Recent developments focus on political activity

NONPROFIT NEWS

October was a blur of unending ballot measure ads and bouncing presidential poll numbers, with a short reprieve for some Halloween fun. However, with election day finally upon us, it seems appropriate to touch on some recent stories relating to the political activity prohibition applicable to organizations recognized as exempt under IRC Section 501(c)(3). For starters, some student publications affiliated with Yale University (where I attended law school) attracted attention for their endorsement and "non-endorsement" of Hillary Clinton. The movement for the Treasury Department and the IRS to issue further guidance on political campaign intervention remains stalled due to a congressional budgetary prohibition. And on a separate note, a donor-advised fund sponsor organization raised the most funds of any charity last year, while we also continue to await further regulations on such donor-advised funds.

Yale Newspaper Endorsement: Political Activity?

On Oct. 26, the Yale Daily News, a college student newspaper affiliated with Yale University, ran an editorial endorsing Hillary Clinton (a graduate of Yale Law School) for president. While political candidates regularly seek out and obtain newspaper endorsements, this particular endorsement became an issue because Yale Daily News Publishing Co., Inc., which publishes the newspaper and is separately incorporated from Yale University, is a 501(c)(3) organization.

To add to the story, in response to the Yale Daily News editorial, the editorial board of The Yale Record, a student humor magazine that is published by another separate corporation that is also recognized as exempt under Section 501(c)(3), issued its own "non-endorsement." The editorial noted that the magazine has never endorsed a candidate for president due to the 501(c)(3) prohibition on political campaign intervention and stated "The Yale Record believes both candidates to be equally un-endorsable, due to our faithful compliance with the tax code." However, it then went on to note Hillary Clinton's exemplary leadership and commitment to improving the country, stating "[b]ecause of unambiguous tax law, we do not encourage you to support the most qualified presidential candidate in modern American history, nor do we encourage all citizens to shatter the glass ceiling once and for all by electing Secretary Clinton on November 8."

As I've discussed in past columns, organizations recognized as exempt under IRC Section 501(c)(3) are strictly prohibited from engaging in political campaign intervention, including through endorsements. The prohibition is intended to be absolute and, by making such an endorsement, the Yale Daily News very likely placed its exempt status in jeopardy. When considering all of the facts and circumstances, The Yale Record's "non-endorsement" would likely similarly be treated as supporting a political candidate in violation of the campaign intervention prohibition.

However, despite these violations, it seems highly unlikely that the IRS would seek to revoke the tax-exemption of either of these student publications. From a practical perspective, recent IRS funding decreases have led to staffing shortages and reduced enforcement capacity within the Exempt Organizations division.

Moreover, the argument against penalizing such organizations is that the exempt purpose of student newspapers is not to inform or influence the public, but rather to enhance the education of students by teaching them the business of operating a newspaper and journalistic skills. Accordingly, when a student newspaper makes a political endorsement, it is part of the educational purpose, as opposed to true campaign intervention aimed at influencing the outcome of an election. While I find this argument to be the beginning of a slippery slope that could arguably apply to nearly every other 501(c)(3) organization, I do think we're unlikely to see action against these organizations.

Furthermore, in a 1972 revenue ruling, the IRS found that editorial statements on political matters published in a student newspaper that was an internal part of the affiliated 501(c)(3) university were part of legitimate journalism that is an accepted feature of student newspapers. It therefore concluded that such student expressions would not be attributed to the university itself and constitute prohibited campaign intervention. It seems plausible that the IRS would choose to extend this position to separately incorporated student newspapers that function in much the same manner.

Political Activity Regulations

On Oct. 31, the IRS and Department of Treasury released the first quarter update to the 2016-2017 Priority Guidance Plan. The plan lays out the projects that are the priorities of Treasury and the IRS, including with respect to exempt organizations. Of particular relevance, the plan has included proposed regulations under Section 501(c) relating to the prohibition on political campaign intervention, which many practitioners feel are deeply needed.

Unfortunately, however, Congress passed an appropriations bill for the 2016 fiscal year that included a rider preventing Treasury and the IRS from spending any funds on such regulations. Based on this prohibition, the 2016-2017 plan, which was issued in August, stated that the political activity regulations project had been suspended in accordance with Section 127 of the Department of the Treasury Appropriations Act, 2016.

Section 127 of the Appropriations Act states that "[d]uring fiscal year 2016 (1) none of the funds made available in this or any other Act may be used by the Department of the Treasury, including the Internal Revenue Service, to issue, revise, or finalize any regulations, revenue ruling, or other guidance not limited to a particular taxpayer relating to the standard which is used to determine whether an organization is operated exclusively for the promotion of social welfare for purposes of Section 501(c)(4) of the Internal Revenue Code of 1986."

Shortly before the end of the 2016 fiscal year on Sept. 30, Congress passed a continuing resolution extending current funding through Dec. 9, with some modifications. Accordingly, the Update to the Priority Guidance Plan continues to list the political campaign intervention regulations project as suspended. This congressional spending prohibition has caused further delay on important work to clarify the distinction between prohibited partisan campaign intervention and permissible nonpartisan civic engagement activities. This guidance, whenever we get it, will be very helpful for nonprofits seeking to better understand how they can effectively and actively engage in our democratic process.

Donor-Advised Funds

The 2016-2017 Priority Guidance Plan also lists as a priority providing "guidance regarding the excise taxes on donor advised funds and fund management." IRC Section 4966 defines a donor-advised fund (DAF) as a "fund or account (i) which is separately identified by reference to contributions of a donor or donors, (ii) which is owned or controlled by a sponsoring organization, and (iii) with respect to which a donor (or any person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor." The Code also lists some exclusions to the definition.

Despite the widespread use of DAFs in the nonprofit sector for many years, we are still awaiting further guidance from Treasury regarding their operation and there is great debate as to whether they should be subject to more stringent rules akin to those applicable to private foundations, or should be allowed to continue self-regulating.

Aware that Treasury is developing draft regulations pertaining to DAFs, the Community Foundation Public Awareness Initiative, a collaboration among nearly 100 foundations in 45 states, sent a letter to Treasury officials last month regarding such draft regulations. Specifically, the letter sought to counter the concern regarding contributions by private foundations to DAFs as a work-around for the 5 percent minimum distribution requirement private foundations are subject to, and listed numerous examples of ways in which private foundations have used contributions to DAFs to effectively further their exempt purposes. While it remains unclear what will be included in the draft DAF regulations, I think we can be fairly certain that they will draw significant public comment regardless.

Relatedly, the Chronicle of Philanthropy reported late last month that a DAF sponsor organization, Fidelity Charitable Gift Fund, raised the most money from private sources of any charity last year. The Chronicle began ranking the top 400 charities in terms of private fundraising in 1991 and this is only the second year in which United Way Worldwide has not held the top spot. Another donor-advised fund sponsor organization created by a financial services institution, Schwab Charitable, also made the top five. This trend towards DAFs likely reflects a shift in the way many Americans are thinking about charitable giving.