Private Letter Ruling
Number: 9635003
Internal Revenue Service
APR 19, 1996
INTERNAL REVENUE SERVICE
NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM
Issues:
(1) Whether M’s limiting candidate forums to less than all the legally qualified candidates constitutes participation or intervention in a political campaign on behalf of or in opposition to candidates for public office under section 501(c) (3) of the Internal Revenue Code.
(2) Whether M’s conduct of N in the years x and v constituted participation or intervention in a political campaign on behalf of or in opposition to candidates for public office under section 501(c) (3) of the Code.
(3) Whether M’s conduct of N in the year u constituted participation or intervention in a political campaign on behalf of or in opposition to candidates for public office under section 501(c) (3) of the Code.
(4) Whether M’s expenditures for the conduct of N in x and v constitute political expenditures under section 4955(d) (1) of the Code.
Facts:
M was incorporated in the year w to foster and promote the development and dissemination of new knowledge in the social sciences relative to new methods of democratic decision-making. To this end, M designs and implements processes that allow citizens to participate more actively and on a more informed basis in public policy debate and decision-making. M was recognized as exempt from federal income tax under the provisions of section 501(c) (3) of the Code. M was also determined to be an organization of the type described in sections 509(a) (1) and 170(b) (1) (A) (vi).
Since its inception, M has focused a good deal of its organizational efforts on the development and refinement of the N process. An “N” is a mechanism for citizen participation in the analysis of public policy issues. Individual citizens are selected to become members of an N through a scientific method so as to reflect the demographic characteristics of a given community. The selected individuals attend a series of meetings, with an agenda which they help to shape; take testimony from, and have an opportunity to question, a variety of expert witnesses; analyze the views and information presented; and prepare a detailed report for public release.
In the year x, M co-sponsored an N with regard to the x Q election in the State in which M is located. The project summary described the goal of the N as follows:
The aim of the project is not to tell the people of the State how to vote, but rather to allow a group of average citizens to review topics important to the campaign, meet the candidates, and release their findings to the public. It is hoped that the questions and comments from the project’s members will stimulate the candidates and the media to provide good information so that all voters are given a good opportunity to make up their minds about who they want as Q.
For purposes of the x N, the State was divided into six regions of equal population, based on population estimates from the State demographer and the Council. Introductory meetings were scheduled in each of the six locations, after which the persons selected to be a part of the N would be given six weeks to set their agendas for regional meetings. Regional meetings lasting three days each were scheduled in each region, with a single three-day statewide meeting one month later.
The process of selecting persons for the N began with a statewide telephone survey using a questionnaire designed by M in consultation with a political scientist at the State University. Randomly generated telephone numbers used in the survey were purchased from an unrelated survey sampling company. The purpose of the survey was to create a pool of approximately y State residents that would mirror the population of the State in terms of age, sex, race, education, and residence distribution within the State. The selection of z persons for the six regional meetings from this initial pool was done by volunteers within each of the six regions. The selection process was designed to preserve the demographic balance of each regional meeting, while assuring the same balance of O’s, P’s, and others as existed in the State as a whole.
an various dates in x, persons involved in each of the six regional meetings assembled for a one-day introductory meeting, in the course of which each N selected three key topics to be addressed during its three-day meeting. Also at the introductory meeting, the individuals were told that the selection of candidates to appear at the meetings would be left largely to their own judgment. The two candidates nominated by the 0 and P conventions were to be invited automatically. Four other candidate slots were available, to be filled by vote of the individuals selected for the N, from among all of the individuals who had filed as primary candidates by the filing deadline, or from among non 0 and P candidates in contested or uncontested primaries. The z individuals voted as a group to fill the four candidate slots, so that any candidate selected would be invited to all six N meetings. As it turned out, only three candidates in addition to the 0 and P nominees received a majority vote of the individuals, so that the regional Ns involved five rather than six candidates.
Following the selection of issue topics by each group at its introductory meeting, the staff of N prepared lists of possible witnesses. These lists, were distributed to each group, and each group made its final selection of witnesses prior to the meetings f or each of the issues it had selected. These witnesses, and the candidates themselves, provided all of the testimony heard by the members of the N in the course of the regional Ns.
The format of each of the six regional Ns were essentially the same. The three issue topics were covered in sessions of three hours each on the morning and afternoon of the first day and the morning of the second day, with two hours for witnesses and one hour for deliberations for each issue. Candidate presentations of one hour each were made on the afternoon of the second day and the morning of the third day. The afternoon of the third day was devoted to deliberations and determinations, with a press conference at the end of the day. Each regional group released a fairly detailed report, with the views of the group as a whole on each issue, an evaluation of each candidate on each issue, comments of the group as a whole on the television commercials of various candidates, and individual comments of N’s members.
The report of one of the regional Ns notes the following:
(t)his report represents the findings of the 12 members of the N, who met for four days to review the candidates for Q. They heard from the five candidates whom they selected, as well as discussing three topics in depth with the help of 12 witnesses… .None of these groups (sponsoring organizations including M) take stands in any way on candidates in an election. The views expressed in this report are solely the views of the (persons) who participated in the project.
After the regional group meetings had been completed, each of the six Ns elected three of their members to serve on the N for the statewide hearing. These individuals met for an introductory meeting at which time they selected three topics for the statewide meeting.
In determining the candidate selection for the general election, the statewide N followed the rules set initially by M and its co-sponsor. By agreement of the two sponsors, invitations were to be extended to the two candidates who had won the 0 and P primary elections, and to any other candidate who reached a 15 percent popular support threshold as reflected in a least one recognized and credible independent state-wide poll. In the period between the introductory meeting of the members of the N, expert witnesses in support of each candidate were selected by M and its co-sponsor to testify on each of the three issues. Members of the N received candidate position papers and material on the issues to prepare them for the meeting.
The first and second days of the statewide meeting were devoted to an analysis of the three issues selected by the individuals on the N and the candidates’ positions on these issues, as developed through testimony from witnesses and a review of public statements. The third day was devoted to candidate interviews and deliberations by the individuals on the N.
After completion of the x statewide N meeting, the individuals on the N as a group held a press conference at which was released their report that focused on specific issue differences among the three candidates. A one-hour summary of the meeting was broadcast a number of times by State cable television channels, and more than 2,000 copies of the report were circulated through the media, libraries, and community organizations.
The final report for the N states that the N with regard to the x Q race in the State in which M is located rated the candidates in the race on their stands on several major issues in “box score” style. Each individual on the N was asked to select the candidate he or she liked best on each issue area and the results were listed. Also listed were differences among the candidates. The individuals on N also gave reasons as to why they liked a candidate best on one of the issues. The report was entitled N, and listed the names of the two co-sponsors.
M states that for the most part, news coverage of the x Q N focused either on the issues that had been debated or on the N process itself; M and its co-sponsor, in their own reports, news releases, and publications, consistently described the N in terms of issue education and public dialogue, rather than in terms of specific candidate support. M also states that a post-election survey showed that 97 percent of a representative sample of State voters had distinguished the N findings from candidate endorsements.
In summary, the members of the x N listened to paid advocates for the candidates and/or witnesses, heard the candidates debate, examined their position papers, and studied how well each would meet the criteria to hold the office in question. After deliberations among themselves, a final report was issued explaining the findings of the members of the N. This report was widely publicized, as were the contents of the hearings themselves.
In the year v, N co-sponsored a similar N with regard to the v Trace in a State other than the one in which M is located. This N was carried out in a substantially similar manner as the one in x except that the press release reflected a revised format. In particular, M somewhat changed the “box score” appearance of the summary of the ratings by the individuals in this, N. While M did not believe that the original press release for the x N would cause problems with M’s status as an exempt organization under section 501(c) (3) of the Code, and was concerned that the new format would be somewhat less effective, M nevertheless made the change. M hoped that, with the new format, it would clarify that M was simply providing a forum for the individuals in N to examine and express their views about the candidates’ positions on certain issues.
However, the final report on the v N rated the candidates on three issues and provided a rating by the individuals in the N on those issues, stating, as an example, that 9 persons rated one named candidate higher, 7 persons rated another named candidate higher, and 1 person rated the candidates equally. Reasons for such conclusions were listed.
In the year u, M co-sponsored another similar N with regard to the u Q race in another State other than the one in which N is located. This N was carried out in a similar manner as the ones in x and v except that the final report reflected a further revised format. This new format was undertaken by M due to M’s understanding that the previous formats might still raise the perception that it was engaged in prohibited political activity. In the final report regarding the u Q N, the individuals comprising the N did not state any positions of their own on the issues being studied, neither evaluating nor rating any of the candidates. Instead, the u final report only listed the questions the N posed to the candidates, which were listed along with short replies from the candidates.
Applicable Law:
Section 501(c) (3) of the Code provides, in pertinent part, for the exemption from federal income tax of organizations organized and operated exclusively for religious, charitable, or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and which 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.
Section 1.501(c) (3)-.(c) (1) of the Income Tax Regulations provides that an organization will be regarded as ‘operated exclusively’ for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c) (3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Section 1.501(c) (3)-l(c) (3) (i) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if it is an ‘action’ organization.
Section 1.501(c) (3)-l(c) (3) (iii) of the regulations provides that an organization is an ‘action’ organization if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. The term ‘candidate for public office’ means an individual who offers himself, or is proposed by others, as a contestant for an elective public office, whether such office be national, State, or local. Activities which constitute participation or intervention in a political campaign on behalf of or in opposition to a candidate include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to such a candidate.
Section 4955(a) (1) of the Code imposes on each political expenditure by a section 501(c) (3) organization a tax equal to 10 percent of the amount thereof. This tax shall be paid by the organization.
Section 4955(a) (2) of the Code imposes on the agreement of any organization manager to the making of any expenditure, knowing that it is a political expenditure, a tax equal to 2 1/2 percent of the amount thereof, unless such agreement is not willful and is due to reasonable cause. This tax shall be paid by any organization manager who agreed to the making of the expenditure.
Section 4955(d) (1) of the Code provides, in general, that the term ‘political expenditure’ means any amount paid or incurred by a section 501(c) (3) organization in any participation in, or intervention in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
Section 53.4955-1(c) (i) of the Foundation and Similar Excise Taxes Regulations cross references the definition of political expenditures under section 4955(d) (2) to section 1.501(c) (3)-1(c) (3) (iii) of the Income Tax Regulations. The latter provides that political participation or intervention may be either direct or indirect.
Rev. Rul. 67-71, 1967-1 C.B. 125 holds that a nonprofit organization created to improve a public educational system is not exempt from Federal income tax under section 501(c) (3) of the Internal Revenue Code of 1954 where it campaigns on behalf of candidates for election to the school board. The revenue ruling concludes that the organization’s activity in evaluating the qualifications of all potential candidates and then selecting and supporting a particular slate constitutes participation in a political campaign on behalf of particular candidates, even though its process of selection may have been completely objective and unbiased and was intended primarily to educate and inform the public about the candidates.
Rev. Rul. 76-456, 1976-2 C.B. 125, holds that an organization formed to elevate the standards of ethics and morality in the conduct of political campaigns that disseminates information concerning general campaign practices, furnishes teaching aids to political science and civics teachers, and publicizes its proposed code of fair campaign practices without soliciting the signing or endorsement of the code by candidates qualifies as an educational organization under section 501(c) (3) of the Code. The revenue ruling states, however, that if the organization directly approaches candidates for public office and asks that they sign or endorse the code, such activity constitutes participation or intervention in a political campaign and may result, through the publication or release of the names of candidates who sign or endorse or who refuse to sign or endorse the code, in influencing voter opinion. Since such activity is prohibited by section 1.501(c) (3)-l(c) (3) (iii) of the regulations, an organization engaging in such activity will not qualify under section 501(c) (3).
Rev. Rul. 78-248, 1978-1 C.B. 154 describes four different organizations, which otherwise qualify for exemption under section 501(c) (3) of the Code, and determines whether they will be considered ‘action’ organizations and not exempt under section 501(c) (3) if they undertake ‘voter education’ activities by publishing a voters guide. In Situation 2, the revenue ruling holds that an organization annually preparing and making generally available to the public a compilation of voting records of all Members of Congress on major legislative issues involving a wide range of subjects, containing no editorial opinion, and structuring the publication so as not to imply approval or disapproval of any Members or their voting records, is not engaged in political activity within the meaning of section 501(c)(3). An organization sending a questionnaire to all candidates for governor in a certain state, soliciting a brief statement of each candidate’s position on a wide variety of issues, and publishing the responses in a voters guide generally available to the public that does not evidence a bias or preference, in either content or structure, with respect to the views of any candidate or group of candidates is not engaged in political activity within the meaning of section 501(c) (3). However, when a voters guide is distributed during an election campaign, with some questions evidencing a bias on certain issues, the revenue ruling holds that the organization is participating in a political campaign in contravention of the provisions of section 501(c) (3) and is disqualified as exempt under that section. Also, when the voters guide is intended as a compilation of incumbents’ voting records on a particular issue (land conservation in this case) and is widely distributed among the electorate during an election campaign, the organization is participating in a political campaign in contravention of the provisions of section 501(c) (3) and is disqualified as exempt under that section even though the voting guide contains no express statements in support of or in opposition to any candidate.
Rev. Rul. 80-282, 1980-2 C.B. 178, amplifies the holding of Rev. Rul. 78-248, supra, with regard to the situations determined to be in contravention of the provisions of section 501(c) (3) of the Code. The revenue ruling states that when the voting records of all incumbents are presented, candidates for reelection are not identified, no comment is made on an individual’s overall qualifications for public office, no statements expressly or impliedly endorsing or rejecting any incumbent as a candidate for public office are offered, no comparison of incumbents with other candidates is made, and the organization points out the inherent limitations of judging the qualifications of an incumbent on the basis of certain selected votes by stating the need to consider such unrecorded matters as performance on subcommittees and constituent service, other factors must be examined to determine whether in the final analysis the organization is participating or intervening in a political campaign. The revenue ruling holds that the additional facts that the organization does not widely distribute its compilation of incumbents’ voting records, but rather distributes to its normal readership who number only a few thousand nationwide (resulting in a very small distribution in any particular state or congressional district), no attempt is made to target the publication toward particular areas in which elections are occurring nor to time the date of publication to coincide with an election campaign, distinguishes the. organization from the organizations described in Rev. Rul. 78-248 as engaged in political intervention, and it is not considered to be engaging in prohibited political campaign activity.
Rev. Rul. 86-95, 1986-2 C.B. 73, provides guidance on when public forums involving qualified congressional candidates by an organization otherwise described in section 501(c) (3) of the Code constitute participation or intervention in any political campaign within the meaning of section 501(c)(3). The revenue ruling states that although providing a forum for all the legally qualified candidates for a certain office is not, in and of itself, prohibited political activity, a forum for candidates could be operated in a manner that would show bias or preference for or against a particular candidate and this would make a candidate forum an intervention in a political campaign. The revenue ruling also states that a forum held for the purpose of educating and informing the voters, which provides fair and impartial treatment of candidates, and which does not promote or advance one candidate over another, would not constitute participation or intervention in a political campaign.
In The Association of the Bar of the City of New York v. Commissioner, 858 F. 2d 876 (2d Cir. 1988), cert. denied, 490 U.s. 1030 (1989), the Court found that the organization’s practice of rating candidates for elective judicial offices constituted participation or intervention in a political campaign. The Court stated that “(a) representation that a candidate is a lawyer or a judge is a readily provable statement of objective fact. A representation that a candidate is able and has proper character and temperament is simply a subjective expression of opinion.” The Court also stated that “the Tax Court recognized quite correctly that ‘ratings, by their very nature, necessarily will reflect the philosophy of the organization conducting such activities,’ and they are simply expressions of ‘professional opinion’ concerning the candidates’ qualifications.” The Court further stated that “(p)ublished expressions of such opinion, made with an eye toward imminent elections, are a far cry from the revenue rulings upon which the Association relies.” The Court then referred to Rev. Rul. 80- 282. The Court also observed that the ratings of candidates were “published with the hope that they will have an impact on the voter.” The effort, and not the effect, constituted intervention in a political campaign.
In Fulani v. U.S., 809 F. Supp. 112, 93-1 USTC 50,267 (S.D. N.Y., 1993), the District Court dismissed Dr. Fulani’s challenge to her exclusion from the Democratic primary debates in the 1992 Presidential campaign in which she ran as a Democratic candidate. Although Dr. Fulani satisfied all of the objective criteria for debate participation based on qualification for matching funds, ballot access, etc., the sponsor of the debate determined under its one subjective criterion that Dr. Fulani was not a “significant candidate” for the Democratic nomination.
Rationale:
Issue 1. Limitation on the number of candidates
As stated in Rev. Rul. 86-95, supra, limiting a particular candidate forum by exempt sponsors of the forum to only a few selected candidates could be considered to be intervention in a political campaign. This is due to the fact that a legally qualified candidate might not be invited to participate in the forum and would thus be denied his or her opportunity to educate the public in the same manner as the selected candidates. In this manner, the organization sponsoring the forum might be considered to be intervening in the campaign by promoting or advancing invited candidates over noninvited candidates rather than educating and informing the voters in a complete, objective, and neutral manner.
Notwithstanding the above, Rev. Rul. 86-95, supra, also states that conclusions in this area should be based on the totality of the circumstances described. In circumstances where the number of legally qualified candidates for a particular office is large, a sponsoring organization exempt under section 501(c) (3) of the Code might determine that holding a debate to which all legally qualified candidates were invited would be impractical and deter from the educational purposes of the organization. In determining whether a section 501(c) (3) organization participates or intervenes in a political campaign when it holds a candidate debate to which not all legally qualified candidates are invited, all the facts and circumstances must be considered, including the following:
(1) Whether inviting all legally qualified candidates is impractical;
(2) Whether the organization adopted reasonable, objective criteria for determining which candidates to invite;
(3) Whether the criteria were applied consistently and non-arbitrarily to all candidates; and
(4) Whether other factors, such as those discussed in Rev. Rul. 85-95, supra, indicate that the debate was conducted in a neutral, nonpartisan manner.
M’s decision to invite only the candidates from 0 and P parties and up to four candidates who had reached a 15 percent share of popular support as reflected in at least one recognized credible and independent State-wide poll would appear to accentuate the educational nature of the forums and still ensure a meaningful field of candidates for worthwhile forums, while allocating for the organization’s limited space and time. See also Fulani v. U.S., supra.
Issues 2 and 3. The conduct of M’s Ns
Holding a forum involving qualified political candidates will not constitute participation or intervention in a political campaign within the meaning of section 501(c) (3) of the Code if the forum is one that is held for the purpose of educating and informing the voters and which does not promote or advance one candidate over another. Rev. Rul. 86-95, supra. The Service has consistently held that the motivation of an organization is irrelevant when determining whether the political campaign prohibition has been violated. Rev. Rul. 76-456, supra, focuses on this point in concluding that where an organization is involved in upgrading the morals and ethics of political campaigning, a laudatory and nonpolitical activity, it is nevertheless considered to be intervening in a political campaign if the organization solicits candidates to sign a code of fair campaign practices and releases the names of those candidates who sign and those candidates who refuse to sign. The court in Association of the Bar of the City of New York v. Commissioner, supra, upheld this view when it stated that although the organization’s activity was nonpartisan and in the public interest, it nevertheless constituted participation or intervention in a political campaign. In explaining the reasoning supporting its conclusion, the court made this observation: “(a) candidate who receives a ‘not qualified’ rating will derive little comfort from the fact that the rating may have been made in a nonpartisan manner.” Id. at 880. See also Rev. Rul. 67-71, supra, involving nonpartisan school board elections.
M’s communication to the general public regarding the vote totals of the Ns in x and v differentiates M from the organization described in Rev. Rul. 86-95, supra, and from the organization described in Situation 2 of Rev. Rul. 78-248, supra. Up to the point where N has elicited all the necessary information from the candidates, has heard all the available information from the expert witnesses, information that has been or will be broadcast to the general public as educational, M has operated within the parameters of section 501(C) (3) of the Code. However, when the individuals within N go on to make a decision about which candidate they favor (or disfavor) and give the reasons why they arrived at this decision,, and that decision is published by M, N and N have gone beyond the limitations imposed by section 501(c) (3) and the regulations thereunder by publicizing a position that implies favoritism towards a particular candidate. Notwithstanding that N states repeatedly and publicly that it “does not endorse” any particular candidate, states that the aim of N is not to tell the people how to vote, and finally states that a post-election survey showed that 97% of a sample of voters had distinguished the N findings from candidate endorsements, it is still providing a platform for those persons it has chosen to be on N to espouse (if not outright endorse) a candidate of their choice from among those being examined by finding one particular candidates program to be superior to other candidates’ programs. When Ns publish a rating of the candidates, as is the situation here in x and ‘/, they are providing political editorial opinions to the general public and are going beyond the neutral forums discussed in Rev. Rul. 86-95, supra. On the other hand, M’s N in u, which deleted the rating publication of the Ns in x and v, was operated in a manner that did not constitute political intervention.
In summation, the Ns in x and v were in violation of the political intervention prohibitions by publishing the final report of N rating the candidates. Although the members of N may be a lot more cognizant of issues and personalities relevant to the particular election, and be in a better position that most of the ordinary citizenry to judge a particular person and his/her fitness for political office, their final report is nonetheless their group’s rating of the candidates and thus is not impartial and the activity is not being performed in the “neutral manner” described in Rev. Rul. 86-95, supra. This culmination shows that all the activity of the organization leading up to the final report is intimately connected with and a part of the process to put on the Ns, and thus publication of the final report makes the entire process with regard to the Ns a proscribed political activity.
Issue 4. Political expenditures under section 4955 of the Code
Inasmuch as the analysis above indicates that the Ns in x and v were interventions in political campaigns and were carried on by an organization recognized as exempt under section 501(c) (3) of the Code, section 4955 becomes applicable. Expenditures for the Ns in x and v were political expenditures under section 4955(d).
Conclusions:
(1) Limiting the candidate forums in this case, to less than all the legally qualified candidates, does not constitute intervention in a political campaign on behalf of or in opposition to candidates for public office under section 501(c) (3) of the Code.
(2) M’s conduct of N in the years x and v constitutes intervention in a political campaign under section 501(c) (3) of the Code.
(3) M’s conduct of N in the year u does not constitute intervention in a political campaign under section 501(c) (3) of the Code.
(4) M’s expenditures for N in the years x and v constitute political expenditures under section 4955(d) of the Code.
A copy of this memorandum is to be given to M. Section 6110(j) (3) of the Code provides that it may not be used or cited as precedent.
CPD Complaint Info 