Many nonprofit organizations will look to engage in various forms of political activity during the upcoming 2022 midterm elections. Understanding how to participate while complying with federal and state laws and regulations governing electoral activities and campaign intervention is vital to the success of a nonprofit organization. In this webinar, Venable partners Lindsay M. Nathan and James E. Tyrrell, III examine key rules, issues, and best practices nonprofits must consider when engaging in such activities.
Risks and Rewards
While there are many reasons to become politically engaged during a midterm cycle, there are also many risks involved for nonprofit organizations. The laws vary widely, and there are local, state, and federal laws with which an organization and its executives must comply. These laws can present problems for personal as well as organizational political activity. To avoid fines and mitigate risks, it's important to treat political activity as a holistic compliance effort that involves the entire organization.
Political activity often comes with scrutiny from regulators, the media, competitors, and different watchdog organizations, but reputational risk is one of the biggest impediments to successful political activity for nonprofits. Despite the risks, there is much that can still be done. Understanding political laws and regulations allows organizations to manage the risks and reap the benefits.
The Legal Framework
The rules regarding election activity differ depending on the type of nonprofit organization. Whereas 501(c)(3) public charities cannot engage in any "campaign intervention"—endorsements, contributions to candidates, or any communications or activities that support or oppose candidates for office—501(c)(6) trade associations and 501(c)(4) social welfare organizations may engage in limited campaign intervention, as long as it is not the organization's primary purpose.
Trade and social welfare organizations may contribute to candidates where permitted under state and local law, but may not contribute to federal candidates. They can form political action committees (PACs) or super PACs and may publish communications that explicitly support or oppose candidates. In addition, they can engage in unlimited lobbying and issue advocacy. On the other hand, 501(c)(3)s may engage in some lobbying, but lobbying cannot be a substantial part of the organization's activities. They can engage in unlimited issue advocacy as long as it does not meet the tax code definition of lobbying.
The definitions of lobbying also differ for (c)(3) versus (c)(4) and (c)(6) organizations. Lobbying for a (c)(3) refers to any attempt to influence legislation, whereas the definition of lobbying for a (c)(4) or (c)(6) is much broader.
All 501 organizations that engage in political activity are subject to a tax that is assessed on the lesser of net investment income or political expenditures under 527(f) of the Internal Revenue Code. The tax is 21% of the lesser of the organization's taxable year investment income or expenditures for "exempt function activities," as defined in 527(e)(2). An organization's separate segregated fund that pays its own taxes is treated as a separate entity.
Although the political activity of 501(c)(3) organizations is subject to much stricter rules than that of (c)(4) or (c)(6) organizations, and violations may result in a loss of an organization's tax-exempt status, there is still plenty 501(c)(3) organizations can do to participate in elections without engaging in campaign intervention. Prohibited campaign intervention activities include endorsements, contributions to candidates, use of organizational resources to support or oppose candidates, and hosting events or activities designed to benefit a particular candidate (regardless of whether the candidate's name is mentioned). On the other hand, 501(c)(3)s may interact with elected officials, host nonpartisan debates and forums, create legislative scorecards, send questionnaires to get people "on the record" on particular issues, and conduct nonpartisan get-out-the-vote and voter registration drives. However, each of these activities comes with some limits and restrictions. It's important that the political activity is done in a way that is unbiased and nonpartisan.
When it comes to issue advertisements, an organization should take into account all of the various factors that the IRS will consider as it determines whether something amounts to campaign intervention. The key item to remember is that context does matter—if it looks like it is going to be a campaign intervention, it probably is. We highly encourage organizations to speak with their counsel to clearly understand the rules before running an advertisement, especially if the timing is close to an election.
Many 501(c)(3) executive directors and CEOs also want to be politically active through candidate endorsements and campaign contributions. Executives of public charities may endorse in their personal capacity; however, the executive cannot use organizational resources to make endorsements or engage in any political activity.
501(c)(4) and 501(c)(6) Activity
501(c)(4) and 501(c)(6) organizations can do much more in the political arena than 501(c)(3) organizations. Campaign intervention is permissible, but it cannot be an organization's primary purpose. The IRS has an amorphous facts and circumstances test for determining whether an activity constitutes campaign intervention. However, some clear examples of campaign intervention include communications that expressly advocate for or against a candidate (i.e., independent expenditures), contributions to state or local candidates where permitted, contributions to political committees (e.g., super PACs), endorsements, and supporting a connected PAC.
While the Supreme Court's decision in Citizens United in 2010 paved the way for (c)(4) and (c)(6) organizations to support or oppose candidates through independent expenditures, such campaign intervention must still not constitute an organization's primary purpose. Accordingly, it is important to track an organization's spending on campaign intervention versus its spending on primary-purpose social welfare activities.
Under the Code, a (c)(4) may engage in numerous activities that amount to social welfare, and a (c)(6) may engage in activities that improve their respective industry, including education, coalitions, lobbying, and any other type of activity that is in line with the main objective of the organization. Although there have not been any rules set in stone by the IRS, generally speaking, the safe harbor for these types of organizations is 60% in social welfare or industry improvement spending and 40% in political spending.
The Citizens United decision broadened the ability of organizations to make independent expenditures for communications that support or oppose candidates through TV, radio, websites, or email. The key to compliance with Federal Election Commission (FEC) regulations is that there cannot be any coordination between the candidate and the outside group or organization sponsoring the communication. Organizations must also be diligent in making the appropriate disclosures. In addition, the DC Circuit's CREW v. FEC decision in 2020 increased the potential amount of disclosure imposed on (c)(4) organizations for their federal independent expenditures.
There are various laws and regulations governing expenditures and donor disclosures and disclaimers. To learn more about them and campaign finance, contributions, and tax requirements, you can watch the full webinar here.
Organizations with questions about their own practices are encouraged to contact Ronald M. Jacobs, Lindsay M. Nathan, or James E. Tyrrell, III for assistance. To learn about our Political Law Practice, please click here.