The Internal Revenue Code establishes a range of different tax-exempt entities, each of which is governed by its own set of rules. Converting an organization exempt under Section 527 of the Code into an organization exempt under Section 501(c)(3) requires particular care, because a 527 organization is a tax-exempt organization that engages in political campaign activity but a 501(c)(3) organization is prohibited from supporting or opposing a candidate for elected office.
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Reasons for Conversion
As exempt organization authority Bruce Hopkins observes, a 527 organization is established expressly for the purpose of engaging in a wide range of political campaign activity, from supporting an individual candidate to issues-based electioneering. While a 527 organization could legally stay in operation in perpetuity, its leaders might decide not to continue supporting a particular candidate or political agenda. For example, its preferred candidate might have retired or lost. As the Massachusetts Office of Campaign and Political Finance notes, any remaining funds in a political committee that stopped its campaign activity cannot go to an individual, but donating them to a 501(c)(3) charitable or religious organization is permitted.
Amending Organizational Purposes
One means of converting to a 501(c)(3) organization is to amend the organization's purpose in its articles of incorporation. A 527 organization has as its exempt function the selection, nomination, election or appointment of any individual to any federal, state or local public office or office in a political organization. A 501(c)(3) organization, however, must be organized and operated for charitable, religious, literary, scientific, educational or public safety testing purposes. In practice, as the Internal Revenue Service notes, organizations exempt under Section 501(c)(3) are often described simply as charities.
Prohibiting Campaign Activity
As the IRS notes in its requirements for 501(c)(3) organizations, the agency can deny 501(c)(3) status to an organization for engaging in lobbying or any activity for or against a political candidate. For this reason, it will also be necessary for a converting 527 to amend its articles or bylaws to prohibit political campaign activity and to provide that lobbying will not constitute a substantial part of the charity's activities.
Obtaining 501(c)(3) Status
In addition to amending its articles and, if necessary, its bylaws, an organization converting to a charity would also have to apply for recognition of its 501(c)(3) status by the IRS. This requires filing IRS Form 1023, the Application for Recognition of Exemption, which requires submitting the organization's articles, by-laws and planned activities for review. In addition, federal law requires certain 527 organizations to report the disposition of their finances to the Federal Election Commission.
Dissolution and Donation
Another method of converting from a 527 to a 501(c)(3) organization is to dissolve the 527 organization and to donate its assets to a new, separate organization. For example, the Massachusetts Office of Campaign and Political Finance notes that a 527 organization that has stopped its campaign activity can decide to follow the formal dissolution procedures required under state law. As part of this process, the 501(c)(3) organization would receive the remaining funds.