The Political Ban in 501(c)(3): Its Odd History
We in the philanthropic community are – along with the rest of the nation – deep in the muck of perhaps the most bizarre election season in recent memory.
There’s an added dimension to our bewilderment; namely, how to skirt the quicksand of the absolute ban in Section 501(c)(3) on political activities; that is, –
participat[ing] in, or interven[ing] in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
It’s just 31 words from the remarkably brief (132-word) statute that defines which organizations are entitled to the most coveted tax-exempt status. But there are huge consequences for running afoul of this crisp, explicit prohibition.
Surely, then, our lawmakers of long ago thought long and hard about it. Undoubtedly, it was a well-considered trade-off for the many generous benefits of the prized 501(c)(3) status. Right?
Well, … not exactly.
It’s a sketchy tale. Among the highlights is Lyndon B. Johnson, then Minority Leader of the U.S. Senate, sitting in a back room at the Capitol in 1954, mulling an amendment to the proposed overhaul of the tax code. There was speculation he may have been plotting a way to get back at a political enemy.
But the story actually begins many decades earlier – in 1894.
The Early Years: No Political Ban
Charities have been given tax breaks since the Tariff Act of 1894. Back then, most revenue of the federal government had come from tariffs.
Earlier, legislators had enacted a federal tax on income, but (also in 1894) it was declared unconstitutional. It wasn’t until almost two decades later that the federal income tax was successfully and permanently launched in the landmark Revenue Act of 1913.
First Hints on Restricting Political Activities
“In 1919, the Treasury Department took the position that organizations ‘formed to disseminate controversial or partisan propaganda’ were not ‘educational’ for purposes of qualifying for tax-exempt status under the precursors to IRS § 501(c)(3).” As a result, contributions to these organizations were not deductible from the new federal income tax.
There were legal challenges, of course, but “no clear standard emerged from the court decisions.” Some courts denied the tax deduction if the organization “advocated for any type of change.” Others considered “how controversial the advocacy was or if the organization’s actions were intended to influence legislation.”
Slee v. Commissioner (1930) emerged as a leading case on this issue. There, the Second Circuit Court of Appeals crafted a different theory. It ruled that “contributions to an organization were not deductible because it did not appear that the lobbying was limited to causes that furthered the organization’s charitable purposes.”
Lobbying Restrictions Codified in 1934
Set against these earlier conflicting and confusing developments, Congress took action in the Revenue Act of 1934.
There are, though, records of the discussions on the Senate floor about the proposed law. One member spoke “about the deductibility of donations that were made for ‘selfish’ reasons.” He called out one particular organization with which he was “apparently having problems.” He believed that the statute under consideration was “too broad in that it applied to organizations without ‘selfish motives.’”
Another Senator “argued that all contributions to organizations that lobby should be nondeductible because of the difficulty in trying to distinguish between organizations that deserve the benefit and those that do not.”
There has been some speculation that Congress intended to codify the Slee ruling. The problem with that premise is that “the focus of the test under Slee is whether the lobbying furthers the organization’s exempt purpose, whereas the focus of the lobbying provision [in the Revenue Act] is whether the lobbying is a substantial part of the organization’s activities.”
As enacted, the 1934 lobbying provision includes the concept that is familiar to us from the current Section 501(c)(3); no “substantial part” of the activities of an exempt organization can be the “carrying on of propaganda” or “attempting to influence legislation.”
It’s significant that the Revenue Act of 1934, as originally proposed, had included an explicit “provision that would have restricted the ability of charities to participate in partisan politics.” But there were concerns that it was “too broad,” so that language was stricken in conference.
It would take another two decades before there was action on a statutory politics ban.
The Electioneering Ban in 1954
This brings us back to that (presumably smoke-filled) room with Lyndon Johnson. A prominent Congressional leader already, his influence was about to skyrocket when the Democrats’ fortunes changed in the 1954 election. He became Senate Majority Leader, a post he held until he was inaugurated as Vice-President beginning January 1961.
The comprehensive restructuring of the federal tax code was a major legislative achievement that year. The tax exemption provisions were codified in section 501(c) of the Internal Revenue Code.
As enacted, new section 501(c)(3) included language almost identical to the current statute:
Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office. (bolding added for political ban)
The only two items left out of the 1954 version are: (a) the language about the subsection (h) lobbying election (enacted in 1976); and (b) the phrase “or in opposition to” in the campaigning ban (enacted in 1987).
The political campaign prohibition was added as a floor amendment by Minority Leader Johnson.
“What is a ‘floor amendment,’” you ask? According to current Senate procedures –
… Senators may … propose floor amendments that are not germane to the subject or purpose of the bill being debated. This permits individual Senators to raise issues and potentially have the Senate vote on them, even if they have not been studied and evaluated by the relevant standing committees…
When Senator Johnson introduced this floor amendment, he “…analogized it to the lobbying limitation.” Of course, it’s important to note that he had –
mischaracterized the lobbying limitation by saying that organizations that lobbied were denied tax-exempt status, as opposed to only those organizations that substantially lobbied. The legislative history contains no further discussion of the prohibition, including whether Senator Johnson’s overly-broad description of the lobbying provision and inaccurate analogy were noticed. (bolding added)
So, to recap: First, the total ban on political campaigning for 501(c)(3) charities was offered as a last-minute, “non-germane” amendment to the massive new Internal Revenue Code; and, second, Senator Johnson’s rationale was based on a significantly incorrect characterization of the 1934 lobbying restriction. (Johnson did not begin to serve as a Congressman until 1937; nevertheless, the specifics of the lobbying provisions were right there in the sentence preceding his proposed politics ban.)
Although Senator Johnson’s motives behind the provision are not clear from the legislative history, it has been suggested that he proposed it … as a way to get back at an organization that had supported an opponent.
Another possible motive was to “offer an alternative to another Senator’s proposal that would have denied tax-exempt status to organizations making grants to organizations or individuals that were deemed to be subversive.” During these years, of course, fellow Senator Joseph McCarthy’s relentless hunt for Communists was in full swing.
Post-1954 Changes on Political Ban
The Revenue Act of 1987 “clarified that political campaign activities may not be conducted ‘in opposition to’ a candidate” as well as “on behalf of” any candidate for public office.
Also added that year was Internal Revenue Code section 4955, with new penalties for violating the campaigning ban. In addition to the remedy available to the IRS to revoke the organization’s tax exemption, the agency may impose – either in addition to, or as an alternative – an excise tax and a termination assessment for all taxes owed. The agency may also seek an injunction against any further prohibited expenditures.
There it is. We thought you’d like to know how we got to this point.