Summary Introduction to Tax Implications Memorandum

• Churches and religious organizations, including Friends meetings, receive 501(c)(3) tax status automatically and without having to seek recognition of their exempt status from the Internal Revenue Service.
• "Excessive" lobbying means lobbying to the extent that a Meeting's attempts to influence legislation constitute a substantial part of its overall activities. This is a multifaceted inquiry that cannot be pigeonholed into simple rules (such as a dollar or percentage of expenditures limit). There also are very few actual instances (precedents) of the test being applied.
• 501(c)(3) contains an absolute prohibition on tax exempt institutions participating in "any political campaign on behalf of (or in opposition to) any candidate for public office".
• A Meeting that violates the restrictions on political activity may be subject to loss of its tax exempt status; if found to have engaged in electioneering, an excise tax for the year in question also may be imposed.

The Internal Revenue Code can not prohibit Meetings from participating in the political life of our nation. The Code can only "punish" Meetings for engaging in political activity by denying them certain tax benefits. Whether a Meeting should engage in a political activity if it risks losing its tax exemption as a result can only be discerned in worship and discussion by its members.

The memorandum seeks to provide a framework to assist in undertaking that spiritual discernment. It accompanies these extracted points. It is also available from the Yearly Meeting office.

Memorandum: Understanding the Tax Implications
of Participating in Worship & Action Peace Initiatives

1. Section 501(c)(3) Tax Exemption
   Section 501 of the Internal Revenue Code, 26 U.S.C. § 501, exempts certain types of organizations from federal taxation. Section 501(c)(3) lists religious corporations as exempt organizations. In fact, churches and religious organizations receive 501(c)(3) tax exemptions automatically and without having to seek recognition of their exempt status from the Internal Revenue Service. Monthly and Regional Meetings, worship groups and New York Yearly Meeting all are considered churches or religious organizations and thus enjoy this automatic federal tax exemption.
2. The Restrictions on Engaging in Political Activity
   This tax exemption, however, is available only to Meetings that are "organized and operated exclusively for religious, charitable, . . . or educational purposes. . . ." Section 501(c)(3) specifically requires that "no substantial part of the activities of [the Meeting] is carrying on propaganda, or otherwise attempting, to influence legislation . . . , and [that the Meeting] 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."

   This requirement seeks to impose two restrictions on political activity:

   A Meeting may not engage in excessive lobbying activity (attempting to influence the legislative process), and

   A Meeting may not engage in any electioneering activity (participating in the election process by supporting or opposing a specific candidate).

   The meaning of these two restrictions is discussed below.

3. Penalties for Engaging in Impermissible Political Activity
   A Meeting that violates the restrictions on political activity may be subject to severe penalties: (i) loss of its tax-exempt status, and (ii) if the Meeting engages in electioneering, imposition of an excise tax for the year in which it loses its tax exemption. The loss of tax-exempt status means both that the Meeting would have to pay federal taxes and that contributions to the Meeting would no longer be deductible for the contributors.
4. What is Lobbying Activity?
   1. "Lobbying activity" is limited to attempts to influence specific legislation. It does not include efforts to achieve (or prevent) executive, administrative or judicial action.
   2. "Legislation," however, includes action not only by Congress, but also by a State legislature, local council or other legislative body and may even include legislative action by the public through a referendum, initiative, constitutional amendment or other similar process. For example, under the Constitution, going to war is supposed to require a Congressional declaration, and, hence, advocating for or against going to war could be viewed as an attempt to influence legislation.
   3. As well, there is no requirement that the proposed legislation already has been introduced into the Congress or other legislative body. Lobbying can include advocacy for or against an issue on which legislative action would be necessary, or for or against the introduction of a bill.
   4. "Attempts to influence legislation" come in two flavors:
      1. "Direct lobbying," which involves direct communications with legislators (or their staffs) about specific legislation.
      2. "Grass roots lobbying," which involves communications with the public about specific legislation.

         For example, visiting a Congressperson to express an opinion that he/she should oppose going to war could be viewed as "direct lobbying"; and placing ads in newspapers encouraging people to let their Congresspersons know that we should not go to war could be viewed as "grass roots lobbying." (On the other hand, communicating with the President, or placing ads encouraging people to communicate with the President, to ask him not to take the country to war is NOT lobbying because it is not an attempt to influence legislation.)

5. What is "Excessive" Lobbying Activity?
   1. Congress established two separate schemes for determining whether a public charity is engaged in excessive lobbying activity. One of these - the "Substantial Part Test" - applies to lobbying activity by a Meeting. The other - the "Expenditure Test" - is NOT available to religious organizations, but is discussed below because the dollar limits used in applying the test may be relevant in determining whether a Meeting's lobbying activity is excessive.
   2. The "Substantial Part Test" looks at all the facts and circumstances to determine whether a Meeting's attempts to influence legislation constitute a substantial part of its overall activities. This is a multifaceted inquiry that cannot be easily pigeonholed into simple rules (such as a dollar or percentage of expenditures limit). There also are very few actual instances (precedents) of the test being applied, so it is difficult to predict how the test likely would be applied in a particular situation. It is precisely because of these uncertainties (and the fact that the easily calculated limits of the Expenditure Test are not available to Meetings) that Meetings may wish to incorporate potential tax consequences into their process of discerning spiritual clearness for participating in peace initiatives.

      The factors that would be considered in undertaking a substantiality determination probably include the following:

      1. Expenditures on lobbying activity, both in terms of absolute dollars and as a percentage of the Meeting's overall expenditures. The Expenditures Test contains specific dollar percentage limits (outlined below) which may be helpful in considering whether a Meeting's expenditures on lobbying activity would be deemed substantial, but these percentage limits are neither directly applicable to, nor conclusive in applying, the Substantial Part Test.

         A few decisions have examined whether particular levels of expenditures constituted a substantial part of the charity's activities. In one case, expenditures of 5% of the charity's total activities was held to be not substantial, and that percentage is sometimes cited as a "safe harbor" limit. Another case found that expenditures of 16 to 20 percent annually during the course of four years was substantial. Again, neither of these percentage ranges is conclusive in applying the Substantial Part Test.

      2. Effort dedicated to lobbying activity, which includes time spent (both in absolute hours and as a percentage of the Meeting's overall activities) by both employees and volunteers.
      3. Importance of the lobbying activity to the organization: What is the relative place of the lobbying action in the Meeting's overall agenda and activities?
      4. Duration of lobbying activity: For how long a period of time did the organization engage in lobbying activity?
      5. Continuity of lobbying activity: Has the organization been engaging in lobbying activity on a more or less continuous basis, or is it something that has occurred only occasionally?
      6. Type of lobbying activity. The Substantial Part Test does NOT explicitly make a distinction between direct lobbying and grass roots lobbying. Nonetheless, because the Expenditures Test assigns very different limits to these two types of lobbying (and reflects a clear bias against grass roots lobbying), the manner in which a Meeting conducts a lobbying effort may be pertinent in determining whether the action is a substantial part of its overall activities.
   3. The "Expenditures Test" looks only at the percentage of an organization's total expenditures that are spent on lobbying to determine whether the organization is engaging in excessive political activity. Under the Expenditures Test, a charity may spend up to 20% of its expenditures on direct lobbying and up to 5% on grass roots lobbying without running afoul of the 501(c)(3) restriction on political activity. For example, if a charity spent a total of $100,000 during the year on all of its activities, it could safely spend up to $20,000 of that on direct lobbying and up to $5,000 on grass roots lobbying without being deemed to have engaged in excessive political activity. (In addition, the consequence of exceeding these ceilings is limited to having to pay a tax on the excess political spending, unless the organization exceeds either ceiling by an average of 150% over a period of four years.) Again, these percentage limits are neither directly applicable to, nor conclusive in applying, the Substantial Part Test.
6. Electioneering
   Remember, 501(c)(3) contains an absolute prohibition on tax exempt institutions participating in "any political campaign on behalf of (or in opposition to) any candidate for public office". None of the tests nor percentage guidelines discussed above are even relevant to electioneering activity by a Meeting.
7. Issues Not Addressed in These Guidelines
   1. These Guidelines do not consider state tax exemption issues that may be pertinent when a Meeting engages in political activity.
   2. These Guidelines do not answer the question: Will my Meeting lose its tax exemption if we engage in specific political activities? In part this is because of the many ambiguities present in determining whether the activities are "excessive" under the Substantial Part Test. There also may be difficult questions that have to be answered to determine whether particular actions even constitute lobbying. Most importantly, examining the potential tax consequences for a Meeting of participating in particular political actions requires considering all of the activities in the life of that Meeting and how these political actions relate to the Meeting's overall spirit and mission.
   3. These Guidelines do not answer the question: Should my Meeting engage in a political activity if we could lose our tax exemption as a result? The Internal Revenue Code can not prohibit Meetings from participating in the political life of our nation. The Code can only "punish" Meetings for engaging in political activity by denying them certain tax benefits. Whether a Meeting should engage in a political activity if it risks losing its tax exemption as a result can only be discerned in worship and discussion among its members. These Guidelines seek only to provide a framework to assist in undertaking that spiritual discernment.