More Questions than Answers in Tax Bill Treatment of Johnson Amendment
by Shyaam Subramanian and Nikhil Pillai
On November 16, 2017, the House approved its tax reform bill, H.R. 1.
There are many controversial aspects of the bill. From our standpoint as advisors on nonprofit advocacy, however, among the most noteworthy are modifications the legislation would make to the Johnson Amendment. The Johnson Amendment has long barred 501(c)(3) nonprofits from certain types of political activity, and has been credited with keeping them out of the political realm. This bill would change that, allowing all 501(c)(3)s, including houses of worship, more latitude in their political speech.
The approved language would read:
“SEC. 5201. 501(c)(3) ORGANIZATIONS PERMITTED TO MAKE STATEMENTS RELATING TO POLITICAL CAMPAIGN IN ORDINARY COURSE OF ACTIVITIES.
(a) IN GENERAL.—Section 501 is amended by adding at the end the following new subsection:
(s) SPECIAL RULE RELATING TO POLITICAL CAMPAIGN STATEMENTS OF ORGANIZATIONS DESCRIBED IN SUBSECTION (c)3—
(1) IN GENERAL.—For purposes of subsection (c)(3) and sections 170(c)(2), 2055, 2106, 2522, and 4955, an organization shall not fail to be treated as organized and operated exclusively for a purpose described in subsection (c)(3), nor shall it be deemed to have participated in, or intervened in any political campaign on behalf of (or in opposition to) any candidate for public office, solely because of the content of any statement which—
(A) is made in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose, and
(B) results in the organization incurring not more than de minimis incremental expenses.
(2) TERMINATION – Paragraph (1) shall not apply to taxable years beginning after December 31, 2023.
(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2018.”
The words are few, but the questions this provision raises are many.
The more straightforward questions relate to whether and how some important terms will be defined. “Ordinary course,” “regular and customary activities” and “de minimis” all remain undefined, which could lead to confusion and even possible litigation.
To begin with, there is no guidance on what is considered de minimis, and it will likely take time (and costly litigation) to reach a consensus. The bill doesn’t define a de minimis expense in this context, and though in general “de minimis” means “insignificant” or “minimal,” the IRS itself provides multiple definitions in various contexts. For example, in the context of taxable fringe benefits, the IRS defines a de minimis benefit as something that is so small in terms of value and/or frequency that accounting for it would be unreasonable or impractical. Alternatively, in the context of the non-deductibility of contributions for lobbying and political expenditures for 501(c)(4), (5), and (6) organizations, a de minimis expense is considered anything under $2000.
But how would this standard apply in the context of a candidate endorsement? Is a ten-second endorsement in a weekly sermon de minimis? What if a 501(c)(3) lists the candidates it endorses in one newsletter that comes out a week before an election? If the executive director of a 501(c)(3) devotes most of a speech at a conference to one issue—like climate change—and at the end briefly mentions that a certain candidate is best on the issue, is all or only part of the speech partisan political activity?
There will also be questions about the definition of a “regular and customary activity.” How many televised sermons would need to be conducted before they’re considered to be a church’s regular and customary activity? These questions arise for other types of 501(c)(3) organizations as well. If upon formation in January of 2020, a nonprofit decides to conduct nonpartisan voter registration, but in October of 2020 includes a statement in their activities supporting a candidate, is that enough time for the activity to be considered a part of their regular and customary activities? Alternatively, if an existing nonprofit began canvassing upon passage of the new tax legislation, and began including political statements during the 2022 campaign season, would that indicate that the additional activity (canvassing) was for political purposes, or would that be considered part of their regular and customary activities? Would this analysis change if the political statements were made in 2019?
Similarly, there is ambiguity around the definition of “ordinary course.” It’s easy to envision a children’s rights group knocking on doors and telling people, “You should support the reauthorization of funding for CHIP. It provides health insurance for millions of children each year.” It is not controversial to say this is a nonpartisan statement in the ordinary course of a nonprofit’s business. However, would adding, “You should support Candidate X, they’re a real champion of children’s rights, and they’ll fight to preserve CHIP” transform that entire statement into a political statement? Would this be considered a statement made in their ordinary course of business? It is unclear. This same analysis would need to be applied to outreach conducted by churches and private foundations, and to other types of communications (print and media).
There are still more complicated questions. For example, would a 501(c)(3)’s political statements be subject to the 527(f) tax on expenditures made for political activities that applies to other 501(c) organizations? Would they need to be disclosed under campaign finance rules as independent expenditures? Statements made independently of a political committee in support of or opposition to a candidate are generally considered independent expenditures. Independent expenditures may need to be disclosed at the state and federal level, and in some instances, on a municipal level. Some states, such as New York, require any organization making an independent expenditure to register as an independent expenditure committee. Other states, likes Pennsylvania, have a monetary threshold that must be crossed before such expenditures are reportable. If 501(c)(3)s are permitted to make political statements in support of or opposition to a candidate, they will be responsible for complying with all of these regulations (which are often draconian), and the state regulatory bodies will also be responsible for ensuring compliance, possibly creating burdens on multiple levels.
Would the tax code provision (section 4945(d)(2)) that currently imposes a prohibitive excise tax on private foundations that influence the outcome of an election apply to the now permitted de minimis communications? Private foundations are a type of 501(c)(3) organization subject to more restrictions because they are funded by a small pool of donors. To ensure these small pools of donors do not receive a disproportionate benefit for engaging in some activities (given that their contributions are tax-deductible) , the tax code contains excise taxes to discourage private foundations from engaging in legislative and political activities (as well as some other grant making activities). Accordingly, unlike their public charity counterparts, private foundations must pay a heavy tax on their lobbying expenditures. This excise tax also applies to any political expenditures. Therefore, it is not clear how this new provision would apply to private foundations.
Finally, it’s unclear why the provision sunsets on December 31, 2023. According to the Joint Committee on Taxation, there is a cost associated with the provision because they expect increased tax-deductible contributions to 501(c)(3)s if they are permitted to engage in (albeit de minimis) partisan activity. They expect donors to shift some contributions currently given to c4s or 527s (without a tax deduction) to tax-deductible contributions to 501(c)(3)s. Is the sunset meant to reduce the cost of the provision? If the drafters view the proposal as important from a policy perspective, what’s the rationale behind ending it? Could this lead to new 501(c)(3) organizations formed to take advantage of the provision in the near term, that then dissolve after 2023? As with many of the questions laid out here, the answer is unclear.
The proposed language was pushed through with no discussion or legislative context, and as a result does not contemplate the complexities associated with 501(c)(3) activities. Any legislation affecting the powers and duties of 501(c)(3) organizations should be thoughtfully drafted with input from the organizations impacted and by experts in the field.