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Monday, October 4, 2010

Tax-Exempt Organizations: Political Activity Restrictions and Disclosure Requirements

Erika K. Lunder
Legislative Attorney

As the 2010 election cycle heats up, attention is focused on the political activities of tax-exempt § 501(c) organizations. This is due in large part to a recent Supreme Court case, Citizens United v. FEC, which invalidated long-standing prohibitions in federal campaign finance law on corporate and labor union campaign treasury spending. These prohibitions had affected § 501(c) organizations because many are incorporated and because all organizations (regardless of corporate status) could not serve as conduits for corporate or labor union treasury funds. Thus, post-Citizens United, § 501(c) organizations are among the entities operating with less restriction under federal campaign finance law. As a result, it is expected there will be increased political activity by the tax-exempt sector in 2010 in comparison with past election cycles.

Due to this expectation, significant attention is being paid to the regulation of § 501(c) groups under the Internal Revenue Code (IRC). Under the IRC, the ability of § 501(c) organizations to engage in political activity, such as electioneering and lobbying, depends on the type of organization. For example, the charitable organizations described in § 501(c)(3) may not engage in any campaign activity and may only conduct a limited amount of lobbying. Meanwhile, § 501(c)(4) social welfare organizations, § 501(c)(5) labor unions, and § 501(c)(6) trade associations may engage in campaign activity (so long as such activity and any other non-exempt purpose activity is not their primary activity) and an unlimited amount of lobbying. Other types of § 501(c) organizations appear to either be subject to restrictions like those imposed on § 501(c)(3) organizations or treated similarly to § 501(c)(4), (c)(5), and (c)(6) organizations.

While some types of organizations are permitted to engage in election-related activities under the IRC, § 501(c) organizations are subject to tax for making certain political expenditures. The tax is imposed on the lesser of the taxable expenditures or the organization’s net investment income. Thus, for organizations with little or no net investment income or those making low-cost expenditures, the tax is of minimal import. For other groups, however, it might serve as a disincentive to directly engage in the activities giving rise to the taxable expenditures.

Finally, § 501(c) organizations must report information regarding their political activities to the IRS on Schedule C of the Form 990. This information must be made publicly available by the organization and the IRS. While information on certain donors also must be reported to the IRS on the Form’s Schedule B, any identifying information about those donors is generally not subject to public disclosure.

While this report discusses the political activity limitations in the IRC, it is important to realize that organizations must also comply with applicable election and lobbying laws. For analysis of the intersection between tax and campaign finance laws, see CRS Report R40141, 501(c)(3) Organizations and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by Erika K. Lunder and L. Paige Whitaker; CRS Report RL34447, Churches and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by Erika K. Lunder and L. Paige Whitaker; CRS Report R40183, 501(c)(4) Organizations and Campaign Activity: Analysis Under Tax and Campaign Finance Laws, by Erika K. Lunder and L. Paige Whitaker; and CRS Report RS22895, 527 Groups and Campaign Activity: Analysis Under Campaign Finance and Tax Laws, by L. Paige Whitaker and Erika K. Lunder. For discussion of the applicability of federal lobbying law to tax-exempt organizations, see CRS Report 96-809, Lobbying Regulations on Non-Profit Organizations, by Jack Maskell. 

Date of Report: September 24, 2010
Number of Pages: 19
Order Number: RL33377
Price: $29.95

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