Governance, Lobbying and Politics

The conflict-of-interest policy (IRS sample, Form 1023 instructions Appendix)

• Article I, Purpose: to protect the organization when it is contemplating a transaction that might benefit the private interest of an officer or director or might result in an excess benefit transaction; supplements state and federal law.
• Article II, Definitions: an interested person is any director, principal officer or member of a committee with board-delegated powers who has a direct or indirect financial interest. A financial interest is, directly or through business, investment or family, (a) an ownership or investment interest in any entity with which the organization has a transaction or arrangement, (b) a compensation arrangement with the organization or with any entity or individual with which it has a transaction, or (c) a potential ownership, investment or compensation interest in anything the organization is negotiating. Compensation includes gifts and favors that are not insubstantial. A financial interest is not necessarily a conflict; the board decides.
• Article III, Procedures: the interested person discloses the interest and all material facts to the board or committee; may make a presentation, then leaves the room while the conflict is discussed and voted; the chair may appoint a disinterested person or committee to investigate alternatives; the board determines whether a more advantageous arrangement is reasonably available from someone with no conflict; if not, a majority of the disinterested directors decides whether the transaction is in the organization’s best interest, for its own benefit, and fair and reasonable. Violations: the person is told of the basis for believing they failed to disclose, is given a chance to explain, and if the board finds a failure it takes corrective and disciplinary action.
• Article IV, Records: the minutes record who had a financial interest, its nature, the board’s determination, the alternatives considered, the comparables, and the votes, with names of those present for the discussion and the vote.
• Article V, Compensation: a voting member of the board or of a compensation committee who receives compensation from the organization may not vote on it, but may provide information. (The hospital insert bars physicians from compensation committees.)
• Article VI, Annual Statements: each director, principal officer and member of a committee with board-delegated powers signs annually that they (a) received a copy of the policy, (b) read and understand it, (c) agreed to comply with it, and (d) understand the organization is charitable and must engage primarily in activities that accomplish its exempt purposes to keep its exemption. This is the clipping at the top of my notes; the statement doubles as the Part VI line 12b disclosure and the line 2 relationship questionnaire if one line is added asking for family and business relationships with other insiders.
• Article VII, Periodic Reviews: at least whether compensation and benefits are reasonable based on competent survey information and arm’s-length bargaining, and whether partnerships, joint ventures and management contracts conform to written policies, are properly recorded, reflect reasonable payments, further charitable purposes, and do not result in inurement, impermissible private benefit or an excess benefit transaction. Article VIII: outside experts may be used but do not relieve the board of responsibility.
• The sample is a floor, not a mandate; adopt one that fits (a church council, a $40,000 booster club and a hospital need different ones). The policy does nothing until it is implemented: circulated, signed on election and annually, and actually used when the treasurer’s brother-in-law bids on the roof. [SQ 5, B; Final Q14 topic]

The other Part VI policies

• Whistleblower policy (line 13): how employees and volunteers report suspected illegality or financial impropriety, to whom, with confidentiality and no retaliation. Sarbanes-Oxley’s retaliation and document-destruction provisions apply to nonprofits; that is why the IRS asks. [SQ 12, D]
• Document retention and destruction (line 14): a schedule by document type — permanent for the articles, bylaws, minutes, determination letter, exemption application, 990s and audit reports; seven years for ledgers, bank records, contracts and payroll; and a litigation hold rule.
• Gift acceptance policy (Schedule M line 31): what noncash gifts are accepted, which need review (real estate, easements, closely held stock, vehicles, art, anything with no market), who decides, and the acknowledgment and Form 8283/8282 procedure.
• Joint venture policy (line 16): when the organization goes into a venture with taxable partners, the venture must be run to further the exempt purpose first and the organization must keep control over the charitable aspects (Rev. Rul. 98-15, Rev. Rul. 2004-51).
• Compensation process (lines 15a–b): the three elements of the rebuttable presumption — independent approval in advance, comparability data (three comparables suffice under $1 million of receipts), contemporaneous documentation — for the top official and then for the other officers and key employees. See §4958.
• Board review of the 990 (line 11a): the whole return to the whole voting board before filing; the review process described on Schedule O. The preparer’s internal deadline is the board meeting, not May 15.

Inurement, private benefit, excess benefit

• Private inurement: any part of net earnings going to an insider (founder, director, officer, their families and companies) other than as reasonable compensation for value received — above-market salaries, below-market sales to insiders, personal expenses paid, loans without terms. Absolute; any amount can cost the exemption in principle, though §4958 is now the usual sanction.
• Private benefit: benefit to anyone, insider or not, that is more than incidental to the public benefit — a school run to feed students to one company, a scholarship fund limited to the founder’s employees, a charity whose real purpose is to pay a vendor. Quantitative (how big) and qualitative (is it necessary to the exempt purpose).
• Excess benefit transactions: the §4958 excise taxes on the insider and the managers, with the automatic-excess-benefit trap for unreported compensation and the rebuttable presumption that avoids it, on Schedule L.

Lobbying

• A (c)(3) loses exemption if a substantial part of its activities is attempting to influence legislation (§501(c)(3)); an “action organization” cannot qualify in the first place. Legislation is action by Congress, a state legislature, a city council or similar body, or by the public in a referendum, initiative or constitutional amendment — not executive, administrative or judicial action (commenting on proposed regulations, zoning decisions and lawsuits is not lobbying). [Final Q4, C; marked]
• Without the election, substantiality is facts and circumstances: dollars, time, volunteer effort, prominence. No safe harbor; 5% has been treated as insubstantial and 16–20% as substantial in the cases; the IRS considers the whole picture. The penalty is revocation plus the §4912 tax (5% of the lobbying expenditures on the organization, 5% on managers who agreed).
• With the election (§501(h), Form 5768, any time in the year, good until revoked; not for churches, their auxiliaries and conventions, or private foundations): only money counts, measured against exempt-purpose expenditures (program, allocable administration, lobbying, depreciation, in-house fundraising; not outside fundraisers or a separate fundraising unit). The lobbying nontaxable amount is 20% of the first $500,000, 15% of the next $500,000, 10% of the next $500,000, 5% above $1.5 million, capped at $1,000,000; the grassroots nontaxable amount is 25% of that. Over either in a year: §4911 tax at 25% of the excess. Over 150% of either on a four-year moving average: exemption lost. So an organization spending $400,000 a year may spend $80,000 on lobbying, $20,000 of it grassroots, with no tax — and up to $120,000 total before the four-year average threatens the exemption. [SQ 22 topic] added 2026
• Direct lobbying: communicating with a legislator or a government official who participates in drafting, about specific legislation (including a specific proposal not yet introduced), reflecting a view. Grassroots: communicating with the public about specific legislation, reflecting a view, with a call to action — contact your legislator, here is the address, here is the postcard, here are the undecided legislators. Without a call to action it is education. A paid mass-media communication within two weeks of a vote on highly publicized legislation is presumed grassroots. [Final Q42, A; Q45, B; marked]
• Not lobbying: nonpartisan analysis, study or research distributed to the public or to government, even if it takes a side, if it gives a full and fair exposition of the facts (Review image16); testimony in response to a committee’s written request; self-defense (the organization’s own existence, powers, exempt status, deductibility — not the scope of its programs); communications to members about legislation of direct interest that do not urge them to act; and discussing broad social problems without naming legislation.
• Affiliated (c)(3)s are measured as one group under the election. A (c)(3) that wants to lobby more spins off a (c)(4) — separate books, separate board minutes, a cost-sharing agreement, no (c)(3) money flowing into the (c)(4)’s lobbying — and the (c)(4) files Form 8976 within 60 days. (c)(4), (5) and (6) organizations that lobby must tell members the nondeductible share of dues or pay the proxy tax; (c)(3) contributions are never affected by the donee’s lobbying.

The campaign ban

• §501(c)(3): no participating or intervening, directly or indirectly, in any political campaign for or against any candidate for elective public office — federal, state, local, school board. Absolute; no de minimis rule; applies to endorsements, contributions, in-kind help, statements by the organization or by officials in their official capacity, and to facilities, lists and newsletters made available to one side. Violations: revocation, and §4955 tax of 10% of the expenditure on the organization and 2½% on a knowing manager, 100% / 50% if not corrected; Form 4720.
• Permitted (Rev. Rul. 2007-41 is the IRS’s own 21-example guide): nonpartisan voter registration and get-out-the-vote drives; candidate forums open to all candidates with neutral moderation; voter guides that cover all candidates on a broad range of issues without editorial bias; issue advocacy that does not identify candidates or time itself to an election; a leader speaking personally, off the organization’s platform, with a disclaimer; renting the mailing list to any campaign at the same price on the same terms. Not permitted: a ranked or scored voter guide, inviting one candidate to speak as a candidate, a sermon or newsletter endorsement, “vote your values” material that any reader would read as an endorsement, campaign signs on the property.
• Churches, 2025–2026: in July 2025 the IRS proposed a consent judgment in National Religious Broadcasters v. Long (E.D. Tex.) saying a house of worship speaking to its own congregation about candidates during services, through its customary channels, is not “intervening” in a campaign. On March 31, 2026 the court refused to enter it (the Anti-Injunction Act bars a judgment conditioning exempt status) and dismissed the case without prejudice. So nothing changed: the IRS’s litigating position has no legal force, the Johnson Amendment stands as written, and the IRS’s long-standing practice of not auditing sermons is practice, not law. added 2026
• (c)(4), (5) and (6) organizations may campaign if it is not their primary activity (the IRS has never said what fraction that is; under 50% of spending is the working rule), pay the §527(f) tax at 21% on the lesser of their net investment income or their political spending, and report it on Schedule C Part I-C. A §527 political organization is the vehicle built for it: Form 8871 within 24 hours, Form 8872 reports, Form 1120-POL, and donations that are not deductible and not gifts.
• Colorado: a nonprofit that spends on state or local ballot issues or candidates may have Secretary of State campaign-finance filings under the Fair Campaign Practices Act (issue committee at $5,000 of contributions or spending check); the office should ask before it is a surprise.

Private reference, not client advice. Notes taken from a continuing-education course, Form 990: A Practical Guide (Thomson Reuters Checkpoint Learning, 12 hours, 2022 edition written on 2021 law and the 2021 forms). Figures and rules brought current to 2026 in October 2026 (P.L. 119-21, Rev. Proc. 2025-32, T.D. 9933, T.D. 9898, the 2025 form instructions). Items tagged check are to be confirmed against primary sources before they are relied on.