Lobbying Expenditures for an IRC § 501(c)(3) Tax-Exempt Organization
Introduction:
The following memorandum analyzes how much lobbying a tax-exempt organization (organization) may engage in under the Internal Revenue Code of 1986, as amended, (IRC), section 501(c)(3).
IRC § 501(c)(3) states that an organization's activities may not substantially be used to carry on propaganda, or otherwise attempting, to influence legislation, except as otherwise provided in subsection (h).
This statute allows two ways to analyze this problem: a) use a facts and circumstances test to determine what "substantial" is, or b) use the precise amounts set out under IRC § 501(h).
The following memorandum is broken up into four parts. The first part of this memorandum defines: “attempting to or actually influence legislation.” The second part of this memorandum defines what is “substantial” and analyzes any fines or penalties that may accrue if an organization attempts to, or actually does influence legislation beyond a 'substantial' amount. The third part of this memorandum outlines the limits imposed under IRC § 501(h) and analyzes any fines or penalties that may accrue if an organization spends beyond the prescribed amounts. The fourth part of this memorandum concludes how the different limitations may be beneficial for different types of organizations attempting to, or actually influencing legislation.
Part 1: Influencing Legislation under IRC § 501(c)(3)
Under IRC § 501(c)(3), an organization's activities may not substantially be used to carry on propaganda, or otherwise attempting, to influence legislation. An organization is absolutely prohibited from engaging in "political activity."[1]
The phrase "influencing legislation" is a vague concept, and requires delineation only for an organization making an IRC § 501(h) election.
"Legislation” includes any action dealing with: Acts; bills; resolutions; or similar items by the Congress; any State legislature; any local council; or similar governing body, or by the public in a referendum; initiative; constitutional amendment; or similar procedure. IRC § 4911(e)(2).
"Influencing legislation” means: (a) any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segment thereof, and (b) any attempt to influence any legislation through communication with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation. IRC § 4911(d)(1).
"Influencing legislation" can be accomplished directly by the organization, or where an organization's member (IRC § 4911(d)(3)(A)) or non-member (IRC § 4911(d)(3)(B)) are directed by the organization or member of the organization.
IRC § 4911(d) states that "Influencing Legislation" does not include:
(A) making available the results of nonpartisan analysis, study, or research;
(B) providing of technical advice or assistance (where such advice would otherwise constitute the influencing of legislation) to a governmental body or to a committee or other subdivision thereof in response to a written request by such body or subdivision, as the case may be;
(C) appearances before, or communications to, any legislative body with respect to a possible decision of such body which might affect the existence of the organization, its powers and duties, tax-exempt status, or the deduction of contributions to the organization;
(D) communications between the organization and its bona fide members with respect to legislation or proposed legislation of direct interest to the organization and such members, other than communications described in paragraph (3); and
(E) any communication with a governmental official or employee, other than -
(i) a communication with a member or employee of a legislative body (where such communication would otherwise constitute the influencing of legislation), or
(ii) a communication the principal purpose of which is to influence legislation.
An organization partakes in "political activity" where it participates or intervenes in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.[2] Engaging in "political activity" also includes spending money for a candidate (IRC § 4955(d)(1)) or spending any money in connection that aids a candidate in an election (IRC § 4955(d)(1)(2)).
Part 2: "Substantial" Defined for IRC § 501(c)(3):
IRC 501(c)(3) states that "no substantial part" of a tax exempt organization's activities can be devoted to "carrying on propaganda, or otherwise attempting, to influence legislation".[3]
An organization’s attempts to influence legislation must constitute a substantial part of its overall activities, and is determined on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial.[4]
The courts have held that a percentage test should not solely determine whether the activities are substantial because such a test obscures the complexity of balancing the organization's activities in relation to its objectives and circumstances in the context of the totality of the organization.[5] However, the percentage test is still an important barometer in determining "substantial."
For practical purposes, anything over 5% of activities should cause nervousness; but one cannot be certain of what substantial means.
The United States Court of Appeals ruled in Murray Seasongood v. Commissioner, 227 F.2d 907 at 912 (6th Cir. 1955) that substantial was more then the 5% of the time and effort of the Hamilton County Good Government League's participation in activities the Tax Court found to be 'political.' These activities included the establishment of committees in investigating proposed legislation and making a study of necessary legislation to affect some public purpose, and endorsing candidates for political office and sponsoring or opposing legislation through contacts with the legislative authorities at the recommendation of these committees. Id. at 909. The Court also made it clear that these activities consisted mostly on the individual members, and did not involve the expenditure of Hamilton County Good Government League's expenses. Id.
The "substantial" threshold will most likely be reached once a tax-exempt organization uses 15% of its resources on attempting to, or actually influencing legislation.
The court ruled in Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert, denied, 419 U.S. 1107 (1975) that a charitable organization was substantially engaged in lobbying activities where those activities comprised from 16.6 percent to 20.5 percent of the total expenditures. The court reasoned that "these percentage relationships are an indication of the relative importance of legislative activities in the tax-exempt organization's total effort." Id. at 1147. The court did not look solely at the monetary expenditures in determining whether there was substantial attempt to influence legislation, but also considered that the plaintiff had acknowledged his objective would require "substantial legislative action by the Congress," and that the primary reason for the tax-exempt organization securing the services of the National Counsel Associates (a Washington consulting firm that specialized in lobbying) was to facilitate efforts to make its position known on the Interstate Commerce Commission's legislative proposals to amend the Interstate Commerce Act. Id.
"Substantial activities" includes the preparation, and other ancillary activities that are used for the actual "carrying on propaganda, or otherwise attempting, to influence legislation."
In League of Women Voters of the United States v. United States, 180 F. Supp. 379 (Ct. CI. 1960), cert. denied, 364 U.S. 822 (1960) (League), the court held that attempts to influence legislation may begin before an organization first addresses itself to the public or to the legislature. In League, the tax-exempt organization was originally organized to make its members or the public, intelligent about the problems of the United Nations and the expansion of its powers to enforce world security. Each of the local Leagues carried on many activities which have no relation to influencing legislation, like sponsoring meetings at which candidates of all parties, or proponents and opponents of measures present their arguments. The plaintiff League further argued that only an insignificant part of its energies and resources were devoted to efforts to influence legislation. It presented an accounting, attributing the woman hours devoted to League activities to various classifications, and attributing very few such hours to efforts to influence legislation.
However, the court ruled that the hours spent by some 128,000 women in more than 700 local Leagues, deliberating and discussing what positions to be taken on questions of public interest, were spent in preparation for the influencing of legislation in order to present a united front to legislative bodies in order to induce action or inaction. Id. at 383. The court also found that these activities were political, even though they were also educational. Id.
Repercussions of lobbying more then an insubstantial amount without making a 501(h) election:
Engaging in a substantial amount of political activity could force an organization to pay fines, or immediately lose its tax-exempt status, if that organization becomes tax-exempt under IRC § 501(c)(3).
If that organization does not lose its tax-exempt status, it will be subject to a fine, (used in the same way as an excise tax) equaling 10% of the expenditure. An additional tax equal to 2.5% of the expenditure, limited to $5,000, may be imposed on the organization’s manager, under IRC § 4955.
If the expenditure is not corrected (i.e., recovered and safeguards established to prevent future expenditures) in a timely manner, then that organization may be subject to an additional tax equal to 100% of the expenditure, and the manager of the organization may face an additional tax equal to 50% of the expenditure, limited to $10,000.
An organization will only be subject to an excise tax on their lobbying expenditures if that organization is disqualified. The tax will equal 5% of the organization's lobbying expenditures, and the same tax may also be imposed any of the organization's managers who agreed to the making of the expenditures, unless that manager's agreement was not willful and is due to reasonable cause. IRC § 4912(b).
Part 3: IRC § 501(h) Election:
An IRC § 501(h) election provides a safe harbor for an organization planning to "carry on propaganda, or otherwise attempt, to influence legislation" beyond a substantial amount, by delineating the specific types of lobbying, and the monetary spending attached to that type of lobbying.
An IRC § 501(h) election also provides an organization leeway if it exceeds the monetary limits set under IRC § 4911 (discussed below) where it would have to pay an excise tax based (discussed below) as opposed to losing its tax exempt status. However, an organization could still lose its tax-exempt status under 501(h) where its expenditures exceed 150% of the IRC § 4911 limitations over a four year period.
In order to make an IRC § 501(h) election, an organization must submit IRS Form 5768, and complete Section Part VI-A in their Form 990 Schedule A annual information returns. Federal law under IRC 501(h) and IRC 4911 together limit the amount that may be expended on grass roots lobbying and direct lobbying by IRC 501(c)(3) organizations.
Lobbying under IRC § 501(h):
The rules determining lobbying are the same for an organization whether it makes an IRC § 501(h) election. However, an organization making an IRC § 501(h) must delineate the different types of lobbying it engages in: a) total amount of lobbying; and b) grass roots lobbying. The reason for this is that IRC § 4911 sets out different limits for an organization in terms of how much it may spend on total lobbying, and grassroots lobbying. The two types of lobbying defined under IRC § 501(h) are direct lobbying and grassroots lobbying.
Direct lobbying: is any attempt to influence legislation through communication with any member or employee of a legislative body, or with any other government official who may participate in the formulation of legislation. There is a three part “test” to determine if a specific activity constitutes direct lobbying:
1) The principal purpose is to influence legislation
2) There is reference to a specific piece of legislation (even if the legislation is not currently under consideration), and
3) A point of view is expressed
As discussed already, there are exceptions to what is considered lobbying.
Asking members of one's own organization to contact legislators is considered direct lobbying because those members are part of that organization, and presumably working on that organization's behalf.
Grassroots lobbying: is any attempt to influence legislation by affecting the opinion of the general public. In this case the organization encourages the public to lobby. The organization refers to a specific piece of legislation and provides information to the public on how to contact decision makers.
Total Lobbying permitted under IRC § 4911:
In order not to be taxed for excessive lobbying, an organization may not spend more than 20% of its first $500,000 of expenditures on lobbying, nor more than 15% of its second $500,000 of expenditures, nor more than 10% of its third $500,000 of expenditures, nor more than 5% of its remaining expenditures, and no more than $1 million on lobbying in the year.
Grassroots Lobbying permitted under IRC § 4911:In order not to be taxed for excessive grass roots lobbying, the organization may not spend more than 5% of its first $500,000 of expenditures on grass roots lobbying, nor more than 3.75% of its second $500,000 of expenditures, nor more than 2.5% of its third $500,000 of expenditures, nor more than 1.25% of its remaining expenditures, and no more than $250,000 on grass roots lobbying in the year.
Spending Above the Limits Prescribed under IRC § 4911:
If an organization spends more then the above limits described, IRC § 4911 imposes an excise tax equal to 25% of the excess of the lobbying expenditures.
Excess lobbying expenditures for a tax year, in this case, means the greater of:
1. The amount by which the lobbying expenditures made by the organization during the tax year are more than the lobbying nontaxable amount for the organization for that tax year, or
2. The amount by which the grass roots expenditures made by the organization during the tax year are more than the grass roots nontaxable amount for the organization for that tax year
Part 4: Conclusions:
There are advantages for relying on either "no substantial lobbying" or making an IRC § 501(h) election.
Advantages for relying on the "no substantial lobbying"
Relying on the "no substantial lobbying" phrase is most likely better for a larger organization planning to spend more then $1 million on lobbying activities. The reason for this is that an organization will not have to rely on the precise limits set under IRC § 501(h). Another advantage relying on this phrase is that there is no distinction between direct lobbying and grassroots lobbying, thus allowing an organization to spend much more on grassroots lobbying then direct lobbying without breaching the "no substantial part" prerequisite.
Finally, breaching the "no substantial amount" may not result in fines especially since the standard is a vague one, and thus the courts most likely penalty would be to disallow an organization of continuing to be an IRC § 501(c)(3) organization.
Advantages for using the IRC § 501(h) election:
The consequences of exceeding the permissible lobbying expenditures for an organization electing to qualify under IRC § 501(h) are only monetary payments, rather than the complete loss of tax-exempt recognition, organizations planning to engage in any amount of lobbying are usually best advised to choose the IRC § 501(h) election.
As well, relying on an IRC § 501(h) election clearly sets out the limitations, which will help an organization avoid the hassle of determining whether they "substantially" attempted to, or actually influenced legislation.
Endnotes:
[1] Internal Revenue Publication 557 "Tax Exempt Status of your Organization" (March 2005), Online: <http://www.irs.gov/pub/irs-pdf/p557.pdf> at 17.
[2] Id.
[3] Richard Koach, "Bright Lines, Facts and Circumstances Tests, and Complexity in Federal Taxation" (1996) vol. no. 46 Syracuse L. Rev. 1287-1319 at 1287 (Lexis).
[4] Internal Revenue Service Article "Measuring Lobbying Activity: Substantial Part Test" (17 January 2007),
[5] Haswell v. United States, 500 F.2d 1133 at 1142 (Ct. Cl. 1974), cert, denied, 419 U.S. 1107 (1975).
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