36% Rate Cap Petitioners Promote “Signature Sunday” August 30—What Will the IRS Say?

Jonathan Ellis questions whether South Dakotans for Responsible Lending will be able to build an effective coalition to support its petition to cap interest rates at 36% and quash predatory payday lenders. To show that South Dakota’s rate-cap initiative isn’t building the same broad support as a multi-year legal battle against payday lenders in Utah, Ellis cites Mark Anderson of the AFL-CIO:

…Mark Anderson, the president of the AFL-CIO here, said his group has stayed out of the issue, preferring instead to focus on a constitutional amendment that would establish a non-partisan redistricting commission for the state Legislature.

“You don’t participate in everything,” Anderson said. “We have limited resources.”

Anderson said he would be surprised if many churches get involved. When his group was working to raise the minimum wage, he said churches declined to help [Jonathan Ellis, “Coffee-Shop Chaos Predicts Pay-Day Loan Petition Campaign,” that Sioux Falls paper, 2015.08.01].

Interesting that Anderson should mention churches. Overshadowed by this week’s “coffeeshop chaos” was this announcement on South Dakotans for Responsible Lending’s Facebook page, calling on pastors to use their pulpit to promote the 36%-rate-cap petition:

PLEASE SHARE THE FOLLOWING WITH YOUR CHURCH LEADERS

Sunday August 30 is SIGNATURE SUNDAY in our state. We have a growing network of pastors and churches who understand there are times to rally our people behind key moral and justice issues in our state. Certainly your church opposes the exploitation of the poor and elderly through predatory lending, the use of defective financial products intended to be debt traps, and the charging of excessive interest rates.

It says in Isaiah for us to “break every unjust contract” and that is what we are trying to do. We have a couple more months to collect thousands of signatures to put a 36% interest rate cap on the 2016 ballot. In a couple weeks you will receive a packet from us with petition sheets and a circulators guide.

Here’s how you can help.

1. On Sunday August 30, either in the announcements or in a sermon, comment on how serious a matter it is to God that we not exploit the poor and that we don’t approve of those who do. Some pastors and priests are preaching on Lending to the Poor and the financial sins of our nation, and immoral usury rates. In the packet you receive we will supply you with a fact sheet for your reference.

2. With your permission and the agreement of your church leaders, ask your congregation to consider signing the petition at the conclusion of the morning worship service. IT IS LEGAL FOR YOU TO COLLECT SIGNATURES FOR BALLOT ISSUES IN YOUR CHURCH. Sadly, in other states we have been told the payday lending bosses have sent deceptive letters to churches threatening them if they get involved. Please don’t be swayed by them. It is legal and the Alliance Defending Freedom is prepared to push back on any threats made to South Dakota clergy.

3. Some of our pastors are having a table in the back with some volunteers to be petition circulators. Others are mentioning the name of people in their fellowship who will be available outside after the service to collect their signature.

4. Ask your members to take a petition sheet with them and a circulators guide and get friends, family, neighbors and co-workers to sign. It’s easy and almost no one is saying no to putting their signature toward this ballot measure. The payday and title lenders only have a 9% approval rating in our nation!!

5. Send an email to petition@captheratesd.com and let them know you are participating in Signature Sunday. Have those who circulate petitions notarize them and send them to South Dakotans for Responsible Lending, P.O. Box 709, Sioux Falls, SD 57101 [South Dakotans for Responsible Lending, Facebook post, 2015.07.28].

In the past, I’ve raised alarms about political candidates trying to get pastors to use their pulpit to endorse their campaigns (see Gordon Howie 2010). We may be able to distinguish endorsing candidates from the pulpit and endorsing ballot measures from the pulpit. Let’s look at the IRS warning to 501(c)3 non-profits about political activity:

Under the Internal Revenue Code, all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity.  Violating this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes.

Certain activities or expenditures may not be prohibited depending on the facts and circumstances.  For example, certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not be prohibited political campaign activity if conducted in a non-partisan manner.

On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate or group of candidates, will constitute prohibited participation or intervention [emphasis mine; “The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations,” Internal Revenue Service, updated 2015.01.06].

Ballot initiatives and the petitions SDRL is asking pastors to ask their congregants to sign on August 30 are non-partisan and not connected with any candidate. Encouraging people to sign a petition would seem to fall under encouraging people to participate in the electoral process.

But let’s look at the exact language of IRS Code 501(c)3, which sets this standard for tax exemption:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office [emphasis mine; 26 US Code 501(c)3, downloaded from Cornell University Law School, 2015.08.02].

Influence legislation—hmmm… under South Dakota Constitution Article 3 Section 1, ballot initiatives are an exercise of the people’s legislative power—i.e., the 36% interest rate cap is legislation. Encouraging people to sign the 36%-rate-cap petition is attempting to influence legislation.

But what’s that about Subsection (h)? That portion of the tax code appears to make exceptions and allow certain 501(c)3’s to try influencing legislation, within certain lobbying expenditure limits. I’d go try to calculate those limits… but then I see under (h) a section 5(a), which appears to say that churches don’t qualify for this exemption.

We thus have an interesting question: if pastors choose to participate in Signature Sunday on August 30, if they from their pulpits, in their vestments, say, “Hey, congregants! Let’s sign this petition and make a new law!” will they be forfeiting their 501(c)3 tax-exempt status? SDRP apparently has its legal defense ready, and that’s good, because, given the wording of the tax code, they may be handing the payday lenders an opportunity to drag the churches into ugly, costly conversations with the IRS.


19 Responses to 36% Rate Cap Petitioners Promote “Signature Sunday” August 30—What Will the IRS Say?

  1. I would imagine churches have long experience with protecting their “golden-cow”-tax-free status.

  2. Porter Lansing

    An excellent observation, Mr. Heidelberger. When the petition is filled and the law is passed giving the lenders an opportunity to delay implementation until the Supreme Court rules on improper involvement by churches would be a travesty. The measure should be able to get on the ballot without religious involvement and if not then try again. It’s a proper and valid proposal. Continue, continue and continue to continue. These payday bullies are powerful and relentless but the petition WILL work and the citizens WILL be better off. e.g. The Pew Charitable Trusts released a report saying that Colorado’s reforms are working and could offer a starting point for other states and even the federal Consumer Financial Protection Bureau to make payday loans less damaging for more consumers. New payday loans are now paid off in an average of 99 days with none refinanced or renewed.
    http://www.denverpost.com/ci_24582759/colorados-payday-loan-reforms-seem-be-working

  3. Roger Elgersma

    First of all this law has so many commas that it is hard to see how each of these commas affect each other and which are just statements following each other.
    There is one point at which it seems to start a new point when it states that ‘no part of the net earnings’ well churches do not have net earnings, they get contributions.
    Also, when it states ‘a substantial part of its activities’ , politics is not a substantial part of a churches activities, so that would not apply to a church.

  4. Roger Elgersma

    The constitution states that the government shall not make any law concerning the churches. It does not say that the church can not have an opinion on the law. So it would be unconstitutional to apply that law in this case against the churches.

  5. Deb Geelsdottir

    I routinely refused to allow politics in church services, while at the same time urging them to be involved and educated voters. Even though I heartily support this petition, I’d tell parishioners they are welcome to discuss the issues after worship. I’d certainly welcome the petition in the fellowship hall and outside on the lawn.

  6. r.e.-while we are not sure what the end of the sentence says (excluded here), this is typical statutory lawyer-speak written by lawyers (and others) every day and once you are used to pausing at each comma, searching for the object and verb of the sentence, it is a way to pack an extraordinary amount of detail into a single idea.

    the IRS code is a huge document which is probably one of the most complex, hair-pulling research resources you could ever approach because of constant references to other related or unrelated sections. gasp, and i am certainly no expert in this area.

  7. I suppose I *am* a bit of an expert in this area because I consult with nonprofits and write for a national publication about the IRS and nonprofits.

    It’s possible to write at some length about the “no substantial part” test and 501(h) election. It’s also possible to write at some length about the differences in the tax code between churches (including other houses of worship and congregations) and other nonprofits.

    The short answer is that churches can do pretty much as they please when it comes to political involvement because: 1) for the past five years, the IRS has consciously stopped all actions against churches while it seeks clarification on various points of US Supreme Court decisions (see July’s GAO report on audit selection of tax exempt entities); 2) the process the IRS uses to investigate a church is different, involving more notice and additional steps, from that used to investigate a secular nonprofit; and 3) any investigation and determination by the IRS (not to mention court challenges to any such IRS decision) would happen long after the election in question.

    I’m not arguing what’s right – that’s a different and much longer discussion. I’m simply expressing my reading of the current state of the IRS’s approach.

  8. Michael, very interesting. You appear to respond to Porter’s concern about impact on the petition on practical grounds—no investigation would get rolling until well after the petition is submitted and the election conducted. I’d go farther on the petition side and say that there is no risk to the petition. No state law forbids pastors from signing or circulating petitions; no state law invalidates signatures gathered by non-profits that violate their 501(c)3 status in doing so.

    My concern is the church side. Practically, the churches may be safe for now… but, Michael, help us understand the law. If the IRS and courts were all working at peak efficiency, and the IRS had solid evidence of a church participating as invited above in Signature Sunday, would the IRS have legal grounds to yank that church’s 501(c)3 status?

  9. And Deb, I appreciate your caution about mingling secular politics with Sunday services. You’d welcome the petitions in the fellowship hall and on the lawn, circulated by individuals taking the opportunity to talk to their fellow congregants; would you carry a petition while wearing your collar?

  10. mike from iowa

    Don’t forget that a certain political party(name starts with a w and ends in nut) is bound and determined to do away with the IRS so churches can politic all they want w/o consequences.

  11. Mike, who is from Iowa, and I seem to agree that we can’t let the crazies make it so churches and cults can politic more and more.

  12. Deb Geelsdottir

    Cory asked, “would you carry a petition while wearing your collar?”

    Nope.

    I’m not anxious to use religion to pressure voters to sign a petition I might proffer. I’ll leave that to Mullahs Huckabee, Dobson, Robertson, F Graham and others who have their god entirely figured out. No Great Mysteries for them.

  13. Deb Geelsdottir

    BTW, I strongly believe that those slimy payday extorters are completely contradicting everything Jesus taught and modeled. I’d be happy to discuss that with potential petition signers. Wearing clerics seems unfairly manipulative and frequently shuts down discussion, rather than encouraging it.

  14. Cory:

    That’s part of that long discussion I alluded to in my earlier response. Assuming several “ifs” about a challenge to political activities sanctioned by a church congregation and/or its leaders, the IRS could challenge the tax-exempt status of the church.

    However, to be successful, they’d have to prove that the church isn’t really a church. That process would not only be potentially long and expensive, but would likely involve court challenges on multiple First Amendment grounds.

    Why? The IRS doesn’t approve or reject tax-exemption for churches; churches are presumed under law to be tax-exempt. They are not required to register with the IRS as charities or to file annual Form 990 informational returns with the IRS.

    However, churches are required to follow various other IRS regulations that apply to all charities and social welfare organizations. The enterprising IRS investigator might be more successful fining a church for failure to comply with those regulations than s/he would be in challenging the church’s true mission and purpose.

  15. Whoa! So Michael, you’re saying churches have blanket immunity to politic from the pulpit, as long as they are still genuinely a church? If churches are presumed under law to be tax-exempt, why then is there that language in subsection (h)5a?

  16. Steve Hickey

    Deb, do you take your collar off every time you address a wrong and a moral issue in your church?

    Let them challenge this. They will lose and we are lawyered up for that fight. Recent tax code doesn’t trump the Constutution.

  17. larry kurtz

    Rev. Hickey: please define “wrong.”

  18. Steve, you’re making me nervous. If Signature Sunday happens (and do keep me posted on participants!), and if payday lenders or the ACLU or who-knows-who hauls pulpit-petitioning-pastors in front of the IRS for 501(c)3 violations, and if you’ve got rock-solid legal arguments to save your tax-exempt status, does Gordon Howie then get to recruit his pastors to petition on Sunday morning for his Thune challenge next year? Or will petitioning for candidates still be off limits?

  19. Deb Geelsdottir

    Hickey, I rarely wear clerics except for worship, funerals and weddings. I don’t talk politics at those times, other than encouraging folks to be informed, active citizens and consider Jesus’ words when they vote.