  By Harvey Berger, Greg Goller and Nancy Murphy Take a very hard look at 501(h) Many Section 501(c)(3) organizations conduct activities that constitute lobbying but don't realize it. As an executive, you must know the Internal Revenue Service's (IRS) lobbying rules and limits, and be able to apply them to your organization. While legislative advocacy is a perfectly acceptable activity for Section 501(c)(3) organizations under the tax law, IRS penalties for doing too much lobbying can be harsh, including loss of tax-exempt status. Whether you realize it or not, communications often contain lobbying language. Consider the following ways in which organizations often communicate:
Your organization undoubtedly performs many of the items listed above. Depending on what is said and to whom, you could be lobbying. Many organizations find that lobbying is an important part of carrying out mission. Others lobby but don't know it, and consequently don't report it properly on Form 990, which is a public document. So, monitor your communications and plan before you act. First of all, by definition, organizations are only tax-exempt under Section 501(c)(3) of the IRS Code (code) if "no substantial part" of activities are "carrying on propaganda, or otherwise attempting to influence legislation." In addition, to stay tax-exempt, an organization must not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office. Your organization's governing documents contain these defining provisions. Section 501(c)(3) organizations are absolutely prohibited from intervening in political campaigns; i.e., supporting or opposing candidates. On the other hand, you may engage in an "insubstantial amount" of activities to influence legislation. In a nutshell, organizations can take sides on political issues to some degree, but not on political candidates. What does "insubstantial amount" mean? You can choose between two methods of answering this question. The default method merely instructs that your organization may not devote a substantial part of its activities to lobbying, which comes straight from the definition of a Section 501(c)(3) public charity. The problem with this method is that "attempting to influence legislation," is not defined, usually leaving organizations wondering what kind and how much lobbying they can do. If you pay any attention to any public policy issues, is that an attempt to "influence legislation?" Does it include the preparation of studies and research? Issuing position papers? Testifying before a congressional committee? And how do you measure this activity? Is it measured by dollars spent lobbying? Hours spent lobbying? Is it measured by your organization's success or failure in advocating its position? These questions are not answered in the code. Courts have considered all of the above factors (and others) to determine if lobbying is "substantial" but have not come up with any clear guidelines. In testing for "no substantial part," the IRS and the courts will consider the totality of the circumstances, rather than just some measurable financial indications of lobbying. Therefore, you can't apply the results of one organization's case to your own organization. This guessing game is made worse by a ruthless sanction. The penalty for lobbying activities deemed substantial under this default method is loss of tax-exempt status. The punishment is absolute and can be imposed even if you are in violation for only one year. You should also note that you can't regain tax-exempt status through reapplying as a 501(c)(4) organization. Therefore, if you violate the "no substantial part" test, it is virtually the end of the line. The code also subjects your organization to a 5 percent excise tax if it violates the "no substantial part" test. Managers are also subject to a separate 5 percent excise tax -- personally. Under the "no substantial part" test, the rules are vague but the penalties are severe. Luckily, the code offers another option to organizations that want clearer rules -- a Section 501(h) election. Nearly all Section 501(c)(3) organizations are eligible to make the election by completing Form 5768. If you do, the IRS will measure "substantiality" only using amounts spent. They will compare them to specific formulas for allowable expenditures. The election rules also contain detailed definitions of what activities constitute lobbying. Thus, by making the election, you can find comfort in the form of mathematical limits as to how much lobbying can be done, what activity will be deemed lobbying activity, and how such lobbying activity is measured. Lobbying limits for organizations making the election are subject to a sliding scale based on "exempt purpose expenditures." Your exempt purpose expenditures include amounts you spend to carry out your exempt purpose, not including items such as tax on unrelated business income, expenses to produce unrelated business income, or capitalized costs, such as real estate improvements and others. The sliding scale allows you to spend a set percentage of tax-exempt expenditures in a given year on lobbying without jeopardizing tax-exempt status and works as follows: Total Lobbying Expenditure Limit is equal to:
Two important limits to the sliding scale percentage limits are: (1) Regardless of the amount of exempt purpose expenditures, lobbying expenditures are limited to $1 million; (2) Grassroots lobbying expenditures (discussed below) are limited to 25 percent of total lobbying expenditures. Therefore, organizations can, at the most, spend only up to $250,000 on grassroots lobbying. Careful budgeting is essential, because under the Section 501(h) election, if you exceed the total lobbying expenditure limit for the year, a 25 percent excise tax on the excess expenditures kicks in. If you exceed both your total lobbying and grassroots expense limits, the excise tax applies to whichever excess amount is greater. Under Section 501(h) and related Section 4911, lobbying is characterized in one of two ways, direct lobbying and grassroots lobbying. Direct lobbying occurs when certain communications are made to legislators (or their staffers), or other government officials who have a hand in the fate of legislation. Furthermore, communications made to voters in a public referendum are direct lobbying, since in that case the voters stand in the shoes of the legislature. A communication to legislators (and staffers) is lobbying only if two elements are present: (1) the communication refers to specific legislation (or proposed legislation) and (2) the communication reflects a view on that legislation. Therefore, expressing opposition to a state senator regarding proposed property tax legislation is lobbying. By contrast, an appeal to a federal agency on interpreting enacted legislation is not lobbying. Communications to your members are direct lobbying if the two elements above are present, and there is a direct call for them to take action. Grassroots lobbying occurs when you make a public communication with a call to action. A call to action for grassroots purposes includes urging individuals to contact a legislator, providing the legislator's contact information, or providing a tear-off postcard, petition, or the like. Merely identifying legislators who oppose, support, or are undecided about the legislation can be considered a call to action. Without careful attention, you can run into your grassroots limitation (25 percent of total lobbying, maximum $250,000) in a hurry. Under Section 501(h), "legislation" includes actions by Congress, state, and local legislatures. Therefore, if you communicate with regulatory agencies you are not lobbying and should not report the associated expenses as lobbying costs. Electing organizations can utilize several exceptions from the definition of lobbying. These exceptions include the preparation and dissemination of non-partisan research, studies, and analysis, examinations of broad social problems, preparing responses to written requests for technical advice from a legislative committee, and self-defense lobbying. Expenditures for these activities do not count as part of your lobbying costs. Be very careful. The exceptions come with their own limitations. For instance, to claim the non-partisan research studies and analysis exception, the research or study must present a "sufficiently full and fair exposition" so that the public can form its own opinion. Unsupported positions for or against legislation won't suffice. Also, you need to beware of the "subsequent use" rule. Money spent for research, study, or analysis that is later used in lobbying will count unless you can establish that the original and primary purpose of the piece was not for lobbying. And, don't be lulled into complacence when your congressman calls you to do some research to promote (or oppose) legislation that falls within your organization's circle of interest. A legislative committee, in writing, must make such requests to fall under the exception. You are not presumed to qualify. You must make your case through your record keeping. No such exceptions, measurements, or definitions for lobbying activity apply under the "no substantial part" test. Hence, organizations that don't elect to live under the Section 501(h) rules are truly caught in a guessing game. If you are not a very large organization, you may be risking your exemption just by engaging in many of the kinds of activities that are measurable, or even excluded under the Section 501(h) expenditure test. The all-or-nothing consequences of losing tax-exempt status are much improved for those electing Section 501(h) coverage. Violations of the limits initially result in a 25 percent excise tax on excess lobbying expenditures. Only when the four-year average of an organization's lobbying costs exceed its limits will tax-exempt status be at risk. Thus, you can better manage lobbying limits through careful budgeting, planning, and documentation of your advocacy strategies. You will need to carefully track and document costs associated with issuing or making communications intended to "influence legislation" to make sure your organization stays within its lobbying limits and thereby avoid the excise tax. In short, many Section 501(c)(3) organizations find it helpful to consider the Section 501(h) election. Review your organization's activity, determine lobbying language and advocacy strategies already in place and be aware of what the future may bring. Make sure that you know and understand what is being communicated by your different departments, such as public relations, government affairs, research, and publication departments, including Web site publications. If it's right for you, the Section 501(h) election can give you a measure of safety and comfort as you carry out your mission through lobbying. Harvey Berger is a partner and national
director of not-for-profit tax for the accounting and management consulting
firm Grant Thornton LLP and is based in the Washington, D.C., area not-for-profit
tax practice. His email address is: hberger@gt.com. 
© 2006 The NonProfit
Times Privacy Policy
|