1). What does "tax-exempt status" mean?
When an organization is described as having
status", this generally means that the organization is not liable for
federal income tax on its net income (with certain exceptions). This
status is based on the fact that the organization fits within one of
numerous categories of special purpose organizations granted favorable
treatment under the federal tax laws, so-called "Section 501"
2). Why does the government grant tax-exempt
One view is that tax-exempt status is granted to certain
of organizations because a policy judgment has been made that the
government can conserve its resources by encouraging private
organizations to conduct certain activities that benefit the public.
Thus, historically, organizations conducting "charitable" activities
have been granted special status.
Government encourages charitable organizations in two
First, by saying: "We are not going to assess any tax on your
revenues." Second, by saying to donors: "If you give money to a
charitable organization, you will be entitled to a deduction which will
reduce your taxes."
3). What is the Internal Revenue Code framework
organizations are granted tax-exempt status?
The starting place is Section 501(a) of the Internal
Code, which states: "An organization described in subsection
(c)...shall be exempt from taxation...." Organizations "organized and
operated exclusively for...charitable... purposes" are described in
subsection (c)(3). These are the so-called Section 501(c)(3) tax-exempt
But other organizations are described in subsection
leagues or social welfare organizations; labor, agricultural,
horticultural organizations; business leagues; social clubs, and 15
additional categories. So when we use the term "tax-exempt
organization", it may mean any one of 22 different types of
organizations, all of which are totally or partially exempt from
federal income tax, subject to certain exceptions. The point to keep in
mind is that the category "tax-exempt organization" is much broader
than the category "charitable organization" or "Section 501(c)(3)
organization". Thus, an organization may be a tax-exempt organization
but not a charitable organization.
A Section 501(c)(3) organization has one important
distinguishing feature from other tax-exempt organizations.
Contributors to Section 501(c)(3) organizations are entitled to deduct
their contributions for federal tax purposes, thus reducing their tax
4). What are the advantages and restrictions
being recognized as a Section 501(c)(3) organization?
We've discussed two advantages already: tax exemption
deductibility of contributions. Some of the other advantages are:
eligibility for grants from other charitable organizations; special
mailing rates for certain Section 501(c)(3) organizations (this
involves going through a process with the Post Office); and exemption
from telephone and transportation excise taxes for certain Section
501(c)(3) organizations. For example, if your organization operates a
school as part of its activities, it may be possible to avoid paying
excise taxes on telephone service related solely to the school. Also,
federal surplus property can be donated to certain types of Section
501(c)(3) organizations. Special pension arrangements are available to
employees of Section 501(c)(3) organizations through the purchase of
annuities which meet the requirements of Section 403(b) of the Internal
Revenue Code. Some of the administrative and legal complexities
involved in establishing regular qualified pension plans can be avoided
by using a Section 403(b) annuity purchase program. For example, a
Section 403(b) program can be set up for only one or two employees;
coverage of all employees is not required.
Some restrictions are: limitations on engaging in
campaign activities; limitations on "lobbying", i.e., attempting to
influence legislation; and limitations on business activities. In
addition, a Section 501(c)(3) organization is usually subject to
scrutiny by the Attorney General of the state in which it is organized.
Therefore, in some cases, it may be more appropriate to conduct certain
activities within the framework of a Section 501(c)(4) social welfare
organization (which is not subject to the limitations on lobbying) or a
non-profit organization which is not tax-exempt.
5). How does an organization qualify as a
The IRS makes a determination as to whether or not an
organization is entitled to recognition as a Section 501(c)(3)
organization. The IRS normally makes this determination in response to
an exemption application. The IRS also determines the organization's
classification as a "public charity" or "private foundation".
Organizations established since 1969 cannot be exempt
Section 501(c)(3) unless they give notice to the IRS of their existence
by filing an exemption application. Also, an organization will be
treated as a "private foundation" unless it establishes that it is
entitled to classification as a "public charity" and requests such
classification in its exemption application.
To qualify under Section 501(c)(3), an organization must
an "organizational test". Its organizational documents--articles of
incorporation, bylaws, etc.--must state that: (1) the organization is
organized and operated exclusively for specified charitable purposes;
(2) none of its earnings or assets can be distributed to officers,
directors or other private individuals (although payment of reasonable
compensation for services is permitted); and (3) if it dissolves, the
organization's assets are to be transferred to another charitable
organization, i.e., its assets are permanently dedicated to charity.
Also, its organizational documents cannot authorize it to engage in
political campaign activities or substantial "lobbying" activities. If
these requirements are met, then the organizational test is satisfied.
Second, an operational test must be met. An organization
operate exclusively for charitable purposes. Initially, the IRS makes a
tentative determination based on the organization's statement of
proposed activities in its exemption application.
However, you won't know if your organization actually
the organizational test until the IRS comes in and looks at your
organization's operations, particularly if its current activities are
not the same as those described in its application.
6). What does operating "exclusively" for
"Exclusively" is a legal term of art. You would think it
that an organization can't do anything but conduct charitable
activities. However, the IRS and the courts have interpreted
"exclusively" to mean "substantially". That is, an organization can
carry on "incidental" non-charitable activities. For example, a
charitable organization can conduct some business activities that are
unrelated to its charitable purposes without losing its tax-exempt
The main point to remember is that although the statute
the word "exclusively", there is some flexibility. But, the IRS will
look closely at organizations that operate in a manner that makes
charity appear to be only a secondary purpose.
An organization can fail to operate exclusively for
purposes if its assets are used to benefit private individuals
connected with the organization, so-called private "inurement" or
Examples of private "inurement" or "benefit" are
salary payments or transactions that are not at arm's length between
the organization and members of its governing board or its officers,
such as letting such individuals use the organization's property
rent-free or for less than fair rental.
Also, an organization cannot benefit private,
interests. For example, Rev. Rul. 70-585 [1970-2 C.B. 115] illustrates
how fine distinctions are drawn by the IRS concerning benefit to
Rev. Rul. 70-585 dealt with two organizations. The first
organization formulated plans for the renewal and rehabilitation of a
lower-income area of a city. The area had deteriorated housing. As part
of a renewal project it rehabilitated apartments for rental to low and
moderate income families. Held: "charitable", because the organization
combats community deterioration.
A second organization was formed to build housing for
to moderate income families at cost. Held: "not charitable", because
its program was not directed at providing relief to the poor or
carrying out any other specific charitable purpose. Benefits were
provided to members of a non-charitable class.
Note that the rental of some apartments by the first
organization to moderate income families (i.e., non-charitable
beneficiaries) was permissible because the organization's primary
purpose was rehabilitation of a deteriorated area. This was not a clear
facto with respect to the second organization's activities. The fact
that it sold houses on a non-profit basis (i.e., at cost) was not
sufficient in itself.
7). What are the advantages of having "public
A Section 501(c)(3) organization classified as a "public
charity" has the following advantages: It pays no tax on its investment
income (if it has any), while a private foundation pays a 2% tax. More
importantly, private foundations are subject to significant
restrictions on their activities. Also, the rules governing the
deductibility of contributions to public charities are more favorable
than those for private foundations. For example, if a donor has a
choice between giving appreciated property (i.e., property which has
increased in value on its original cost) to a private foundation or to
a public charity, he or she can obtain a larger tax deduction if the
gift is made to a public charity.
Certain organizations are public charities by the nature
their activities, e.g., schools, hospitals, religious organizations.
Others qualify because they are affiliated with or controlled by
another public charity. However, the organizations you represent
usually will be classified as "public charities" because of their
sources of support. In general, they qualify because a sufficient
amount of their support comes from public sources-- contributions from
the general public or grants from governmental agencies.
8). What is the difference between a "public
charity" and a
The distinction has to do with the sources of an
organization's support. For example, The Ford Foundation is a "private
foundation" because it does not get any support from the general public
or the government and it is not affiliated with or controlled by
another organization which itself gets public support. In contrast,
your local United Way is a "public charity" because it receives broad
If an organization receives at least one third of its
from the public or the government and it does not receive too much
income form investments, it can qualify as a public charity under
Section 509(a)(1) or Section 509(a)(2) and will not be subject to the
restrictions applicable to private foundations.
Even if an organization loses government support and has
rely on private foundation money, its status would not change
immediately. There is a one-year transition period before its status
Also, an organization can have as little as 10% public
and still qualify as a public charity. But it has to meet a subjective
"facts and circumstances" test as contrasted with the "mechanical"
one-third test. The IRS will look at a number of factors: Does the
organization have a program for trying to get public support? Does it
have a board of trustees which is representative of various segments of
Alternatively, an organization can maintain its public
status by affiliating with another public charity, such as a church or
a local university, and qualifying as a "supporting organization" under
Section 509(a)(3). This is not a perfect solution because it means that
another organization has to have some degree of control over your
organization. But if your organization would be totally cut off from
private foundation money if it lost its public charity status, it might
have to choose some form of affiliation in order to continue to receive
sufficient funding to operate.
9). What are the restrictions on organizations
Penalty taxes are imposed on the private foundation
"foundation managers", i.e., trustees or directors, officers, etc., if
(1) it uses its funds for political campaigns, payments to certain
government officials, voter registration activities, lobbying or
non-charitable activities; (2) there are financial transactions between
the foundation and its "disqualified persons"--directors or trustees,
officers, substantial contributors and certain government officials and
members of their families or improper uses of the foundation's assets
for the benefit of such persons, i.e., "self-dealing"; (3) improper
investments are made; or (4) it fails to pay out annually for
charitable purposes at least 5% of its investment assets. There also
are special requirements that must be met if grants are made to
Also, a private foundation has to go through a more
procedure called "expenditure responsibility" if it makes a grant to
another private foundation. It has to use a more detailed grant
agreement and require more reports from the grantee and do more
checking on how the money is actually spent. So, from a private
foundation's standpoint, it would prefer to make grants to public
charities because there is less "red tape". As a result, many private
foundations have a policy of not making grants to other private
10). Can our organization, as a public charity,
serve as a
"fiscal agent" for an organization which is not a Section 501(c)(3)
organization? That is, can it "pass through" a grant from a private
foundation to another organization?
A private foundation cannot use your organization as a
"conduit" simply to pass through a grant to another organization which
is not a public charity or which is not a Section 501(c)(3)
The private foundation can't treat such a grant as a
your organization if it is required to distribute the grant funds to
another organization. However, it can make a grant to your organization
to support activities that involve making funds available to other
organizations, as long as your organization assumes responsibility for
the conduct of the activities funded by the grant, has control over the
ultimate use of the grant funds and has the power to select which
organizations will receive funds. If the private foundation "earmarks"
the grant for another group, i.e., requires that your organization give
the grant to another group which the foundation selects, then the
grantor foundation will have problems if that group isn't a public
11). What can a community group do to promote
activities in its neighborhood without affecting its Section 501(c)(3)
Promotion of business in itself is not a charitable
even though there may be benefits to the community. In Rev. Rul. 77-111
[1977-1 C.B. 144, Situation 2.], an organization formed to revive
retail sales in an area of economic decline by constructing a shopping
center was held not to be organized and operated for a charitable
purpose. The private business interests of the owners of the stores in
the shopping center were viewed as the primary beneficiaries of the
organization's activities. The group involved in this situation may not
have adequately linked the business activity to a specific charitable
But, in Rev. Rul. 76-419 [1976-2 C.B. 146], development
industrial park in a low-income neighborhood in order to provide
employment opportunities to low-income residents was held to be in
furtherance of a charitable purpose.
Thus, promotion of business activities which create
or training opportunities may be charitable. But, not in every case. In
Rev. Rul. 73-127 [1973-1 C.B. 222], an organization which operated a
supermarket to provide food at lower cost to residents of a poverty
area was held to be operated for non-charitable purposes, even though
it also provided on-the-job-training to unemployed residents. Its
operations were considered the same as normal commercial activity,
notwithstanding the type of customers it served or the job training
activities it conducted (which were not large relative to the overall
However, in Rev. Rul. 73-128 [1973-1 C.B. 222], it was
that operation of a toy factory to provide vocational training was
charitable. The organization provided a full range of supportive social
services to its employees. The key difference was that the training
activities were the primary focus and the manufacturing activities were
only a means to achieve that end. In contrast, in Rev. Rul. 73-127 the
operation of a supermarket was considered to be the primary focus
because job training activities were not a significant part of the
The key point to keep in mind is that the business
being promoted or conducted have to be linked to a defined charitable
purpose (i.e., providing jobs or training to low income persons).
Otherwise, they are indistinguishable from regular business activities.
12). Can a community economic development group
provides direct assistance to for-profit businesses or entrepreneurs
get a tax exemption under Section 501(c)(3)?
Yes. The fact that an activity undertaken to further
charitable purposes results in benefit to private business interests
does not prevent the activity from qualifying as "charitable" if the
private benefit is "incidental" or "insubstantial" (i.e., relatively
small) and not unreasonable in relationship to the primary public
benefit resulting from the activity. In Rev. Rul. 74-587 [1974-2 C.B.
162], it was held that a non-profit organization providing financial
assistance to various businesses in a depressed area was exempt under
IRC Section 501(c)(3). The funds were distributed to businesses or
individuals unable to obtain funds from conventional sources. The
organization combated community deterioration. The IRS concluded that
the organization's thrust was not to promote business but rather to
accomplish a charitable purpose--combating community deterioration. The
recipients of the financial assistance were the "instruments" or means
by which this charitable purpose was sought to be accomplished.
A similar result was reached in Rev. Rul. 81-284 [1981-2
131], in which a non-profit small business investment company which
provided financial assistance in the form of low cost loans to various
businesses located in economically depressed areas was held to be
exempt under IRC Section 501(c)(3). The organization gave preference to
businesses that would provide training and employment opportunities for
the unemployed or underemployed residents of economically depressed
Thus, it has been recognized that there are situations,
context of community development, where the benefit to the community
may be best accomplished by channeling funds through non-charitable
entities, such as for-profit businesses, even though such entities or
their owners may derive some direct or indirect benefit.
Careful structuring is needed if activities involve
to businesses. The businesses being assisted must be identified as
instruments or the "means" to an "end" -- achievement of a charitable
purpose. In Rev. Rul. 77-111 [1977-1 C.B. 144, Situation 2], a
community organization thought that promotional activities directed at
increasing patronage at local stores in a depressed area would aid the
economic well-being of the community and therefore were charitable. The
IRS said, in effect, "No, aiding business is not a charitable
instrument in this situation. This is because the direct beneficiaries
of the assistance are the businesses and not the community." In this
situation, the community organization may not have adequately
emphasized the tangible benefits to the community that would result
from providing assistance to businesses. It did not adequately
demonstrate how promotion of business could help achieve a charitable
objective. It did not require businesses being assisted to make
commitments to provide direct benefits to members of a charitable
class, e.g. by agreeing to provide jobs to low-income individuals, nor
did it limit assistance to businesses which were owned by members of a
disadvantaged minority group.
The key to making business development activities fit
charitable framework is to tie such activities to identifiable
charitable objectives such as providing employment opportunities to the
unemployed (relief of the disadvantaged); providing financial
assistance to businesses owned by members of disadvantaged minority
groups who have been unable to obtain financial assistance from
conventional sources (alleviation of the effects of racial
discrimination); or requiring businesses obtaining assistance to
upgrade their stores, make changes in their storefronts, etc.
(combating or preventing community deterioration).
13). What happens if our organization's
incorporation do not specifically authorize it to conduct economic or
business development activities?
If the "purpose" clause of your organization's articles
incorporation is stated in sufficiently broad terms, there should be no
problem. State law normally authorizes a corporation to conduct any and
all activities related to carrying out its stated purposes. There might
be a problem if your organization's purposes are narrowly defined, e.g.
if there is no general language, such as "combating community
A more important question is whether engaging in such
activities will affect the organization's Section 501(c)(3) tax-exempt
status if the organization's exempt application did not indicate that
this type of activity would be undertaken.
If such activities were not described in the
exemption application and they are a significant departure from its
current activities, then such activities must be reported to the IRS by
attaching a description of such activities to the organization's annual
information return or by sending a letter to the IRS.
In some cases, it may be advisable to request a ruling
advance from the IRS that your organization's tax-exempt status will
not be lost if it engages in such activities, particularly if the
economic business development activities will completely overshadow
your organization's current activities.
14). Can a Section 501(c)(3) organization lose
tax-exemption if it earns business income? Can its business income be
Section 501(c)(3) organizations can have two kinds of
income--related business income, which is not taxed, and unrelated
business income, which is subject to tax at regular corporate
rates--16% on the initial $25,000 of taxable income (gross business
income less deductible business expenses), increasing on a graduated
basis to 46% on taxable income in excess of $100,000. The first $1000
of unrelated business taxable income is not subject to tax.
If your organization runs a business activity, the first
question that has to be asked and answered is--is this a related
activity or an unrelated activity? Does it contribute importantly to
the achievement of your organization's charitable objectives as
specified in your organization's articles of incorporation and its
exemption application. If it does, it is a related business activity.
"Relatedness" is determined by the way the activity is conducted. It is
essentially a "purpose" test--why is the organization doing this? Is it
doing this to make money or is it doing this to achieve a charitable
goal? Are the means or methods appropriate?
For example, if an organization's objective is to
housing for low-income persons in order to combat neighborhood
deterioration and the organization sells some of the houses to upper
income persons to make money to help support its low-income housing
activities, the IRS will view the income from such sales as unrelated
business income because the sales are not made to members of a
charitable class (e.g. low-income individuals), and the purpose is to
obtain funds. However, income from sales to low-income persons would be
regarded as related business income because such sales are made for the
purpose of achieving the charitable goal of providing housing to
low-income persons and the revenue objectives are assumed to be of
To establish that a business activity is a related
you must be able to show that it is merely an instrument to achieve a
charitable purpose and not an end in itself, i.e., that it is not
conducted to produce income in a commercial manner.
If your organization cannot show how operation of a
helps to achieve a charitable objective rather than an economic
objective, then the business is not a related business. In this case,
the question to be answered is whether the business activity is large
in relation to the organization's other activities. Generally, having
unrelated business income will not affect your organization's
tax-exempt status unless the business activity is at such a significant
level that the IRS can question whether the organization is running a
business or a charity.
The other point to keep in mind about unrelated business
income is that the government is very fair. It does not tax your
organization on 100% of its gross unrelated business revenue. It lets
your organization deduct its expenses and taxes only its net unrelated
business revenue. The tax is simply the price your organization will
have to pay to obtain revenue. An evaluation should be made of the
business activity to determine if the economic return, after payment of
tax, is sufficient in light of the time and money that has to be
diverted from charitable activities to the business activity.
15). Let's say we, as a community group, are
setting up a
factory to manufacture prefabricated building components and we are
going to make a profit on these components by selling them to
contractors. But we are also going to provide employment for the
disadvantaged individuals and are going to sell the components at cost
to low-income individuals who are rehabilitating or rebuilding their
homes. Is this a related business?
The fact that you plan to sell components at cost to
low-income individuals does not make the business a related business.
The IRS has ruled that selling products at a lower cost to poor people
is not a charitable activity. Rev. Rul. 73-127 [1973-1 C.B. 221]
involved a supermarket in a low-income neighborhood which sold food at
low prices to poor people. The IRS concluded that the group was merely
running a supermarket business which was the same as other
supermarkets. Similarly, if you are running a housing component
business, how does the IRS distinguish your operation from a regular
manufacturer? Providing poor people with something at a lower cost does
not make an activity charitable.
However, providing employment to member of a charitable
may cause the business to be a related business if the focus is on
helping the employees, e.g. through providing supportive social
services, training, and other assistance that an employer normally
would not furnish so that it is clear that the business is not being
operated to achieve profits but for other objectives. The business
operation must have factors that make it different from similar
16). Can a Section 501(c)(3) organization's
income be taxed?
Yes; if the organization is a private foundation, it
subject to a 2% tax on its net investment income. It will also be
subject to tax, even if it is a public charity, on investment income
which is "debt-financed income". Generally, "passive" income (i.e.,
income earned without actively participating in business operations),
such as dividends, interest, rent and royalties, is not subject to tax
as unrelated business income. However, if the organization borrows
money and uses it to acquire income-producing property for purposes not
related to its program activities, a portion of the income from that
property will be subject to unrelated business income tax even though
the income would otherwise be exempt from tax because it is "passive"
The portion of the income from the debt-financed
will be subject to income tax will depend on the relationship between
the amount of debt and the cost of acquiring the property. In general,
if the property is 50% financed, 50% of the net income from the
property will be taxed as if it were unrelated business income.
So, if an organization is borrowing money to acquire
or investments which generate income and which are not related to its
charitable program, it can wind up getting less income than it expected
because it will have to pay tax on this income. However, if the
organization borrows to acquire property that is used to carry out its
program activities, e.g. an office building to house its administrative
offices or an apartment building to carry out its program of providing
housing to the disadvantaged, such property will not be "debt-financed
property" because its use is substantially related to the
organization's charitable program.
There is another exception to the general rule that
investment income is not unrelated business income. If an organization
receives rent, interest or royalties from an exempt or non-exempt
organization controlled by it, all or part such of income may be
treated as unrelated business income. In general, control is defined as
ownership of 80% of the voting power of a stock corporation or direct
or indirect control of 80% of the directors or trustees of a non-stock
or non-profit corporation.
17). What are the limits on investment
charitable organizations for community development purposes?
Such investments must either be "prudent" investments or
further a "charitable purpose". Relevant "charitable purposes" may
a. Relief of the poor and distressed or of the
underprivileged, e.g. providing low-income housing, developing
b. Lessening the burdens of government, e.g. providing
community social service facilities, supplementing government
c. Combating community deterioration, e.g. commercial
revitalization programs, housing rehabilitation, increasing or
improving housing stock; and
d. Eliminating prejudice and discrimination, e.g. home
purchase programs related to neighborhood integration programs,
minority business assistance.
It should be recognized, however, that "lessening
government" and "combating community deterioration" are general
catch-alls which also cover many non-traditional charitable activities.
Therefore, a careful description is needed of the "charitable purposes"
to be achieved by the investment.
When investment activities are undertaken to encourage
business activities, caution is needed because benefit to private,
non-charitable interests will have to be adequately justified.
Investments have to be analyzed under a two-step test:
a. Does the investment further a defined charitable
b. If it does, is the investment a reasonable method in
of the purpose being sought and the benefit, if any, to private
Use of investments as the means for achieving charitable
purposes is a difficult concept. The problem is that the Internal
Revenue Service is uncomfortable when they see investment activities in
a charitable context. Therefore, it is important to fully document the
charitable objective of each such investment.
In many instances, it is important for the charitable
organization to choose the right piece of a project to assure that it
can demonstrate that its investment furthers charitable purposes.
For example, a charitable organization might finance the
construction of a facility for charitable activities (e.g., a school,
health care facility, or social service agency, etc.) which can be a
key element of a larger development project oriented toward business or
Similarly, in the case of housing development
charitable organization might limit its investment to the portion of a
project directed at providing housing to members of a charitable class,
i.e., low-income individuals or the elderly.
If economic development activities such as commercial
estate development are being financed, then the charitable organization
might structure its investment to assure that there is benefit to
members of a charitable class by, for example, requiring the recipients
of its investment to provide jobs to low income individuals.
18). From a tax standpoint, when should
activities be conducted through a separate organization?
Problems in meeting the "charitable purpose" test often
with "single purpose" organizations. In contrast, organizations which
provide comprehensive assistance aimed at rehabilitating disadvantaged
areas and which assist or operate businesses as only part of their
activities have found it easier to obtain and maintain "charitable"
Therefore, if a business activity is to be undertaken
will need financing with charitable dollars, it may be better to
initially conduct the business activities within the framework of an
existing charitable organization rather than through a separate
organization. However, at some point, to protect the charitable
organization's tax-exempt status, consideration should be given to
"spinning off" the business activity into a separate for-profit
subsidiary, particularly if the size and scope of the business activity
becomes relatively large in relation to the organization's other
19). Can a charitable organization involved in
activities enter into partnership arrangements?
Partnership or joint venture arrangements with
entities will be closely scrutinized by the IRS. The IRS often views
such arrangements as giving private interests the benefit of charitable
assets, particularly if the charitable organization is to be the sole
general partner. This is because a general partner can be held liable
for all of a partnership's debts. Alternatively, the partnership
arrangement should be structured to minimize financial risk to the
charitable organization, e.g., by having a co-general partner which has
adequate financial resources. This is an evolving area because the IRS
is beginning to recognize that certain types of partnership
arrangements are appropriate for charitable organizations. However, in
some cases it may be advisable for a charitable organization to use a
subsidiary corporation as a vehicle for a partnership arrangement
rather than entering into a direct relationship with a for-profit
entity or private investors. This would protect the charitable
organization's assets from the claims of partnership creditors.
20). What political activities are permitted
Section 501(c)(3) organizations cannot support or oppose
political candidates. No partisan political campaign activities,
however minimal, are allowed. Section 501(c)(3) groups can distribute
non-partisan "voter education" information, but such information should
be carefully reviewed to make sure it is a fair presentation of
information about all candidates and is not "slanted". It cannot be
anything that can be construed as an attempt to sway the public one way
or the other. Also, a Section 501(c)(3) organization is not permitted
to allow groups or individuals to use its facilities and equipment to
campaign for candidates. However, a limited amount of legislative
activity, i.e. "lobbying" for the enactment or defeat of legislation,
21). Are all activities involving legislative
No, certain activities are not treated as "lobbying".
include: (1) talking to legislators about legislation that might affect
an organization's tax-exempt status or existence--but this does not
include budgetary or funding matters; (2) activities related to
non-legislative decisions, such as opposing or supporting the issuance
of regulations; (3) making available the results of non-partisan
studies; and (4) responding to requests to testify before legislative
I want to emphasize four technical points about
before a legislative committee. First, your organization has to be
invited by the chairman of the committee, not just a member of the
committee. Second, the invitation must be in writing. Third, the
invitation should request your organization's opinion on the topic
begin considered. Fourth, any information provided must be made
available to all members of the committee.
22). How much "lobbying is permitted for a
An "insubstantial" or incidental amount of lobbying is
permitted if an organization is a public charity. These terms are
difficult to quantify. Five percent is sometimes used as an informal
guideline, i.e., an organization's staff should not devote more than 5%
of its time and/or 5% of the organization's annual budget to lobbying.
But, this is not an official IRS guideline.
However, a public charity can make lobbying expenditures
certain specified levels if it files a special "election" form, Form
5768 (See Form 6.3) with the IRS under Section 501(h) of the Internal
Revenue Code. Even if the organization exceeds the specified
expenditure levels, the worst that can happen is that it will have to
pay a tax of 25% of its excessive lobbying expenditures. It doesn't
lose its exemption unless it keeps exceeding the limits in subsequent
If the Section 501(h) election form is filed the
level of lobbying expenditures is set forth in Section 4911(c)(2) and
is based on specified percentages of an organization's program
expenditures--starting at 20% of the initial $500,000 of program
expenditures, with lower percentages as program expenditures reach
higher levels. For example, if an organization has a program budget of
$200,000, it could spend 20%, or $40,000, on lobbying. No more than
25%, or $10,000, could be expended on "grass roots" lobbying--direct
communications with the public.
All Section 501(c)(3) organizations have to report on
annual information return, Form 990, how much they spent on
lobbying--even those that don't make the Section 501(h) election. This
means that organizations have to keep records and make allocations. For
example, if an organization sends out a newsletter urging people to
contact their legislators about certain pending legislation, the IRS
doesn't regard the cost of this lobbying effort as consisting of only
the out-of-pocket costs for the mailing, i.e., paper, postage,
printing, etc. It also includes the cost of staff time and an allocable
portion of overhead--rent, utilities, etc.
23). Do the limitations on lobbying or
activities extend to activities of individuals who are members or
employees of an organization, but who are acting as individuals?
To the extent that individuals can "separate" themselves
the organization, they can engage in lobbying and political campaign
activities. If you are attending meetings after work or on the
weekends, you are clearly doing this on your own time and there should
be no problem. But, you must be careful to make it clear that you are
acting in your individual capacity, not as an employee of the
organization. You must be extra cautious because there is no "safe
harbor" for political campaign activities. If your activities can be
regarded as activities of the organization, the IRS can revoke the
organization's tax-exempt status.
24). Let's say that you're working for a
organization but you are also on the board of directors of a national
or local lobbying group which is not a Section 501(c)(3) organization.
As long as you do this work for this organization outside of your
office hours and do not use your office telephone, is that permissible?
Yes. But, you have to keep your lobbying activities
from your work as an employee of the Section 501(c)(3) organization.
You should not conduct such activities on any regular basis during
office hours. As a practical matter, the fact that you make one or two
phone calls from your office probably isn't going to create a problem.
However, you should not send letters relating to affairs of the
national group on your organization's letterhead. When you are making a
speech for the lobbying group or permitting your name to be used in a
newspaper ad, you should make it clear that you are not acting in your
capacity as an employee of the Section 501(c)(3) organization. The
usual way to do this is to add a statement that use of your
organization's name in connection with yours is for identification
purposes only and is not intended to represent the official views of