Last week, the Yale Daily News Publishing Company, Incorporated (i.e., the Yale Daily News (YDN)) caused a minor stir when it endorsed Hillary Clinton for President. The YDN is a corporation that claims tax-exempt status under Section 501(c)(3), and engaging in political activity is inconsistent with that statute’s requirements. Specifically, if a corporation wants to claim tax-exempt status under Section 501(c)(3), it cannot participate in or intervene in political campaigns. This restriction includes the publishing or distribution of statements in support of a candidate, such that the YDN’s explicit endorsement of Hillary Clinton comes within the statute’s prohibition. Questions have thus been raised about the YDN’s tax-exempt status.
In defense of the YDN, some have pointed to Internal Revenue Service Ruling 72-513, in which the IRS concluded that the political statements of a student newspaper, including its editorial endorsements of political candidates, would not jeopardize the tax-exempt status of the university itself. In that ruling, the university did not “exercise any control or direction over the newspaper’s editorial policy,” and the paper made clear that the views expressed were those of the student editors and not of the university. In these circumstances, even though the university provided the paper with physical facilities and advising services, that did not “make the expression of political views by the students in the publishing of the newspaper the acts of the university.” Consequently, the university was not considered to have engaged in any political activity, and it remained eligible for the Section 501(c)(3) tax exemption.
However, the IRS Ruling does not apply to the YDN, because the paper is incorporated separately from Yale University and claims its own tax exemption. That is, the question raised by the YDN’s endorsement is not whether Yale University qualifies for tax exemption on account of the newspaper’s political activities. Rather, it’s whether the YDN qualifies for tax exemption on account of its own political activities. Nothing in the IRS Ruling addresses that issue.
The IRS Ruling would provide help to the YDN if, for example, a staffer made political statements on social media. In these circumstances, the YDN would probably be able to show that the staffer’s statements did not reflect the view of the organization as a whole. However, the YDN’s endorsement of Hillary Clinton was published under the name of “The Yale Daily News,” not any particular reporter, and it would appear that the Clinton endorsement reflects the statements of the organization itself.
One might object that the differences between the YDN and the newspaper in the IRS Ruling are purely formalistic. Why should it matter that the YDN is a separate corporation and claims its own tax-exemption under Section 501(c)(3)? After all, if it were simply a student organization recognized by the university, not an independent corporation, the IRS Ruling would allow Yale University to be tax-exempt and channel monetary donations to the newspaper.
There are a few responses to this. First, to state the obvious, the law itself applies on an organization-by-organization basis, and nothing in the statute allows a corporation like the YDN to claim tax-exempt status simply because its staff are students at a tax-exempt organization. The YDN must independently qualify under Section 501(c)(3) as an organization devoted exclusively to educational and literary purposes and comply with all related requirements. Its Form 990, for example, describes the activities, purposes, and financials of the YDN corporation itself, not those of Yale University. The IRS would surely look askance at the YDN’s tax returns if it claimed the activities, purposes, and financials of another organization as its own.
Second, under the tax law, respecting a corporation as a separate entity is the default approach. There are endless circumstances where activities conducted through a corporation lead to drastically different consequences than would attach had the organization not been separately incorporated. To pretend like the YDN corporation does not exist, whether for purposes of tax exemption or otherwise, would be an extraordinary step. Taxpayers who attempt to disregard the existence of their corporation face nearly insurmountable hurdles, see Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), and typically only the IRS successfully disregards the existence of a corporation, and even then only in circumstances implicating severe tax abuse.
Third, the separate incorporation of the YDN would be respected in other contexts, so it’s hard to understand why its separate status should be ignored here. For example, if Yale University itself did something to destroy its tax-exempt status, the YDN would remain described under Section 501(c)(3) and contributions to it would remain tax deductible, even if contributions to the university no longer were.
Fourth, it’s hard to believe that any separately organized campus newspapers associated with for-profit universities should have their separate statuses ignored. That is, if a newspaper at (say) the for-profit University of Phoenix were separately organized for literary and educational purposes, the IRS would look at the activities of the paper itself to determine whether it qualified for a tax exemption. The analysis should be no different for a separately incorporated paper at Yale University. Either incorporated newspapers are analyzed separately or they are not.
All that being said, though the law does not allow an organization to engage in political activities and claim tax-exempt status under Section 501(c)(3), this does not reflect a high enforcement area for the IRS. The statute’s restriction is so broad that organizations would routinely risk loss of their exemptions if the IRS approached the issues with a heavy hand. Given the absence of enforcement in this area, Congress should perhaps consider revising the statutory regime and enacting statutory sanctions (short of losing tax exemption) for organizations that cannot qualify under Section 501(c)(3) on account of political activities.
Nonetheless, the YDN’s accountant will be in an awkward position when preparing the corporation’s tax returns next year. The Form 990 (Part IV, Question 3) explicitly asks if the corporation has engaged in political activities. Were I advising the YDN, I would recommend clear and honest disclosure of the Clinton endorsement, even though I do not suspect the IRS would pursue the loss of a tax exemption. If the publicly-released Form 990 for 2016 does not reflect such a disclosure, that will present some further questions of ethics, enforcement, and the tax law.