Author: Adam Pitchel, Associate Member, University of Cincinnati Law Review
Non-profit organizations are not required to pay federal income taxes so that they can better fulfill their purpose. According to §501(c)(3) of the Internal Revenue Code, any organization that “operates exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes or to foster amateur sports competition” has an acceptable purpose.[1] However, organizations having an acceptable purpose and meeting the other requirements of §501 may only maintain their tax-exempt status if they refrain from influencing legislation and/or intervening in a political campaign.[2] This restriction was propose d by Senator Lyndon B. Johnson in 1954, to prevent churches and other organizations holding significant amounts of moral authority from interfering with elections.[3] H.R. 6195, also known as the Free Speech Fairness Act, proposes to create an exception to this prohibition.[4] The proposal would allow 501(c)(3) organizations to make political statements and endorse candidates if the statement or endorsement “is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose and results in the organization incurring not more than de minimis expenses.”[5] This act is impermissibly vague, creates an exception that threatens to swallow the rule, and is redundant with the existence of 501(c)(4) organizations.
Vagueness
The first section of H.R. 6195 would allow 501(c)(3) organizations to make any political statement provided the statement is made while fulfilling its tax-exempt purpose.[6] While legislators likely included this section to limit the context that these organizations can make political statements, they assumed that each 501(c)(3) organization has a clear, defined purpose. Several of these organizations have broad agendas and fulfill multiple acceptable purposes outlined in §501(c). For example, the Boy Scouts of America National Council is classified as a 501(c)(3) organization.[7] The purpose of the Boy Scouts is the development and education of young men, however it includes the phrase “to do to my duty to God” in its Scout Oath.[8] While seemingly innocuous, this phrase could blend the educational purpose of the Boy Scouts with a religious motivation. Consequently, the Boy Scouts of America National Council could make any political statement or endorsement while fulfilling either of these purposes. Recently, the Boy Scouts of American National Council has been criticized for firing gay scout leaders.[9] Through their religious purpose, they could oppose LGBT rights and abortion similar to other religious groups. Passing this statute into law would permit the Boy Scouts of America to endorse any candidate who shares these views.
The second section of the proposal permits 501(c)(3) organizations to make these statements and political endorsements, provided it does not incur more than minimal expenses.[10] However, this section fails to include a definition of minimal or describe the meaning of minimal whatsoever. This becomes problematic when organizations need to determine how much money it can permissibly spend on these statements. If an organization such as the Salvation Army wishes to make a political endorsement, its interpretation of “minimal” may differ significantly from a local church or charity’s definition. Legislators could rectify this problem by tying the definition of “minimal” to the gross income of the charity or organization. For example, they could determine that any expenses incurred in making political endorsements should not exceed one percent of the organization’s gross annual income. This amendment would make it easier for an organization to allocate its resources appropriately. Another possible change to resolve the ambiguity would be to place a dollar amount on how much organizations are allowed to spend on their political statements. This limitation could mirror the personal donation caps that limit how much individuals are allowed to directly contribute to political campaigns.[11] A monetary cap would reduce the amount of vagueness in H.R. 6195 and increase the ability of 501(c)(3) organizations to properly interpret its meaning.
Barn-Door Exceptions
As a general rule, exceptions to any test, statute, or proposal should be relatively narrow in scope. A broad exception threatens to consume not only the rule, but also the purpose for which the rule was created. H.R. 6195 proposes to eliminate one of the only limitations placed on 501(c)(3) organizations using the argument that §501(c)(3) unduly restricts freedom of speech.[12] In Regan v. Taxation with Representation, the Supreme Court determined that these restrictions were constitutional and comported with the First Amendment.[13] It found that §501(c)(3) represented a choice by Congress not to subsidize the political statements and lobbying activities of 501(c)(3) organizations.[14] While this is an appropriate justification, perhaps a better rationale would include an acknowledgement that 501(c)(3) organizations are not people. While Citizens United found that organizations have legal rights, they still cannot vote or perform many of the tasks of a natural person.[15] If these organizations are not considered people, then they need not be provided the same rights under the First Amendment.[16] The difficult question arises when the IRS is forced to determine when an individual is speaking as a private citizen and when they are speaking on behalf of the organization. The classic example of this issue is the preacher speaking to his congregation, discussing various topics, some of which are political. Although a church is a 501(c)(3) entity, the preacher remains a private individual with the right to make political statements. Thus, distinguishing between his different roles becomes nearly impossible. H.R. 6195 attempts to resolve this issue by permitting individuals in this situation to make political statements regardless of who they are speaking on behalf of.[17]
The problem with this solution is the messages that people would be allowed to convey and the effect that these messages would have on the purpose of the organization. If an organization makes a political statement or endorsement, it ceases to have the sole purpose of promoting education, religion, or charitable donations and instead has the dual purpose of promoting the original purpose, while also using influence to achieve a goal in the political arena. In Regan, Justice Blackmun held that denying these organizations the ability to engage in this dual purpose would be unconstitutional if not for the availability of another §501 designator, §501(c)(4).[18]
Redundancy
§501(c)(4) of the Internal Revenue Code provides all of the same protections available under §501(c)(3) with one major distinction.[19] Organizations formed under §501(c)(4) are not prohibited from making political contributions or statements, provided they are “operated exclusively for the promotion of social welfare…and the net earnings of which are devoted exclusively to charitable, education, or recreational purposes.”[20] The only problem with classifying an organization under this section is that any political contributions, donations, or expenditures are subject to taxation.[21] The availability of this classification substantially reduces the need for H.R. 6195. Organizations who wish to engage in political activity while maintaining their non-profit status have the option to do so. However, since individual political contributions remain taxable, organizations should not be given special treatment.[22] This resolution has the potential to create an extremely large loophole in this regard. It would carve out a unique niche in the tax code by making 501(c)(3) organizations the only groups that can make political statements without paying taxes on them. This leads to a secondary issue. Instead of contributing to a political campaign, wealthy individuals could donate to any 501(c)(3) organization to elicit that organization’s support for a particular candidate, and then write that donation off as a charitable contribution.[23]
There have been numerous complaints that the IRS has failed to enforce the political restriction on 501(c)(3) organizations, particularly if the organizations are limited in both size and scope.[24] To rectify this, Congress levied new penalties against non-conforming organizations that allowed the IRS to charge a one hundred percent tax on any political expenditure.[25] The current proposal would likely blur the distinction between a 501(c)(3) and a 501(c)(4) organization, making the IRS’s job even more complicated. If the proposal were enacted, the IRS and organization managers would have to determine which political statements fall within the scope of the organization’s purpose. This determination would have to be made on a case-by-case basis for over 1.4 million tax-exempt organizations in the United States every single year.[26]
Conclusion
The tax code has become hopelessly complicated since its original adoption in 1939. Endless loopholes, pitfalls, and exceptions have created an intricate maze that most organizations could not hope to navigate on their own. H.R. 6195 attempts to add another exception to this extensive list to preserve the freedom of speech for certain tax-exempt organizations in the United States. This exception adds very little to the rights of organizations while adding a substantial burden to the IRS’s obligation to police these organizations. The rights of 501(c)(3)s are permissibly limited as they can organize a 501(c)(4) to make political statements. Furthermore, the proposal fails to define some of its key terms, increasing its vagueness. This ambiguity will increase the likelihood that the distinction between 501(c)(3) and 501(c)(4) organizations will disappear completely, leaving no barriers to political contributions from tax-exempt organizations.
[1] I.R.C. §501(c)(3) (West 2015).
[2] Id.
[3] Id.
[4] H.R. 6195, 114th Cong. (2016).
[5] Id.
[6] Id.
[7] CLARIFYING UNIT TAX-EXEMPT STATUS, http://www.bsa-la.org/miscellaneous/tax-exempt-status.html (last visited Oct. 27, 2016).
[8] BOY SCOUTS OF AMERICA, http://www.scouting.org/scoutsource/Venturing/About/welcome.aspx (last visited Oct. 27, 2016).
[9] Boy Scouts of America Fire Gay Scoutmaster After He Comes Out to NBC News, HUMAN RIGHTS CAMPAIGN (April 1, 2014), http://www.hrc.org/press/boy-scouts-of-america-fire-gay-scoutmaster-after-he-comes-out-to-nbc-news
[10] H.R. 6195, 114th Cong. (2016).
[11] 52 U.S.C. §30116 (2016).
[12] H.R. 6195, 114th Cong. (2016).
[13] Regan v. Taxation with Representation of Washington, 460 U.S. 540, 541-43 (1983).
[14] Id. at 551-53.
[15] Citizens United v. Federal Election Commission, 558 U.S. 310 (2010)
[16]Id. at 428 (2010) arguing “The Framers…had little trouble distinguishing corporations from human beings, and when they constitutionalized the right to free speech in the First Amendment, it was the free speech of individual Americans that they had in mind.”
[17] H.R. 6195, 114th Cong. (2016); I.R.C. §501(c)(4) (West 2015).
[18] Regan, 460 U.S. at 553.
[19] I.R.C. §501(c)(4) (West 2015).
[20] Id.
[21] Id.
[22] 26 U.S.C. §276 (2016).
[23] I.R.C. §501(c)(3) (West 2015).
[24] Joseph Klapach, Note, Thou Shall Not Politic: A Principled Approach to 501(c)(3)’s Prohibition of Political Campaign Activity, 84 Cornell L. Rev. 504 (1999)
[25] Lauren Chisolm, Politics and Charity: A Proposal for Peaceful Coexistence, 58 Geo. Wash. L. Rev. 308 (1990).
[26] GRANTSPACE, http://grantspace.org/tools/knowledge-base/Funding-Research/Statistics/number-of-nonprofits-in-the-u.s (last visited Oct. 27, 2016).
