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The University of Chicago Business Law Review

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473

Abstract

Federal tax law treats separate nonprofit corporations as distinct legal entities for almost all purposes, in common with most other areas of law. With respect to political activity, this means that one nonprofit corporation’s lobbying or election-related actions are generally not attributed to another nonprofit corporation. This is the case even if the two entities have overlapping or even identical boards of directors. It is also the case even if the two entities collaborate regarding their respective activities and share employees, facilities, outside vendors, and other resources, as long as the entities reasonably allocate the costs for those shared resources. In addition, longstanding Supreme Court precedents strongly indicate that the First Amendment requires Congress and the IRS to permit this overlapping, collaboration, and sharing.

That lack of attribution is important because different types of nonprofit corporations receive different tax benefits and face different restrictions on their political activity under federal tax law. For example, a charitable nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(3) and eligible to receive tax deductible charitable contributions is limited with respect to lobbying and is prohibited from supporting or opposing candidates for elected public office. In contrast, a social welfare nonprofit corporation that is tax-exempt under Internal Revenue Code section 501(c)(4) but not eligible to receive tax deductible charitable contributions can engage in unlimited lobbying related to its social welfare purpose and can also support or oppose candidates as long as doing so is not its primary activity. And a political organization that is tax-exempt under Internal Revenue Code section 527, although only with respect to contributions received for political purposes, can engage entirely in supporting or opposing candidates. Yet a section 501(c)(3) organization, a section 501(c)(4) organization, and a section 527 organization can have overlapping boards, collaborate about their respective activities, and share resources, as long as they reasonably allocate their expenses and avoid spending directly on political activity that is limited or prohibited given their specific exemption category. There are therefore many groups of nonprofit organizations that consist of affiliated organizations with different federal tax categorizations but a common political purpose.

This lack of attribution is in tension with an aspect of federal election law and the election laws of many states. Under these election laws, if an individual or entity coordinates its activities with a candidate committee or political party, that activity is considered a contribution to the benefitted candidate or party. This result means that any spending on that activity is subject to existing source and amount limits on such contributions. In effect, the activity is attributed to the candidate or party because of the coordination even though the candidate or party does not legally control that activity. This is a common sense approach because if it did not exist it would be easy for individuals and other entities to evade contribution limits by engaging in activities not only designed to benefit a candidate or party but done at the specific request of that candidate or party. This reasoning also provides the basis for Supreme Court decisions concluding that this approach is constitutional under the First Amendment.

This essay explores the tension created by federal tax law’s respect for separate entity status on one hand and the coordination rules of federal and state election law on the other hand. It also revisits whether, given this tension, the Supreme Court was correct to constitutionalize the former approach when it comes to tax-exempt nonprofits. I conclude that whether this difference is appropriate as a policy matter depends on the policy justification for the political activity limits on section 501(c)(3) charities. If the only such justification is to support the broader federal tax policy prohibiting the deduction of expenditures for political activities, then the lack of attribution is appropriate. If instead the justification is that political activity is inconsistent with status as a section 501(c)(3) charity for broader reasons, then there is a policy argument for attributing the political activity of noncharitable nonprofit corporations to closely affiliated charitable nonprofit corporations and so subjecting that activity to the section 501(c)(3) limits. I also conclude that this latter justification could provide a basis for revisiting the Supreme Court precedents that bar this attribution as a constitutional matter.

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