Johnson Amendment order is merely symbolic

Since becoming the Republican nominee for president and subsequently being elected, Donald Trump has sparked no shortage of news as it pertains to nonprofits, the role they play in our society, and the laws that govern them. The past few weeks were no exception as Trump signed yet another executive order, this time with respect to religious liberty. In his typical bluster, Trump claimed that the order followed through on his promise to undo the prohibition on campaign intervention for churches recognized as exempt under Section 501(c)(3). However, the text of the order itself paints a different picture.

On a more positive note, the Ford Foundation also recently announced its plan to commit $1 billion of its endowment funds to mission-related investments over the next 10 years, and its hope that its decision would spur the adoption of similar investment strategies by other private foundations.

The Johnson Amendment? Again

Claiming to be following up on an earlier promise to "totally destroy" the Johnson Amendment, Trump signed an executive order titled "Promoting Free Speech and Religious Liberty" on May 4. Among other problematic things, the order instructs that "the Secretary of the Treasury shall ensure, to the extent permitted by law, that the Department of the Treasury does not take any adverse action against any individual, house of worship, or other religious organization on the basis that such individual or organization speaks or has spoken about moral or political issues from a religious perspective, where speech of similar character has, consistent with law, not ordinarily been treated as participation or intervention in a political campaign on behalf or (or in opposition to) a candidate for public office by the Department of Treasury."

The order goes on to define "adverse action" in this context as including "the imposition of any tax or tax penalty; the delay or denial of tax-exempt status; the disallowance of tax deductions for contributions made to entities exempted from taxation under Section 501(c)(3) ? or any other action that makes unavailable or denies any tax deduction, exemption, credit, or benefit."

In announcing the order prior to its signing, it was reported that a White House official stated Trump would be directing the IRS "to exercise maximum enforcement discretion to alleviate the burden of the Johnson Amendment, which prohibits religious leaders from speaking about politics and candidates from the pulpit." The White House's official Twitter account further described the order as stopping "the IRS from revoking a church's or nonprofit's tax-exempt status if it chooses to support a political cause." The reach of the order is clearly limited solely to houses of worship, religious organizations, and speech from a religious perspective, saying nothing as to enforcement of the prohibition with respect to other institutions.

While Trump made a big to-do of what the order would accomplish with respect to the Johnson Amendment prohibition, the actual text appears to do very little in that regard. As an initial matter, the Johnson Amendment does not prohibit organizations recognized as exempt under Section 501(c)(3) or their leaders from speaking about "moral or political issues from a religious perspective." Rather, it prohibits 501(c)(3) organizations "from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office," as a condition of exemption under that Section.

Moreover, the clause including "where speech of a similar character has ? not ordinarily been treated as participating or intervention in a political campaign" basically instructs the IRS to continue doing what it has been doing with respect to enforcement of the Johnson Amendment, and perhaps not to discriminate against religious institutions in its enforcement.

The order states in several places that it shall be implemented and interpreted consistent with applicable law, essentially providing that the current guidance regarding what constitutes prohibited campaign intervention shall continue to apply. The primary current interpretation of the Johnson Amendment by the IRS is set forth in Revenue Ruling 2007-41, which provides a number of examples and indicates whether the IRS would consider the conduct in each to constitute prohibited campaign intervention or not.

Given that the Johnson Amendment is rarely enforced, particularly with respect to churches, the ultimate impact of the order in this respect is likely symbolic — an effort by Trump to convince his base that he is getting things done as he promised he would. During the signing ceremony for the order, Trump repeated his frequent mischaracterization of the Johnson Amendment:

"Under [the Johnson Amendment], if a pastor, priest, or imam speaks about issues of public or political importance they are threatened with the loss of their tax-exempt status. A crippling financial punishment. Very very unfair. But no longer. I promised to take action if I won .... And to this end, this financial threat against the faith community is over. In just a few moments, I will be signing an executive order to follow through on that pledge and to prevent the Johnson Amendment from interfering with your First Amendment rights. And you're the people I want to listen to .... So, you're now in a position where you can say what you want to say."

While Trump has repeatedly referred to the Johnson Amendment as an unfair restriction of the free speech rights of churches and religious leaders and as a penalty imposed on them, it is in fact a condition of a privilege — exemption from federal income taxes. And it is a condition that we place on all organizations exempt under Section 501(c)(3), not just houses of worship.

A lawsuit has already been filed by the Freedom from Religious Foundation in the U.S. District Court for the Western District of Wisconsin, challenging that the order applies a more vigorous enforcement standard with respect to secular nonprofits than religious nonprofits, in violation of the Constitution. The lawsuit seeks an injunction blocking the IRS from implementing the executive order.

Ford Foundation & Impact Investing

On April 5, Ford Foundation's president, Darren Walker, announced that the foundation would be committing up to $1 billion of its $12 billion endowment to mission-related investing over the next 10 years.

Mission-related investments (MRIs) generally refer to investments made from a private foundation's assets that include consideration of the foundation's exempt purposes and mission as part of the prudent investment analysis, allowing for multiple bottom lines. These investments are distinguished from the distributions that private foundations make each year to satisfy the minimum distribution requirement, generally requiring a payout of 5 percent of total assets each year in furtherance of the foundation's exempt purposes. Rather, MRIs are made with what is sometimes referred to as the other 95 percent of a foundation's assets.

Ford Foundation plans to "gradually carve out funds from its existing investment portfolio and deploy them over time into funds seeking to earn not only attractive financial returns but concrete social returns as well." The foundation has indicated it plans to allocate MRI funds to established impact funds and not to individual companies, and to focus initially on affordable housing in the United States and access to financial services in emerging markets.

In making its announcement, the Ford Foundation indicated its hope that the move would send "a signal to other foundation and institutional investors that perhaps the time has come to consider the potential of impact investing." According to Xavier de Souza Briggs, vice president for the foundation's Economic Opportunity and Markets program, "[t]he result, we hope, is to expand and diversify the market for MRIs so that it becomes easier for other institutional investors to invest in ways that consider social impact." To this end, the foundation also plans to make information about its MRIs and investment methods, including how investments are selected, mission-related value is assessed and performance of its investments, publicly available. Hopefully this will assist other foundations in assessing their own capacity for MRIs.

With respect to the relevant law applicable to MRIs, Internal Revenue Code Section 4944 provides for the imposition of taxes on a private foundation if it "invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes." The accompanying regulations state that "an investment shall be considered to jeopardize the carrying out of the exempt purposes of a private foundation if it is determined that the foundation managers, in making such investment, have failed to exercise ordinary business care and prudence, under the facts and circumstances prevailing at the time of making the investment, in providing for the long- and short-term financial needs of the foundation to carry out its exempt purposes." The regulations also list a number of factors that may be considered in making investments.

However, in 2015, the IRS issued Notice 2015-62, which clarified that, "[w]hen exercising ordinary business care and prudence in deciding whether to make an investment, foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation's charitable purposes." The notice went on to explicitly state that a private foundation will not be subject to the jeopardizing investment taxes if "foundation managers who have exercised ordinary business care and prudence make an investment that furthers the foundation's charitable purposes at an expected rate of return that is less than what the foundation might obtain from an investment that is unrelated to its charitable purposes."

While guidance regarding MRIs could change, this notice, and the leadership of Ford Foundation and many other private foundations, should provide comfort to foundations seeking to enhance mission-impact through their investments.

Erin Bradrick is senior counsel with the NEO Law Group in San Francisco. Erin's practice focuses on corporate, governance, charitable trust and tax matters solely for nonprofit and exempt organizations.