ACTIVITIES OF SOCIAL WELFARE ORGANIZATION'S SEPARATE POLITICAL FUND ARE TAX-EXEMPT.

UIL Number(s) 0527.03-00

                                             Date: October 1, 1996

[1] This is reference to a letter dated July 12, 1996, requesting rulings on the federal tax treatment, under sections 527(e)(1) and 527(e)(2) of the Internal Revenue Code, of gifts made for the purpose described in this letter.

[2] The information provided indicates that X is a social welfare organization concerned with * * * recognized as exempt from federal income tax under section 501(c)(4) of the Code. X has established and maintained for many years a separate segregated fund under section 527(f)(3) known as Y. The purpose of Y is to expressly advocate the election or defeat of certain federal candidates for public office and for other purposes related to federal elections.

[3] X is developing an election-year voter education program to raise public consciousness about the importance of * * * and about the positions of incumbent public officials and candidates on those issues, without engaging in express advocacy for or against any identified candidates. In January, 1996, at the outset of the program, X advanced certain expenses for public opinion polls, focus groups, and other related activities. The new section 527(f)(3) separate segregated fund established to support the program, as described below, intends to reimburse these funds.

[4] On * * *, the Board of Directors of X adopted the following resolution creating M (the "Fund"):

     X hereby establishes a separate segregated fund (the Fund) under

[6] Z ("Taxpayer") is an individual * * *. On May 24, 1996, Taxpayer loaned $x to the Fund, under the terms and conditions set forth in a Loan Agreement. The Loan Agreement provides that if the Service rules that disbursements made and contemplated to be made from the Fund are for an exempt function within the meaning of section 527(e)(2) of the Code, then Taxpayer will forgive the loan. Taxpayer believes the resulting donation would not be subject to federal gift tax under section 2501(a)(5) if the Service's ruling is favorable. If the Service rules that any disbursements from the Fund do not qualify under section 527(e)(2), the portion of the loan used for such disbursements will be assigned to X and then be forgiven so long as the other terms and conditions of the loan agreement are met. Taxpayer believes that the latter forgiven amount would be subject to federal gift tax.

[7] In the Loan Agreement, the Fund made the following covenants regarding its operations:

     a. The Fund shall be operated at all times in a manner

[9] The covenants in the Loan Agreement are the same program parameters that the Fund will observe with respect to all donations received in 1996 from all donors, including but not limited to Taxpayer.

[10] The program to be paid for by the Fund consists of a two- part package of activities which will repeat the same * * * issues and themes throughout the country, using the mass media and other means of dissemination. These issues and themes will be linked to the * * * records and positions of incumbents and candidates in order to reinforce the significance of those connections in the minds of the voters.

     1. The Fund will address PAST legislative decisions on those

[12] Voter Education materials paid for by the Fund may include some or all of the following variations:

     o Comparative information about the identities and amounts of

[14] Section 527(e)(1) of the Code defines the term "political organization" as "a party, committee, association, fund or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function."

[15] Section 527(e)(2) of the Code defines the term "exempt function" to mean, in relevant part, "the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected or appointed."

[16] Section 527(f)(3) of the Code provides that, for purposes of section 527(e)(1), a separate segregated fund maintained by an organization described in section 501(c) which is exempt from tax under section 501(a) shall be treated as a separate organization.

[17] Section 1.527-2(a) of the Income Tax Regulations defines a "political organization" as a "party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the purpose of directly or indirectly accepting contributions or making expenditures for an exempt function activity as defined in section 1.527-2(c). [sic]

[18] Section 1.527-2(a)(3) of the regulations, relating to the operational test for a political organization, gives examples of activities that are not for an exempt function (but which a political organization may undertake if they are not the organization's primary activities.) One such example is sponsoring "nonpartisan educational workshops which are not intended to influence or attempt to influence the selection, nomination, election, or appointment of any individual for public office."

[19] Section 1.527-2(c)(1) of the regulations provides that expenses directly related to an "exempt function," as defined in section 527(e)(2), includes all activities that are directly related to and support the process of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to public office or office in a political organization (the selection process). Whether an expenditure is for an exempt function depends upon all the facts and circumstances. Generally, where an organization supports an individual's campaign for public office, the organization's activities and expenditures in furtherance of the individual's election or appointment to that office are for an exempt function of the organization. The individual does not have to be an announced candidate for the office. Furthermore, the fact that an individual never becomes a candidate is not crucial in determining whether an organization is engaging in an exempt function.

[20] Section 1.527-2(c)(2), relating to indirect expenditures for an exempt function, provides in relevant part that "[e]xpenditures that are not directly related to influencing or attempting to influence the selection process may also be an expenditure for an exempt function by a political organization. These are expenses which are necessary to support the directly related activities of the political organization. Activities which support the directly related activities are those which must be engaged in to allow the political organization to carry out the activity of influencing or attempting to influence the selection process."

[21] Section 1.527-2(c)(5) of the regulations provides examples of expenditures for an exempt function within the meaning of section 527(e)(2). Example (8), described in section 1.527-2(c)(5)(viii) relates to "Q," a political organization described in section 527(e)(2). In this example, "Q finances seminars and conferences which are intended to influence persons who attend to support individuals to public office whose political philosophy is in harmony with the political philosophy of Q. The expenditures for these activities are for an exempt function."

[22] Section 1.527-6(f) of the regulations provides that an organization or fund described in section 527(f)(3) of the Code is a separate segregated fund. An organization described in section 501(c) that is exempt from taxation under section 501(a), may, if it is consistent with its exempt status, establish and maintain such a separate segregated fund to receive contributions and make expenditures in a political campaign. If such a fund meets the requirements of section 1.527-2(a) of the regulations, (relating to the definition of a political organization), it shall be treated as a political organization subject to the provisions of section 527.

[23] Section 501(c)(3) of the Code provides, in part, for the exemption of organizations that are organized and operated exclusively for religious, charitable, or educational purposes and that do 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."

[24] Section 1.501(c)(3)-1(c)(3)(i) of the regulations provides that an "action" organization described in section 1.501(c)(3)- 1(c)(3)(iii) is not described in section 501(c)(3).

[25] Section 1.501(c)(3)-1(c)(3)(iii) of the regulations provides that:

          an organization is an "action" organization if it

[27] Rev. Rul. 78-248, 1978-1 C.B. 154, discusses whether certain "voter education" activities by 501(c)(3) organizations constitute prohibited political activities under section 501(c)(3). Whether an organization is participating or intervening, directly or indirectly, in a political campaign "depends upon all of the facts and circumstances of each case." The ruling sets forth four illustrative situations with different outcomes.

[28] Situations 1 and 4 involve compilations of officeholders' voting records. In Situation 1, the activity is permissible given the following factors: the publication contains voting records of all members of Congress on "major legislative issues involving a wide range of subjects," the publication does not imply approval or disapproval of any members or their records; and the publication is compiled annually and made available to the public. By contrast, in Situation 4, where an organization that is primarily concerned with land conservation issues presents incumbents' voting records only on issues of importance to the organization, and widely distributes the guide among the electorate during an election campaign, the activity is prohibited political activity even though the materials contain no express statements supporting or opposing any candidate.

[29] Situations 2 and 3 involve publicly distributed voter guides presenting candidates' positions on the issues based on candidates' responses to a questionnaire. In Situation 2, a section 501(c)(3) organization solicited from all candidates for governor a brief statement of the candidate's position on a wide variety of issues. The results then were published in a voters guide made generally available to the public. The activity is permissible where the organization selected the issues "solely on the basis of their importance and interest to the electorate as a whole" and "[n]either the questionnaire nor the voters guide, in content or structure, evidences a bias or preference with respect to the views of any candidate or group of candidates." In Situation 3, the same questionnaire-based voter guide is prohibited political activity where "some of the questions evidence a bias on certain issues."

[30] Rev. Rul. 80-282, 1980-2 C.B. 178, holds that a 501(c)(3) organization's publication of a newsletter containing voting records of congressional incumbents on selected issues would not, based on the facts in that case, constitute participation or intervention in a political campaign within the meaning of section 501(c)(3). The ruling reiterates the rule that whether an organization is participating or intervening, directly or indirectly, in a political campaign "depends upon all of the facts and circumstances in each case." In this case, the format and content were "not neutral": the newsletter would report the incumbents' votes on selected issues of importance to the organization, state the organizations' own views on the issues, and indicate whether the incumbent supported or opposed the organization's views. But weighing in favor of the conclusion that the publication of voting records would not constitute direct or indirect participation or intervention in a political campaign were the following factors: the publication would present the voting records of all incumbents and point out the limitations of judging qualifications based on voting records; and the publication would not identify who was running for reelection nor comment on individuals' overall qualifications for office nor expressly or impliedly endorse any incumbent nor compare incumbents with candidates. Given that the format and content was not conclusive, the determining factor was the timing and nature of the distribution: in the revenue ruling, the organization would not gear the timing of the distribution to any federal election and would not target distribution to any particular areas where elections were occurring, but instead would distribute the voting record compilation only in its newsletter to the regular subscribers who number only a few thousand nationwide.

[31] 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), held that an association did not qualify as a tax-exempt charitable and educational organization within the meaning of section 501(c)(3) of the Code where one of the association's activities was rating candidates for appointive and elective judgeships and publicizing the ratings to the public.

[32] Section 501(c)(4) of the Code provides for the exemption from federal income tax of organizations not organized for profit but operated exclusive1y for the promotion of social welfare.

[33] Section 1.501(c)(4)-1(a)(2)(i) of the regulations provides that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.

[34] Section 1.501(c)(4)-1(a)(2)(ii) of the regulations provides that the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.

[35] Rev. Rul. 67-368, 1967-2 C.B. 194, describes an organization formed for the purpose of promoting an enlightened electorate. Its primary activity is rating candidates for public office on a nonpartisan basis. In order to acquaint voters with candidates for local public offices, the organization analyzes the candidate's qualifications, such as education and experience. On the basis of its conclusions, it rates candidates as average, good, or excellent and disseminates these ratings to the public. The ruling concludes that the comparative rating of candidates, even though on a nonpartisan basis, is participation or intervention on behalf of those candidates favorably rated and in opposition to those less favorably rated. Therefore, such participation or intervention does not promote social welfare within the meaning of section 501(c)(4) of the Code and the organization does not qualify for recognition of exemption.

[36] Rev. Rul. 81-95, 1981-1 C.B. 332, holds that a section 501(c)(4) organization may participate or intervene in political campaigns and remain exempt under 501(c)(4) as long as it is primarily engaged in activities designed to promote social welfare. The ruling cites Rev. Rul. 78-248, supra, (pertaining to voter guides and voting records) and Rev. Rul. 80-282, supra, (pertaining to voting records), among others, as examples of what constitutes participation or intervention in political campaigns. The ruling further states that a 501(c)(4) organization is subject to the tax imposed by section 527 on any of its expenditures for political activities that come within the meaning of section 527(e)(2).

[37] X is exempt from income taxes as a social welfare organization under section 501(c)(4) of the Code. Under Rev. Rul. 81-95, a section 501(c)(4) organization may participate or intervene in campaigns for public office, so long as such activities are secondary to its primary social welfare activities. Under section 527(f)(3), by setting up a separate segregated fund, X may finance political intervention activities through a mechanism treated as a separate organization for tax purposes. As such, the separate segregated fund will be a political organization subject to all the tax laws and regulations under section 527 generally.

[38] The organizational test of section 527 of the Code requires that the Fund's governing documents indicate that it was organized "primarily for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an exempt function." Section 527(e)(1). "Exempt function" is in turn defined as "influencing or attempting to influence the . . . election . . . of any individual any Federal . . . office . . .". [sic]

[39] X's Board resolution creating the Fund states that it was formed "for the purpose of supporting X's efforts to educate the public . . . so that people can make judgements about the * * * positions and qualifications of their elected officials and candidates during the 1996 election season." This purpose is equivalent to accepting and expending funds not to expressly advocate for or against candidates, but to promote a program of issue advocacy designed to influence the public to give more importance to * * * issues when they decide among the candidates. Therefore, the Fund meets the organizational test for qualification under section 527(e)(1).

[40] Section 527 also imposes on political organizations an operational test. The operational test requires that the Fund be "primarily" operated for the purpose of accepting contributions and making expenditures for an exempt function. Whether the Fund's expenditures for voting records and voter guides are for an exempt function depends on all the facts and circumstances. Regulations section 1.527-2(c)(1).

[41] The regulations under section 527 distinguish between "nonpartisan educational workshops" which are not intended to influence or attempt to influence the selection and election process and which, therefore, are not exempt function expenditures (see regulations section 1.527-2(a)(3)), and seminars and conferences which are intended to have a political impact and which, therefore, are exempt function expenditures (see Example 8, regulations section 1.527-2(c)(5)(viii)).

[42] In general, the Fund will attempt to influence the public through education linking candidates to issues selected by X. For example, X will prepare or compile and distribute voting records and voter guides which will educate the public on the records of incumbents and the legislative positions of the candidates. While both factual and educational, the selective content of this material, and the manner in which it will be presented, will be intended to influence readers to consider * * * when voting in 1996. The program will identify candidates for public office whose philosophy about * * * is in harmony with X's own stance. The Fund's expenditures for such educational activities are similar to the type of exempt function expenditures described in section 1.527-2(c)(5) of the regulations.

[43] Rev. Rul. 78-248 and Rev. Rul. 80-282 address the facts and circumstances that are relevant to determining when voting records and voter guides cross over the line from simply educating voters to influencing or attempting to influence their votes in the context of section 501(c)(3)'s prohibition on participation or intervention in a political campaign on behalf of or in opposition to a candidate. But they also may be used to indicate the types of voter guides and voting records that would qualify as an exempt function activity under section 527(e)(2). Since the 501(c)(3) prohibition is also based on a "facts and circumstances" test, the rulings provide guidance as to the important factors to consider.

[44] Rev. Rul. 81-95, in discussing what activities constitute participation or intervention in a candidate campaign for a section 501(c)(4) organization, refers to Rev. Rul. 78-248 and Rev. Rul. 80-282 for examples. It follows that any activities constituting prohibited political intervention by a section 501(c)(3) organization are activities that must be less than the primary activities of a section 501(c)(4) organization, which are, in turn, activities that are exempt functions for a section 527 organization.

[45] Unlike Situation 1 of Rev. Rul. 78-248, which was deemed to be acceptable voter education for a section 501(c)(3) organization, the issues to be covered will be dictated by X's public policy agenda, and the targeted distribution and timing of the publications will be tied to the upcoming election. As in Situation 4 of Rev. Rul. 78-248, which was deemed unacceptable for a section 501(c)(3) organization, the Fund's materials will present incumbents' voting records only on selected * * * issues, and will be widely distributed to voters prior to an election. The format and content of the voting records will not be neutral: X will select issues based on the X's legislative agenda which is focused on * * * and will by implication approve or disapprove an incumbent's position based on how well it matches the X's position. Furthermore, the key factors present in Rev. Rul. 80-282 that tipped the balance in favor of acceptable voter education under section 501(c)(3) -- distribution only to a few thousand subscribers nationwide, through the organization's regular newsletter -- are not present in the Fund's case. The Fund will intentionally target distribution of voter guides to areas where * * * issues are thought to be critical to voters choices, and time those distributions to maximize their impact.

[46] A critical factor suggested by Situations 2 and 3 of Rev. Rul. 78-248 in determining whether a voter guide is nonpartisan, is whether the guide "evidences a bias or preference with respect to the views of any candidate or group of candidates." The Fund's voter guide, in which candidates' views on issues will be compiled without contacting the candidates themselves, will be intended to evidence a bias on the issues, and in the selection of the issues, in the language used in characterizing the issues, and in the format: all will convey a * * * bias. As with the voting records, the targeting and timing of the distribution will also be aimed at influencing the public's judgments about the * * * positions of the candidates.

[47] Based on the factors identified in the revenue rulings, the Fund's voter guides and voting records would be prohibited political intervention for a section 501(c)(3) organization, and are, correspondingly, for an exempt function within the meaning of section 527(e)(2) of the Code. While the guides may not meet all of the factors, any one guide meets enough of the factors so that distribution of the guide can be said to be exempt function activity within the meaning of section 527(e)(2).

[48] The Fund anticipates making a variety of expenditures that are necessary to make it possible for the Fund to carry out its activities directed at influencing voters' views on the connections between * * * and candidates. These include but may not be limited to research activities, management and administrative personnel and associated expenses, rent, phone and other overhead items, legal services, and accounting services. Such indirect expenditures nonetheless qualify as exempt function expenditures by a section 527 organization under section 1.527-2(c)(2) of the regulations.

[49] Accordingly, we rule as follows:

     1. Disbursements made and contemplated to be made from the Fund

[51] We are informing your the appropriate District Director of this ruling. You should keep this letter in your permanent records.

[52] If you have any questions about this ruling, please contact the person whose name and telephone number are shown in the heading of this letter.

                                   Sincerely,