FAQs About Tax-Exempt Organizations
Report for Congress
Received through the CRS Web
Order Code 96-264
Frequently Asked Questions
About Tax-Exempt Organizations
Updated March 21, 2003
Marie Morris
Legislative Attorney
American Law Division
Summary
This report answers frequently asked questions about tax-exempt organizations, including
how to set up a tax-exempt organization, how to get information about a tax-exempt
organization, what limits are placed on the lobbying and political activities of tax-exempt
organizations, and the meaning of the terms "tax-exempt," "nonprofit," and "private
foundation." Although various types of exempt organizations are discussed, the primary
emphasis is on the tax treatment of 501(c)(3) organizations, usually called charities or
charitable organizations. Several questions are intended to guide the reader to more
information about tax-exempt organizations in general or about specific organizations.
Another group of questions provides general information on how to form a tax-exempt
organization, what record keeping requirements an organization might encounter, and
how an organization might lose its tax-exempt status. The appendix contains a
comparison of the types of tax-exempt organizations and the deductibility of
contributions, and the tax law limits on their ability to lobby and participate in political
campaigns.
Thanks
The author deeply appreciates the contributions of Felicia Kolp, Susan Watkins, and
Erika Lunder. Felicia Kolp envisioned this report, instigated its development, and coauthored the first edition of the report. In addition to suggesting many of the topics to be
covered, she wrote the initial drafts of the sections on resources, organizations which
evaluate or report on the activities of charities, and getting information about tax-exempt
organizations. Without her collaboration and support, the report might never have been
written.
Susan Watkins provided invaluable assistance in updating the second version of this
report. She checked, updated, corrected, and added bibliographic references, addresses,
useful sources of information, organizational references, and website addresses.
Erika Lunder, Legal Intern, American Law Division, provided the impetus to produce a
third version of the report. She updated and substantially rewrote this version of the
report under the supervision of the author. Her able contributions brought it into the 21st
century.
Contents
1. What is a Tax-exempt Organization?
2. What is a Nonprofit (Not-for-profit) Organization?
3. What are the Differences Between 501(c)(3) and 501(c)(4)
Organizations?
4. What is a Private Foundation?
5. How Do I Know if My Contribution to an Organization is TaxDeductible?
6. Are There Organizations Which Evaluate Charities or Report on
Their Activities?
7. How Can I Get Information about a Tax-Exempt Organization?
8. How Do You Set up a Tax-exempt Organization?
9. What Tax Records Do Tax-exempt Organizations Have to Prepare?
10. Can Tax-Exempt Organizations Lobby?
11. Can Tax-Exempt Organizations Participate in Political
Activities?
12. How Does an Organization Lose its Tax-exempt Status?
Suggested Resources for More Information
Organization
Books
List of Tables
Types of Tax Exempt Organizations and Their Tax Characteristics:
Ability to Receive Deductible Charitable Contributions, Lobby,
and Participate in Political Campaigns
Frequently Asked Questions About
Tax-Exempt Organizations
1. What is a Tax-exempt Organization?
A tax-exempt organization is an organization that is exempt from Federal income taxes
under section 501(a) of the Internal Revenue Code. In order to become exempt, an
organization must meet the Code's requirements and file an application for exempt status
with the Internal Revenue Service. Various types of organizations may qualify for taxexempt status, including social welfare organizations, labor unions, trade associations,
social clubs, veterans' organizations, cooperatives, and fraternal organizations. The type
of organization that people often mean when using the term "tax-exempt organization" is
described in section 501(c)(3):
Corporations . . . 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 . . . .
Each type of organization is subject to specific requirements in order to qualify for taxexempt status. A summary of the types of tax-exempt organizations and their
characteristics is appended at the end of this report.
2. What is a Nonprofit (Not-for-profit) Organization?
The term "tax-exempt organization" is often used interchangeably with the term
"nonprofit organization." This can be misleading. While a tax-exempt organization is
defined under Federal law (the Internal Revenue Code) as exempt from Federal income
taxes, the status and privileges of a nonprofit organization are determined under state law.
The requirements vary by state, but the term "nonprofit organization" generally means a
corporation which is not intended to be a profit-making corporation. State incorporation
laws usually take into account the fact that nonprofit corporations typically do not have
shareholders or the same business motives as for-profit corporations. A nonprofit
corporation is not automatically a tax-exempt organization. Since the qualifications for
"nonprofit" status vary among states, it is possible for the term "nonprofit organization"
to be broader than, narrower than, or identical to the term "tax-exempt organization." In
order for a nonprofit organization to be exempt from Federal income taxes, it must meet
the statutory requirements found in the Internal Revenue Code and file an application for
recognition of exempt status with the IRS.
3. What are the Differences Between 501(c)(3) and 501(c)(4) Organizations?
Section 501(c) of the Internal Revenue Code (IRC) describes many types of organizations
that qualify for tax-exempt status. When an organization applies for exempt status, it
must tell the IRS which paragraph of IRC § 501(c) it qualifies under. Generally, the
answer is obvious since most paragraphs under section 501(c) are discrete categories; for
example, section 501(c)(5) refers to agricultural organizations, section 501(c)(8) refers to
fraternal societies, and section 501(c)(14) refers to credit unions. The organizations
described in paragraphs 501(c)(3) (usually referred to as "charitable" organizations)1 and
501(c)(4) (usually referred to as "social welfare organizations")2, however, have some
overlapping characteristics. Both sections include organizations that operate for
charitable purposes3 and are restricted so that none of the organization's earnings may
benefit a private shareholder or individual.
Despite these similarities, 501(c)(3) and 501(c)(4) organizations differ in two significant
ways. First, under IRC § 170(c), contributions to 501(c)(3) organizations are deductible,
but contributions to 501(c)(4) organizations are not. When a contribution is deductible, a
donor may deduct the amount of the contribution from taxable income, subject to the
restrictions in IRC § 170. This is an important benefit for the organization because it
encourages donors to contribute in order to lower their taxable income and to make larger
contributions since the after-tax cost of each contribution is reduced. The second
difference is that 501(c)(3) organizations are heavily restricted in their ability to lobby
and attempts to influence legislation or public opinion and they are prohibited from
directly engaging in political campaigns, but 501(c)(4) organizations are not. (Questions
10 and 11 provide information on these restrictions).
These two differences are important when an organization is faced with the choice of
applying for tax-exempt status as a 501(c)(3) or 501(c)(4) organization. If the
organization's agenda depends on influencing public opinion or the legislative process, it
may be advantageous to be a 501(c)(4) organization. For other organizations, it will
usually make more sense to be a 501(c)(3) organization in order to have the advantage of
tax-deductible contributions.
Finally, it is important to note that while an organization must identify itself as one type
of 501(c) organization, it may be paired with another 501(c) organization under certain
circumstances. For example, a 501(c)(3) organization can be paired with another
organization, such as a 501(c)(6) trade association or a 501(c)(4) social welfare
organization, if the organizations are actually and legally separate entities. It is not
unusual for a trade association, such as the American Bar Association or the American
Medical Association, to have a similarly named charitable foundation that conducts
charitable activities. Organizations may also be paired when a group has a need to lobby
as well as to conduct charitable activities. The two organizations' activities and funds
must be kept separate, but they may have overlapping boards of directors. The charitable
organization may qualify to accept deductible contributions if the charitable activities are
isolated from the lobbying organization.
4. What is a Private Foundation?
A 501(c)(3) organization is either a public charity or a private foundation. Public charities
have broad public support and tend to provide charitable services directly to the intended
beneficiaries. Private foundations differ from public charities in several ways. First,
private foundations are often tightly controlled and receive a significant portion of their
funds from a small number of donors, perhaps even a single source. Additionally, many
private foundations make grants to other organizations rather than directly carry out
charitable activities. Since these factors create the potential for self-dealing or abuse of
position by a small group controlling a tax-exempt organization, private foundations are
more closely regulated than public charities. Thus, private foundations are subject to the
additional requirements found in IRC § § 4940- 4946. They face additional taxes and
penalties for failing to meet these requirements. It is important to note that all 501(c)(3)
groups are presumed to be private foundations and must actively tell the IRS how they
qualify for public charity status, based on the support and control tests found in IRC §
509.
5. How Do I Know if My Contribution to an Organization is Tax-Deductible?
Section 170 of the Internal Revenue Code allows for certain charitable contributions
made to tax-exempt organizations to be deducted from the donor's gross income. When a
contribution to a tax-exempt organization is not deductible as a charitable contribution,
the organization must notify the potential contributor of that fact at the time of
solicitation.4 Organizations that fail to meet this requirement face a fine of $1,000 for
each day the failure occurs, with an annual cap of $10,000, under IRC § 6710. The fines
are higher and the cap is eliminated for organizations that intentionally disregard the
notification requirement. The only contributions to tax-exempt organizations that are
deductible are those that meet the requirements of IRC § 170. Under section 170(c),
contributions made for charitable purposes are tax deductible when made to qualifying
501(c)(3) organizations, governmental units, veterans organizations, fraternal
organizations, and cemetery companies. IRC § 501(c)(3) organizations must be granted
approval by the IRC to receive tax-deductible contributions. The IRS determines the
deductibility of charitable contributions at the same time that it considers the
organization's application for exempt status. A listing of the 501(c)(3) organizations
eligible to receive deductible contributions is found in IRS Publication 78, Cumulative
List of Organizations Described in Section 170(c) of the Internal Revenue Code of 1986.
This publication is available on the IRS web site [ http://www.irs.gov ] or may be
requested from the IRS.
Charitable contributions that meet the requirements of section 170(c) are not deductible if
the organization provides goods or services in exchange for the contribution. If the
contribution exceeds the fair market value of the goods or services, then the amount of
the excess may be deductible. When an organization receives more than $75 in exchange
for goods or services, IRC § 6115 requires that the donor be told the amount of the
contribution, if any, that is tax-deductible.
Even if a contribution to an organization is deductible, individual taxpayers face
restrictions on the ability to benefit from the deduction. Only donors who itemize
deductions may take the charitable deduction.5 High-income taxpayers are further limited
in the amount of total itemized deductions they may take. Additionally, certain
substantiation requirements exist, including the rule that donors must obtain a written
acknowledgment from the organization for any contribution that exceeds $250 in value.
Finally, section 170 may restrict the amount of the deduction depending on the size and
nature of the contribution. For example, taxpayers may not deduct contributions
exceeding 50% of the taxpayer's adjusted gross income (the percentages are lower for
certain property, e.g., a donation of capital gain property).
Dues to some organizations may be deductible as business expenses or employee
business expenses. Typically, dues to trade associations (501(c)(6)) and labor unions
(501(c)(5)) are potentially deductible as employee business expenses; however, without
significant business expenses, i.e., exceeding 2% of adjusted gross income, the individual
will find that the deduction cannot be used.
6. Are There Organizations Which Evaluate Charities or Report on Their
Activities?
The following are examples of organizations which report on the activities of charities.
The information is adapted from the organizations' websites.
American Institute of Philanthropy
3450 Lake Shore Drive Suite 2802E
P.O. Box 578460
Chicago, IL 60657
Phone: (773) 529-2300
Fax: (773) 529-0024
E-mail: aip@charitywatch.org
Internet: [http://www.charitywatch.org/links.html]
The American Institute of Philanthropy (AIP) is a nonprofit charity watchdog and
information service, which provides ratings, opinions, and other information on the
financial and managerial practices of approximately 400 charities. It publishes the
Charity Rating Guide, which gives a letter grade rating and other statistics on the
financial performance of about 400 major American charities in 37 different categories,
including Environment, Cancer, Crime Prevention, Child Protection, Senior Citizens, and
more. The Guide provides information on the percentage of funds each charity spends on
its charitable purpose, its cost to raise $100, whether it holds massive asset reserves, and
an overall grade from "A+ to F."
BBB Wise Giving Alliance
4200 Wilson Boulevard, Suite 800
Arlington, VA 22203-1804
703-276-0100
e-mail: give@cbbb.bbb.org
Internet: [http://www.give.org]
The BBB Wise Giving Alliance was formed in 2001 with the merger of the Council of
Better Business Bureaus' Philanthropic Advisory Service and the National Charities
Information Bureau. The Alliance collects information and prepares reports on several
hundred charitable organizations. The Alliance does not recommend or rate charities, but
serves to report information on the organization's background, staff and governance,
financial status and fund raising practices. The report will also state whether the charity
meets the Alliance's standards for charitable solicitations. These reports are available on
the Alliance's comprehensive website or upon request. Besides the report, the Alliance
also publishes the BBB Wise Giving Guide four times per year.
Guidestar / Philanthropic Research, Inc.
427 Scotland Street
Williamsburg, VA 23185
757-229-4631
e-mail: customerservice@guidestar.org
Internet: [http://www.guidestar.com]
The Guidestar website, produced by Philanthropic Research, Inc., contains information
on more than 850,000 nonprofit organizations. The information can be searched by a
variety of fields (e.g., organization name, state, category, or income level). The site
provides information on the organization's address, finances, employee and volunteer
levels, and general activities. For some organizations, the site contains a wealth of
information, including annual returns (Form 990). The comprehensiveness of the
information varies by charity.
National Center for Charitable Statistics (NCCS)
c/o The Urban Institute
2100 M St., NW, 5th Floor
Washington, D.C. 20037
202-261-5801
e-mail: NCCS@ui.urban.org
Internet: [http://www.nccs.urban.org]
The National Center for Charitable Statistics is a program of the Urban Institute's Center
on Nonprofits and Philanthropy. NCCS is the national repository of data on the nonprofit
sector in the United States. It collects and provides statistics and public information on
charitable enterprise in the United States. It permits the public to use its library and
provides computer services for its members from a database of over 1 million charitable
organizations registered with the Internal Revenue Service. Some of the data is accessible
through the organization's website. NCCS publishes the Non-Profit Almanac and Desk
Reference 2001, the State Nonprofit Almanac 1997: Profiles of Charitable Organizations
and Giving and Volunteering in the United States.
7. How Can I Get Information about a Tax-Exempt Organization?
Under IRC § 6104(d), the application for exempt status and the annual information return
(Form 990) of a tax-exempt organization are open to public inspection.6 This requirement
has two parts: the organization must allow the public to inspect the documents and must
provide copies upon request. For inspection purposes, the information must be made
available during normal business hours at the organization's principal office and any
district office with more than three employees. With respect to providing copies, requests
for copies of the documents may be made in writing or made in person. The organization
must furnish copies immediately if the request is made in person and within 30 days for
written requests. The organization is permitted to charge a reasonable fee for
reproduction and mailing costs. An organization is not required to provide individual
copies if either: (1) the organization makes these documents widely available on the
internet or (2) the requests are part of a harassment campaign and compliance is not in the
public interest.
Certain information does not have to be disclosed. Organizations are not required to
disclose the names and addresses of any contributors. Furthermore, the IRS is permitted
to create exceptions to public disclosure of information relating to trade secrets, patents,
processes, styles of work, or apparatus, if public disclosure would adversely affect the
organization or if the information would adversely affect the national defense.
If an organization refuses to provide a copy of its returns, the IRS suggests that the
taxpayer notify the IRS Examination Division, 1100 Commerce Street, ATTN: T:EO:E,
Dallas, TX 75242 by letter. The letter should provide the name and address of the
organization that refuses to allow public inspection or provide copies of its return, and
request that the return be made available for public inspection. The Tax
Exempt/Government Entities Division of the IRS will contact the organization and
arrange a time during which the return may be inspected. If the organization fails to
provide the return at the agreed upon time, the IRS will assess statutory penalties. Failure
to comply with the inspection requirement is penalized under IRC § 6652(c)(1). There is
a $20 per day penalty for failure to comply with the return inspection requirement, with a
maximum penalty of $10,000 per return. There is an unlimited $20 per day penalty for
failure to allow inspection of the application for exemption.
There are other sources of information besides the organizations themselves. Requests to
see an organization's annual return and application for exemption may be made to the
IRS. Furthermore, if the inquiry does not require the level of detail found in the Form 990
and exemption application, other sources of information include:
IRS Publication 78, the Cumulative List of Organizations Described in Section
170(c) of the Internal Revenue Code of 1986. This publication lists the
organizations that qualify to receive tax-deductible contributions. The list includes
the name of the organization and the city and state in which it is located.
Publication 78 is offered in two formats: the paper version and the online version
[ http://www.irs.gov ]. While both contain the same information, the web-based
version is superior with respect to ease of use as it allows the user to search by
organization name, city or state.
National Directory of Nonprofit Organizations. This commercially published
directory contains information on many of the organizations required to file Form
990. The directory, published by the Taft Group [http://www.gale.com],is based
on IRS data. The directory has fewer CRS-8 entries than Publication 78, but
contains more information, such as the organization's address, telephone number
and annual income. It also provides geographic and broad subject indexes.
The organizations listed under Question 6 also provide information on various taxexempt organizations. In particular, Guidestar may have copies of the organization's
latest Form 990 on its web site.
8. How Do You Set up a Tax-exempt Organization?
For many tax-exempt organizations, the first step is to incorporate the organization.
Organizations incorporate for a variety of reasons, but incorporation is not usually
required in order to apply for tax-exempt status from the IRS. The benefits associated
with corporate status include limited personal liability for members of the organization.
Incorporation is achieved under state law. Contact the appropriate state office -- most
often, the Secretary of State -- for information on that state's not-for-profit laws. An
organization may be required to:



Register with the Secretary of State to reserve that organization's name and enable
the group to solicit funds, do business, or own property in the state.
File Articles of Incorporation which will include the organization's purposes and
names of incorporators and will enable the state to recognize the organization as
an incorporated nonprofit organization. Some states do not have special nonprofit
corporation status and the organization will be incorporated under regular
corporation laws.
Another important consideration for many exempt organizations is the ability to
solicit charitable contributions. The National Association of State Charity
Officials web site provides links to state offices which regulate charitable
solicitations. [http://www.nasconet.org/stories/storyReader$8]. Many of the links
enable the searcher to download the necessary forms. There is also a unified
registration form for those charities seeking to solicit in multiple states.
Whether or not the organization incorporates, it will need to file for recognition of taxexempt status from the IRS. IRS Publication 557, Tax-Exempt Status for Your
Organization, provides a detailed explanation of the procedures and forms for
establishing tax-exempt status. These include:

Obtaining a Federal Employer Identification Number (IRS Form SS-4). Every
exempt organization is required to have an employer identification number,
whether or not it has any employees; this number will allow the IRS to track your
application for tax-exempt status.

Completing IRS Form 8718 (User Fee for Exempt Organization Determination
Letter Request) to calculate the correct fee which must be submitted with the
application for tax-exempt status.
Filing IRS Package 1023 (Application for Recognition of Exemption Under Section 501
(c)(3) of the Internal Revenue Code), or IRS Package 1024 (Application for Recognition
of Exemption Under Section 501(a) for Determination Under Section 120). The
exemption application must usually include a statement of the organization's activities, a
copy of its articles of incorporation and bylaws, and current financial statements.
Certain organizations are not required to file Package 1023 or submit other specific
application forms. This is explained in IRS Publication 557. IRS Publication 557 and the
applicable forms may be downloaded from the IRS web site [ http://www.irs.gov ]. The
forms may be requested from the IRS at local IRS offices or by calling (toll-free) 1-800829-3676.
If the organization is applying for 501(c)(3) status, it should file the application for
recognition during the first 15 months of the organization's life. This assures that the
recognition of exempt status will date back to the date of the organization's formation.
Although there are certain exceptions, the general rule under IRC § 508(a) is that if the
application is filed at a later time, the determination will date back only to the date of the
application. For other types of exempt organizations, the recognition of exempt status
will date back to the date of the organization's formation if the organization's activities
and purposes are the same as those at the time recognition was granted. If the
organization is required to alter its activities or substantially amend its charter to qualify
for exempt status, then the recognition of exempt status will be effective as of a date
determined by the Internal Revenue Service.
9. What Tax Records Do Tax-exempt Organizations Have to Prepare?
Under IRC § 6033, most exempt organizations are required to file an annual return (Form
990) that discloses such information as income, receipts, expenses and disbursements, a
balance sheet of assets, liabilities, and net worth, the total of contributions and gifts
received during the year, the names and addresses of substantial contributors, the names
and compensation of managers and highly compensated employees, the amounts of
penalty taxes imposed for excessive lobbying, political expenditures, or excess benefit
transactions. Certain organizations also have to report their lobbying expenditures and
grass roots expenditures. Certain dues- collecting organizations are required to estimate
what portion of member's dues is spent on lobbying. All of these requirements are
satisfied by filing IRS Form 990. If the organization has unrelated business income, it
must also file a Form 990-T. Not all organizations have to file an annual return. For
example, churches, certain church-related organizations, and organizations with gross
receipts that are normally less than $25,000 do not have to file an annual return. There are
other exceptions contained in IRC § 6033(a)(2).
The penalty for failure to file the required returns is found in IRC § 6652(c)(1)(A). The
penalty is $20 per day for each day the failure continues. If the organization has annual
gross receipts exceeding $1 million in any year, then the daily penalty is $100 per day.
The maximum penalty is the lesser of $10,000 or 5 percent of the organization's gross
receipts. For organizations exceeding $1 million in gross receipts, the maximum penalty
is $50,000.
Although tax-exempt organizations are generally exempt from Federal income taxes, they
must pay the same employment-related taxes and file the same tax forms as for-profit
employers. Thus, organizations must withhold income taxes from employee's wages
(Forms 941, W-2, W-3, W-4 and 8109) and pay state and federal unemployment taxes
(Forms 940 and 8109 plus state requirements). Additionally, they must pay the
employer's share of the social security and medicare taxes and withhold the employee's
share of these taxes from wages (Forms 941, W-3, W-4, and 8109).
10. Can Tax-Exempt Organizations Lobby?
Some types of exempt organizations are completely prohibited from lobbying, others are
restricted in the amount of lobbying that they may do, and the rest may lobby so long as
they primarily serve their tax-exempt purpose. Among those types of exempt
organizations completely prohibited from lobbying by the tax law are those described in
IRC § § 501(c)(2), (c)(17), (c)(18), (c)(21), (c)(22), (c)(24), and (c)(25). Most of these
organizations are trusts which must use their income and principal "exclusively" for the
purposes for which they are established. Other organizations are restricted in the amount
of lobbying that they may do. This group includes 501(c)(3) organizations, 501(e)
cooperative hospital service organizations, 501(f) cooperative investment organizations
of educational institutions, and 501(k) child care centers. For these organizations, "no
substantial part" of their activities can be lobbying. Case law suggests that "no substantial
part" is probably between 5% and 20% of the organization's expenditures. Since this
standard is indefinite, some 501(c)(3) organizations may elect to have their lobbying
activities measured by an objective, numerical limit, referred to as the 501(h) election.7
The limits are described in IRC § 4911: the organization may not spend more than 20%
of its first $500,000 of expenditures on lobbying, nor more than 15% of its second
$500,000 of expenditures, nor more than 10% of its third $500,000 of expenditures, nor
more than 5% of its remaining expenditures. An electing organization may never spend
more than $1 million a year on lobbying expenses and no more than 25% of lobbying
expenditures can be spent for "grass roots" lobbying. Most organizations do not make the
501(h) election and remain subject to the "no substantial part" test. An organization that
fails the applicable test may lose its exempt status, be subject to penalties for loss of
exemption, and face possible excise taxes under IRC § § 4911 and 4912. IRC § 4911
imposes a tax on organizations making the 501(h) election equal to 25% of the excess
lobbying expenditures for the year. IRC § 4912 imposes two taxes on organizations
making expenditures which would disqualify them from continuing as a 501(c)(3)
organization: a tax on the organization equal to 5% of all lobbying expenditures, and a
tax on the organization management equal to 5% of all lobbying expenditures, unless
there is a reasonable cause exception.
Most other types of tax-exempt organizations are not subject to any tax law limits on the
amount of lobbying that can be done, other than they must primarily serve their own taxexempt purposes. In other words, lobbying cannot be the primary purpose of the
organization.
A tax-exempt organization's lobbying may affect the amount that its contributors would
otherwise be able to deduct (see question 5). The organizations at issue are those that
collect tax-deductible dues from their members (e.g., a trade association or a charitable
organization). When such an organization conducts lobbying activities, IRC § § 162(e)
and 6033(e) work together to disallow a deduction for the portion of the members' dues
that represents the lobbying expenditures. The organization is required to notify its
members of the portion of dues that is nondeductible. 8 If the organization fails to make
the notification, IRC § 6033(e)(2) imposes a proxy tax on the organization's lobbying
expenditures.
Since the 104th Congress, there have been a number of non-tax proposals to restrict the
ability of certain tax-exempt organizations, especially 501(c)(4) social welfare
organizations and 501(c)(5) labor unions, to lobby. Section 18 of the Lobbying
Disclosure Act of 1995, P.L. 104-65, prohibited organizations described in IRC §
501(c)(4) from receiving federal grants, loans, contracts, or other awards if they engage
in lobbying activities, even if they conducted the lobbying with their own funds. This
language was quickly amended by P.L. 104-99 to permit lobbying by certain tax-exempt
organizations that received federal contracts, but not grants or loans. The Lobbying
Disclosure Act also imposes registration and disclosure requirements on organizations
that have paid lobbyists whose lobbying activities on behalf of the organization exceed
certain time and monetary limits. For more information on this topic, see CRS Report 96809, Lobbying Regulations on Non-Profit Organizations, by Jack H. Maskell.
11. Can Tax-Exempt Organizations Participate in Political Activities?
IRC § 501(c)(3) organizations are prohibited from participating in, or intervening in "any
political campaign on behalf of (or in opposition to) any candidate for public office."
Thus, charitable organizations can lose their exempt status for engaging in "political
campaign activities." Political campaign activities include those activities that are
specifically linked to election periods that support or oppose particular candidates.
Examples of prohibited political campaign activities include endorsing or opposing
particular candidates; evaluating candidates and supporting a slate of the best-qualified
candidates; preparing and distributing voters' guides during an election where the
questions asked or the presentation of the information indicate a bias on certain issues;
and making contributions to a political campaign.
It should be noted, however, that many types of political activities which are not
"campaign activities" are permitted to some extent. The key is that these activities do not
support or oppose a particular candidate. Permissible activities under the tax laws, so
long as no candidate is endorsed or opposed, include: educational activities such as
conducting public forums at which social, political, and international questions are
considered; compiling voting records of Members of Congress, so long as the record is
not widely distributed to the general public during an election campaign; publishing
candidate responses to a questionnaire on a variety of subjects; issuing report cards that
indicate whether legislators support or oppose the organization's views; issue advertising
(this is usually considered lobbying); nonpartisan public opinion polling; non-partisan
voter registration drives meeting the requirements of IRC § 4945(f); and lobbying for or
against the appointment of nonelective officers, such as judges. While these noncampaign political activities are not prohibited, they may be subject to tax under IRC §
527 or IRC § 4955, or they may be regulated or taxed as "lobbying" or "legislative"
activities. See IRC § § 4911 and 4912.
The "Bipartisan Campaign Reform Act of 2002" (P L. 107-155) bans corporations,
including tax-exempt corporations, and labor unions from referring in their broadcasts to
federal candidates within 60 days of an election and 30 days of a primary. The Federal
Election Commission regulations have carved out an exception for 501(c)(3)
organizations on the theory that the Internal Revenue Code prohibits such organizations
from doing so.
The other types of tax-exempt organizations may generally engage in all types of political
activities, so long as such activities are not the organization's primary means of
accomplishing its exempt purpose. However, while the tax laws may permit
organizations described in IRC § § 501(c)(4) social welfare organizations, 501(c)(5) labor
unions, 501(c)(6) trade associations, and 501(c)(19) veterans' organizations to engage in
political campaign activities, it should be noted that the election laws ban corporations
and labor unions from making any contribution or expenditure in connection with federal
elections. 2 USC § 441b. This ban applies whether or not a corporation is for-profit or
tax-exempt. Exceptions may arise from the definitions used in election law rules, but it is
important to observe that the election law rules do not necessarily correspond to the tax
law rules.
One way that corporations and labor unions participate in election campaigns without
violating federal election laws is to set up political action committees or PACs. PACs are
creatures of federal election law, but they are subject to special tax rules for "political
organizations" in IRC § 527. Organizations described in IRC § 527 are expected to raise
money for, and to try to influence, the selection, nomination, election or appointment of
candidates for public office. Although considered tax-exempt organizations, IRC § 527
organizations are subject to special tax rules. Generally, 527 organizations are not taxed
on their political income, but they are taxed on their investment income.
Political organizations cannot be used to participate indirectly in activities that are
prohibited to an exempt organization. The activities of a 527 organization affiliated with
a tax-exempt organization are attributed to the organization. Thus, if a PAC affiliated
with a charitable organization engages in political campaign activities that would cause
the organization to lose its tax exemption if the organization had participated in the
activity directly, the charitable organization could still lose its exemption because of the
activities of the PAC. For this reason, if 501(c)(3) organizations have PACs, their
activities are generally limited to noncampaign political activities. The Federal Election
Commission takes the position that the directors of a charitable organization could
establish an independent or "nonconnected" PAC. The IRS has not addressed this issue,
other than to state that any rulings in the area will be prospective only.
12. How Does an Organization Lose its Tax-exempt Status?
Generally, once an organization has tax-exempt status, it can continue as a tax-exempt
organization unless there is a material change in its character, purposes, or methods of
operation. Organizations are required to report material changes to the IRS. A 501(c)(3)
organization can lose its tax-exempt status for excessive lobbying or engaging in political
campaign activities or if its principal purpose becomes operating a for-profit business.
The IRS may also revoke rulings granting exempt status because of changes in the law or
regulations or for other good causes.9 Organizations may ask for court review of any IRS
attempt to revoke their exempt status.
An individual who believes that an organization should lose its exempt status may
contact the IRS. Complaints about the appropriateness of continued exemption for a
particular organization may be directed to the Exempt Organizations Examination
Division, 1100 Commerce Street, ATTN: T:EO:E, Dallas, TX 75242. The complaint
should contain all relevant facts concerning the alleged violation of tax law. The
complaints or allegations may cause the IRS to review the propriety of exempt status for
a particular organization, but because of confidentiality rules, the IRS cannot reveal
whether or not it has followed up on a particular complaint or not.
It is not possible to bring a legal suit to challenge the IRS' granting of an exemption to a
particular organization. While third parties had been successful in bringing suits to
challenge IRS policies in administering the tax laws10, the Supreme Court severely
limited this practice by requiring plaintiffs to show a direct personal injury that is likely
to be redressed by a favorable decision in the case.11 In United States Catholic
Conference v. Baker, 885 F.2d 1020 (2d Cir. 1989), cert. den., ARM v. USCC, 495 U.S.
918 (1990), the Second Circuit reviewed the standing of various parties to force the IRS
to examine the tax- exempt status of the Catholic Church because of its political activities
and concluded that it would be a very rare case when a third party would have standing to
bring such a suit.
Suggested Resources for More Information
In addition to the previously mentioned organizations, the following organization and
books may provide further information.
Organization.
Society for Nonprofit Organizations (SNPO)
5820 Canton Center Road, Suite 165
Canton, MI 48187
Tel. 734-451-3582
e-mail: info@snpo.org
[http://www.snpo.org]
The Society for Nonprofit Organizations (SNPO) is an organization whose purpose is to
provide a forum for the exchange of information on nonprofit organizations, offering
services to directors, board members, volunteers, and anyone interested in nonprofit
organizations operations. It offers professional support services and referral services to
members and maintains an information center of books, periodicals, and tapes. SNPO
publishes a bimonthly journal, Nonprofit World: The National Nonprofit Leadership and
Management Journal, which focuses on the management of nonprofit organizations.
SNPO also issues a monthly electronic newsletter, Nonprofit World Funding Alert, which
details funding opportunities and includes profiles of various foundations.
Books. These books, all recently published, deal with various aspects of starting and
managing non-profit organizations. All are available at the Library of Congress and may
be available in larger public libraries or be borrowed by a local library on interlibrary
loan. They may also be ordered from various bookstores.
Blazek, Jody. Tax planning and compliance for tax-exempt organizations: forms,
checklists, procedures. 3rd ed. New York: Wiley, 1999. 818 p.
LC CALL NUMBER: KF6449 .B58 1999
Colombo, John D. The charitable tax exemption. Boulder, CO: Westview Press, 1995.
265p.
LC CALL NUMBER: KF6449.C59 1995
Financial and accounting guide for not-for-profit organizations. New York: Wiley, 2000.
6th ed. 823p.
LC CALL NUMBER: HF5686.N56 G76 2000
Grobman, Gary M. The nonprofit handbook: everything you need to know to start up and
run your nonprofit organization. Harrisburg, PA: White Hat Communications, 2002. 3rd
ed. 441p.
LC CALL NUMBER: HD62.6 .G762 2002
Hopkins, Bruce R. The law of tax-exempt organizations. 7th ed. New York: Wiley, 1998.
(2003 edition is expected soon)
LC CALL NUMBER: KF6449 .H6 1998
Kitrosser, Edward. Tax considerations in non-profit organizations. New York, NY (1211
Ave. of the Americas, New York 10036) : American Institute of Certified Public
Accountants, 1993. 1 v. (various pagings) : ill.
LC CALL NUMBER: KF6449.Z9 K57 1993
Listro, John P. Accounting and financial reporting for governmental units and not-forprofit organizations. Dubuque, Iowa : Kendall/Hunt Pub., 1998. 3rd ed. 424p.
LC CALL NUMBER: HF5686.N56 L57 2001
National directory of nonprofit organizations. Rockville, MD: The Taft Group. 2 vol.
(annual)
LC CALL NUMBER: AS29.5.N38
Nonprofit executive's tax desk annual. Gaithersburg, MD: Aspen Publishers, Inc. (annual)
LC CALL NUMBER: KF6449 .A15 N66
The nonprofit handbook. Fund raising. 3rd ed. New York : J. Wiley, 2001. 1154p. : ill.
LC CALL NUMBER: HD62.6 .N662 2001
The nonprofit handbook. Management. 3rd ed. New York : J. Wiley, 2001. 932 p. : ill.
LC CALL NUMBER: HD62.6 .N662 2001b
Nonprofit organization management: forms, checklists & guidelines. Gaithersburg, MD:
Aspen Publishers, 2001. 2nd ed. 1 v. (various pagings): ill.
LC CALL NUMBER: HD62.6 .N666 2001
Types of Tax Exempt Organizations and Their Tax
Characteristics:
Ability to Receive Deductible Charitable Contributions,
Lobby,
and Participate in Political Campaigns
Type
501(c)91)
Examples
501(c)(1) Corporations organized by Act of Congress; Central
Liquidity Facility for Federal Credit Unions; Resolution Trust
Corporation; Resolution Funding Corporation
Charitable Contributions Deductible?
Yes
Lobbying
No tax law
Campaign Activities
No tax law limit
Type
501(c)(2)
Examples
Title-Holding corporations
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(c)(3)
Examples
Public charities, private foundations, religious, charitable,
scientific, testing for public safety, literary, or educational,
fostering national or international amateur sports competition,
prevention of cruelty to children or animals
Charitable Contributions Deductible?
Yes
Lobbying
Insubstantial lobbying permitted; certain organizations may elect a
numerical test
Campaign Activities
Prohibited
Type
501(c)(4)
Example
Civic leagues, social welfare organizations, local associations of
employees dedicated to charitable, educational, or recreational
purposes
Charitable Contributions Deductible
No
Lobbying
No tax law limit
Campaign Activities
Limited in regulations
Type
501(c)(5)
Examples
Labor unions, agricultural, or horticultural organizations
Charitable Contributions Deductible
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(6)
Examples
Trade associations, professional football leagues
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(7)
Examples
Social and recreational clubs
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(8)
Examples
Fraternal benefit societies providing payment of certain benefits to
members
Charitable Contributions Deductible?
Yes, if for certain section 501(c)(3) purposes.
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(9)
Examples
VEBAs (Voluntary employees' beneficiary associations providing the
payment of certain employee benefits)
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(10)
Examples
Domestic fraternal societies whose net earnings are devoted to
religious, charitable, scientific, literary, educational, and
fraternal purposes, which do not provide benefits to members
Charitable Contributions Deductible?
Yes, but must be used exclusively for charitable purposes
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(11)
Examples
Teachers' retirement fund associations
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(12)
Examples
Benevolent life insurance associations, mutual ditch or irrigation
companies, mutual or cooperative telephone, electric, or water
companies
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(13)
Examples
Cemetery companies
Charitable Contributions Deductible?
Yes
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(14)
Examples
Credit unions
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(15)
Examples
Small mutual insurance companies
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(16)
Examples
Corporations to finance crop operations
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(17)
Examples
Supplemental unemployment benefit trusts
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(c)(18)
Examples
Pre-June 25, 1959 trusts to fund pension benefits
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(c)(19)
Examples
Veterans' groups
Charitable Contributions Deductible?
Yes
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(20)
Examples
Group legal service organizations
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(21)
Examples
Black lung benefit trusts
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(c)(22)
Examples
Multi-employer pension plan trusts
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(c)(23)
Examples
Armed Forces insurance organizations established before 1880
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(c)(24)
Examples
ERISA trusts for certain terminated plans
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(c)(25)
Examples
Multi-parent real property title-holding companies
Charitable Contributions Deductible?
No
Lobbying
Prohibited
Campaign Activities
Prohibited
Type
501(d)
Examples
Religious and apostolic organizations with common or communal
treasury
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
501(e)
Examples
Cooperative hospital service organizations
Charitable Contributions Deductible?
Yes
Lobbying
Treated as 501(c)(3)
Campaign Activities
Treated as 501(c)(3)
Type
501(f)
Examples
Cooperative educational investment organizations
Charitable Contributions Deductible?
Yes
Lobbying
Treated as 501(c)(3)
Campaign Activities
Treated as 501(c)(3)
Type
501(k)
Examples
Child care organizations
Charitable Contributions Deductible?
Yes
Lobbying
Treated as 501(c)(3)
Campaign Activities
Treated as 501(c)(3)
Type
501(n)
Examples
Charitable risk pools
Charitable Contributions Deductible?
Yes
Lobbying
Treated as 501(c)(3)
Campaign Activities
Treated as 501(c)(3)
Type
521
Examples
Farmers' cooperatives
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
526
Examples
Shipowners' protection and indemnity associations
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No No tax law limit
Type
527
Examples
Political organizations
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
Type
528
Examples
Homeowners' associations
Charitable Contributions Deductible?
No
Lobbying
No tax law limit
Campaign Activities
No tax law limit
FOOTNOTES
1
501(c)(3): 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 (except as otherwise provided in subsection (h)), and
which does not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any candidate for
public office.
2
501(c)(4): Civic leagues or organizations not organized for profit but operated
exclusively for the promotion of social welfare or local associations of employees, the
membership of which is limited to the employees of a designated person or persons in a
particular municipality and the net earnings of which are devoted exclusively to
charitable, educational, or recreational purposes.
3
The IRS recognizes that a "social welfare organization" qualifying under 501(c)(4) may,
in certain circumstances, also meet the definition of "charitable organization" under
501(c)(3). Treas. Reg. § 1.501(c)(4)-1(a)(2).
4
IRC § 6113. This notification requirement applies to organizations that qualify for taxexempt status under sections 501(c) and (d), except 501(c)(1), and 527. Organizations
with gross annual receipts of less than $100,000 are exempted from the notification
requirement.
5
Legislation introduced in the 108th Congress proposes a limited charitable contribution
deduction for non-itemizers: Three versions of the CARE Act of 2003 (S. 476, § 101; S.
272 § 101; and S. 256 § 101) would allow a direct deduction of up to $250 of charitable
contributions ($500 in the case of a joint return) in addition to the standard deduction.
The deduction would be available only for that portion of contributions actually made
during the year that exceed $250 ($500 in the case of a joint return). Under the provision,
an individual would not be entitled to a charitable deduction for the first $250 of cash
contributions made during the tax year, would be entitled to a deduction on a dollar-fordollar basis for contributions of $251 to $500 (e.g., a $1 deduction in the case of $251 of
contributions, and a $250 deduction in the case of $500 of contributions), and would not
be entitled to a deduction for contributions exceeding $500. Contributions below the
minimum amount or that exceed the maximum deduction would not be carried over for
purposes of a subsequent taxable year's calculation of the direct charitable deduction. S.
476 was reported by the Senate Finance Committee on February 27, 2003. S. Rept. 10811.
6
If an organization is denied exempt status, its application for exemption is not open to
public inspection.
7
Churches and related organizations are not allowed to make this election.
8
If the organization's dues are generally not deductible, then the notification requirement
does not apply. IRC § 6033(e)(3).
9
Section 208 of three versions of the CARE Act of 2003 (S. 476, S. 272, and S. 256) and
section 108 of two versions of the Armed Forces Tax Fairness Act of 2003 (S. 351 and S.
289) contain provisions that would suspend the tax-exempt status of any organization
designated a terrorist organization by certain executive actions. S. 476 was reported by
the Senate Finance Committee on February 27, 2003; S. 351 was reported by the Finance
Committee on February 11, 2003. Under these bills, terrorist organizations would not be
entitled to court review of the suspension.
10
See e.g., Green v. Kennedy, 309 F.Supp. 1127 (D.D.C. 1970), where a class action was
brought to force the IRS to stop granting exempt status to racially discriminatory private
schools, and its subsequent history found at 398 U.S. 956 (1970), 330 F.Supp. 1150
(D.D.C. 1971), culminating in a summary affirmance, Coit v. Green, 404 U.S. 997
(1971)).
11
Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26 (1976)