8-3-07
Artists, Politics and the IRS
Fed up with Bush and Cheney, their military adventurism, obsessive secrecy and narcissistic smugness?
I’m not surprised.
Wound up and ready to do something about it at the next election?
Great.
Planning to get your non-profit theatre involved in the process?
Er…not such a good idea. You could be risking its tax-exempt status, and, in so doing, its financial future.
Speak Precisely, Please
“Nonprofit” and “tax-exempt” are not synonyms. A nonprofit corporation is easy to create under the Illinois General Not-for-Profit Corporation Act and similar laws of other states. File a few papers, pay a fee, and poof!—you have a nonprofit corporation.
Tax-exempt status, however, is conferred by the Internal Revenue Service and is not automatic. A nonprofit corporation submits a lengthy application, explaining in great detail why it fits one of the 28 categories of tax-exempt organizations described in Section 501(c) of the Internal Revenue Code. If the IRS agrees, they will issue an exemption letter.
The highly restrictive process derives from the obvious fact that no one likes to pay taxes. The IRS needs to make sure that the organizations truly do what they say they are going to, and that there is no private benefit, i.e., that no person directly or indirectly winds up with the net income as a way of evading taxes. (That is not to say an organization cannot pay reasonable salaries; we’re talking about profits here.)
Of the 28 categories, arts organizations fall into the third, Section 501(c)(3), under the description “...religious, charitable, scientific, literary and educational organizations....”
501(c)(3) organizations have a very special privilege that none of the others do: contributions to these entities are deductible for income tax purposes.
With that privilege comes a special restriction: stay out of politics. They don’t say it quite that crudely but that is what the extraordinarily complex rules mean.
The restriction is rooted in a broad public policy that tax dollars should not be used to pay for the political process, except as carefully and even-handedly meted out by the government. Tax deductibility of charitable contributions indirectly subsidizes charitable giving: a $100 contribution might have an after-tax cost to the donor of only $70, with the other $30 coming from the government’s tax revenue.
The rules are complex because terms and boundaries are tough to define, and there are practical issues. For example, 501(c)(3) organizations may need to get involved in political processes for their own needs—zoning, licensing, seeking increased government funding and so on. A limited amount of lobbying, therefore, is allowed.
Enforcement Ahead
Historically, the IRS has been cautious, even timid, about enforcement in this area. No more. In June, they issued a Revenue Ruling with an extensive list of “Do’s” and “Don’ts” and announced plans to monitor the 2008 election period closely.
What changed? The IRS is not talking, but there are some clues. Until a few years ago, the IRS had only one enforcement tool: they could revoke an organization’s tax-exempt status. That would usually kill the organization, not an appropriate response to minor infractions. Now they have a variety of “intermediate sanctions” available. Also, churches are often involved, and the IRS treads very lightly there for constitutional, historical and—yes—practical political reasons.
The more cynical or paranoid might put a racial/political spin on it, like this: White evangelicals and their churches supported Bush heavily in 2000 and 2004, but their influence has clearly faded. Black churches, in contrast, still play their traditional leadership roles that lap into the political arena. And now that the Democrats might have a black candidate...
A previous Republican president (Nixon) infamously used the IRS for political purposes, but I don’t think that is the case with the current enforcement effort. Rather, I think it was triggered both by the egregious violations by many white evangelicals in the 2000 and 2004 elections and the new availability of intermediate sanctions. I hope I’m right.
About Those “Do’s” and “Don’ts”
So what can and can’t a 501(c)(3) organization do? The common thread is that you can get involved with the issues, but must stay neutral about particular candidates. Neutrality must be both direct and indirect—no implicit endorsements, nothing that’s the equivalent of Henry II’s “will no one rid me of this meddlesome priest?” You can invite a candidate to speak, provided that you offer the exact same opportunity to his opponents and no fundraising occurs. You can rent your mailing list to a candidate, provided it is available on the same terms to all candidates.
An organization’s leaders can support one candidate over another, but not through the organization: not in a newsletter, not in a board meeting, and not from the pulpit. (Somebody tell the Pope, please.)
My Two Cents
I want to add two related points.
First, try to stay close to your mission in picking issues. Activism for, say, arts in education, or education funding generally, or even free-speech issues, is less likely to be suspicious than concern about Gov. Blagojevich’s business tax proposals or North Korea’s nuclear program.
Second, arts organizations have the opportunity to make political statements through their creative mission that a hospital or church does not. Presenting Shakespeare’s Scottish play rewritten as a piece about the present administration would be acceptable, though not original. (MacBird, presented in 1966 during a previous unpopular war, got there first, with Stacy Keach as Lyndon/Macbeth and Rue McLanahan as Lady Bird/Lady Macbeth.)
Staying on the right side of these rules requires some conservatism and caution; so does not offending your major donors. This is unfortunate, because art should be truthful and powerful and even subversive. Finding the edge, the limit of how far one can go without offending the authorities and one’s patrons has been a problem for artists since the very concept of an artist emerged during the Renaissance. Do your best, and remember we no longer burn heretics at the stake.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.