1. Michael A. Clark (312) 853-2173 mclark@sidley.com June 4, 2015
Tax – Exempt Organizations and Lobbying– Chicago Kent Not for Profit Organizations Conference
Michael A. Clark (312)
June 4, 2015

2. Summary of Lobbying Rules

3. Tax Law Limits On Lobbying and Political Activity
Section 501(c)(3) of the Internal Revenue Code of 1986 (“Code”) provides tax exemption for charitable, religious, educational, and scientific organizations
“. . . no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, (except as otherwise provided in subsection [501] (h)), and which do not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

4. Potential Consequences for Violation of Lobbying and Political Activity Prohibition
A section 501(c)(3)organization can lose its tax exemption for substantial lobbying or any political activity.
Public charities which have elected to be subject to section 501(h) of the Code can incur an excise tax if their lobbying activity exceeds certain limits.
Private foundations can incur a punitive excise tax on lobbying or political expenditures.

5. Exemption Issues
Public charities which do not make a Code section 501(h) election can lose their exemption if lobbying is a “substantial part” of their activities.
To avoid the uncertainty of the “no substantial part” test, public charities can elect, for any taxable year, to be subject to sections 501(h) and 4911 of the Code.
Section 501(h) subjects an electing public charity to revocation of exemption only if its lobbying expenditures exceed specified dollar amounts (based on the expenditures of the electing organization) over 4 years.

6. Exemption Issues
An electing public charity which exceeds the lobbying nontaxable amount (or gross roots ceiling amount) in any year pays a 25% excise tax on the excess lobbying expenditures, but does not lose its exemption.
Public charities which exceed the lobbying nontaxable amount (or grass roots ceiling amount) lose exemption if lobbying expenses exceed 150% of the lobbying nontaxable amount or grass roots ceiling amount over a 4 year period.

7. Exemption Issues – 501(h) limits
Under section 4911, the lobbying nontaxable amount is computed as the sum of the following:
20% of the first $500,000 of exempt purpose expenditures ($100,000);
15% of exempt purpose expenditures from $500,000-$1,000,000 ($75,000);
10% of exempt purpose expenditures from $1,000,000-$1,500,000 ($50,000); and
5% of exempt purpose expenditures in excess of $1,500,000 up to $17,000,000 (up to $775,000).

8. Exemption Issues – 501(h) limits
Exempt purpose expenditures include amounts paid to accomplish the organization’s charitable, educational, scientific, or other exempt purpose, including administrative expenses and amounts paid to influence legislation, but not amounts paid to a separate fundraising unit of the organization or other separate fundraising organizations.
Amounts are not indexed for inflation

9. Exemption Issues – 501(h) limits
Grass roots expenditures are subject to a lower ceiling of 25% of the lobbying nontaxable amount. Thus, for an organization exceeding $17 million of exempt purpose expenditures, no more than $250,000 could be spent on grass roots lobbying in any one year.
If an organization loses its exemption for normally exceeding the 150% of the lobbying nontaxable amount or grass roots ceiling amount, it cannot thereafter obtain exemption as a section 501(c)(4) organization.

10. Example of section 501(h) reporting –Natural Resources Defense Council

11. Example of section 501(h) reporting –Natural Resources Defense Council

12. Private Foundation Excise Taxes on Lobbying and Political Expenditures
Taxes apply to ANY lobbying or political campaign expenditure, no matter how small.
In the case of lobbying expenditures made through earmarked grants to public charities, a lobbying expenditure still subjects a private foundation to tax even if it would not cause the grantee to lose its exemption (e.g., a grantee expenditure below the applicable section 501(h) limits).
The tax on the private foundation is 20% of expenditure; an additional tax of 100% of the expenditure applies if the expenditure is not corrected.

13. Private Foundation Excise Taxes on Lobbying and Political Expenditures
A foundation manager who knowingly and willfully approves the expenditure without reasonable cause is subject to a tax of 5% of the expenditure, capped at $20,000 per taxable expenditure.
Taxes must be reported on the private foundation’s Form 990-PF

14. Definition Of Lobbying: Direct Lobbying
A communication is direct lobbying if it:
Refers to specific legislation introduced in a legislative body, or a specific legislative proposal the organization seeks or opposes;
Reflects a view on the legislation; and
Is with any member or employee of a legislative body, or is with another government official who might participate in the formulation of legislation (but only if the principal purpose of the communication with the government official is to influence legislation).

15. Definition Of Lobbying: Grass Roots Lobbying
Grass roots lobbying is an attempt to influence legislation through an attempt to affect the opinions of the general public or a segment thereof with respect to legislation. Communications are grass roots lobbying if they:
Refer to specific legislation or a specific legislative proposal;
Reflect a view with respect to such legislation; and
Provide a “call to action” encouraging the recipient of the communication to take action with respect to such legislation.

16. Definition Of Lobbying: Grass Roots Lobbying
A call to action exists if a communication:
states that the recipient should contact legislators, employees of a legislative body, or governmental officials (if the principal purpose of the government official contact is influence legislation);
states the addresses or phone numbers for legislators or employees;
provides a petition, tear off postcard, or “similar form” for communication; or
identifies legislators who are opposed to the organization’s view, undecided, members of committees considering the legislation, or legislators representing the recipient of the communication.

17. Definition Of Lobbying: Grass Roots Lobbying
Mass Media Exception. Paid mass media advertising without a call to action is rebuttably presumed to be grass roots lobbying if the following conditions are met:
the advertising appears two weeks before a vote in a legislative body or committee;
the legislation is highly publicized;
the advertisement reflects a view on the subject of the legislation; and
the advertisement either (a) refers to the legislation or (b) encourages the public to contact legislators on the general subject of the legislation.

18. Definition Of Lobbying: Grass Roots Lobbying
The presumption may be rebutted if it is shown that the communication is of the same type regularly made by the organization without regard to the timing of legislation or by showing that the timing of the advertisement was unrelated to the legislative action.

19. Lobbying Definition: What is “Legislation”?
Action by a “Legislative Body,” e.g.,
Congress,
State Legislature,
Local Council, or
Public in a referendum or ballot measure.
A “Legislative body” does not include “administrative bodies,” such as school boards, housing authorities, zoning boards, or similar elected or appointed bodies.
Executive or judicial bodies are NOT legislative bodies.

20. Guidelines for Identifying a Legislative Body
The same rules apply for both domestic and foreign organizations. For example, if a country other than the United States has legislative bodies for states or provinces, and such legislative bodies have authority to pass laws governing conduct within their respective jurisdictions, such bodies would be “legislative bodies” for purposes of applying the lobbying rules.
Administrative bodies. If a governmental body is formed for a special purpose, and therefore does not have general legislative authority over a particular geographic area, then it is an “administrative body,” and communications with such a body are not lobbying (unless for the principal purpose of

21. Guidelines for Identifying a Legislative Body
influencing legislation by a legislative body). Thus, a communication with a hospital district seeking its recommendation of action by the state legislature could be a lobbying communication; a communication to the hospital district seeking only action by the hospital district likely would not be lobbying.
Complex issues may arise when members of an administrative body serve on the body by virtue of their positions as members of a legislative body. Legislators still qualify as such even if serving ex-officio on an administrative body.

22. Lobbying Definition: What is “Legislation”?
“Specific Legislation” or “Specific Legislative Proposals” include:
Introduced bills,
Treaties once negotiations commence,
Ballot measures once petition to place on ballot is circulated,
Bills passed by other states, and
Proposals which have sufficient detail so that legislation could be drafted

23. Challenges of Identifying “Specific Legislation” or a “Specific Legislative Proposal”
Definitions are not as “bright line” as most of the lobbying rules.
In general, there is no “look back” rule — if an expenditure is made before legislation or a specific proposal has emerged, that expenditure generally will not count as lobbying.
Once legislation or a specific legislative proposal materializes, expenditures will be treated as lobbying if all requirements of a lobbying communication are met.

24. Challenges of Identifying “Specific Legislation” or a “Specific Legislative Proposal”
Changes in circumstances illustrate the importance of analyzing BOTH the exceptions from lobbying and the special exceptions for private foundation grants.

25. Exceptions: Activities which are NOT Lobbying
The following activities are not lobbying taxable expenditures
making available the results of nonpartisan analysis, study, or research;
technical assistance provided upon the written request of a governmental body;
appearances before legislative bodies by representatives of a private foundation with respect to legislation affecting the foundation’s existence, powers, tax-exempt status, or eligibility to receive deductible contributions; and
broad discussions of economic and social policy issues which may at some time be the subject of legislation, provided that the discussion does not deal with specific legislation.

26. Exceptions: Activities which are NOT Lobbying
certain member communications

27. Exceptions: Nonpartisan Research and Analysis
A 501(c)(3) organization may fund research and present an “independent and objective” discussion of a particular subject matter.
A particular viewpoint or position may be advocated if the study presents a “sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion.” Mere presentation of unsupported opinion is insufficient.
The research may be distributed to the public, legislators or governmental officials in any suitable manner, such as distribution of speeches, articles, and reports; conferences and discussions; and media presentations. However, the exception may not apply if the communication is directed solely to individuals interested only in one side of a particular issue.

28. Exceptions: Nonpartisan Research and Analysis
If a communication qualifies as nonpartisan research and analysis but nonetheless is an “advocacy communication,” special rules may apply. An “advocacy communication” is a communication that refers to specific legislation and expresses a view on such legislation but is not a lobbying communication because it contains no call to action.
The subsequent distribution of an advocacy communication for grass roots lobbying purposes with a direct encouragement for the recipient to take action may convert the communication to a grass roots lobbying expense (but not a direct lobbying expense). In order for the call to action to be “direct,” it must urge a legislative contact, provide legislator addresses or phone numbers, or a post card or petition; mere identification of legislators and their positions is not a “direct” call to action.

29. Exceptions: Nonpartisan Research and Analysis
The “advocacy communication” rule with respect to nonpartisan research and analysis distribution may be avoided if the distribution for lobbying purposes occurs more than six months after payment of the expenditure for nonpartisan research and analysis or if it is shown that the “primary purpose” of the research expenditure was for nonlobbying use.
The “primary purpose” test will be met if it is shown that, prior to the lobbying distribution, there was a “substantial” nonlobbying distribution of the advocacy communication at least equal in scope to the subsequent lobbying distribution.

30. Exceptions: Technical Advice or Assistance
A section 501(c)(3) organization may provide testimony or other information in response to a written request from a governmental body or committee such as a congressional committee or subcommittee or a state legislature or a committee thereof.
The presentation of such assistance need not be nonpartisan, although opinions may be offered only if requested by the legislative body or if they are directly related to the information requested.
The request for advice or assistance must be in writing and must be submitted on behalf of the requesting legislative body, as distinguished from an individual member thereof.

31. Exceptions: Decisions Regarding Organization Powers and Duties
A section 501(c)(3) organization may communicate with members or staff of a legislative body concerning legislation (including legislation proposed by the organization) affecting the organization’s existence, powers and duties, tax-exempt status, or eligibility to receive deductible contributions.
If legislation is proposed which would impose additional taxes on the organization or would prevent it from engaging in certain transactions, the organization may communicate with legislators with respect to such legislation.
However, decisions affecting the scope of operations

32. Exceptions: Decisions Regarding Organization Powers and Duties
of the organization, such as decisions affecting the continued funding of programs operated by an organization, are not protected by the “self-defense lobbying” exception.

33. Exceptions: Discussions of Broad Social Problems
A private foundation may make expenditures for discussions and examinations of broad social and economic policy not directed at specific legislative proposals.
Such expenditures are permitted — even if government would be ultimately expected to deal with the problem — so long as specific legislative proposals are not discussed and no direct request to take action on legislation is involved.

34. Private Foundation Grant-Making and the Lobbying Rules

35. Foundation Grant-Making and the Lobbying Rules
A private foundation can make grants to public charities for non-lobbying purposes under a grant agreement prohibiting use of the grant for lobbying.
Private foundations may also make grants to public charities that may end up using some grant funds for lobbying activities by using either one of the following options:
a grant for a specific project using the “project grant rule”; or
a “general support grant” for charity’s discretionary use.
The key to using either of these options is that the private foundation’s funds are not directed for lobbying use, and the public charity controls the use.
In contrast, for foundation grants to non-public charities (e.g., to section 501(c)(4) or (c)(6) organizations, or to other private foundations) the private foundation must exercise “expenditure responsibility” (“ER”) over the grant. ER grants carry additional requirements and are subject to more IRS scrutiny.
Private foundations may fund discussions with government officials for a program jointly funded by the private foundation and the government.

36. Project Grant Rule
A private foundation may make a grant to a public charity for a project that includes lobbying activities when three factors are met:
The grant is not “earmarked” for lobbying;
The grantee provides a project budget showing that the amount of the foundation grant, together with any other grants from the foundation to the grantee for the same year, does not exceed the amount budgeted for the project’s non-lobbying activities; and
The private foundation has no reason to doubt the accuracy of grantee’s budget representations.
For multi-year grants, the project grant rule applies to each year of the grant.

37. General Support Grants
These are private foundation grants made to a public charity to support the charity’s general operations and used by the charity in its discretion. These grants are often small.
Grants cannot be earmarked for lobbying expenditures. However, since the grantee controls the funds, the grantee may end up using funds for lobbying activities.

38. Expenditure Responsibility Grants (Grants to a Non-Public Charity):
ER grants involve additional rules and procedures:
The private foundation must conduct a “pre-grant inquiry” of the grantee to ensure grantee has good management and controls in place.
ER grants must have a written grant agreement that expressly prohibits using grant funds for lobbying, political activities or other items that are “taxable expenditures.”
Grantee must hold the ER grant funds in a separate account (except if grantee is a section 501(c)(3) private foundation).
Grantee must report annually to the private foundation on its use of the funds, and confirm its compliance with the ER rules. The foundation must attach an annual summary report on the grant to its tax return that confirms the grant was used for proper purposes.
The foundation is required to maintain a copy of the grant agreement, all grantee reports, and any foundation reports on the grantee in its files.

39. Jointly Funded Projects
A private foundation may make expenditures to fund discussions with government officials, provided that:
The subject of the discussions is a program that is jointly funded, or a new program to be jointly funded, by the foundation and the government.
The discussions are for the purpose of exchanging data and information on the subject matter of the program; and
The discussions are not undertaken in a direct attempt to persuade government officials or employees to take positions on specific legislative issues other than the joint program.