Free Speech Fairness Act Introduced to House of Representatives

Business Tax

Free Speech Fairness Act Introduced to House of Representatives

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On September 28, 2016, Steve Scalise (R-LA) and Jody Hice (R-GA) introduced proposed legislation, H.R. 6195, “The Free Speech Fairness Act” (“Bill”) to the House of Representatives. As stated in the Bill the purpose is “To amend the Internal Revenue Code of 1986 to allow charitable organizations to make statements relating to political campaigns if such statements are made in the ordinary course of carrying out its tax exempt purpose.”

Background

 Any organization recognized by the Internal Revenue Service (“IRS”) as tax-exempt under Internal Revenue Code (“IRC”) §501(c)(3) is prohibited from having any direct or indirect political campaign activity involvement.  Current IRS rules and regulations state “Under the Internal Revenue Code, all section 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of (or in opposition to) any candidate for elective public office.  The prohibition applies to campaigns at the federal, state and local level.”  The IRS is clear in all of its published guidance that violation of this prohibition could potentially result in the organization’s revocation, or denial, of tax-exempt status. Additionally, those organizations which knowingly, or not, violate this prohibition may be subject to the imposition of certain excise taxes.

Political Campaign Involvement

Currently, political campaign involvement by a tax-exempt organization includes activities that extend far beyond simply endorsing a candidate.  These types of activities include any activities that could be construed as either favoring or opposing candidates for public office. According to the IRS, “Contributions to political campaign funds, public statements or support or opposition (verbal or written) made by or on behalf of an organization, and the distribution of materials prepared by others that support or oppose any candidate for public office all violate the prohibition”.

Political Activities versus Lobbying Activities

IRC §501(c)(3) tax-exempt organizations are subject to different sets of rules when it comes to political activities versus legislative activities; commonly referred to as lobbying.  Although IRC §501(c)(3) tax-exempt organizations are not permitted to engage in political activities, they are able to perform lobbying activities subject to certain dollar limitation thresholds.  Exceeding these thresholds can result in distinct consequences to the tax-exempt organization.

It is important for tax-exempt organizations to be aware of the limitations on lobbying in order to preserve tax-exempt status.  IRS rules and regulations state that no organization may qualify for IRC §501(c)(3) tax-exempt status if a substantial part of its activities is attempting to influence legislation; however, these organizations may participate in certain lobbying activities.  According to the IRS, “An organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation”.

When engaging in any lobbying activity the organization should determine what portion of its activities lobbying would constitute. There are several factors that need to be taken into consideration when making this determination including, but not limited to, the percentage of employees’ time devoted to lobbying, the nature of the organization and its mission, the percentage of lobbying in the organization’s annual budget, whether the activities are continuous or sporadic, and how controversial the organization’s position would be in the activities. Certain activities, such as paying annual dues to organizations which perform lobbying on behalf of their members as well as paying an outside, independent company to perform lobbying on a tax-exempt organization’s behalf, are allowable as the tax-exempt organization is not directly influencing or advertising its position with respect to any political position, stance or legislation.

Schedule C

Any tax-exempt organization which is required to file a Form 990, Return of Organization Exempt From Income Tax, and engaged in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office or engaged in lobbying activities will be required to file a Schedule C, Political Campaign and Lobbying Activities, with its Form 990. The purpose of Schedule C is to allow organizations to furnish additional information regarding political campaign and lobbying activities.

In addition to the IRS limitations placed on lobbying activities, tax-exempt organizations may also be governed by state and federal lobby disclosure laws which require certain organizations and individuals to register when they begin to engage in lobbying and to file periodic reports with respect to their lobbying activities.

IRC §501(h) Election

Under current IRS rules and regulations, tax-exempt organizations, other than churches and private foundations, may elect an expenditure test under IRC §501(h) as an alternative method for measuring lobbying activity. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in IRC §4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000.

Organizations electing to use the expenditure test must file Form 5768, Election/Revocation of Election by an Eligible IRC §501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed.

Any organization choosing to make this election may be subject to an excise tax under IRC §4911, equal to 25 percent of the excess amount, if the organization spends more than the dollar amounts permitted under IRC §501(h). In accordance with the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may jeopardize its tax-exempt status, making all of its income for that period subject to tax.

The Bill

The purpose of the Bill is to amend the prohibition imposed on IRC §501(c)(3) organizations from engaging in any political activities.  The Bill states the following:  “An organization shall not fail to be treated as organized and operated exclusively for a purpose described in subsection (c)(3), nor shall it be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) any candidate for public office, solely because of the content of any statement which —- (A) is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose and (B) results in the organization incurring not more than de minimis incremental expenses.”

The Bill, as currently written, does not define what is considered participation or intervention in a political campaign activity.  Additionally, the Bill is silent with respect to how an organization would determine what constitutes “de minimis incremental expenses”. If the Bill passes as written, tax-exempt organizations would still be prohibited from engaging in large-scale lobbying activities.

Conclusion

According to the IRS, an organization exempt under IRC §501(c)(3) will lose its tax-exempt status and its qualifications to receive deductible charitable contributions if a substantial part of its activities are carried on to influence legislation. The Bill would be the first step in potentially modifying a tax-exempt organization’s ability to be involved in “insubstantial” political activities.   At present, the Bill has only been introduced in the House of Representatives and has not yet been introduced to the Senate.

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