Committee on Ways and Means, Subcommittee on Oversight, 5-14-02 Testimony

Statement of Steven T. Miller, Director, Exemption Organizations, Internal Revenue Service

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

Hearing on Review of Internal Revenue Code Section 501 (c)(3)
Requirements for Religious Organizations

May 14, 2002

Thank you Mr. Chairman, for the opportunity to provide this Subcommittee with general background on the requirements for tax exemption, particularly as they relate to the prohibition on political activities. I will also discuss how these rules apply to churches, the Internal Revenue Service’s experience with these issues, and the numerous challenges we confront in administering this law.

General Requirements for Tax Exemption

Section 501(c)(3) of the Internal Revenue Code provides for the exemption from federal income taxation of organizations organized and operated exclusively for religious, charitable, scientific, educational, and certain other purposes. Section 501(c)(3) imposes a number of conditions to exempt status:

No part of the organization’s net earnings may inure to the benefit of any private shareholder or individual.
No substantial part of the organization’s activities may be attempts to influence legislation (lobbying restriction).
The organization may not intervene in any political campaign on behalf of or in opposition to any candidate for public office (political campaign prohibition).

Section 501(c)(3) does not specifically mention churches. They qualify as entities organized and operated for religious purposes. Thus, the above-referenced conditions apply to churches as well as all other section 501(c)(3) entities. In addition, there are rules specifically applicable to churches that I will outline in my testimony.

Restriction on lobbying

One condition of exemption under section 501(c)(3) is that no substantial part of an organization’s activities can be carrying on propaganda, or otherwise attempting to influence legislation (commonly known as lobbying). Lobbying includes direct communications to members of a legislature, indirect communications through the electorate or general public (“grass roots” lobbying), and advocating adoption or rejection of legislation on an issue, even if specific legislation is not pending. Whether a communication on an issue constitutes lobbying depends on the facts and circumstances of the communication.

Section 501(c)(3) restricts lobbying; it does not prohibit it. Churches are subject to the restriction, but unlike other section 501(c)(3) organizations, are not eligible to file the election provided under section 501(h) of the Code to have lobbying measured by expenditures. Although the “no substantial part” test is less precise – courts have generally rejected using a percentage test as the sole test of whether the activity is a substantial part of an organization’s activities –it is fair to say that the IRS has not identified situations in which we received information showing, or even suggesting, that a church was engaged in lobbying as a substantial part of its activities.

Prohibition on Political Campaign Intervention

Section 501(c)(3) does not prohibit all activity that might be described as “political” within the common meaning of that term. Rather, it prohibits an organization seeking to be exempt from directly or indirectlyparticipating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made by or on behalf of the organization in favor of or in opposition to any candidate for public office violate the prohibition against political campaign intervention.

The section 501(c)(3) limit on political campaign intervention is absolute. Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

Section 1.501(c)(3)-1(c)(3)(iii) of the Income Tax Regulations refines the prohibition on campaign intervention by defining “candidate for public office” as an “individual who offers himself or herself, or is proposed by others, as a contestant for elective public office”. The regulation also provides that prohibited political campaign intervention includes, but is not limited to, publishing or distributing written or printed statements or making oral statements on behalf of or in opposition to such a candidate. Since a candidate must be a contestant for elective public office, section 501(c)(3) only prohibits organizations from participating or intervening in election campaigns.

It has been argued that the prohibition on campaign intervention does not apply to churches. Courts have considered and rejected this argument. In Branch Ministries, Inc. v. Rossotti, 211 F.3d 137 (D.C. Cir. 2000), aff’g 40 F. Supp. 15 (D.D.C. 1999), the Court of Appeals upheld the IRS’s revocation of the section 501(c)(3) exempt status of the Church at Pierce Creek. The District Court had granted summary judgment to the IRS on its claim the organization violated the statutory prohibition on political campaign intervention when it placed full-page advertisements in two newspapers. The content of the advertisement was in opposition to a candidate. The Court of Appeals rejected the church’s claims that the revocation violated the church’s right to free exercise of religion under the Constitution and the Religious Freedom Restoration Act, and that it was the victim of selective prosecution.

Rules Relating to Specific Issues in the Area of Political Intervention in Campaigns

Certain activities or expenditures may or may not constitute campaign intervention. For example, certain voter education activities (including the presentation of public forums and the publication of voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. On the other hand, voter education activities that show a bias for one candidate over another will constitute prohibited political campaign intervention. Two examples are described below to better explain the rules in this area and our administration.

Voter guides

Like other section 501(c)(3) organizations, some churches undertake voter education activities by publishing voter guides. Voter guides, in general, provide information on how candidates stand on various issues. These guides may be distributed with the stated purpose of educating voters. A careful review of the following may help determine whether or not a church’s publication or distribution of voter guides constitutes prohibited political campaign activity:

Whether the guide provides information with respect to all candidates for an office;
Whether the guide contains editorial opinion or remarks, or otherwise indicates approval or disapproval of candidate or their records;
Whether the guide is disseminated in close proximity to an election;
Whether the guide covers a wide variety of issues; and
For a candidate questionnaire, whether the organization asks the same neutral questions of all candidates, or indicates a bias toward the organization’s preferred responses, whether the guide is based on responses to a questionnaire sent to all candidates, and whether the guide is made generally available to the public.

“Get out the vote” activities

Questions are raised about the use of church assets or funds in “get out the vote” activities. In this regard, whether these activities violate the campaign prohibition depends on whether a church’s activities favor or oppose a candidate for public office. Thus, the church’s financial resources, facilities, or personnel may not be used in get out the vote activities that favor one candidate over another (as by only helping individuals get to the polls if they favor a particular candidate). Of course, this does not mean that church members may not conduct these activities independent of the church.

Consequences of Political Campaign Intervention

Like any other section 501(c)(3) organization, a church not only jeopardizes its tax exempt status under section 501(c)(3) for participating in political campaign activities, it also becomes subject to an excise tax under section 4955 on its political expenditures. This excise tax may be imposed in addition to revocation, although in certain situations it may be imposed instead of revocation. Also, the church or religious organization must correct the violation to avoid the second-tier tax under section 4955.

Section 4955 imposes an initial tax on an organization at the rate of 10 percent of the political expenditures. It also imposes an initial tax at the rate of 2.5 percent of the expenditures on any of the organization's managers (jointly and severally) who, without reasonable cause, agreed to the expenditures knowing they were political expenditures. The initial tax on management may not exceed $5,000. In any case in which an initial tax is imposed against an organization, and the expenditures are not corrected within the period allowed by law, an additional tax equal to 100 percent of the expenditures is imposed against the organization. In that case, an additional tax is also imposed against any of the organization's managers (jointly and severally) who refused to agree to make the correction. The additional tax on management is equal to 50 percent of the expenditures and may not exceed $10,000 with respect to any one expenditure. Correction of a political expenditure requires the recovery of the expenditure, to the extent possible, and establishment of safeguards to prevent future political expenditures.

Rules Applicable to Churches under the Internal Revenue Code

Congress has enacted tax laws applicable to churches in recognition of their unique status in American society and of rights guaranteed them under the First Amendment of the Constitution of the United States. The Internal Revenue Code includes several provisions relevant for a discussion of the treatment of churches by the Internal Revenue Service. These provisions generally serve the purpose of preventing needless entanglement between churches and the IRS. For example, unlike almost any other section 501(c)(3) organization, a church need not apply for recognition from the IRS to obtain tax-exempt status. Nor do churches ordinarily have to file an annual information return (the Form 990) with the IRS. However, Congress recognized the need for the IRS to ensure that churches follow the requirements for tax exemption. In this regard, it enacted section 7611 of the Internal Revenue Code.

Section 7611 requires that the IRS follow several procedures when auditing an organization claiming to be a church. First, a church tax inquiry requires the approval of a high level official of the Internal Revenue Service (the Director of Examinations for Exempt Organizations); that is, the IRS may begin a church tax inquiry only when a high level official believes, on the basis of facts and circumstances recorded in writing, that the organization: may not qualify for tax exemption as a church; may be carrying on an unrelated trade or business; or may otherwise be engaged in an activity subject to tax.

Under section 7611, notice to the church is required before beginning an examination, and must include the following elements: an explanation of the concerns that give rise to the inquiry and the general subject matter of the inquiry in sufficient detail to allow the church to understand which specific activity is at issue; a general explanation of the Internal Revenue Code provision(s) that authorize the inquiry and that may otherwise be involved; and a general explanation of applicable administrative and constitutional provisions involved, including the right to a conference before examination. Other rights guaranteed under the statute and implementing regulations include an offer of pre-examination conference, completion of any audit tax liabilities within two years after the date on which the notice of examination is supplied to the church, limitations on the IRS’s ability to revoke a church’s tax-exempt status, limitations on the period of assessment, limitations on additional inquiries and examinations, required coordination with IRS counsel at various stages, and remedies for IRS violation of the procedures.

Outreach Efforts to the Church Community by the Internal Revenue Service

The IRS takes the approach that an educated taxpayer is generally a compliant taxpayer. As a result, we have attempted to make the church community aware of the tax law rules relating to political campaign intervention. The IRS has (1) disseminated to the church community and the public for comment, a publication (Tax Guide For Churches and Other Religious Organizations (Draft 7/26/94)); (2) periodically reminds churches (and all section 501(c)(3) organizations) of their responsibilities in the area of political campaign intervention (see, e.g., News Release 2000-47 (July 5, 2000)); and (3) shared information with individual church leaders and persons who provide tax advice to churches.

In the coming weeks, we will release a revised version of the Tax Guide for Churches and Other Religious Organizations. It will have an expanded discussion of the prohibition on political campaign activity, including practical guidance.

Administrative Issues and Internal Revenue Service Experience in this Area of Political Campaign Activity

The IRS is appreciative of the sensitive nature of this area. Our mission and our hope are to influence individuals to voluntarily comply with existing rules. Thus, we try to enhance voluntary compliance in as unobtrusive a manner as possible recognizing that the less entanglement the better between the religious community and the IRS. Such an approach is in the best interests of both parties and is in keeping with the competing Constitutional interests in this area. Unfortunately, from time to time, we find well-meaning individuals acting out of faith but not acting in conformance with the rules. As a result, when we find an issue in this area, we normally prefer to pursue correction rather than revocation. Correction means that the organization attempts to undo the error, and creates and adheres to procedural safeguards to prevent a recurrence.

Our experience in this area indicates that this issue occurs infrequently in our examinations and does not often result in revocation of tax-exempt status. However, as indicated by the Branch Ministries case discussed above, the IRS will revoke the exempt status of an organization for political activities in appropriate circumstances.

This is a challenging area for the IRS to administer. This is not the first time that Congress has reviewed our activities in this area. This was the subject of congressional review in the 1980’s, and as recently as March of 2000, when the Joint Committee on Taxation reported on our handling of tax-exempt organization matters. In Report of Investigation of Allegations Relating to Internal Revenue Service Handling of Tax-Exempt Organization Matters (JCS-3-00), the staff looked at numerous cases, including certain church tax inquiries and examinations. The Joint Committee staff found no credible evidence of political motivation in the manner in which we carry out our responsibilities.

Our administration is made more challenging in part because of issues specific to churches. For example, at page 22 of the Joint Committee report, staff commented upon the church tax procedures:

The Joint Committee staff found that the church audit procedures provide important safeguards against the IRS engaging in unnecessary examinations of churches. However, the procedures also have the effect of (1) making it more difficult for the IRS to initiate an examination of a church even where there is clear evidence of impermissible activity on the part of the church and (2) hampering IRS efforts to educate churches with respect to actions that are not permissible, such as what constitutes impermissible political campaign intervention.

Similarly, the lack of information available from churches (e.g., the fact that churches do not need to apply for a determination letter and are not required to file an annual information return) has an impact on our ability to determine compliance with requirements for tax exemption. This in turn leads us to more frequent use of third-party referrals of information about potential non-compliance in the church area.

Other issues in this area exist not just for churches, but also for all organizations prohibited from participating in political activity. First, we have the issue of attribution. Was an individual making a pronouncement in his or her individual capacity, or can the pronouncement be attributed to the tax-exempt organization? In the church area, the IRS is sometimes asked to consider whether campaign advocacy by a minister or other church official may be attributed to the church with which he or she is associated. The prohibition on political campaign activities applies only to section 501(c)(3) organizations, not to the activities of individuals acting in their private capacities. Accordingly, the prohibition does not prevent a church’s minister from being involved in a political campaign, so long as the minister does not use the church’s financial resources, facilities, or personnel, and clearly indicates that his or her actions or statements are his or her own, and not those of the organization.

A second difficult issue we face is whether a given pronouncement constitutes prohibited political campaign intervention. In this area specifically, the IRS is faced with reviewing both the content and circumstances surrounding the distribution of voter guides during worship services or on church property.

A third issue common to churches and other non-profits is that the sanction in this area is often misdirected. Candidates, political fundraisers or other outsiders sometimes request churches or other section 501(c)(3) organizations to make their resources available for political purposes either because the outsider does not know the rules or simply does not care. The sanction for such action is on the church and its managers, not on the outsider.

Finally, the section 4955 excise tax that can be used in lieu of revocation may not be effective in certain instances. The tax is based on expenditures. Yet there are times when this excise tax does not correspond to the prohibited intervention. For example, what is the expenditure related to an endorsement of a candidate during a sermon from the pulpit?

The IRS takes all these considerations into account when it enforces or educates, but taken together they do make the area more challenging to regulate. Thank you for your time and I am available for any questions.