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Advocacy and lobbying

While all tax-exempt organizations are free to engage in general issue advocacy, various restrictions apply to election-related activities and lobbying. It is important to understand these restrictions before selecting a form of tax-exempt organization, as failure to comply may have severe consequences.

501(c)(3) public charities

Advocacy versus Lobbying. 501(3)(3) public charities may engage in lobbying to a limited extent, while they face no restrictions on general advocacy. Lobbying is specifically defined in the Internal Revenue Code for this purpose as an attempt to influence legislation, including actions by Congress, a state legislature, local council or similar governing body, or by the general public through a referendum, initiative, constitutional amendment or similar procedure.

How much lobbying is allowed? A public charity may not devote a “substantial” portion of its activities to lobbying. Because the term “substantial” has never been defined, an organization that intends to engage in lobbying should consider making an election under section 501(h) of the Internal Revenue Code. This election applies an alternative mechanical test, referred to as the “expenditure test,” for determining the extent to which an organization may engage in lobbying activities.

Section 501(h) “expenditure test” election

Application of the “expenditure test.” The expenditure test bifurcates lobbying into two categories: direct lobbying and grass roots lobbying.

Direct Lobbying is a communication with a member or employee of a legislative body which refers to and reflects a view on specific legislation. Direct lobbying also includes a communication with the general public making reference to and reflecting a view on a referendum, ballot initiative or similar procedure.

Grass roots lobbying is a communication with the general public, referring to specific legislation and including a call to action. However, if the communication is made to an organization’s members, it is direct rather than grass roots lobbying.

Expenditure test thresholds. Under the expenditure test, an organization may devote up to a specified portion of its total expenses (excluding certain items) to direct and grass roots lobbying as follows:

Direct lobbying threshold:
20% of the first 500,000 of expenditures
15% of the next 500,000
10% of the next 500,000
5% of the remaining expenditures
The maximum lobbying expenditure is $ 1 million per year.

Grass roots lobbying threshold: 25% of direct lobbying threshold. Grassroots lobbying expenditures reduce the allowable direct lobbying amount.

Lobbying in foreign countries.
Attempting to influence legislation in a foreign country falls within the lobbying restriction if it meets the definition of lobbying. It is necessary to determine whether the recipient of the communication is a legislative body and whether the subject is specific communication. There are no clear guidelines here, and caution is advised. It is also critical to understand and comply with applicable local laws.

Prohibited political campaign activities
A public charity is strictly prohibited from participating in, or intervening in political campaign activities, for or in opposition of a candidate for public office, at the federal, state, local and international levels. The proscription includes implied, as well as express, support for or opposition to a candidate. The IRS adopts a “facts and circumstances” approach to determining whether an organization’s activity constitutes participating or intervening in a political campaign. Note that linking to other organizations’ websites may present a trap for the unwary, as the IRS generally holds an organization responsible for its links.

In December, 2007, the IRS provided guidance containing 21 examples of permissible and impermissible activities. For further information, see the IRS website.

Private foundations

Private foundations, unlike public charities, are subject to prohibitive penalties if they engage in any lobbying activity. Like public charities, they are also prohibited from intervening in or participating in political campaigns. Private foundations may provide grants to public charities that engage in lobbying, subject to certain restrictions.

Other types of tax-exempt organizations

Different rules and restrictions apply to lobbying and campaign related activities by other types of tax-exempt organizations.

501(c)(4) social welfare organizations may engage in substantial lobbying (but not political campaign activity), so long as influencing legislation is not an organization’s primary purpose. A public charity that wishes to engage in lobbying in excess of the allowable thresholds may consider forming a separate 501(c)(4) organization. Though common, this relationship must be carefully structured.

501(c)(6) business leagues are also free to engage in substantial lobbying, although lobbying expenditures result in reduced tax deductions for members’ dues, or a tax on the organization itself.