Lobbying by All Types of Exempt Organizations Terry Miller Session 68 1.

Lobbying by All Types of Exempt Organizations

Terry Miller

Session 68

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TAX OVERVIEW

Tax: 501(c)(3) Public Charities (“PC”) Non-substantial part of activity; choice of two tests Limit on Legislative lobbying (not Executive or Judicial)

Tax: 501(c)(3) Private Foundations (“PF”) Prohibitively taxed, with some exceptions for issue advocacy Tax on Legislative lobbying only (not Executive or Judicial)

Tax: 501(c)(4), (5) & (6) Organizations (“(c)(4,5,6)”) Unlimited Business dues may be nondeductible or a proxy-taxable

expenditure for the (c)(4,5,6) Legislative AND Executive branch officials’ actions or positions

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OVERLAYS

Lobbying Disclosure Act (“LDA”) & similar state or

local legislation

Different definitions; likely to include influencing

executive branch. Registration triggers.

Bipartisan Campaign Reform Act (“BCRA”) a/k/a

McCain Feingold

Blackout prior to elections on TV/Radio lobbying issue

ads naming Federal candidates by corporations and

unions (covers (c)(4,5,6)) = prohibited “electioneering

communications.”

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Public Charities OVERVIEW

Public charities may lobby, within limits

Choice of 2 tests: * facts and circumstances test or * IRC 501(h) expenditure test

Lobbying definition varies depending on test chosen

Expenditure test requires “election” via Form 5768(IRC 501(h), Reg. 56.4911)

Most, but not all, public charities are eligible to elect 501(h) (not eligible: churches & certain affiliates, government units,

supporting organizations to (c)(4,5,6) organizations, 509(a)(4) testing for public safety

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NON-electing PCs:Lobbying Defined

? Facts and Circumstances

No expenditure level is guaranteed safe

Volunteer effort counts

Impact may count

May not rely on electing charity definitions

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ELECTING PCs: Lobbying Defined

“Direct Lobbying” is expenditure for communication

with legislator, about specific legislative proposal,

expressing a view, with intention to influence the

legislation (Reg. 56.4911-2(b)

(1))

“Grassroots Lobbying” is expenditure for a

communication with the public, about a specific

legislative proposal, expressing a view, and calling for

action to communicate with a legislator to influence the

legislation (Reg. 56.4911-2(b)

(2))

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Electing PCs: Direct vs. Grassroots

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PCs: Excise Tax& Revocation

(IRC 501(h))

Electing Charities

excess lobbying, either type, in any one year: 25% excise tax (if both exceeded, the higher of the two)

revocation only if spend over 150% of allowance over any given four-year period

Non-Electing Charities

excess lobbying = revocation

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Electing PCs:Lobbying Allowance

(IRC 501(h), Reg. 56.4911)

2 allowances: Total and Grassroots Total allowance: sliding scale

% of Exempt Purpose Expenditures (“EPE”) 20% of first $500K 15% of next $500K 10% of next $500K 5% over $1.5M

Maximum allowance = $1M (occurs at $17M EPE) Grassroots allowance is 25% of total allowance

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Electing PCs: Exempt Purpose Expenditures

(Reg. 56.4911-4)

EPE: Usually all expenses, EXCEPT costs of “separate fundraising unit” (2 or more staff) payments to fundraising counsel or professional

fundraisers capital expenditures (s/l depreciation OK) investment management expenses certain excise taxes certain transfers (to affiliates, to boost EPE, to (c)

(non-3’s) if not controlled grant) (Reg. 56.4911-4(e))

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Electing PCs:Cost Allocation

“Reasonable” cost allocation, including

Direct costs of lobbying (e.g. lobbyists, publications)

Staff time for lobbying

Reasonable share of overheads and operating costs

(Reg. 56.4911-6)

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Electing PCs:Not Lobbying 1

Volunteer effort (501(h) is an expenditure test)(Reg. 56.4911-2(b)(4)(ii))

Attempts to influence executive branch matters(Reg. 56.4911-2(b)(1)(i))

Communications with the public expressing a view on

specific legislation, with NO call to action(Reg. 56-4911-2(b)(2)(ii))

Communications with members expressing a view on

specific legislation, with NO DIRECT call to action(Reg. 56-4911-5(b))

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Electing PCs:Not Lobbying 2

Communications about a Broad Social Problem are not a

specific legislative proposal, by definition(Reg. 56.4911-2(c)(2))

Nonpartisan Analysis Study & Research(Reg. 56.4911-2(c)(1))

requires substantial non-lobbying distribution, not just to allies (Reg. 56.4911-2(b)(2)(v)(E))

full exposition of the facts (Reg. 1-501(c)(3)-1(d)(3)) may express a view, but may only contain an indirect

call to action (Reg. 56-4911-2(c)(1)(vi),(vii))

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Electing PCs:Not Lobbying 3

Requests for opinions, recommendations and Technical

Advice by a legislative body, committee or sub-

committee(Reg. 56-4911-2(c)(3))

Self-defense lobbying (affects existence, powers &

duties, tax-exempt status, or deductibility of

contributions)(Reg. 56-4911-2(c)(4), 2(d)(3))

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Electing PCs: Not Grassroots Lobbying

Broad communications that are DIRECT lobbying:

Communication with the public on ballot measures(Reg. 56.4911-2(b)(1)(iii))

Communication with members encouraging them to

make a DIRECT lobbying contact (but NOT

encouraging them to “tell your friends and neighbors”) (IRC 4911(c)(3)(A))

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Electing PCs:May Be Lobbying

Subsequent Use of Nonpartisan Analysis Study & Research materials within six months may render the earlier preparation costs grassroots lobbying

(Reg. 56.4911-2(c)(1)(v)) Mass Media advertisements within 2 weeks of a highly

publicized vote by legislative body or committee even with NO call to action (Reg. 56-4911-2(b)(5))

Also don’t forget: Preparation for Lobbying (could be either type), Contact with executive branch officials to influence action on

specific legislation (direct), and Accidentally saying in a membership communication “so tell

your friends and neighbors” (grassroots)

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NON-Electing PC: Reporting

narrative

Form 990, Schedule C, Part II-B

Line Ite

ms

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ELECTING PC:Reporting

4 year test

1 year test

Form 990, Schedule C, Page 2, Part II-A

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Private FoundationsOVERVIEW

Lobbying is a (Prohibitively) Taxable Expenditure

(IRC 4945(d)(1) & Reg.

53.4945-2)

Some lobbying excepted from taxable expenditure

Flexible rules on grantmaking to charities that lobby

Grants should NOT prohibit lobbying, need only avoid

earmarking

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PF: Lobbying Defined

Lobbying for Private Foundations (“PF”) is defined in

Reg. 53.4945-2(a)(1) by direct reference to the definition

of lobbying for electing public charities at Reg. 56.4911-2

Direct and grassroots lobbying; specific legislative

proposal, not just existing legislation

Not executive or judicial branch matters

Not the identical set of exceptions as public charities

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PF: Excise Tax onTaxable Expenditures

Tax on Taxable Expenditure (IRC 4945(d)(1) & Reg. 53.4945-2) initial tax on expenditures,

20% on foundation lesser of 5% or $10K on foundation managers

additional tax if not corrected 100% on foundation lesser of 50% or $20K on foundation managers

Initial foundation tax may be abated for “reasonable cause and not willful neglect” AND corrected timely (Pub 578, Pg 1)

Managers’ tax abated if foundation tax is abated, AND if action was not “knowing and willful,” or was due to reasonable cause or was based on written advice of counsel

(Reg. 53.4945-1(a)(2))

all %s and amountsdoubled in Aug 06 PPA

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PFs: NOT Taxable Expenditure

Communications about jointly-funded projects with

government officials (Reg. 53-4945-2(a)(3))

Nonpartisan Analysis Study & Research(Reg.

53.4945-2(d)(1))

Requests for opinions, recommendations and Technical

Advice by a legislative body, committee or sub-committee

(Reg. 53.4945-2(d)(2))

Self-defense lobbying (affects existence, powers & duties,

tax-exempt status, or deductibility of contributions)

(Reg. 53.4945-2(d)(3))

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PF: Reporting Tax

Form 990-PF, Page 4, Part VII-A, Line 1a

Form 990-PF, Page 6, Part VII-B, Line 5

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PF: Paying Tax

Form 4720, Page 4, Schedule E

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PFs: Advocacy Allowed

Examination and discussion about a Broad Social Problem are not a specific legislative proposal, by definition (Reg. 53.4945-2(d)(4))

General support grants to public charities that lobby, provided there is no written or verbal earmarking of the grant for lobbying (Reg. 53.4945-2(a)(6)(I))

Project support grants to public charities where the project includes lobbying, but the grant is not earmarked, and is less than the non-lobbying portion of the project budget (Reg. 53.4945-2(a)(6)(ii))

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PF Advocacy Summary

PF’s may still advocate on public policies:

Communications about broad social problems

Executive and judicial branch advocacy

Exceptions for nonpartisan analysis, self-defense, technical advice, jointly-funded projects

Communications to public without call to action

General support to charities that lobby, not earmarked

Project support not earmarked, below non-lobbying amount

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501(c)(4,5,6) OVERVIEW

501(c)(4,5,6) may engage in unlimited lobbying

(related to organization’s exempt purpose)

However, membership “dues and similar amounts” used

for lobbying activities may be either:

Non-deductible to the member

(Notice of Disallowance required from the (c)(4,5,6))

or

Taxable to the (c)(4,5,6) (Proxy tax)

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(c)(4,5,6) Lobbying includes

Direct lobbying: Federal and State legislation

Grassroots lobbying: at any level of government

Administrative lobbying: Lobbying communications

with certain high-level Federal Executive Branch

officials to affect their actions or positions

(c)(4,5,6)Lobbying Defined

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Businesses may not deduct most lobbying – IRC 162(e)

No deduction for indirect lobbying via association “dues or similar amounts” (since 1965) (IRC162(e)(3))

OBRA 1993: placed disallowance notice requirements on many (c)(4,5,6) organizations (IRC 6033(e))

“Dues and similar amounts” do not require that members be voting, and do include voluntary payments, assessments for operating costs, and special assessments for lobbying

(Rev Proc 98-19,

§5.01)

(c)(4,5,6) DuesNon-deductible

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(c)(4,5,6) Notification of Disallowance

(c)(4,5,6) Organizations, unless excepted, must either:

estimate the amount of dues to be used for lobbying (and political campaign) activities, and notify members of NON-deductibility with their dues bill, OR

pay a proxy tax on dues used for lobbying at highest corporate rate (IRC 6033(e))

If estimated total is LESS than actual lobbying, carry forward to next year’s disallowance or pay proxy tax on difference (IRC 6033(e)(1)(C)(ii))

If estimated total is MORE than actual lobbying, informal guidance is to carry forward as credit against next year’s disallowance or proxy tax (IRS CPE 2003, Pg L29)

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(c)(4,5,6): ExceptedOrganizations

Not ALL (c)(4,5,6) Organizations must comply.

Excepted Organizations: (IRC 162(e)(3) & Rev. Proc. 98-19)1. 501(c)(4) veterans’ organizations

2. 501(c)(5) labor organizations

3. More than 90% of dues from (c)(3)’s, governments, or IRC 115 orgs

4. More than 90% of dues non-deductible by members Organizations who “maintain records” (or get a PLR) that more than 90%

of dues are non-deductible by members Safe Harbor: (c)(4) social welfare organizations and (c)(5) agricultural and

horticultural organizations receiving more than 90 percent of annual dues from members paying annual dues of $97 (2008) or less

Reporting: if get dues or similar amounts, Core Form Part IV, Line 5 will drive you to Schedule C Part III

Excepted organizations check “Yes” on Sched C, Part III-A, Line 1 (and need not track or report lobbying):

“Were substantially all dues nondeductible by members?”

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(c)(4,5,6) Direct Lobbying 1

Direct Lobbying (IRC 162(e) & Reg. 1.162-29)

Definition of direct lobbying is essentially identical to that for 501(c)(3) organizations“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 legislation”

“Influencing legislation” explicitly includes planning, preparation & coordination for a lobbying communication (Reg. 1.162-29(b)(1)(ii))

No specific exceptions as with electing public charities (nonpartisan analysis, technical advice, self-defense)

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(c)(4,5,6) Direct Lobbying 2

Direct Lobbying (cont) (IRC 162(e) & Reg. 1.162-29)

Federal and State only: “legislative bodies” do not include local councils and similar governing bodies

De Minimis exception: in-house expenditures < $2,000

Similar to the rules for electing public charities, “legislation” includes a “specific legislative proposal” prior to being active legislation

(IRC 162(c)(4)(B) refers to 4911(e)(2); also Reg. 1.162-29(b)(5))

Comments on broad social problems are not specific legislation (1.162-29(b)(7) Example 5)

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(c)(4,5,6) Grassroots Lobbying

Grassroots Lobbying

Broader definition than for electing public charities.

Definition of grassroots lobbying does not require

calls to action. Test is “attempt to influence.”

No exception for LOCAL (IRC 162(e)(2)(A))

No exception for DE MINIMIS (IRC 162(e)(5)(B)(ii))

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(c)(4,5,6) Executive Branch

Administrative Lobbying

Direct communication with “covered” executive

branch officials in an attempt to influence their official

actions or positions “Covered” are President, Vice President, Cabinet Officers,

deputies, and certain other specified high-level employees

(IRC 162(e)(6))

State and Local exception: Federal officials only De minimis exception:

in-house expenditures < $2,000 (IRC 162(e)(5)(B)(ii))

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(c)(4,5,6) De minimis Exception

“De minimis” exception

(NOT applicable to grassroots lobbying) If organization incurred only in-house expenses of

$2,000 or less, not counting overhead, it need not

comply (IRC 6033(e)(1)(B)(ii) & Rev Proc

98-19)

Excepted organizations check “Yes” on Sched C, Part

III-A, Line 2: “Did the organization make only in-house lobbying

expenditures of $2,000 or less?”

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(c)(4,5,6) Other Activity Exceptions

Planning and preparation for lobbying communications that don’t happen are not lobbying, and if reported as lobbying in one year, may be backed out of the next year as a carry forward credit (Reg. 1.162-29(e))

Activities Not Treated As Lobbying (Reg. 1.162-29(c)(3))

Compliance with the requirements of any law

Reading publications available to the general public

Viewing or listening to other mass media

communications

Merely attending a widely attended speech

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CalculatingLobbying Costs

Cost Allocation Methods are much more specific than for

electing public charities; rules allow any reasonable

method but specify three safe methods

(Reg. 1.162-28)

Ratio method

Gross-up method

Method based on uniform capitalization rules

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(c)(4,5,6) 990 Reporting

Form 990, Schedule C, Pg3, Parts III-A and IIII-B

If paying Proxy Tax: Form 990-T, Pg 2, Part III, Line 37

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LDA:OVERVIEW

Federal Lobbying Disclosure Act (“LDA”) of 1995; amended effective

1/1/8 by Leadership and Open Government Act of 2007

Ethics-based: disclose money-in-government

Applies to nonprofits; registers individuals and organizations (was

just organizations); churches exempt

Has “trigger” point when registration required in 45 days:

At least one staffer more than 20% devoted to Federal

direct lobbying (in a Qtr), AND Qtrly expenditures over $11.5K or

outside lobbyist over $5K

Covers both Legislative and Executive Branch contacts

Filing requirements: quarterly, Clerk of U.S. House and Secretary

of the U.S. Senate; online, e-signature verification takes time

LDA is Federal only, but similar laws exist in some states, and even

some local governments

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LDA:Lobbying Defined

Lobbying activities include preparation, research,

planning, coordination with allies, contacts made to

arrange a lobbying contact

Lobbying includes work on:

Federal legislation

Federal rules, regulations, executive orders, and other

executive branch positions

Nominations subject to US Senate confirmation

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LDA:Other Details

Certain specific exclusions from lobbying activity, including:

Materials made available to public or mass media

Mere request for meeting or information

Testimony before a committee or subcommittee

Responding to a specific written request from a covered official

Responding to a published request for comment

Covered officials are specified; high-level, includes military

Associations can lead to disclosures by members (a bit like tax

rules) if contribute more than $5,000 toward the registrant’s

lobbying activities (either directly to the registrant or indirectly

through the client) in a quarterly period and actively participate in

the planning, supervision, or control of such lobbying activities.

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LDA:Other Details

Electing Public Charities may use hybrid LDA/501(h)

definitions to determine both trigger point expenditures,

and lobbying activity costs; all other nonprofits use the

LDA only

Quarterly reporting by organizations, semi-annual

reporting of [certain political] contributions by

organizations and lobbyists (staff or contract) and

certification of no prohibited gifts or travel

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BCRA

Bipartisan Campaign Reform Act (“BCRA”) a/k/a McCain

Feingold, a/k/a McConnell v. FEC Prohibits unions and corporations (e.g. (c)(4,5,6)) from broadcast

media ads that promote, support, attack or oppose a candidate for

Federal office [Some modifications from Wisconsin Right to Life v.

FEC]

30 days before primary or 60 days before general

Criminal act

ERGO: Blackout dates in certain markets for lobbying messages

that name an officeholder / candidate

The Future? As of this writing, (5/4/04), FEC plans are to leave (c)(4,5,6) alone,

focus on issue-based IRC 527 organizations

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RECAP

Tax: 501(c)(3) Public Charities (“PC”) Non-substantial part of activity; choice of two tests

Legislative lobbying is limited (not Executive or Judicial)

Tax: 501(c)(3) Private Foundations (“PF”) Prohibitively taxed, with some exceptions for issue advocacy

Tax on Legislative lobbying only (not Executive or Judicial)

Tax: 501(c)(4), (5) & (6) Organizations (“(c)(4,5,6)”) Unlimited, but business dues may be nondeductible or proxy-taxable

Legislation AND Executive branch officials’ actions or positions

BCRA prohibits certain messages

Lobbying Disclosure Act (“LDA”) & similar legislation Different definitions; likely to include influencing executive branch

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END

Thank you!

Terry Millerwww . TerryMiller . biz

Terry @ TerryMiller . biz