Lobbying and 501(c)(3) Tax Exempt Status

Lobbying and Political Activities
By 501(c)(3) Tax Exempt Status

What is the best the recommended legal structure for an organization that wanted to qualify for foundation grants yet still egage in a certain amount of partisan political ativities and/or lobbying.

Background on 501(c)(3)

Section 501(a) of the Internal Revenue Code states: "An organization described in subsection (c)...shall be exempt from taxation...."

Section 501(c)(3) describes organizations that meet the following criteria: they are "organized and operated exclusively for...charitable, education, religion . . . purposes", no part of the net receipts of the organization does not egage in partisan political activities, and which does not engage in "substantial" amounts of lobbying.

Section 501(c)(3) organizations have one important distinguishing feature from other tax-exempt organizations. Contributors to Section 501(c)(3) organizations are entitled to deduct their contributions for federal tax purposes, thus reducing their tax liabilities.

Partisan Political Activities

Section 501(c)(3) organizations cannot support or oppose political candidates. No partisan political campaign activities, however minimal, are allowed. Section 501(c)(3) groups can distribute non-partisan "voter education" information, but such information should be carefully reviewed to make sure it is a fair presentation of information about all candidates and is not "slanted". It cannot be anything that can be construed as an attempt to sway the public one way or the other. Also, a Section 501(c)(3) organization is not permitted to allow groups or individuals to use its facilities and equipment to campaign for candidates. CLICK HERE to download an excellent article on political activities by 501(c)(3) organizations (it's a "pdf" file).

Lobbying

A limited amount of legislative activity ("lobbying") for the enactment or defeat of legislation is permissible.

Certain activities are not treated as "lobbying". These include: (1) talking to legislators about legislation that might affect an organization's tax-exempt status or existence--but this does not include budgetary or funding matters; (2) activities related to non-legislative decisions, such as opposing or supporting the issuance of regulations; (3) making available the results of non-partisan studies; and (4) responding to requests to testify before legislative committees.

There are two choices for a nonprofit in managing its lobbying activities:

"FACTS AND CIRCUMSTANCES TEST" - this is the default choice unless the nonprofit specifically elects to be treated under the "safe harbor" provisions (see below). An "insubstantial" or incidental amount of lobbying is permitted if an organization is a 501(c)(3) organization. These terms are difficult to quantify. The IRS will examine all of the facts and circumstances if lobbying becomes an issue for them. Five percent is sometimes used as an informal guideline, i.e., an organization's staff should not devote more than 5% of its time and/or 5% of the organization's annual budget to lobbying. But, this is not an official IRS guideline. CLICK HERE to get more information on the "facts and circumstances" test from the IRS website.

"SAFE HARBOR" ELECTION - 501(c)(3) organizations can elect to take themselves out of the facts and circumstances approach. They can make an election Section 501(h) of the IRS Code by filing Form 5768. Doing this will allow them to spend a specfied amount of money on lobbying without getting in in trouble. Under this expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures related to such activity do not normally exceed an amount specified in section 4911 of the IRS Code. Under this expenditure test an organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess. CLICK HERE to get more information on this safe harbor from the IRS website.

501(c)(4) - "Social Welfare Organizations"

Because of these restrictions it may be more appropriate for some organizations to conduct certain activities within the framework of a Section 501(c)(4) social welfare organization (which is not subject to the limitations on lobbying) or a non-profit organization which is not tax-exempt.

Private Foundation Grants 501(c)(4) organizations

Technically speaking, private foundations are not prohibited from giving to a 501(c)(4) corporation but they may suffer financial penalties from the IRS. According to the IRS Code, any amount that expended by a private foundation for any purpose other than one that is "exclusively charitabal or educational . . ." is a taxable expenditure. The term "taxable expenditure is defined by the Code of Federal Regulations (CFR). Here are two relevant sections:

Title 26, Chapter I, Subchapter D, Part 5, Subpart F
Sec. 53.4945-2 Propaganda influencing legislation.

(a) Propaganda influencing legislation, etc. -

(1) In general. Under section 4945(d)(1) the term 'taxable expenditure' includes any amount paid or incurred by a private foundation to carry on propaganda, or otherwise to attempt, to influence legislation.An expenditure is an attempt to influence legislation if it is for a direct or grass roots lobbying communication, as defined in Sec. 56.4911-2 (without reference to Sec.6.4911-2(b)(3) and 56.4911-2(c)) and Sec. 56.4911-3. See, however, paragraph (d) of this section for exceptions to the general rule of this paragraph (a)(1).

Sec. 53.4945-6 Expenditures for noncharitable purposes.

(a) In general.Under section 4945(d)(5) the term 'taxable expenditure' includes any amount paid or incurred by a private foundation for any purpose other than one specified in section 170(c)(2)(B). Thus, ordinarily only an expenditure for an activity which, if it were a substantial part of the organization's total activities, would cause loss of tax exemption is a taxable expenditure under section 4945(d)(5). For purposes of this section and Sec.3.4945-1 through 53.4945-5, the term 'purposes described in section 170(c)(2)(B)' shall be treated as including purposes described in section 170(c)(2)(B) whether or not carried out by an organization described in section 170(c). (b) Particular expenditures.

Recommended Structure:

Possily create two corporations One could engage in "charitable or "educational" activities (as those terms are defined by the IRS) and thus qualify for 501(c)(3) status. The other could be a social welfare organization egaged in lobbying and perhaps other activies. This would be a 501(c)(4). There could be overlapping or identical boards just as long as they keep separate bank accounts, financial recores, and minute books and they deal with other at arms length.

To the extent that individuals can "separate" themselves from the organization, they can engage in lobbying and political campaign activities. If you are attending meetings after work or on the weekends, you are clearly doing this on your own time and there should be no problem. But, you must be careful to make it clear that you are acting in your individual capacity, not as an agent of the organization. You must be extra cautious because there is no "safe harbor" for political campaign activities. If your activities can be regarded as activities of the organization, the IRS can revoke the organization's tax-exempt status.