The 2020 presidential campaign is already underway, and it’s likely to be an especially contentious one. That may lead the Internal Revenue Service to issue one of its recurrent reminders about what tax-exempt organizations, other than political action committees, are allowed to do. Since the 1950s, nonprofits have been prohibited from participating directly in federal elections. But they are permitted to conduct educational and other activities, consistent with their purposes, that might influence the outcome of an election.
The point where permissible activities cross the line into forbidden campaign acts is not always easy to determine, but three decades ago, a federal court demanded that the IRS be more specific about what is allowed and what is not.
In its ruling, the court rejected a regulation first imposed in 1959. The IRS had used the ruling to determine that a feminist publication out of Colorado called Big Mama Rag couldn’t get a tax exemption as an educational organization unless it presented its facts in a way that was “sufficiently full and fair” to permit a “member of the public to form an independent opinion.” The group could get tax-exempt status only as advocacy group. The big difference: Advocacy groups cannot accept tax-deductible contributions, while educational groups qualify as charities and offer donors a way to get a tax break.
In designating Big Mama Rag an advocacy group, the IRS happened to note the publication’s “political and legislative commentary” and its material “promoting lesbianism.”
In ruling that the IRS had erred, Judge Abner Mikva said the IRS’s definitions of an “advocacy” group, an “educational” organization, and a “full and fair” exposition of facts were all unconstitutionally vague, opening the door to the very kind of subjective treatment that Big Mama Rag had gotten from the IRS.
Big Mama Rag went out of business in 1984. Two years later, the IRS adopted a new approach, focusing on the issue of how fairly organizations conducted their activities rather than on what they advocated. By this test, to be considered “educational,” a group’s communications had to be supported by facts, avoid “inflammatory and disparaging terms,” and consider the “background and training” of its audience.
To put it mildly, this did not amount to much of an improvement, but the constitutionality of the new standards has not been seriously tested. (In one case, the court simply dismissed outright a white supremacist group’s claim of being “educational.”) In other words, the federal judiciary has been managing to avoid the issue.
It’s a case study in the American way of espousing controls on the activities of nonprofit groups but imposing few of them.
A British ‘Breach of Trust’
A recent case demonstrated just how different things are elsewhere. In the United Kingdom, the body that oversees tax-exempt organizations, the Charity Commission, delivered a formal legal “warning”in February to a U.K. organization named the Institute of Economic Affairs. The commission, in the words of the warning, “considers” the institute’s trustees to have “committed a breach of trust or duty … in the administration of the charity.” To an American, that sounds like extremely strong language.
The institute isn’t exactly a fringe organization. It’s a free-market think tank founded in 1955 under the influence of the economist and Nobel Prize winner Friedrich Hayek. The group’s authors and speakers have included Milton Friedman, Ronald Coase, and the chief rabbi of the United Kingdom.
But the issue that gave rise to the stern warning was — no surprise — Brexit. Last September, the institute published a paper called “Plan A+,” which advocated a “hard” Brexit; that is, an exit without an agreement on terms with the European Union. What’s more, the institute launched Plan A+ at an event that pro-Brexit politicians attended.
The Charity Commission has now reacted, saying that the institute’s use of resources to promote Plan A+ constituted “misconduct,” “mismanagement,” and a “misuse of charitable resources.” Indeed, the commission has forced the institute to remove Plan A+ from its website and says the group must promise not to engage again in political campaigning that “does not further the educational purposes of the IEA.”
The institute hasn’t accepted the commission’s verdict lying down. Its chairman described the organization as “disappointed” — undoubtedly a Briticism for “greatly ticked off.” He called the consequences of the commission’s action“extremely widespread and worrying” for “the whole of the think tank and educational charity sector.” And he accused the commission of making the legal rules governing charities “unclear,” in an echo of Judge Mikva’s ruling that the comparable IRS regulation was unconstitutionally vague.
Students of American philanthropy are prone to envywhen they look at Britain’s system of charity regulation. We have an Internal Revenue Service with limited conceptual tools and even more limited resources. We have 50 state attorneys general, each with his or her own legal doctrines and political imperatives. The British, by contrast, have a unified system of authority that does not hesitate to speak with confidence.
They have coherence and potentially plenary power. We have a multivalent mess.
Today in America, unless a nonprofit poses a massive and fundamental challenge to the national ethos — like Bob Jones University’s espousal of segregationist doctrine — it is virtually impossible to imagine the Internal Revenue Service being able to decide, as a unilateral administrative matter, to disapprove of a group’s activities as being contrary to the group’s “educational” mission, let alone as evidence of a “breach of trust or duty,” “misconduct,” or “mismanagement.”
For all the reminders about illegal political activity that the IRS has given to tax-exempt groups over the years, it has begun only a small number of enforcement actions.
Closely related to this issue of administrative discretion is the issue of the regulators’ political bias. Though the Charity Commission’s attitude toward the Institute of Economic Affairs may be connected to Brexit politics, deference to the commission’s authority is likely to protect it from political pressures.
In contrast, not long ago the IRS — a part of it, anyway — tried to regulate the topics U.S. nonprofits could address by heightening its scrutiny of organizations with certain words in their names, like “tea party.” The result was a full-blown and damaging scandal that may have further dulled the IRS’s appetite for policing the uncertain boundaries of permissible behavior by tax-exempt groups.
At a time when political temperatures are so hot, America’s approach to regulating nonprofits — an approach that allows the public to express its views through a wide, if inconvenient, variety of political as well as non-political groups — doesn’t look so bad.
Leslie Lenkowsky is an Indiana University expert on philanthropy and public affairs and a regular contributor to these pages. He and Suzanne Garment, a visiting scholar at Indiana University, write frequently on philanthropy and public policy.
