Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements







Prepared for Members and Committees of Congress



Recently, significant attention has been paid to the political activities of tax-exempt organizations.
In particular, the activities of IRC § 501(c)(3) charitable organizations, § 501(c)(4) social welfare
organizations, § 501(c)(5) labor unions, § 501(c)(6) trade associations, and § 527 political
organizations have been scrutinized.
This report examines the limitations that the Internal Revenue Code places on political activity,
including lobbying and campaign intervention, by tax-exempt organizations. It focuses on the
above organizations, but also discusses the restrictions on the other types of tax-exempt
organizations. The report also looks at the administrative procedures recently unveiled by the IRS
that provide for expedited review of possible tax laws violations by IRC § 501(c)(3) organizations
that conduct political activities. In addition, the report contains a summary of the information that
tax-exempt organizations must report to the Internal Revenue Service about their political
activities and whether the information must be made publicly available.






Introduc tion ..................................................................................................................................... 1
Political Activity by IRC § 501(c)(3) Organizations.......................................................................2
Organizational Definition..........................................................................................................2
Summary of the Definition’s Restrictions on Political Activity..........................................2
Legislative History of the Political Activity Restrictions...................................................2
Lobbying by IRC § 501(c)(3) Organizations............................................................................4
What Is Lobbying?..............................................................................................................4
What Is “No Substantial Part”?...........................................................................................5
Regan v. Taxation With Representation of Washington......................................................6
Political Campaign Activity by IRC § 501(c)(3) Organizations...............................................7
Voter Guides........................................................................................................................7
Conducting Public Forums.................................................................................................9
Inviting Candidates to Speak..............................................................................................9
Voter Registration.............................................................................................................10
Issue Advocacy.................................................................................................................10
Selling Mailing Lists and Other Business Activities.........................................................11
Website Links.....................................................................................................................11
Activities of the Organization’s Leaders and Members.....................................................11
Tax on Expenditures for Political Campaign Activity......................................................12
Tax Under IRC § 527(f)..........................................................................................................12
IRS Compliance Initiative.......................................................................................................12
Political Activity by IRC §§ 501(c)(4), (c)(5), and (c)(6) Organizations......................................13
Organizational Definitions......................................................................................................13
IRC § 501(c)(4).................................................................................................................13
IRC § 501(c)(5).................................................................................................................14
IRC § 501(c)(6).................................................................................................................14
Lobbying by IRC §§ 501(c)(4), (c)(5), and (c)(6) Organizations...........................................14
Dues .................................................................................................................................. 14
Lobbying Disclosure Act..................................................................................................14
Political Campaign Activity by IRC §§ 501(c)(4), (c)(5), and (c)(6) Organizations..............15
Tax Under IRC § 527(f)..........................................................................................................15
Political Activity by IRC § 527 Organizations..............................................................................15
Organizational Definition........................................................................................................15
Legislative History of IRC § 527......................................................................................16
Tax Treatment of IRC § 527 Organizations............................................................................16
Nonexempt Function Activities...............................................................................................17
Political Activity by Other Types of Tax-Exempt Organizations..................................................17
Tax Under IRC § 527(f)..........................................................................................................19
IRC § 527 Exempt Functions........................................................................................................19
What Are IRC § 527 Exempt Functions?................................................................................20
Exceptions for Certain Expenditures Made by IRC § 501(c) Organizations..........................21
Related Organizations...................................................................................................................21
Reporting and Disclosure Requirements.......................................................................................22
Initial Application or Notification of Tax-Exempt Status.......................................................23





Application for Tax-Exempt Status...................................................................................23
Notification of 527 Status.................................................................................................23
Annual Returns........................................................................................................................24
Information Return............................................................................................................24
Excise Tax Returns............................................................................................................24
Disclosure of Expenditures and Contributions........................................................................25
Federal Funding Accountability and Transparency Act..........................................................25
Author Contact Information..........................................................................................................26






There are more than 30 types of organizations that qualify for exemption from the federal income
tax. Each type is described in a particular section or subsection of the Internal Revenue Code
(IRC). The organizational definition in that section or subsection determines the extent to which
the organization may participate in political activity, including lobbying and campaign
intervention.
The majority of tax-exempt organizations are described in
• IRC § 501(c)(3), which describes public charities and private foundations;
• IRC § 501(c)(4), which describes social welfare organizations;
• IRC § 501(c)(5), which describes labor unions;
• IRC § 501(c)(6), which describes trade associations; and
• IRC § 527, which describes political organizations.
These organizations receive the most attention with respect to their political activities. In general,
the basic parameters of these organizations’ ability to participate in political activity is understood
from the IRC, Treasury regulations, and IRS guidance. With respect to the other types of tax-
exempt organizations, the IRC restrictions on their political activities are less clear and there is
almost no IRS guidance to help clarify the situation. The lack of guidance is not unexpected
because it does not appear that these other organizations participate in a significant amount of
political activity.
This report discusses the IRC limitations on political activity by IRC § 501(c)(3) organizations,
§§ 501(c)(4), (c)(5) and (c)(6) organizations, § 527 organizations, and the other types of tax-
exempt organizations. It ends with a summary of the IRC reporting and disclosure requirements.
Although this report discusses the political activity limitations in the IRC, it is important to
realize that organizations must abide by any applicable election laws. For example, since
campaign finance laws ban corporations from making any contribution or expenditure in
connection with federal elections, an incorporated tax-exempt organization is generally prohibited 1
from doing so. For more information on campaign finance laws, see CRS Report RS21571,
Campaign Finance and Prohibiting Contributions by Tax-Exempt Corporations: FEC v.
Beaumont, by L. Paige Whitaker. For more information on IRC § 527 organizations beyond that
contained in this report, see CRS Report RL33888, Section 527 Political Organizations:

1 Under 11 CFR § 114.10, qualifying incorporated IRC § 501(c)(4) organizations may makeindependent
expenditures (expenditures that expressly advocate for a candidate but are made without the candidates cooperation)
and “electioneering communications” (broadcast, cable, or satellite advertisements that refer to a clearly-identified
federal candidate within sixty days of a general election or thirty days of a primary election and, if a House or Senate
election, are targeted to the relevant electorate). Among other things, the organization must have the promotion of
political ideas as its sole express purpose. This exception reflects the Supreme Courts decision in Federal Election
Commission v. Mass. Citizens for Life, Inc., 479 U.S. 238 (1986), in which the Court held that limits on election-related
independent spending by certain incorporated advocacy groups were unconstitutional because the government had
failed to show a compelling reason for infringing on the groups’ free speech rights. The Court stated that while the
government may have a compelling corruption-related interest in restricting the independent spending of incorporated
businesses, it had not shown that a similar interest existed for treating incorporated nonprofit organizations differently
than other nonprofit organizations. Id. at 263-64.





Background and Issues for Federal Election and Tax Laws, by R. Sam Garrett, Erika Lunder, and
L. Paige Whitaker.

The organizations described in IRC § 501(c)(3) are commonly referred to as charitable
organizations. The section describes these organizations as:
organized and operated exclusively for religious, charitable, scientific, testing for public
safety, literary, or educational purposes, or to foster national or international amateur sports
competition (but only if no part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals, no part of the net earnings
of which inures to the benefit of any private shareholder or individual, no substantial part of
the activities of which is carrying on propaganda, or otherwise attempting, to influence
legislation (except as otherwise provided in subsection (h)), and which does not participate
in, or intervene in (including the publishing or distributing of statements), any political 2
campaign on behalf of (or in opposition to) any candidate for public office.
There are two types of IRC § 501(c)(3) organizations: public charities and private foundations.
Public charities receive contributions from a variety of sources whereas private foundations
receive contributions from limited sources. Due to fear of abuse, private foundations are subject
to stricter regulation than public charities. This includes additional restrictions on their political
activities, as discussed below. Examples of public charities include the Red Cross, churches,
schools, hospitals, Boy Scouts, Girl Scouts, animal shelters, and Little League. Examples of
private foundations include the John D. and Catherine T. MacArthur Foundation, the Ford
Foundation, and the Mars Foundation.
The organizational definition in IRC § 501(c)(3) restricts the ability of these organizations to
participate in political activity in two ways: (1) they may only conduct an insubstantial amount of
lobbying and (2) they may not intervene in political campaigns. Organizations that violate either
restriction may lose their tax-exempt status and the eligibility to receive deductible contributions.
Additionally, the organization may, either in addition or as an alternative to the loss of tax-exempt
status, be required to pay an excise tax on its political or lobbying expenditures, be enjoined from
making further expenditures, and receive a termination assessment of all taxes owed. The
lobbying restriction and political campaign prohibition are discussed in detail below.
The lobbying limitation was enacted in 1934 and the political campaign prohibition was enacted
in 1954. The legislative history of both provisions is sparse.

2 IRC § 501(h) provides a test for measuring the amount of lobbying done by an organization. It is discussed below.





In 1919, the Treasury Department took the position that organizations “formed to disseminate
controversial or partisan propaganda” were not “educational” for purposes of qualifying for tax-3
exempt status under the precursors to IRC § 501(c)(3). One consequence of this rule was that
contributions to these organizations were not deductible. Several lawsuits were brought that
challenged this treatment, but no clear standard emerged from the court decisions—some courts
denied the deduction if the organization advocated for any type of change, whereas others looked
at factors such as how controversial the advocacy was or if the organization’s actions were 4
intended to influence legislation. In what is generally recognized as the seminal case, Slee v. 5
Commissioner, the U.S. Court of Appeals for the Second Circuit used another rationale. In that
decision, the court held that contributions to an organization were not deductible because it did
not appear that the lobbying was limited to causes that furthered the organization’s charitable 6
purpose.
With this background, Congress enacted the lobbying limitation as part of the Revenue Act of

1934. There is very little legislative history for the provision, but it appears that Congress was 7


concerned with organizations that lobby also being able to receive tax-deductible contributions.
While discussing the provision on the Senate floor, one Member complained about the
deductibility of donations that were made for “selfish” reasons and specifically mentioned an 8
organization with which he was apparently having problems. Although this Member apparently 9
believed the provision was too broad in that it applied to organizations without “selfish motives,”
other Members argued that all contributions to organizations that lobby should be nondeductible
because of the difficulty in trying to distinguish between organizations that deserve the benefit 10
and those that do not. It has also been suggested that Congress enacted the provision in order to 11
codify the Slee decision. Although this may be true, it should be noted that the Slee test and the
lobbying provision are not identical. This is because the focus of the test under Slee is whether the
lobbying furthers the organization’s tax-exempt purpose, whereas the focus of the lobbying
provision is whether the lobbying is a substantial part of the organization’s activities.
The 1934 Act had also included a provision that would have restricted the ability of charities to
participate in partisan politics. However, that limitation was removed in conference, apparently 12
because of concerns it was too broad.

3 Treas. Reg. 45, Art. 517 (1919).
4 For a discussion of the Treasury position and these cases, see William J. Lehrfeld, The Taxation of Ideology, 19
CATH. U. L. REV. 50 (1969); Tommy F. Thompson, The Availability of the Federal Educational Tax Exemption for
Propaganda Organizations, 18 U.C. DAVIS L. REV. 487 (1985); Laura B. Chisholm, Exempt Organizations Advocacy:
Matching the Rules to the Rationales, 63 IND. L.J. 201 (1988); Miriam Galston, Lobbying and the Public Interest:
Rethinking the Internal Revenue Code’s Treatment of Legislative Activities, 71 TEX. L. REV. 1269 (1993); Oliver A.
Houck, On The Limits of Charity: Lobbying, Litigation, and Electoral Politics by Charitable Organizations under the
Internal Revenue Code and Related Laws, 69 BROOK. L. REV. 1 (2003).
5 42 F.2d 184 (2nd Cir. 1930).
6 See id. at 185.
7 See 78 CONG. REC. 5,959 (1934) (statement by Sen. Harrison).
8 78 CONG. REC. 5,861 (1934) (statement by Sen. Reed).
9 Id.
10 See 78 CONG. REC. 5,861 and 5,959 (1934) (statements by Sens. Harrison and La Follette).
11 See e.g., Gen. Couns. Mem. 34289 (May 3, 1970). General Counsel Memoranda contain legal interpretations of the
IRC by the IRS. They have no precedential value. They are available through such services as Lexis and Westlaw.
12 See 78 CONG. REC. 7,831 (1934) (statement by Rep. Hill).





The political campaign prohibition was enacted as part of the Internal Revenue Code of 1954.
The provision was added by Senator Lyndon Johnson as a floor amendment. Upon introducing
the amendment, Senator Johnson analogized it to the lobbying limitation; however, he
mischaracterized the lobbying limitation by saying that organizations that lobbied were denied 13
tax-exempt status, as opposed to only those organizations that substantially lobbied. The
legislative history contains no further discussion of the prohibition, including whether Senator
Johnson’s overly-broad description of the lobbying provision and inaccurate analogy were
noticed. Although Senator Johnson’s motives behind the provision are not clear from the
legislative history, it has been suggested that he proposed it either as a way to get back at an
organization that had supported an opponent or because he wished to offer an alternative to
another Senator’s proposal that would have denied tax-exempt status to organizations making 14
grants to organizations or individuals that were deemed to be subversive.
The organizational definition in IRC § 501(c)(3) states that “no substantial part” of an
organization’s activities may be “carrying on propaganda, or otherwise attempting, to influence
legislation” (i.e., lobbying).
Lobbying includes activities that attempt to influence legislation by (1) contacting, or urging the
public to contact, legislators about proposing, supporting, or opposing legislation and (2) 15
advocating for or against legislation. Thus, it includes direct lobbying (contacting governmental
officials) and grassroots lobbying (appeals to the electorate or general public). “Legislation”
includes action by any legislative body and by the public through such things as referenda and 16
initiatives. “Action” includes the introduction, amendment, enactment, defeat, or repeal of such 17
things as acts, bills, and resolutions. It also appears to include Senate confirmation of judicial 18
and executive branch nominations. An organization’s advocacy activities may be lobbying even 19
if legislation is not actually pending. Furthermore, an organization may be treated as lobbying if
it does such things as make a contribution or lend money on favorable terms to an entity that
lobbies.
Lobbying generally does not include providing testimony in response to an official request by a 20
legislative body. It also does not include contacting executive, judicial, and administrative 21
bodies on matters other than legislation. Additional examples of activities that may not be
lobbying include conducting and publishing nonpartisan analysis, study, or research; discussing

13 See 100 CONG. REC. 9,604 (1954).
14 See Judith E. Kindell and John Francis Reilly, Election Year Issues, IRS 2002 EO CPE TEXT, 448-51 (2002).
15 See Treas. Reg. § 1.501(c)(3)-1(c)(3)(ii).
16 See id.
17 See Gen. Couns. Mem. 39694 (January 22, 1988); IRC § 4911(e)(3).
18 See IRS Notice 88-76, 1988-2 C.B. 392; Gen. Couns. Mem. 39694 (January 22, 1988).
19 See e.g., Christian Echoes Nat’l Ministry Inc. v. United States, 470 F.2d 849, 855 (10th Cir. 1972).
20 See Rev. Rul. 70-449, 1970-2 C.B. 111.
21 See Treas. Reg. § 1.501(c)(3)-1(c)(3)(ii).





broad social issues, so long as specific legislation is not discussed; and contacting legislative 22
bodies about legislation that relates to the organization’s existence or status.
In order to determine whether lobbying is a substantial part of an organization’s activities, the
organization may elect under IRC § 501(h) to measure its lobbying expenditures against 23
objective, numerical standards. If the election is not made, the organization is subject to the “no
substantial part” test, which has no bright-line standards. Most organizations do not make the
election.
IRC § 501(h) election. Organizations that make the IRC § 501(h) election measure their lobbying
activities against the limits in IRC § 4911. Some IRC § 501(c)(3) organizations, including 24
churches and private foundations, are not allowed to make the election.
The IRC § 501(h) election has two effects. First, it imposes an excise tax on organizations whose
lobbying expenditures exceed the limits in IRC § 4911. IRC § 4911 sets limits for total lobbying
expenditures and for grass roots expenditures. In order not to be taxed for excessive lobbying, an
organization may not spend more than 20% of its first $500,000 of expenditures on lobbying, nor
more than 15% of its second $500,000 of expenditures, nor more than 10% of its third $500,000
of expenditures, nor more than 5% of its remaining expenditures, and no more than $1 million on
lobbying in the year. In order not to be taxed for excessive grass roots lobbying, the organization
may not spend more than 5% of its first $500,000 of expenditures on grass roots lobbying, nor
more than 3.75% of its second $500,000 of expenditures, nor more than 2.5% of its third
$500,000 of expenditures, nor more than 1.25% of its remaining expenditures, and no more than
$250,000 on grass roots lobbying in the year. If an organization’s lobbying expenditures exceed
these limits, IRC § 4911 imposes an excise tax equal to 25% of the excess.
Second, the IRC § 501(h) election provides a safe harbor so that organizations that do not exceed
that amount will not lose their IRC § 501(c)(3) status due to substantial lobbying. Specifically, an
organization will not lose its exempt status so long as its lobbying expenditures do not exceed
150% of the IRC § 4911 limitations over a four year period. Thus, depending on its activities in
prior years, an organization could conduct lobbying in the current year that is significant enough
to be subject to tax, but not lose its tax-exempt status.
Non-Electing Organizations. For organizations that do not make the IRC § 501(h) election and
those that cannot (e.g., private foundations and churches), the determination as to whether they
have conducted more than an insubstantial amount of lobbying is dependent on the facts and
circumstances of each case. Case law suggests that “no substantial part” is between 5% and 20%

22 See Rev. Rul. 64-195, 1964-2 C.B. 138; Gen. Couns. Mem. 36127 (January 2, 1975); IRC § 4945(e); Treas. Reg. §
53.4945-2(d).
23 IRC § 501(h) was enacted as part of the Tax Reform Act of 1976, P.L. 94-455.
24 Some churches lobbied not to be eligible for the election because they were concerned that their inclusion would be
interpreted as congressional approval of Christian Echoes Nat’l Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir.
1972), in which the U.S. Court of Appeals for the Tenth Circuit held that the lobbying limitation did not violate a
church’s rights under the First Amendment. The legislative history of the election provision explicitly states that its
enactment does not indicate congressional approval or disapproval of the Christian Echoes decision. See Joint
Committee on Taxation, General Explanation of the Tax Reform Act of 1976, JCS-33-76, at 416 (1976).





of the organization’s expenditures.25 However, there is no bright-line test and the percentage of 26
expenditures spent on lobbying is not determinative. Rather, the determination is made by
examining the lobbying in the broad context of the organization’s purpose and activities, which
requires looking at such things as how important lobbying is to the organization’s purpose, the
amount of time devoted to lobbying as compared with other activities, and the extent to which the 27
organization is continuously involved in lobbying.
Unlike electing organizations, non-electing public charities are only subject to an excise tax on 28
their lobbying expenditures if they lose their exempt status because of substantial lobbying. The
tax equals 5% of the organization’s lobbying expenditures, and the same tax may also be imposed
on the organization’s manager. Some organizations, including churches, are not subject to the tax.
Private foundations, on the other hand, must generally pay an excise tax on any lobbying 29
expenditures they make. Thus, although private foundations may conduct an insubstantial
amount of lobbying, there is a disincentive for them to do so. The tax equals 10% of the
expenditures. Note that unlike the case with electing public charities, any amount spent by the
private foundation on lobbying is subject to tax. Additionally, a foundation manager who agrees
to the expenditure may individually be subject to a tax equal to 2.5% of the expenditure, limited
to $5,000. If the foundation fails to timely correct the expenditure, it is subject to an additional tax
equal to 100% of the expenditure and the manager may be subject to an additional tax equal to

50% of the expenditure, limited to $10,000.


In 1983, the Supreme Court ruled in Regan v. Taxation With Representation of Washington that 30
the lobbying limitation is constitutional. In that case, the IRS denied the application of Taxation
With Representation of Washington (TWR) for IRC § 501(c)(3) status because a substantial
amount of the group’s activities would be lobbying. TWR argued that the lobbying limitation
violated its right to freedom of speech under the First Amendment. The group also argued that it
was being denied equal protection under the Fifth Amendment because IRC § 501(c)(19)
veterans’ organizations were allowed to lobby substantially and still qualify for tax-exempt status
and to receive tax-deductible contributions.
The Supreme Court rejected both claims. With respect to the First Amendment, the Court found
that Congress had not prevented TWR from speaking, but had simply chosen not to subsidize it 31
by means of the tax exemption and tax-deductible contributions. The court also noted that TWR
could qualify for exemption under IRC § 501(c)(4) and receive deductible contributions for its

25 See Seasongood v. Commr, 227 F.2d 907, 912 (6th Cir. 1955); Haswell v. United States, 500 F.2d 1133, 1146-47
(Ct. Cl. 1974).
26 See Christian Echoes Natl Ministry, Inc. v. United States, 470 F.2d 849, 855 (10th Cir. 1972); Haswell, 205 Ct. Cl. at
1142; Krohn v. United States, 246 F. Supp. 341, 347-48 (D. Colo. 1965); see also, Gen. Couns. Mem. 36148 (January
28, 1975).
27 See Christian Echoes, 470 F.2d at 855-86; Haswell, 205 Ct. Cl. at 1145; Krohn, 246 F. Supp. at 348-49.
28 IRC § 4912. This section was enacted as part of the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203).
29 IRC § 4945. This section was enacted as part of the Tax Reform Act of 1969 (P.L. 91-172).
30 461 U.S. 540 (1983).
31 See id. at 545-46.





non-lobbying activities by setting up a separate IRC § 501(c)(3) organization.32 With respect to
the Fifth Amendment, the Court stated that the test to determine whether the classification was
constitutionally permissible was whether it bore a rational relationship to a legitimate 33
governmental purpose. Noting that legislatures have broad discretion when it comes to making
classifications for tax purposes, the Court found that it was not irrational for Congress to decide
not to extend the taxpayer-funded benefit of unlimited lobbying to charities because of concerns 34
they may lobby for their members’ benefit. The Court also stated that distinguishing charities
from veterans organizations was permissible because the United States “has a longstanding policy
of compensating veterans for their past contributions by providing them with numerous 35
adva ntages.”
The organizational definition in IRC § 501(c)(3) prohibits these organizations from “participating
in, or intervening in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office.” The IRC does not
further elaborate on the prohibition. Treasury regulations define candidate as “an individual who
offers himself, or is proposed by others, as a contestant for an elective public office, whether such 36
office be national, State, or local.” As to what types of activities are prohibited, the regulations
add little besides specifying that they include “the publication or distribution of written or printed 37
statements or the making of oral statements on behalf of or in opposition to such a candidate.”
Thus, the statute and regulations do not offer much insight as to what activities are prohibited.
Clearly, IRC § 501(c)(3) organizations may not do such things as make statements that endorse or
oppose a candidate, publish or distribute campaign literature, or make any type of contribution,
monetary or otherwise, to a political campaign. On the other hand, IRC § 501(c)(3) organizations
are allowed to conduct activities that are not related to elections, such as issue advocacy, lobbying
for or against legislation, and supporting or opposing the appointment of individuals to
nonelective offices.
Additionally, IRC § 501(c)(3) organizations are allowed to conduct certain election-related
activities so long as the activities are nonpartisan and do not indicate a preference for any
candidate. Whether such an activity is campaign intervention depends on the facts and
circumstances of each case. The following examples show some of the ways in which an activity
might be biased. As will be seen, some biases can be subtle and it is not necessary that the
organization expressly mention a candidate by name.
IRC § 501(c)(3) organizations may create and/or distribute voter guides and similar materials that
do not indicate a preference towards any candidate. The guide must be unbiased in form, content,

32 See id. at 544.
33 See id. at 547.
34 See id. at 547 and 550.
35 Id. at 550-51.
36 Treas. Reg. § 1.501(c)(3)-1(c)(3)(iii).
37 Id.





and distribution. There are numerous ways in which a guide may show a bias, and the
determination will depend on the specific facts and circumstances of each case. For example, a
guide could display a bias by not including all candidates on an equal basis. Another way a guide
could be biased is by rating candidates, such as evaluating candidates and supporting a slate of
the best-qualified candidates, even if the criteria are nonpartisan (e.g., based on professional 38
qualifications). A voter guide could also indicate a bias by comparing the organization’s position 39
on issues with those of the candidates. A more subtle way in which a guide may show bias is by
only covering issues that are important to the organization, as opposed to covering a range of 40
issues of interest to the general public.
Some guides consist of candidate responses to questions provided by the organization. According
to the IRS, factors that tend to show these guides are candidate-neutral include
• the questions and descriptions of the issues are clear and unbiased,
• the questions provided to the candidates are identical to those included in the
guide,
• the candidates’ answers have not been edited,
• the guide puts the questions and appropriate answers in close proximity to each
other,
• the candidates are given a reasonable amount of time to respond to the questions,
and
• if the candidates are given limited choices for an answer to a question (e.g.,
yes/no, support/oppose), they are given a reasonable opportunity to explain their 41
positions.
It is important to realize that the above two paragraphs are just examples of how a guide could be
biased. The determination of whether a guide is a campaign intervention depends on the facts and
circumstances of that case. Thus, it is possible that a guide that is neutral according to the above
paragraphs could still be treated as campaign intervention because it indicates a preference for a
candidate in some other way. On the other hand, a guide is not necessarily biased just because it
has or lacks a characteristic from the above examples. Other factors that may be important in a
specific factual situation include the timing of the guide’s distribution and to whom it is
distributed. For example, the IRS ruled that an IRC § 501(c)(3) organization could include in the
edition of its monthly newsletter after the close of each Congress a compilation of the Members’
voting records on issues important to the organization and the organization’s position on those 42
issues. The newsletter was sent to the usual small number of subscribers and not targeted to
areas where elections are occurring. In this specific situation, the IRS stated that the publication
was permissible because it was not timed to an election or broadly distributed.

38 See Rev. Rul. 67-71, 1967-1 C.B. 125.
39 See IRS FS-2006-17 (February 2006).
40 See Rev. Rul. 78-248, 1978-1 C.B. 154.
41 See IRS FS-2006-17 (February 2006); Rev. Rul. 78-248, 1978-1 C.B. 154.
42 See Rev. Rul. 80-282, 1980-2 C.B. 178.





IRC § 501(c)(3) organizations may conduct unbiased and nonpartisan public forums where
candidates speak or debate. According to the IRS, factors that tend to show a public forum is
unbiased and nonpartisan include
• all legally qualified candidates are invited,
• the questions are prepared and presented by a nonpartisan independent panel,
• the topics and questions cover a broad range of issues,
• all candidates receive an equal opportunity to present their views,
• the moderator does not comment on the questions or imply approval or
disapproval of the candidates, and
• the moderator explicitly states that the views expressed are not those of the
organization and that the organization does not support or oppose any 43
candidate.
The presence of all the above factors does not necessarily mean that the forum is permissible, and
the absence of some does not necessarily mean that the forum is impermissible. Whether an
organization is found to have participated in political campaign activity will depend on the facts
and circumstances of that case.
An IRC § 501(c)(3) organization may invite a candidate to speak at its functions without it being
prohibited campaign activity. According to the IRS, factors that will be considered include
whether the organization provided an equal opportunity to speak at similar events to the other
candidates, the organization made clear that it is not supporting or opposing the candidate, and no 44
fund-raising may occur. IRC § 501(c)(3) organizations may also invite candidates to speak in 45
their non-candidate capacity. Factors that the IRS will consider in determining whether
prohibited campaign activity occurred include whether (1) the individual is chosen to speak solely
for non-candidacy reasons, (2) the individual speaks only in his or her non-candidate capacity, (3)
any reference to the upcoming election is made, (4) any campaign activity occurs in connection
with the individual’s attendance, (5) the organization maintains a nonpartisan atmosphere at the
event, and (6) the organization’s communications announcing the event clearly indicate the non-
candidate capacity in which the individual is appearing and do not mention the individual’s 46
candidacy or the election.

43 See Rev. Rul. 86-95, 1986-2 C.B. 73; Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
44 See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
45 See id.
46 See id.





IRC § 501(c)(3) organizations may conduct nonpartisan voter registration and get-out-the-vote 47
drives. Again, the activities may not indicate a preference for any candidate or party. According
to the IRS, factors that may indicate these activities are neutral include
• candidates are named or depicted on an equal basis,
• no political party is named except for purposes of identifying the party affiliation
of each candidate,
• the activity is limited to urging acts such as voting and registering and to
describing the hours and places of registration and voting, and
• all registration and get-out-the-vote drive services are made available without 48
regard to the voter’s political preference.
IRC § 501(c)(3) organizations may take positions on policy and legislative issues, although, as
discussed above, there are restrictions on the amount of lobbying an organization may do.
Because there is no rule that political campaign activity only occurs when an organization 49
expressly advocates for or against a candidate, the line between issue advocacy and political
campaign activity can be difficult to discern. According to the IRS, key factors that indicate an
issue advocacy communication is not political campaign intervention include
• the communication does not identify any candidates for a given public office
(note that candidates may be identified by means other than their name; e.g., by
party affiliation or distinctive features of a candidate’s platform),
• the communication does not express approval or disapproval for any candidate’s
positions and/or actions,
• the communication is not delivered close in time to an election,
• the communication does not refer to voting or an election,
• the issue addressed in the communication has not been raised as an issue
distinguishing the candidates,
• the communication is part of an ongoing series by the organization on the same
issue and the series is not timed to an election, and
• the communication’s timing and identification of the candidate are related to a
non-electoral event (e.g., a scheduled vote on specific legislation by an 50
officeholder who also happens to be a candidate for public office).

47 See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
48 See 2002 EO CPE TEXT, supra footnote 14, at 379.
49 See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
50 See id.; see also, 2002 EO CPE TEXT, supra footnote 14, at 376-77.





Once again, whether a specific communication violates the political campaign prohibition
depends on the facts and circumstances of that case. Thus, a communication that has all of the
above factors could still be treated as campaign intervention if it shows bias in some other way.
Under certain circumstances, IRC § 501(c)(3) organizations may sell or rent goods, services, and
facilities to political campaigns. This includes selling and renting mailing lists and accepting paid
political advertising. According to the IRS, factors that indicate the activity is not biased towards
any candidate or party include
• the selling or renting activity is an ongoing business activity of the organization;
• the goods, services, and facilities are also available to the general public;
• the fees charged are the organization’s customary and usual rates; and
• the goods, services, or facilities are available to all the candidates on an equal 51
basis.
An IRC § 501(c)(3) organization could engage in political campaign activity by linking its 52
website to another website that has content showing a preference for a candidate. It does not
matter that the organization cannot control the other site’s content. Whether the linking is political
campaign intervention will depend on the facts and circumstances of each case. The factors that
the IRS will look at include the context of the link on the organization’s website, whether all
candidates are presented, whether the linking serves the organization’s exempt purpose, and the
directness between the organization’s website and the page at the other site with the biased 53
material.
Members, managers, leaders, and directors of IRC § 501(c)(3) organizations may participate in
political campaign activity in their private capacity. The organization can not support the activity 54
in any way. For example, these individuals may not express political views in the organization’s
publications or at its functions (this is true even if the individual pays the costs associated with 55
the statement), and the organization may not pay expenses incurred by the individual in making
the political statement. Individuals may be identified as being associated with an organization, but 56
there should be no indication that their views represent the organization.

51 See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421; see also, 2002 EO CPE TEXT, supra footnote 14, at 383-84.
52 See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
53 See id.
54 See id.; see also, 2002 EO CPE Text, supra footnote 14, at 363-65; Gen. Couns Mem. 34523 (June 11, 1971); Gen.
Couns. Mem. 39414 (September 25, 1985).
55 See Rev. Rul. 2007-41, 2007-25 I.R.B. 1421.
56 See id.





Under IRC § 4955, an IRC § 501(c)(3) organization that makes an expenditure on political 57
campaign activity may be subject to an excise tax. If the expenditure is small and the violation
is unintentional, the tax may be imposed as an alternative to the organization losing its tax-58
exempt status. The tax equals 10% of the expenditure, and a tax equal to 2.5% of the
expenditure, limited to $5,000, may also be imposed on the organization’s manager. If the
expenditure is not corrected (i.e., recovered and safeguards established to prevent future
expenditures) in a timely manner, then the organization is subject to an additional tax equal to
100% of the expenditure, and the manager may be subject to an additional tax equal to 50% of the
expenditure, limited to $10,000.
A similar tax is imposed on private foundations under IRC § 4945. If a tax is assessed on a private
foundation under IRC § 4955, then no tax may be assessed under IRC § 4945.
All IRC § 501(c) organizations are subject to tax if they make an expenditure for an IRC § 527
exempt function. An IRC § 527 exempt function is influencing the selection, nomination,
election, or appointment of an individual to a federal, state, or local public office, to an office in a
political organization, or as a presidential or vice-presidential elector. This issue is discussed
further in the “IRC § 527 Exempt Functions” section, below.
There has been ongoing congressional and public concern about violations of the political
campaign prohibition by IRC § 501(c)(3) organizations. In June 2004, in anticipation of increased
political activity during that election season, the IRS started the Political Activity Compliance 59
Initiative (PACI) project. The PACI project had two parts: the IRS performed educational
outreach to IRC § 501(c)(3) organizations about the political campaign prohibition and developed
a “fast track” process for reviewing possible violations of the prohibition.
The 2004 PACI project involved the expedited review of 110 cases in which IRC § 501(c)(3)
organizations had been alleged to have violated the political campaign prohibition (47 of the
cases involved churches). The IRS issued a written advisory in 69 of these cases, which meant
that the agency determined the organization engaged in political campaign activity but there were
mitigating factors so that the organization was not penalized. Mitigating factors included that the
activity was of a one-time nature or shown to be an anomaly, the activity was done in good faith
reliance on advice of counsel, or the organization corrected the conduct (e.g., recovered any funds
that were spent) and established steps to prevent future violations. The IRS revoked the tax-
exempt status of five organizations (one of which was for issues not related to campaign
activities) and proposed revocation of the tax-exempt status of two organizations. The IRS did not

57 This section was enacted as part of the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203).
58 See H.Rept. 100-391, at 1623-24 (1987).
59 The IRSs final report on the 2004 project is available on the agencys website at http://www.irs.gov/pub/irs-tege/
final_paci_report.pdf. The final report on the 2006 PACI project, which includes updated statistics for the 2004 project,
is available on the agency’s website at http://www.irs.gov/pub/irs-tege/2006paci_report_5-30-07.pdf.





find substantiated campaign activities in 23 of the cases, and found non-political violations in six
other cases. The remaining five cases were still open as of March 30, 2007.
While the PACI project was proceeding, there were reports in various media outlets that raised
the question of whether the IRS had been politically motivated in investigating the IRC § 60
501(c)(3) organizations so close to the 2004 election. In response, the IRS Commissioner asked
the Treasury Inspector General for Tax Administration (TIGTA) to investigate whether the IRS
had engaged in any improper activities while conducting the project. In 2005, TIGTA released its
report, which concluded that the IRS had used appropriate, consistent procedures during the PACI 61
project.
The IRS again used expedited PACI procedures during the 2006 election year. In 2006, the IRS
selected 100 cases for examination (44 of which involved churches). As of March 30, 2007, 60 of
these cases remained open. In the 40 closed cases, the IRS issued written advisories in 26 of
them, and did not find substantiated political intervention in the other 14 cases.


The organizations described in IRC § 501(c)(4) are commonly referred to as social welfare
organizations. The section describes these organizations as
[c]ivic leagues or organizations not organized for profit but operated exclusively for the
promotion of social welfare, or local associations of employees, the membership of which is
limited to the employees of a designated person or persons in a particular municipality, and
the net earnings of which are devoted exclusively to charitable, educational, or recreational
purposes. [This paragraph] shall not apply to an entity unless no part of the net earnings of
such entity inures to the benefit of any private shareholder or individual.
Treasury regulations clarify that “[a]n organization is operated exclusively for the promotion of
social welfare if it is primarily engaged in promoting in some way the common good and general 62
welfare of the people of the community.” Examples of IRC § 501(c)(4) organizations include 63
the National Rifle Association and the Sierra Club.

60 See, e.g., Mike Allen, NAACP Faces IRS Investigation, WASHINGTON POST (October 29, 2004); Vincent J.
Schodolski, Political sermons stir up the IRS: Effort to enforce tax-exempt rules or bid to bully pulpits? CHICAGO
TRIBUNE (November 20, 2005).
61 TIGTA Report 2005-10-035 (February 2005).
62 Treas. Reg. § 1.501(c)(4)-1(a)(2).
63 The purposes described in sections IRC §§ 501(c)(3) and (c)(4) overlap, so that an organization may be able to
qualify under either section. An IRC § 501(c)(3) organization is eligible to receive tax-deductible contributions, while
an IRC § 501(c)(4) organization is not, but an IRC § 501(c)(3) organization is more limited in the amount and types of
political activity it may do. Thus, an organization that could qualify under either section will generally choose based on
(continued...)





IRC § 501(c)(5) organizations are described as “labor, agricultural, or horticultural
organizations.” Most of these organizations are labor unions.
The organizations described in IRC § 501(c)(6) are generally thought of as trade associations. The
section describes these organizations as:
[b]usiness leagues, chambers of commerce, real estate boards, boards of trade, or
professional football leagues ... not organized for profit and no part of the net earnings of
which inures to the benefit of any private shareholder or individual.
Examples of IRC § 501(c)(6) organizations include the Chamber of Commerce, Jaycees,
American Bar Association, American Medical Association, and National Association of
Manufacturers.
The organizational definitions in IRC §§ 501(c)(4), (c)(5), and (c)(6) do not contain any explicit
limitations on lobbying. The organizations described in these three sections may participate in an
unrestricted amount of lobbying so long as the lobbying is related to the organization’s exempt
purpose. In fact, organizations whose sole activity is lobbying may be recognized under these 64
sections so long as they serve the appropriate tax-exempt purpose. For example, a business
association whose only activity is lobbying for and against legislation according to its members’ 65
interests may qualify for IRC § 501(c)(6) status.
Dues to labor unions and trade associations are potentially deductible under IRC § 162. However,
if an organization conducts lobbying activities, IRC § 162(e) disallows a deduction for the portion
of dues that represents lobbying expenditures. In general, the organization must either notify its 66
members of the amount that is nondeductible or pay a tax on its lobbying expenditures.
Section 18 of the Lobbying Disclosure Act of 1995 (P.L. 104-65) prohibits organizations
described in IRC § 501(c)(4) from receiving federal grants, loans, or other awards if they engage
in lobbying activities, even if they conduct the lobbying with their own funds. As originally

(...continued)
which is more important: receiving tax-deductible contributions or participating in political activity. With the exception
of churches and related organizations, an organization that loses its IRC § 501(c)(3) status because of political
campaign activity or substantial lobbying may not then seek recognition as an IRC § 501(c)(4) organization. IRC § 504.
64 See Rev. Rul. 61-177, 1961-1 C.B. 117; Rev. Rul. 71-530, 1971-2 C.B. 237.
65 See Rev. Rul. 61-177, 1961-1 C.B. 117.
66 See IRC § 6033(e).





passed, section 18 also applied to IRC § 501(c)(4) organizations that received government
contracts, but the section was amended by P.L. 104-99 to delete that restriction. The Lobbying
Disclosure Act imposes registration and disclosure requirements on any organizations that have
paid lobbyists whose lobbying activities exceed certain time and monetary limits. For more
information, see CRS Report 96-809, Lobbying Regulations on Non-Profit Organizations, by Jack
Maskell.
The organizational definitions in IRC §§ 501(c)(4), (c)(5), and (c)(6) do not contain any explicit
restrictions on political campaign activity. These organizations may engage in political campaign
activity so long as it is consistent with the organization’s exempt purpose. However, unlike the
case with lobbying, the organizational definitions contain an implicit restriction on the amount of
political campaign activity these organizations may do. Specifically, participating in political 67
campaign activity cannot be the organization’s primary activity.
All IRC § 501(c) organizations are subject to tax if they make an expenditure for an IRC § 527
exempt function. An IRC § 527 exempt function is influencing the selection, nomination,
election, or appointment of an individual to a federal, state, or local public office, to an office in a
political organization, or as a presidential or vice-presidential elector. This issue is discussed
further in the “IRC § 527 Exempt Functions” section, below.

The organizations described in IRC § 527 are political organizations or funds organized and
operated primarily for accepting contributions and/or making expenditures for an exempt
function. IRC § 527 defines an exempt function as:
influencing or attempting to influence the selection, nomination, election, or appointment of
any individual to any Federal, State, or local public office or office in a political
organization, or the election of Presidential or Vice-Presidential electors, whether or not such
individual or electors are selected, nominated, elected, or appointed.
IRC § 527 encompasses every kind of political committee, including a candidate committee, a
political party, and a political action committee set up by a union, a corporation or a group of
politically interested citizens. In recent years, the term “527 organization” has been used to
describe certain groups that intend to influence federal elections in ways that may be outside the
scope of federal election law; however, the tax definition of the term is not limited to such
organizations.

67 See Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii); Gen. Couns. Mem. 34233 (December 30, 1969).





Prior to 1975, the IRC was silent as to the tax treatment of organizations whose primary purpose
is influencing elections. The IRS did not generally require these organizations to file tax returns, 68
apparently because the IRS treated contributions to political organizations as nontaxable gifts.
By the early 1970s, it became apparent that these organizations had sources of income besides
contributions, such as investment income and gain from the sale of donated appreciated property.
In 1973, the IRS announced it would begin requiring political committees and parties with 69
investment and other types of income to file tax returns and pay tax.
Congress responded in 1975 by enacting IRC § 527,70 which generally grants tax-exempt status to
political organizations, as discussed below. The 1975 version of the section is similar to the
version that currently exists, with the exception of the reporting requirements added in 2000.
Prior to the 2000 amendments, IRC § 527 organizations only had contact with the IRS if they
were required to file a tax return because they had taxable income. The lack of reporting
requirements may have been because political organizations were generally thought to be
candidate funds and political parties and committees (i.e, the same types of entities that, when
involved in federal elections, are regulated by the Federal Election Campaign Act of 1971
(FECA) and required to report to the Federal Election Commission (FEC)).
By 2000, as an increasing number of groups known as “stealth PACs” spent money on elections,
it became clear that not all IRC § 527 political organizations were being regulated under FECA.
Stealth PACs were organizations designed to qualify as political organizations under IRC § 527
without having to report under FECA to the FEC. It appears the reason these organizations began
growing in number during the late 1990s was because the fact that organizations could qualify
under IRC § 527 without reporting to the FEC was largely unnoticed until 1996, which was when
the IRS began issuing guidance on the types of activities that qualify as IRC § 527 exempt 71
functions.
In response to the issue of stealth PACs, Congress amended IRC § 527 in 2000 to generally
require that most organizations that do not report to the FEC report to the IRS and that the 72
information be available to the public. In 2002, Congress made changes to some of these 73
provisions in order to, among other things, remove duplicative reporting requirements.
IRC § 527 organizations are not subject to tax on their “exempt function income.” This income is
the amounts received from certain sources that are then segregated to be used for an exempt
function. These sources are

68 See IRS Notice of Opportunity to Submit Written Comments and to Request Public Hearing with respect to the Tax
Treatment of Contributions of Appreciated Property to Committees of Political Parties, 37 F.R. 22427-28 (October 19,
1972).
69 IRS Announcement 73-84, 1973-33 I.R.B. 18.
70 P.L. 93-625.
71 See Priv. Ltr. Rul. 9652026 (October 1, 1996); Priv. Ltr. Rul. 9725036 (March 24, 1997); Priv. Ltr. Rul. 9808037
(November 21, 1997); Priv. Ltr. Rul. 199925051 (March 29, 1999).
72 P.L. 106-230.
73 P.L. 107-276.





• contributions of money or other property;
• membership dues, fees, or assessments;
• proceeds, which are not received in the ordinary course of business, from
political fund-raising and entertainment events or from the sale of campaign
materials; and
• proceeds from conducting a bingo game.
IRC § 527 organizations are subject to tax on income from any other sources and on the income
from the listed sources if the funds are not properly segregated or used for an exempt function.
The tax rate is generally the highest corporate income tax rate, but the income of the principal
campaign committee of a congressional candidate is taxed using the graduated corporate tax rate
schedule (this is not true for campaign committees of candidates for state or local office). What
types of activities are “exempt functions” is discussed in the “IRC § 527 Exempt Functions”
section, below.
IRC § 527 organizations may engage in nonexempt function activities so long as these are not an
organization’s primary activities. Thus, these organizations may do such things as sponsor
nonpartisan education workshops, pay an incumbent’s office expenses, lobby, carry on social 74
activities unrelated to its exempt function, and provide services to other entities. However, as
mentioned above, IRC § 527 organizations are only exempt from tax to the extent their 75
nontaxable income is segregated to be used for an exempt function. If an organization spends
more than an insubstantial amount on a nonexempt function, the organization will be subject to 76
tax on the amount in the segregated fund. There is no definition of “insubstantial,” although the
IRS has indicated that the determination is made using principles similar to those used in
determining whether a non-electing public charity has violated the lobbying limitation (discussed 77
above). Thus, although these organizations may conduct nonexempt function activities, the
activities may increase their tax liability.


While the majority of tax-exempt organizations fall into one of the types discussed above, the
IRC describes numerous other types of organizations. The limitations the IRC places on the

74 See Treas. Reg. § 1.527-2(a)(3); Gen. Couns. Mem. 39178 (March 6, 1984).
75 An exempt function under IRC § 527 is the
influencing or attempting to influence the selection, nomination, election, or appointment of any
individual to any Federal, State, or local public office or office in a political organization, or the
election of Presidential or Vice-Presidential electors, whether or not such individual or electors are
selected, nominated, elected, or appointed.
76 See Treas. Reg. § 1.527-2(b)(1). Expenditures for an illegal activity or that benefit the organization may be taxable to
the organization, regardless of whether they are substantial. See Treas. Reg. § 1.527-5(a).
77 See 2002 EO CPE TEXT, supra footnote 14, at 411.





ability of these organizations to participate in political activity is less clear than it is for IRC §§
501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), and 527 organizations. Furthermore, for most of these
other organizations, there is no IRS guidance on the topic. This may be because the need for
guidance has not arisen due to the fact that there are not as many of these organizations and they
do not appear to participate in political activities to the same extent as IRC §§ 501(c)(3),

501(c)(4), 501(c)(5), 501(c)(6), and 527 organizations.


These other types of organizations fall into three categories: (1) those that appear to be prohibited
from participating in most, if not all, types of political activity; (2) those that may be able to
participate in political activity but are limited in the amount they may spend; and (3) those that
appear to be treated like IRC §§ 501(c)(4), (c)(5), and (c)(6) organizations.
The first category would appear to include tax-exempt organizations that are trusts whose funds
must be dedicated to their exempt purpose. These would include such trusts as IRC § 501(c)(17)
supplemental unemployment benefit trusts, IRC § 501(c)(21) black lung benefit trusts, and IRC §
501(c)(22) multi-employer pension plan trusts. Due to the restriction on what these organizations
may use their funds for, it appears these organizations are generally unable to participate in
political activities. It has been suggested that these organizations may lobby for limited purposes, 78
such as on legislation that affects their existence or status.
The first category also appears to include the organizations that the IRS has indicated, in
unofficial guidance, may not participate in political activities “because the subparagraph in which
they are described limits them to an exclusive purpose (for example, IRC 501(c)(2) title holding 79
companies, IRC 501(c)(20) group legal services plans).” It could be argued that this rationale is
suspect because IRC § 501(c)(3) requires those organizations be organized and operated
“exclusively” for an exempt purpose, but the IRS has interpreted the term to mean “primarily” in 80
this context, and they may participate in nonpartisan political activity. Nonetheless, this
rationale could prohibit IRC § 501(c)(10) domestic fraternal societies, for example, from
participating in political activities because their net earnings must be devoted exclusively to
religious, charitable, scientific, literary, educational, and fraternal purposes. To the extent that any
organizations are precluded from participating in political activities, there could still be
exceptions for such things as lobbying for legislation that affects the organization’s existence or 81
status.
The second category—organizations that may be able to participate in political activities, but are
limited in how much they could spend—could include IRC § 528 homeowners’ associations. IRC
§ 528 requires that at least 90% of the organization’s expenditures be for “the acquisition,
construction, management, maintenance, and care of association property, and in the case of a
time share association, for activities provided to or on behalf of members of the association.”
The third category consists of the organizations that appear to be treated in the same manner as
IRC §§ 501(c)(4), (c)(5), and (c)(6) organizations. It appears that they would not be limited by the
tax laws with respect to their ability to participate in lobbying and political campaign activity so
long as such activity is consistent with the organization’s tax-exempt purpose. These could

78 See Webster & Abegg, 613-3rd T.M., Lobbying and Political Expenditures, at A-89.
79 2002 EO CPE TEXT, supra footnote 14, at 434.
80 See Treas. Reg. § 1.501(c)(3)-1(c)(1).
81 See Webster & Abegg, 613-3rd T.M., Lobbying and Political Expenditures, at A-89.





include such organizations as IRC § 501(c)(7) social and recreational clubs,82 IRC § 501(c)(8) 83
fraternal benefit societies and associations, IRC § 501(c)(14) credit unions, and IRC § 84

501(c)(19) veterans’ groups.


All IRC § 501(c) organizations are subject to tax if they make an expenditure for an IRC § 527
exempt function. An IRC § 527 exempt function is the influencing the selection, nomination,
election, or appointment of an individual to a federal, state, or local public office, to an office in a
political organization, or as a presidential or vice-presidential elector. This issue is discussed
further in the “IRC § 527 Exempt Functions” section, below.

Determining whether an activity is an IRC § 527 exempt function is important for IRC § 527
political organizations and IRC § 501(c) organizations. As discussed above, IRC § 527
organizations must primarily engage in IRC § 527 exempt function activities and are subject to
tax on income not used for these activities.
IRC § 501(c) organizations, on the other hand, are subject to tax if they make an expenditure for 85
an IRC § 527 exempt function. The organization is taxed at the highest corporate rate on the
lesser of the organization’s net investment income or its total amount of exempt function
expenditures. The tax applies if the organization makes the expenditure directly or through
another organization (e.g,. through an IRC § 527 political organization). However, IRC § 501(c)
organizations may set up a separate segregated fund under IRC § 527(f)(3). Assuming the fund is
set up and administered properly, it will be treated as an IRC § 527 political organization and the
IRC § 501(c) organization will not be subject to tax. However, as discussed below in the “Related
Organizations” section, an IRC § 501(c) organization may not set up a separate segregated fund 86
to accomplish activities the organization may not do.
IRC § 527 defines an exempt function as
influencing or attempting to influence the selection, nomination, election, or appointment of
any individual to any Federal, State, or local public office or office in a political
organization, or the election of Presidential or Vice-Presidential electors, whether or not such
individual or electors are selected, nominated, elected, or appointed.
“Public office” may include federal judgeships.87

82 See Rev. Rul. 68-266, 1968-1 C.B. 270.
83 See Priv. Ltr. Rul. 8342100 (July 20, 1983); Priv. Ltr. Rul. 8852037 (October 4, 1988).
84 See Regan v. Taxation with Representation of Washington, 461 U.S. 540, 546 (1983); Priv. Ltr. Rul. 7904064
(October 25, 1978).
85 IRC § 527(f).
86 See Treas. Reg. § 1.527-6(g).
87 See Announcement 88-114, 1988-37 I.R.B. 26; Gen. Couns. Mem. 39694 (January 22, 1988).





Whether an activity is an IRC § 527 exempt function depends on the facts and circumstances of
each case. IRC § 527 exempt functions include making expenditures for activities directly and
indirectly related to supporting an exempt function. Direct expenses include campaign
expenditures for such things as travel and meals, voice and speech lessons, attending testimonial 88
dinners, election-night parties, and reasonable cash awards to campaign workers. Indirect
expenses are for activities that are necessary to support the organization, including the costs of
solicitations, overhead, record keeping, and constructing and operating the organization’s 89
headquarters. Exempt function expenditures also include expenditures for activities engaged in
between election cycles, such as fund-raising and administrative activities, if directly related to 90
the next election. Another example is amounts spent to hold seminars and conferences that are
intended to generate support for candidates that share political philosophies with the 91
organization.
Examples of expenditures that are not for an IRC § 527 exempt function include those to
purchase periodicals to keep an incumbent informed on national and local issues expenses
incurred by an incumbent’s staff in connection with work on legislative issues, and excess 92
campaign funds transferred to the office holder’s office expense account. Additionally, 93
expenditures for the candidate’s personal use are not for an exempt function.
Expenditures for an issue advocacy communication may be exempt function expenditures if the
communication crosses the line from being issue advocacy to attempting to influence an election
or other selection process. The determination depends on the facts and circumstances of each
case. Factors that tend to show an expenditure for an issue advocacy communication is actually
for an IRC § 527 exempt function include
• the communication identifies a candidate for public office,
• the communication identifies the candidate’s position on the subject of the
communication,
• the candidate’s position has been raised (either by the communication or in other
public communications) to distinguish him or her from other candidates,
• the communication is timed to coincide with an electoral campaign,
• the communication is targeted at voters in a particular election, and
• the communication is not part of an ongoing series of substantially similar 94
advocacy communications by the organization on the same issue.

88 See Treas. Reg. § 1.527-2(c)(1) and (5); Rev. Rul. 87-119, 1987-2 C.B. 151; 2002 EO CPE Text, supra footnote 14,
at 398-99.
89 See Treas Reg. § 1.527-2(c)(2); Gen. Couns. Mem. 39178 (March 6, 1984).
90 See Treas. Reg. § 1.527-2(c)(1).
91 See Treas. Reg. § 1.527-2(c)(5)(viii).
92 See Treas. Reg. §§ 1.527-2(c) and 1.527-5(c); Rev. Rul. 87-119, 1987-2 C.B. 151.
93 See Treas. Reg. § 1.527-5.
94 See Rev. Rul. 2004-6, 2004-1 C.B. 328.





Factors that tend to show such an expenditure is not for an IRC § 527 exempt function include
• the absence of one or more of the above factors,
• the communication identifies specific legislation or an event outside the
organization’s control that the organization hopes to influence,
• the communication’s timing coincides with a specific event outside the
organization’s control that it hopes to influence,
• the candidate is identified solely as a government official who is in a position to
act on the issue in connection with a specific event (e.g., will vote on the
legislation), and
• the candidate is identified solely in a list of the legislation’s key sponsors.95
Finally, illegal activities are not exempt function activities.96 Thus, the making of expenditures in
violation of election laws is not an exempt function activity.
In general, an IRC § 527 exempt function means the same thing with respect to IRC § 527
organizations and IRC § 501(c) organizations. There are, however, several exceptions. Treasury
regulations specify that there are several instances where an exempt function expenditure made 97
by an IRC § 501(c) organization will not be subject to tax. These expenditures include those
related to requested appearances before a legislative body and those for nonpartisan activities.
Furthermore, the regulations state that two types of expenditures are taxable only to the extent
provided in the regulations: indirect expenses and certain expenditures that may be made by 98
unions and trade associations under FECA. Although the regulations state that these indirect and
FECA-allowed expenses are taxable only to the extent provided in the regulations, the Treasury
Department has not yet promulgated regulations that state what that extent is. Until the 99
regulations address the matter, it appears these expenses are not for an exempt function.

It is not uncommon to see related tax-exempt organizations. For example, an IRC § 501(c)(3)
organization may be paired with an IRC § 501(c)(4) social welfare organization or an IRC §
501(c)(6) trade association. It is not unusual for a trade association, such as the American Bar

95 See id.
96 See Treas. Reg. § 1.527-2(c)(4).
97 See Treas. Reg. § 1.527-6.
98 Although FECA generally prohibits unions and corporations from making election-related expenditures, FECA does
allow these organizations to make expenditures for internal communications with members, stockholders, and their
families that support candidates; conducting nonpartisan registration and get-out-the-vote campaigns aimed at their
members, stockholders, and their families; and the establishment, administration, and solicitation of contributions to
separate segregated funds. See 2 U.S.C. § 441b(b)(2)(C).
99 See 2002 EO CPE Text, supra footnote 14, at 437.





Association or the American Medical Association, to have a similarly named charitable
foundation that conducts charitable activities. It is also common to see a group with a need to
lobby as well as conduct charitable activities set up both an IRC § 501(c)(4) organization and an
IRC § 501(c)(3) organization. The organizations must be legally separate entities, and their
activities and funds must be kept separate.
Additionally, as discussed above, the IRC encourages IRC § 501(c) organizations to set up a
separate segregated fund under IRC § 527 in order to avoid the tax on IRC § 527 exempt function
expenditures. Incorporated tax-exempt organizations and IRC § 501(c)(5) labor unions also have
another reason to establish a separate segregated fund—as mentioned above, federal election laws
generally ban these entities from making contributions and expenditures in connection with
federal elections. Any IRC § 501(c) organization that is prohibited from participating in political 100
activities by the IRC may not use an IRC § 527 organization to get around the prohibition. For
example, an IRC § 501(c)(3) organization may not establish a separated segregated fund to
conduct election-related activities because that would be an indirect way for the IRC § 501(c)(3)
organization to participate in political campaign activity.
There are, however, several ways that an IRC § 501(c)(3) organization may be connected to an
IRC § 527 organization. For example, individuals involved in the IRC § 501(c)(3) organization,
such as its directors or managers, could establish an IRC § 527 organization separate from the
IRC § 501(c)(3) organization. Another possibility is if the IRC § 501(c)(3) organization was
established by or related to an organization that has also established an IRC § 527 organization. In
any of these situations, it is imperative that the IRC § 501(c)(3) organization be separately
organized from the other organizations. This means that all contributions collected by the IRC §

501(c)(3) organization must be kept separate from other funds. Additionally, if the IRC §


501(c)(3) organization and other organizations share offices or staff, the expenses must be
allocated between the two organizations and adequate records must be kept. In such a situation,
the IRC § 501(c)(3) organization must be careful not to make a contribution to the IRC § 527
organization by, for example, paying expenses that should be allocated to it or providing
unreimbursed services or supplies to it.

With the exception of IRC § 527 organizations, the Internal Revenue Code generally does not
require tax-exempt organizations to report detailed information about their political activities.
Nonetheless, some types of information reported by IRC § 501(c) organizations may give an idea
about the extent of the organization’s political activities (e.g., the total amount it spends on these
activities). These reporting and disclosure requirements are summarized below.
It is important to note that tax-exempt organizations are subject to campaign finance laws and
therefore may be required to report information to the FEC. Many IRC § 527 organizations must
report to the FEC as political committees. Additionally, organizations that make “electioneering
communications” must file a report with the FEC. Electioneering communications are broadcast,
cable, or satellite advertisements that refer to a clearly identified federal candidate within sixty

100 See Treas. Reg. § 1.527-6(g).





days of a general election or thirty days of a primary election and, if a House or Senate election, 101
are targeted to the relevant electorate.
Organizations usually must apply to the IRS for tax-exempt status. Exceptions include IRC § 527
organizations (see below), churches, and small organizations. Organizations that must apply will
have to show on the application (Form 1023 or 1024) that they meet the requirements in the
appropriate IRC section. The application must include such things as organizing documents (e.g.,
articles of incorporation or association), financial statements or budget proposals, and a detailed
description of the organization’s operations. If an organization plans to lobby or conduct political
campaign activity, this information may be included in the organizing documents or explanation
of its operations.
If the organizations is granted exempt status, the organization and the IRS generally must make 102
the application and supporting documents available to the public. The organization is subject to 103
a penalty of $20 per day if it fails to do so.
IRC § 527 organizations must notify the IRS of their existence by electronically filing Form 8871 104
within 24 hours of formation. The requirement does not apply to an organization that
anticipates having gross receipts of less than $25,000 for any year, is a state or local candidate’s
political committee or a state or local committee of a political party, or is required to report to the
FEC as a political committee. The information provided on Form 8871 includes the
organization’s name, address, and purpose; names and addresses of certain employees and
directors; and name of and relationship to any related entities.
The organization and the IRS must make Form 8871 publically available, with the organization 105
being subject to a penalty of $20 per day for failing to do so. Additionally, the IRS must post
electronically submitted forms in an on-line database within 48 hours of their filing.

101 See 2 U.S.C. § 434(f)(3)(A)(i). The FEC had initially carved out an exception for IRC § 501(c)(3) organizations in
its regulation interpreting “electioneering communication,” presumably on the theory that these communications were
already prohibited under the IRC. The regulation was invalidated as being inconsistent with the Bipartisan Campaign
Finance Reform Act of 2002 (P.L. 107-155). See Shays v. Federal Election Commission, 337 F. Supp. 2d 28 (D.D.C.
2004). When the FEC re-promulgated the regulation, the exception for IRC § 501(c)(3) organizations was not included.
11 C.F.R. § 100.29.
102 See IRC § 6104(a) and (d).
103 See IRC § 6652(c)(1)(D).
104 See IRC § 527(i).
105 See IRC §§ 527(k), 6104(a) and (d), and 6652(c)(1)(D).





Tax-exempt organizations must generally file an annual information return with the IRS using the 106
Form 990 series. Exceptions exist for such organizations as churches and those with less than
$5,000 in annual gross receipts. Additionally, an IRC § 527 organization is not required to file
Form 990 if it has less than $25,000 in annual gross receipts ($100,000 if a qualified state or local
political organization), is a state or local committee of a political party or a political committee of
a state or local candidate, is required to report to the FEC as a political committee, is a caucus or
association of state or local officials, is an authorized committee under FECA § 301(6) of a
candidate for federal office, is a national committee under FECA § 301(14) of a political party, or
is a congressional campaign committee of a political party committee.
Form 990 includes such information as the organization’s revenue sources and functional
expenses. For purposes of this report, several items are noteworthy. IRC § 501(c)(3) organizations
must report their aggregate political expenditures and any excise taxes imposed during the year
on their lobbying and political expenditures. They must also report their aggregate lobbying
expenditures on Schedule A. Certain IRC §§ 501(c)(4), (c)(5), and (c)(6) organizations must
report the costs of their lobbying and political activities. Additionally, all organizations must
report the names and addresses of significant donors, which are generally defined as individuals
who contributed at least $5,000 during the year, on the form’s Schedule B.
The organization and the IRS must make publically available the organization’s Form 990 for the 107
last three years. The organization is subject to a penalty of $20 per day per return (limited to 108
$10,000) for failing to do so. However, whether the information on Schedule B is publically 109
available will depend on the type of organization. Only private foundations and IRC § 527
organizations must disclose all of Schedule B. For other organizations, any identifying
information of the contributors will not be publically disclosed.
Organizations that owe the penalty and excise taxes mentioned in this report must file an excise
tax return (e.g., Form 4720 or Form 1120-POL). The return includes such information as the
aggregate totals of the taxable expenditures and taxes owed and the names of managers who
approved the activities.
Neither the organization nor the IRS is required to make any tax return available to the public.

106 See IRC § 6033.
107 See IRC § 6104(b) and (d).
108 See IRC § 6652(c)(1)(C).
109 See IRC § 6104(b) and (d).





IRC § 527 organizations that accept a contribution or make an expenditure for an exempt function 110
must periodically file a disclosure report, Form 8872, with the IRS. There is no comparable
requirement for the other tax-exempt organizations.
The IRC § 527 organization may file on a (1) quarterly basis in a year with a regularly scheduled
election and semi-annually in any other year or (2) monthly basis. There are additional
requirements for pre-general election, post-general election, and year-end reports. A periodic
report must include (1) the name, address, occupation, and employer of any contributor who
makes a contribution during the reporting period and has given at least $200 during the year,
along with the amount and date of the contribution, and (2) the amount, date, and purpose of each
expenditure made to a person during the reporting period if that person has received at least $500
during the year, along with the person’s name, address, occupation, and employer. The failure to
file a timely or accurate Form 8872 is subject to a penalty equal to the highest corporate tax rate
multiplied by the amount of contributions and/or expenditures to which the failure relates.
The disclosure requirements do not apply to an IRC § 527 organization that anticipates having
gross receipts of less than $25,000 for any year, is a political committee of a state or local
candidate, is a state or local committee of a political party, is required to report to the FEC as a
political committee, or is a qualified state or local political organization. The requirements also do
not apply to any expenditure that is an independent expenditure (i.e., an expenditure that
expressly advocates for a candidate but is made without the candidate’s cooperation).
The IRS and the IRC § 527 organization must make the forms available to the public.111 The 112
organization is subject to a penalty of $20 per day, which is limited to $10,000 per return.
Additionally, the IRS must post electronically submitted forms in an online database within 48
hours of their filing.
The Federal Funding Accountability and Transparency Act (P.L. 109-282) requires the Office of
Management and Budget to establish an online, searchable database that contains information
about entities, including tax-exempt organizations, that are awarded federal grants, loans, and
contracts. The database must include information such as the entity’s name and location, details
about the award (e.g., amount, funding agency, program source, and descriptive title), and the
primary location of performance under the award (including the congressional district). For more
information, see CRS Report RL33680, The Federal Funding Accountability and Transparency
Act: Background, Overview, and Implementation Issues, by Garrett Hatch.

110 See IRC § 527(j).
111 See IRC §§ 527(k) and 6104(d).
112 See IRC § 6652(c)(1)(C).





Erika Lunder
Supervisory Legislative Attorney
elunder@crs.loc.gov, 7-4538