The LDS Church, Proposition 8, and the Federal Law of Charities

by Brian Galle*

In the days before and after the passage of California's "Proposition 8," a ballot initiative barring legal recognition of same-sex marriages in the state, it was widely reported that the LDS Church, together with other religious organizations, played a significant role in supporting the initiative. National attention peaked with a New York Times report detailing some of the church's efforts, which included e-mails to members imploring them to donate money to "Yes on 8" organizations as well as other logistical support for proponents of the measure. Gay rights advocates and others have now called for an investigation of the Church's activities, arguing that they violate federal restrictions on political activities by tax-exempt charities.

This Essay considers the merits of the argument that the Mormon Church's support for Proposition 8 violated federal tax law. I take as given the facts reported by the New York Times and other major news outlets. Although the facts are not really in dispute, much of the underlying law is. There are few clear guidelines governing lobbying by charities. In the end it is impossible to say whether the Church's conduct will have any tax-law repercussions. My conclusion that there is uncertainty, though, stands in contrast with existing claims that the expenditures of the LDS Church and others are clearly unproblematic.

My discussion here is also aimed at revealing some of the weaknesses of the law of charities. In particular, the Proposition 8 episode exposes a serious hole in the fabric of the federal law: the possibility that massive, multi-million dollar lobbying expenditures, large enough to swamp any opposition, may be perfectly legitimate, so long as they are undertaken by a sufficiently gigantic organization. It is hard to see a good justification for a rule that would, in effect, grant political influence only to the largest charities, but that seems to be one plausible interpretation of current law (albeit an interpretation I argue against here). Further, recent events show that the IRS so far has failed to grapple with the most important questions surrounding the rules against lobbying, such as the problem of how to value the use of mailing lists, websites, e-mail, and phone trees—tools that now are central to modern politics.

Part I of the Essay sets out the background rules governing charities. Part II explains how these rules, as interpreted to date, lead to fairly inconclusive results in the Prop 8 scenario, largely because of valuation problems and uncertainty about the extent of permissible activities for large organizations. Part III presses more closely towards a thorough understanding of the political-activity laws, arguing that the two best candidates for the purposes underlying those laws both suggest that the LDS Church's expenditures should be problematic.

I. Federal Limits on "Substantial" Political Activity by Charities

Churches and other forms of charity are generally exempted by § 501(c)(3) of the Tax Code from the federal tax on the income of corporations. Section 170 of the Code also allows individuals who make contributions to those organizations to deduct some or all of their contribution on their federal income tax return. It is this eligibility to receive deductible contributions that distinguishes (c)(3)'s from so-called "noncharitable" nonprofit organizations, many of whom also are exempt from federal corporate income tax. Qualifying as a 501(c)(3) also often results in additional state tax benefits.

In order to obtain the extra goodies that come with (c)(3) status, a would-be charity must abide by a set of additional requirements over and above those faced by other nonprofits. Most pertinently for our purposes, "no substantial part" of a charity's activities can consist of "propaganda, or otherwise attempting, to influence legislation." Similarly, a charity must forfeit its exemption if it carries on one or more "substantial" nonexempt purposes such as running an unrelated for-profit business.

There is no clear law on what comprises a "substantial" amount of lobbying. In the leading cases upholding IRS decisions to revoke (c)(3) status, the offending charity either engaged in pervasive lobbying, or could not achieve any of its ends except through lobbying. Because it was obvious in all of those instances that the lobbying was more than insubstantial, we have little guidance about how to decide closer cases. Conversely, in the leading case in which a court rejected the IRS's determination, less than "5% of the time and effort" of the organization was devoted to lobbying.

The rules for determining what amounts to "substantial" commercial activity are somewhat more clear-cut. The Tax Court, a federal trial court with jurisdiction to decide tax disputes, has held that a charity whose nonexempt expenditures were about 10% of its total revenues was not engaging in a "substantial" amount of commercial activity. That is, if an organization brings in $100,000, it can spend up to $10,000 on noncharitable activities without losing its exemption. Later cases have emphasized that this 10% figure is not an absolute safe harbor, however. It also is uncertain whether the Supreme Court, which first crafted the "substantial" commercial activity language, would read that term to have the same meaning in the context of lobbying activities.

Some charities can escape much of this uncertainty by electing into a more definite set of rules under Tax Code § 501(h). The 501(h) election permits an organization to make lobbying expenditures without fear of penalty so long as the organization stays below its statutory expenditure cap. The cap increases in proportion to the charity's revenues, but maxes out at $1 million no matter the size of the organization. Importantly, churches cannot make a 501(h) election. However, as I will argue, it is possible that the structure of § 501(h) has implications for the proper interpretation of "substantial" even for nonelecting charities.

II. Proposition 8 and the Valuation Problem

How, then, do these rules play out in the context of the Proposition 8 controversy? The reported facts seem not to be in dispute. The LDS Church leadership announced its support for Proposition 8 in a letter that was to be read in every Mormon congregation, in which leaders strongly intimated that church members should donate time and money to supporting Proposition 8. During the weeks leading up to the vote, church officials took part in a satellite broadcast "discussing the LDS Church's doctrine of marriage and describing the church's participation in the Protect Marriage Coalition, which wants voters to approve the initiative." The broadcasters urged viewers to contact "friends, family and fellow-citizens in California" and encourage them to support the initiative. The Church reportedly "tapped every resource, including the church's built-in phone trees, e-mail lists and members' willingness to volunteer and donate money." It also ran a website—, labeled an "official website" of the Church—with content including videos supporting the ban. The Church's support paid off, as both sides estimated that about half of the $40 million spent in support of Prop 8 came from Mormons.

As a threshold matter, there is little doubt that many of these activities constitute "lobbying" as the IRS has interpreted that term. Charities may disseminate "nonpartisan" and "objective" information about pending legislation, but statements that express only one side of a controversial issue do not qualify. It is not clear from reported accounts who made use of the Church's e-mail and phone lists—that is, whether the Church itself made calls and e-mails, or instead shared those lists with the organizations leading the Proposition 8 charge. That, however, probably makes no difference. Providing services for free or at discount to others who are engaged in lobbying is likely itself lobbying; the Treasury has said as much in regulations issued to implement § 501(h), and there is no obvious reason the rule would be different for nonelecting organizations. Otherwise charities could easily escape the lobbying limits by use of a simple shell entity.

The difficult question, then, is whether together the Church's activities are "substantial." Commentators to date have assumed that, because of the vast size of the Mormon Church, its Proposition 8 efforts cannot be substantial. While exact financial information on the Mormon Church is not publicly available, estimates of its annual revenues are usually on the order of hundreds of millions, if not billions, of dollars. Since the Church's direct expenditures were reportedly fairly limited, the Church could likely argue that its spending was well under the 5% or 10% thresholds in existing caselaw.

This analysis rests on two important assumptions, both of them questionable. First, it is possible that the actual value of the Church's contributions is large, perhaps even exceeding the $20 million spent directly by its members. In the case of 501(h)-electing organizations, the IRS would compute the value of the organization's efforts by totaling the costs of preparing the lobbying communications, including a proportion of the organization's salary and other overhead costs, based on the time the charity's staff devoted to lobbying. Considering that the Church's documented communications were relatively modest—a broadcast, a website, and the distribution of e-mail and phone lists—the allocable costs to the Church under this method would also be fairly small. It simply isn't very expensive to send a ten-minute e-mail.

Yet the difficulties with this approach are myriad. For one, it appears to omit entirely the costs of compiling the mail, e-mail and phone lists used to distribute the communication. But most of the costs and value in political communications are precisely located in the task of identifying accurately those who would be most receptive to the message.

Relatedly, a church's communication with its members is likely to carry far more weight than a similar message from an unrelated party to the same group. In commercial terms, the church has an established store of goodwill, which in a market setting would command a high premium. A more economically accurate method of valuing the communication would be the price the charity could obtain for renting out its services (including its endorsement) to an unrelated outsider. In this instance, that figure might have been quite large. While such transactions have been rare among churches, universities, and other charities now commonly contract with private firms to sell their implicit endorsement to members, as with so-called "affinity" credit cards. Those deals might provide at least a baseline for comparison for the value of church political efforts.

We do not know, however, how courts would resolve this valuation dilemma. The 501(h) rules by their terms do not apply to churches, and the holes I have just outlined suggest that their power to persuade by analogy should be limited. Perhaps the most viable approach would be to employ something like the 501(h) valuation rules, but to recognize that they fail to account for a substantial amount of the value added by nonprofit lobbyists. Thus, the 501(h) number alone should not determine whether a charity has exceeded 10% or some other threshold; instead, the court should weigh both the 501(h) total and the other factors I have mentioned. Admittedly, this approach would create a fair deal of uncertainty, but most of the uncertainty would fall on large, established charities, whose vast member lists and accumulated goodwill would be most subject to valuation questions. Those organizations likely have the institutional capacity to consult experts and plan accordingly.

III. Is "Substantiality" a Meaningful Limit for Large Charities?

The second assumption behind commentators' conclusion that the LDS expenditures are unproblematic is that there is no meaningful limit on how high lobbying expenses can rise, so long as they remain approximately 10% of the charity's revenues. The implication is that a sufficiently large entity could spend billions of dollars without violating the prohibition against "substantial" lobbying efforts.

That view seems to strain the plain meaning of "substantial." It is hard to believe that a charity could outspend its opponents by a large margin and still have engaged in insubstantial lobbying. Nor is it clear why charities with large budgets should be free to exert political influence while small charities are condemned to be ineffectual. At best, it seems the statutory language is ambiguous between meaning "substantial" in relation to the size of the organization and "substantial" in an expenditure's effects on political outcomes. Therefore, we likely must consider the purposes behind the lobbying ban in order to interpret its scope.

While Congress has not been explicit about its goals in enacting the limit on lobbying, we might infer its views from the structure of the statute. Notably, § 501(h) caps permissible contributions at $1 million, regardless of the size of the organization. The implication is that some expenditures are too large to be permitted, no matter the size of the organization.

Admittedly, it could be argued in response that § 501(h) is intended to serve as a "safe harbor" provision to provide certainty in an uncertain field, and thus that there should be little negative inference that amounts above the safe harbor are impermissible. But, even if so, the design of the safe harbor still sheds some light on Congress' view about the correct interpretation of § 501(c)(3). If (c)(3) offers an opportunity for massive expenditures by massive organizations, then the § 501(h) safe harbor is useless for just those organizations that are most in need of assurance—those that invest a large sum in lobbying. Either Congress did not believe that such large expenditures were permissible under the "substantial" standard, or it did not want to encourage large expenditures by offering safe harbor to them. Either way, § 501(h) undermines somewhat the unlimited reading of "substantial."

Turning to academic theories, commentators have offered two main justifications for the lobbying limits. For one, the lobbying limits mitigate the impact of wealth on the political process. Charitable contribution deductions are more valuable (and economically more feasible) for high-income taxpayers, so that permitting entities that receive deductible donations to lobby would give disproportionate voice to rich contributors. Second, lobbying restrictions help to preserve charity as a separate sphere from government. When charity is a political player, government has incentives to manipulate the charitable sphere, to capture or blunt charitable influence. Both of these rationales are controversial, but to date they offer the best principled explanations for the current statutory scheme.

The wealth rationale clearly would condemn big spending by big organizations. Indeed, under the wealth rationale one might expect that there should be no permissible lobbying because any amount of lobbying would run the risk of distorting the political process. But perhaps a de minimis exception makes sense in a world in which it may be difficult to distinguish between impermissible lobbying and permissible charitable activity.

It could be argued that the wealth rationale is incoherent in that the Tax Code appears to permit other lobbying expenditures to be deductible, such as some dues paid by corporate members of business leagues, which are in turn permitted to lobby. At best, though, this reduces the second layer of tax on business entities; it does not directly reduce the tax paid by individual shareholders. Thus, shareholders who use their corporation for lobbying purposes generally cannot come out ahead of other nonshareholders. There have been some proposals to permit (c)(3) organizations to lobby using nondeductible funds, but none of these to date has dealt persuasively with the question of how to value the goodwill and economies of scale built up by the charity with deductible dollars.

The separate spheres rationale, too, looks to be inconsistent with a boundless reading of "substantial." The relevant factor under that rationale should be whether or not a charity's activities are important enough to tempt government officials to meddle with the charity's affairs. Expenditures large enough to tip an election are bound to draw attention from governmental actors, regardless of the size of the organization. True, large charities may be more difficult for government to influence, but that might simply increase the size of the temptations, threats, or whatnot the officials offer to the charity.


Under existing precedent, the outcome of any challenge to the LDS Church's intervention in Proposition 8 is uncertain. Most caselaw has looked to the cost, and perhaps time and effort, devoted to lobbying, and compared that to the organization's overall size. By that standard, the Church's vast size likely shields it from any serious threat of revocation. But that method has serious problems. It fails to consider the true economic value of political endorsements by influential organizations with extensive and time-tested lists of phone numbers and e-mail addresses. And more importantly, it neglects the fact that under either of the most persuasive explanations for the very existence of the lobbying limits, it makes no sense to permit multi-million dollar expenditures simply because a charity itself is large.

Even under my proposed methodology, the outcome of any challenge to the Church's exemption is hard to predict. We do not know how the market would value the use of the Church's mailing lists nor do we know the value of the staff time and other costs the Church invested. Perhaps these sums are modest, even in absolute terms. My point here is only that if these figures prove to be large—several million dollars, say—then there ought to be a serious question whether revocation is appropriate. The fact that several million dollars is a tiny fraction of the Church's budget should not by itself render the expenditure permissible.

* Brian is a Visiting Associate Professor at Georgetown University Law Center and Assistant Professor, Florida State University School of Law

First published in the Northwestern University Law Review Colloquy as 103 Nw. U. L. Rev. Colloquy 370 (2009),

Republished with permission

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