CHARITABLE ORGANIZATIONS AND LOBBYING
Charitable organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code ("IRC") are subject to limits on the amount of lobbying in which they may engage. Under the IRC, "no substantial part of a [charitable] organization’s activities [may] constitute carrying on propaganda or otherwise attempting to influence legislation." The reason for this limitation is that charities receive tax deductible income, and as such are essentially government subsidized organizations, which should not become too mired in politics or political controversy.
This is the same rationale for the prohibition on involvement in political campaign activities and electioneering to which charitable organizations are subject. That said, the lobbying rules create only a limitation — not an outright ban as the electoral rules do — and leave much room for charities to undertake legislative activities in furtherance of their program goals. Unfortunately, much confusion exists as to how to define and quantify lobbying activities, often leading charities to underutilize lobbying as a tool or to avoid it altogether. This article provides a general overview of the legal landscape around charitable lobbying in order to provide a degree of familiarity and comfort to charitable managers contemplating taking advantage of this tool.
Defining and Measuring Lobbying
As indicated above, charities legally may engage in no more than an "insubstantial" amount of lobbying. Before the enactment of IRC §501(h) and related regulations in 1976, there existed no clear definition of lobbying and no hard guidance on how to determine how much would be considered "substantial." For example, outside the 501(h) context, lobbying might include any activity intended to influence the enactment, amendment or repeal of legislation, from direct communication with legislators to preparation of letters to the editor or publication of research reports, and substantiality might be measured in terms of financial expenditures, staff time commitments or relative importance to mission. Even the substantiality threshold was indefinite, with case law suggesting only that 5% might be acceptable while 15-20% would be too high.
IRC 501(h) and its related regulations eliminate much of the uncertainty surrounding lobbying limits for charities. These rules provide a concrete definition of lobbying and permit it to be measured exclusively in terms of expenditures. They also state clear monetary thresholds to enable charities to gauge exactly how much lobbying they can undertake without crossing the line. It is important to note that the 501(h) rules and definitions only apply to charities that make an affirmative election to be governed by such rules. The election can be made using a simple, one-page IRS form (Form 5768), and can be withdrawn by the charity at any time. Charities that do not make the election will be subject to the amorphous pre-501(h) lobbying rubric described above.
Definition of Lobbying Under 501(h)
The 501(h) rules divide lobbying activities into two types: direct and grassroots.
Direct lobbying is defined as any (i) communication, (ii) which is made to a legislator or employee of a legislative body and (iii) which refers to a specific piece of legislation (or legislative proposal) and (iv) expresses a view on that legislation. Each of these elements must be present. For example, a fact sheet published on a charity’s website describing and expressing approval of pending legislation would not count as lobbying, though the same fact sheet sent to a legislative aide would.
Grassroots lobbying is defined as any (i) communication, (ii) which refers to a specific piece of legislation (or legislative proposal), and (iii) reflects a view on that legislation, and (iv) includes a "call to action" (encourages the recipient of the communication to take lobbying action with respect to the legislation by one of the methods enumerated below).
The fact sheet posted on the charity website described in the example above would not constitute grassroots lobbying unless it included a call to action. Any of the following communications would be considered a "call to action":
- One that asks the recipient to contact his or her legislator or staff;
- One that lists the address, telephone number or similar information of a legislator or employee of a legislative body;
- One that provides a petition, tear-off postcard or similar mechanism (such as an email link) to allow the recipient to communicate with his or her legislator; or
- One that specifically identifies a legislator who will vote on the legislation and who opposes the organization’s view regarding the legislation, is undecided with respect to the legislation, is the recipient’s legislative representative, or is a member of the committee or subcommittee that will consider the legislation.
It should be noted that because the public is considered the legislature with respect to legislation that takes the form of a ballot initiative or referendum, communications with the public regarding such legislation will count as direct rather than grassroots lobbying.
Exceptions to the Definition of Lobbying Under 501(h)
Even where each of the elements described above is present, there are some communications that will not be considered lobbying. The four basic exceptions are as follows:
Nonpartisan Analysis – Research reports that provide a sufficiently full and fair exposition of the facts on both sides of the issue to allow a reader to make up his/her own mind, may express a view on legislation without being considered lobbying. Such nonpartisan reports must be distributed to the general public, a segment of the general public or to governmental bodies or employees, and not just to people interested in one side of an issue.
Examinations of Broad Social, Economic Issues – Communications that examine general topics that are also the subject of current legislation will not be considered direct or grassroots lobbying if they do not refer to specific legislation or directly encourage recipients to take action.
Requests for Technical Advice – A communication in response to a written request by a legislative body or committee, which is made available to all members of such body or committee will not be considered lobbying.
Self-Defense Communications – If a legislative body is proposing to make a change that could affect a charity’s existence, exempt status, deductibility of contributions made to it, or its powers and duties, the charity may communicate with that legislative body and/or individual legislators or staff members regarding such changes and such communication will not be considered lobbying.
Expenditure Limits Under 501(h):
Charities may spend the following amounts on lobbying in total (direct + grassroots) in any given year:
- 20% of the first $500,000 of exempt purposes expenditures, plus
- 15% of the next $500,000 of exempt purposes expenditures, plus
- 10% of the next $500,000 of exempt purposes expenditures, plus
- 5% of the remaining exempt purpose expenditures,
With an outside limit of $1 million.
Separate limits also exist for expenditures on grassroots lobbying. Simply stated, the amount of money expended on grassroots lobbying must not exceed 25% of an organization’s total expenditures on total lobbying (direct + grassroots).
“Exempt purpose expenditures” are generally defined to include all amounts a charity spends in furtherance of its exempt purposes.
Consequences of Exceeding Lobbying Limits
The consequences of exceeding the limits under the expenditure test are twofold. First, an excise tax of 25% is levied on the lobbying or grassroots lobbying expenditures that exceed the limits for a given year. If an organization exceeds both the lobbying and the grassroots lobbying limits in a single year, then the tax is levied on whichever excess is greater. Second, if an organization exceeds either the direct or the grassroots limit by more than 50% over a four-year period (the current tax year and the three preceding years), it will lose its tax-exempt status.
Charities must report their lobbying activity on their Form 990 annual informational tax return, whether they make the 501 (h) election or not. Charities that make the election must keep track, on an annual basis, of their total exempt purposes expenditures, total lobbying expenditures, total grass roots lobbying expenditures, and payments made to other organizations earmarked for lobbying. They should also maintain records of how mixed-purpose expenditures are allocated between lobbying and non-lobbying activities.
Although there is much nuance and ample room for interpretation of the rules, the above is intended to provide charity managers a solid general sense of what lobbying is and how much of it they may engage in.