labor organizations, Section 501(c)(6) trade associations, and Section 527 political organizations.
The proposed regulations raise several questions:
- Would nonprofits be prohibited from hosting candidate debates within 60 days of an election?
- Are nonpartisan voter registration efforts really a political activity?
- Will organizations have to “scrub” their websites 60 days before an election, including blog posts, newsletters, and announcements that favorably mention a candidate by name?
- If Congress is debating a budget in October of an election year, will grass roots lobbying activities, such as encouraging members to contact Congressional representatives, be limited?
- Will 501(c)(4) organizations that provide grants to other 501(c)(4)s have to get written representations promising that the funds will not be used for political purposes?
The debate continues
Faced with an increasingly polarized electorate, the IRS has the almost impossible task of enforcing vague standards, navigating the distinction between political activism and social welfare, and measuring political activity relative to total activities without a clearly defined objective measure.
The IRS is caught between those such as Jeffrey Toobin, who argues in a May 14, 2013, New Yorker blog post that the “real scandal is that 501(c)(4) groups have been engaged in political activity in such a sustained and open way,” and those like James Taranto, who wrote in the May 17, 2013, Wall Street Journal that “the demagoguery … was sufficient to prompt the IRS agents to cast aside their professional obligations and embark on a campaign of political abuse whose effect was to ease [President] Obama's re-election.”
Nevertheless, it appears that the Treasury Department’s response to accusations of unfairly limiting the free speech rights of nonprofit organizations is to institutionalize limits on the free speech rights of nonprofit organizations. Replacing the ambiguous “facts and circumstances” test with more objective criteria, while beneficial, still offers no definition for the allowable proportion of total activities that nonprofits can safely devote to politics.
In addition, the proposed regulations restrict educational and voter registration efforts even when those efforts stop short of promoting or endorsing a particular candidate or party. The result may be to drive political activity out of 501(c)(4)s and into Section 527 political action committees. Some commentators have suggested that this is the real purpose of the proposed regulations, and that the executive branch appears to be attempting to achieve a result that would stand almost no chance of being approved by the legislative branch.
Donors to politically active social welfare organizations are rightly concerned because Section 527 political action committees must disclose donor names, opening the way for potential retaliation, intimidation, harassment, vandalism, and boycotts.
Should free speech be taxable?
Partisans can agree that free speech is a cornerstone of American identity, and an essential ingredient to public debate and dissent. The Supreme Court confirmed this in Citizens United v. Federal Election Commission, ruling that it is unconstitutional to restrict the political speech of corporations. With these newly proposed regulations, the executive branch, through the Treasury Department, is telling nonprofits that they can say whatever they want, they just can’t do it tax-free.
The debate will no doubt continue, and nonprofits involved in lobbying and political activity on behalf of their supporters must carefully consider how many rights they should be expected to waive, or are willing to waive, in exchange for tax-exempt status.
We encourage you to have further conversations on the impact of this debate and evolving laws on the future of your programs, structure, and exempt-status.