OVERVIEW
501(c)(3) organizations that engage in federal lobbying are subject to at least two separate—and very different— definitions of lobbying in order to comply with applicable federal tax and lobbying disclosure laws. This QuickCounsel will review the definitions and reporting requirements for 501(c)(3) public charities under the Internal Revenue Code (the "Code") and under the Lobbying Disclosure Act ("LDA") and provide a guide for compliance efforts under each legal framework.
FEDERAL TAX LAW
Nonprofit organizations that qualify for federal income tax exemption as public charities1 under Section 501(c)(3) of the Code are subject to heightened restrictions on lobbying and political activities. Carrying on propaganda or otherwise attempting to influence legislation may not constitute a "substantial part" of the activities of an organization exempt under Section 501(c)(3); exceeding the "substantial part" limit places an organization at risk of losing its exempt status. Further, the Code prohibits such organizations from engaging in any political activities. Whether an organization's attempts to influence legislation are substantial will be determined by a vague facts and circumstances "substantial part" test, unless an organization elects to have such determination made pursuant to an expenditure test, by filing a 501(h) election with the Internal Revenue Service ("IRS").
The No Substantial Part Test
Under the substantial part test, codified in part in Section 1.501(c)(3)-1(c)(3)(ii) of the Treasury Regulations, an organization's tax-exempt status will not be at risk because of lobbying, provided such organization is not classified as an "action" organization, or an organization, "a substantial part of its activities is attempting to influence legislation by propaganda or otherwise." The definition of lobbying under the substantial part test includes the following:
- Attempts to influence legislation by propaganda or otherwise;
- Presentation of testimony at public hearings held by legislative committees;
- Correspondence and conferences with legislators and their staffs;
- Communications by electronic means; and
- Publication of documents advocating specific legislative action.
Legislation is defined to include action by Congress, a state
legislature, a local council or similar governing body, and the
general public in a referendum, initiative, constitutional
amendment, or similar procedure.
The determination of whether an organization's lobbying
activities are substantial is generally based on a facts and
circumstances analysis. In some cases, the IRS has taken into
consideration the percentage of the organization's expenditures
devoted to influencing legislation on an annual basis. See
Haswell v. United States, 500 F.2d
1133 (Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975).
In others, it has determined substantiality based on the percentage
of the organization's activities that constitute influencing
legislation. See Seasongood v. Commissioner of Internal
Revenue, 227 F.2d 907 (6th Cir. 1955). To date, the IRS
has not offered clear guidance on the point at which it will deem
an organization's lobbying activities substantial or set any
type of threshold that an organization must not exceed.
Consequentially, organizations following the "substantial
part" test alone operate with some level of uncertainty.
Further, if an exempt organization exceeds an
"insubstantial" amount of lobbying activity, a five
percent excise tax may be imposed on the organization, for each
year that lobbying expenditures was incurred. In some
circumstances, an additional five percent tax may be levied on an
organization's managers.
The 501(h) Election
Limits on Lobbying
Instead of relying on the vague "substantial part"
test, organizations exempt under Section 501(c)(3) may choose to
make the so-called "lobbying election" under Section 501(h) of the Code. Electing
organizations are governed by the "expenditure test," a mathematical formula
that limits the amount a 501(c)(3) entity may spend on lobbying
activities to precise amounts and provides specific definitions of
"lobbying." Section 4911(c)(2) of the Code sets forth the
manner of calculating the lobbying ceiling, or nontaxable amount,
which is the lesser of $1,000,000 or amounts determined on a
sliding scale based on the organization's exempt purpose
expenditures as follows:
If the exempt purposes expenditures are: |
The lobbying nontaxable amount is: |
Not over $500,000 |
20 percent of the exempt purpose expenditures |
Over $500,000 but not over $1,000,000 |
$100,000, plus 15 percent of the excess of the exempt expenditures over $500,000 |
Over $1,000,000 but not over $1,500,000 |
$175,000 plus 10 percent of the excess of the exempt purpose expenditures over $1,000,000 |
Over $1,500,000 |
$225,000 plus 5 percent of the excess of the exempt purpose expenditures over $1,500,000 |
In addition, the amount of grassroots lobbying expenditures may
not exceed 25 percent of the permitted overall lobbying
expenditures. If an organization exceeds its lobbying expenditure
limit in a given year, it must pay an excise tax equal to 25
percent of the excess. An organization may make the 501(h) election
at any time by filing the one-page Form 5768 with the IRS.
Lobbying Defined
For the purposes of calculating lobbying expenditures under the
501(h) election, there are two types of "lobbying":
- "Direct lobbying" is any attempt to influence legislation through communication with a member or employee of a legislative body, or with any other government official or employee who may participate in the formulation of legislation. "Direct lobbying" also includes communications by an organization to its members, encouraging those members to engage in direct lobbying.
- "Grassroots lobbying" is any attempt to influence legislation through an attempt to affect the opinions of the general public or any segment thereof.
For both direct and grassroots lobbying, the costs of
researching and preparing materials, as well as the allocable
portion of administrative, overhead, and other general expenses
attributable to "lobbying" count as lobbying expenditures
as well.
Several activities are expressly exempt from this definition of
lobbying, including:
- Certain technical assistance or advice to a governmental body or committee in response to an unsolicited, written request;
- So-called "self-defense activities"—i.e., communications concerning decisions that may affect an organization's existence, powers, duties, 501(c)(3) status, or deductibility of contributions; and
- Nonpartisan analysis, study, or research that may advocate a particular view, provided that (a) presentation of the relevant facts is sufficient to enable readers to reach an independent conclusion, and (b) distribution of the results is not limited to or directed toward persons solely interested in one side of a particular issue.
LOBBYING DISCLOSURE ACT
In addition to complying with the tracking requirements and
restrictions of lobbying activities under federal tax law,
nonprofit organizations that lobby also may be required to register under the LDA if one or
more of their employees spends more than 20 percent of his or her
time on lobbying activities. The LDA also requires organizations to
submit quarterly reports to Congress regarding their lobbying
activities, including the amount spent on lobbying. The LDA
definition of "lobbying" differs significantly from the
definition used for the 501(h) election.
Under the LDA, "lobbying activities" include
"lobbying contacts" as well as efforts in support of such
contacts, including preparation and planning activities, research,
and other background work that is intended, at the time it is
performed, for use in contacts, and coordination with the lobbying
activities of others.
Under the LDA, "lobbying contacts" are the actual
communications with "covered officials." Lobbying
contacts may be oral, written, or electronic. A contact is not a
lobbying contact unless it involves:
- The formulation, modification, or adoption of federal legislation;
- The formulation, modification, or adoption of a federal rule, regulation, Executive Order, or other program, policy, or position of the United States government;
- The administration or execution of a federal program or policy (including the negotiation, award, or administration of a federal contract, grant, loan, permit, or license); or
- The nomination or confirmation of a person for a position subject to confirmation by the Senate.
There are a number of exceptions to these four categories. The following exceptions do not constitute "lobbying contacts" (and therefore preparation for such contacts does not constitute "lobbying activity") and are particularly relevant to nonprofit organizations:
- Administrative requests, such as requests for a meeting or about the status of a matter;
- Testimony given before a committee or sub-committee of Congress;
- Speeches, articles, or publications made available to the public or distributed through mass communication;
- Information provided in writing in response to a request by a covered official;
- Information required by subpoena, a civil investigative demand, or otherwise compelled by the federal government;
- Communications in response to a notice in the Federal Register and directed toward the official listed in the notice;
- Written comments filed in the course of a public meeting;
- Any communication that is made on the record in a public proceeding; and
- Petitions for agency action made in writing and made part of the public record.
The term "covered legislative branch official" includes all elected Members of Congress and the Senate, as well as all employees and officers of Congress. The definition of "covered executive branch officials" is more specific. It includes:
- The President;
- The Vice President;
- Admirals and generals;
- Any officer or employee, or any other individual functioning in the capacity of such an officer or employee, in the Executive Office of the President;
- Any officer or employee in a position listed in levels I through V of the Executive Schedule; and,
- Schedule C political appointees.
The "Executive Schedule" delineates the most
senior positions in the administration. Schedule C posts are typically non-career
policymaking or "political" appointees, and confidential
secretaries and administrative assistants of key appointees within
an agency.
Reporting Expenses under the LDA
Although many organizations will be subject to both the Code and
LDA reporting requirements for lobbying, a provision of the LDA
permits organizations to track and disclose lobbying expenditures
using the Code's Section 4911 definition rather than the LDA
definition. For many organizations, the LDA definition is far
narrower than the Code's definition of "lobbying." If
the organization elects to use the Internal Revenue Code
definitions, they must, however, use the LDA's definition with
respect to the legislative branch, and the Internal Revenue Code
definition with respect to the executive branch, to determine which
individuals are considered to be lobbyists and which agencies have
been lobbied.
Nonprofit organizations that are sensitive to having high dollar
amounts reported on their LDA reports may consider opting to track
lobbying activities separately under both the Code and the LDA.
This approach will increase recordkeeping obligations, but will
likely allow an organization to report a lower, more accurate
estimate of federal lobbying expenditures to the Clerk of the House
and the Secretary of the Senate as the LDA does not require
organizations to report state lobbying and grassroots lobbying
expenses.
CONCLUSION
This QuickCounsel provided an overview of the federal tax law and LDA definitions and requirements applicable to 501(c)(3) organizations. In-house counsel with an understanding of these requirements will be able to effectively engage in lobbying while maintaining compliance with applicable federal law.
ADDITIONAL RESOURCES
ACC Resources
- ACC Article (2010): Supreme Court Decision Opens New Doors for Associations [http://author.acc.com/legalresources/resource.cfm?show=796949]
- ACC Top Ten (2010): Mythbusting the Top Ten Fallacies of 501(c)(3) Lobbying [http://acc.com/legalresources/publications/topten/mythbusting.cfm]
- ACC Form & Policy (2009): Model Lobbying Tax Compliance Guide for Association Employees [http://acc.com/legalresources/resource.cfm?show=128117]
- ACC Leading Practices Profile (2008): Corporate Political Compliance: Best Practices for Legal Departments in Lobbying, Campaigning, and Gifts and Entertainment [http://acc.com/legalresources/resource.cfm?show=172707]
- ACC Top Ten (2008): Top Ten Trends Nonprofit Counsel Need to Know [http://acc.com/legalresources/publications/topten/trends.cfm]
Web Resources
- Grassroots Lobbying: A Legal Primer (Summer 2011)
- Federal Ethics and Lobbying Rules (May 2011)
- Effective 501(c)(3) Lobbying: 501(h) Election, No Substantial Part, Creating Related Lobbying Organizations (August 2010)
- Myths about Lobbying, Political Activity, and Tax Exempt Status (June 2010)
- The New Form 990: Defusing Governance, Political Activities, Compensation, and Other Issues (December 2009)
- The Mechanics of Lobbying Disclosure Completing LD-1, 2, & 203 (June 2008)
- Tax Information for Charities & Other Non-Profits, Internal Revenue Service
- IRS Summary of "501(c)(3) Lobbying"
- IRS Summary of "Measuring Lobbying - Substantial Part Test"
- Lobbying Disclosure Act Guidance, Office of the Clerk, U.S. House of Representatives
Footnotes
1Note that this brief article does not discuss the application of 501(c)(3) lobbying restrictions to private foundations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.