A Primer on Federal Tax Law Affecting Lobbying

By Certain Types of Tax-Exempt Organizations

By MacKenzie Canter, III, ©2000
Member of VA, DC, MD and MO Bars
Copilevitz & Canter, LLC
1900 L Street, NW
Suite 215
Washington, D.C. 20036
202-861-0740

This general discussion⁽¹⁾ of federal tax law governing lobbying by three (3) classes of tax-exempt organizations, identified in Internal Revenue Code ("Code") §§ 501(c)(3), 501(c)4), and 501(c)(6).

What Is Lobbying?

Generally, lobbying is the attempt to influence pending legislation or specific legislative proposals through (1) communications to legislators and government officials and/or (2) via creating or affecting public opinion, coupled with a "call to action." This definition embraces two types of lobbying: "direct" and "grassroots." When you contact your Congressman and urge him to vote against HR 2345, this is direct lobbying. When you place a full-page advertisement in a newspaper advocating the defeat of HR 2345 and urge subscribers to tell their Congressmen to vote against HR 2345, this is grassroots lobbying.

What Is Not Lobbying?

Many activities and communications which affect legislation are not "lobbying."⁽²⁾ For example, publishing research is not "lobbying" even though it has implications for policy-makers and concludes that a certain policy is prudent (or foolish.) Research may yield conclusions which influence legislation. However, this does not render the publication of the research "lobbying", so long as the report does not call for the enactment or defeat of specific legislation.

Merely expressing a general view on an issue of public importance and advocating a certain policy is not considered "lobbying." Communications with the organization's own members on issues of direct importance to the organization are not considered "lobbying" so long as the communication does not directly encourage the members to engage in direct or grassroots lobbying. Not every "contact" with a legislator or government official is considered "lobbying." Expressing general views is not. Nor is asking for assistance, e.g., help in getting a tax refund.

Federal tax law varies, depending on whether the organization is a § 501(c)(3), 501(c)(4) or 501(c)(6) organization. Because contributions to a § 501(c)(3) organization may qualify for deduction as charitable contributions, the rules are stricter for this category of tax-exempt organization.

§ 501 (c)(3) Organizations

§ 501(c)(3) organizations include charities, schools, religious organizations, research foundations, museums, and universities. § 501(c)(3) organizations may engage in direct and grassroots lobbying, but only within certain limits. Code § 501(h) permits most § 501(c)(3) organizations to make an election to be governed by limits expressed as a percentage of "exempt purpose expenditures." (The election is made on IRS Form 5768.)⁽³⁾

If the organization is not eligible to make the § 501(h) election or chooses not to do so, the organization is in a "grey area" in terms of how much lobbying is "too much." If the IRS regards lobbying to be a "substantial part" of the activities of the "non-electing" § 501(c)(3) organization, the IRS may revoke its tax-exempt status. One federal court held that 5% (or less) should not be regarded as substantial. But other federal courts have rejected a "mathematical" approach, in favor of a "balancing test." There is no clear guideline for non-electing organizations.

For § 501(c)(3) organizations which are eligible for and choose to make the § 501(h) election, the following limits define permissible, annual "lobbying amounts." The permissible lobbying amount is the lesser of $1 million or an amount determined as a percentage of "exempt-purpose expenditures." (Exempt-purpose expenditures are amounts spent to accomplish the mission of the organization, but do not include fundraising costs.)

Code §4911 provides the following limits: (1) If exempt-purpose expenditures do not exceed $500,000, the lobbying amount is 20% of expenditures; (2) if exempt-purpose expenditures exceed $500,000, but do not exceed $1 million, the lobbying amount is $100,000 plus 15% of expenditures in excess of $500,000; (3) if exempt-purpose expenditures exceed $1 million but do not exceed $1.5 million, the lobbying amount is $175,000 plus 10% of the expenditures over $1 million; and (4) if exempt-purpose expenditures exceed $1.5 million, the lobbying amount is $225,000 plus 5% of the excess of the expenditures over $1.5 million.

The "grassroots" lobbying limit is 25% of the organization's permissible lobbying amount for that year. (It is, thus, a "sub-limit.")

Excise taxes and possible revocation of tax-exempt status are sanctions imposed by the IRS if the limits are exceeded.

The Federal Lobbying Disclosure Act ("LDA") [2 U.S.C. § 1601 et seq.] which took effect in 1996 requires written disclosures by Code § 501 (c)(3) entities that spend $20,000 or more for lobbying in a six month period and meet other requirements set forth in the LDA. The LDA reports are filed with the Clerk of the House of Representatives on February 14 and August 14 of each year. Form LD-2 is used for this purpose. Because of the Code § 501 (h) election and the LDA, it is important for Code § 501 (c)(3) organizations to consult with legal counsel before engaging in lobbying.

§ 501 (c)(4) Organizations

§ 501(c)(4) organizations include civic organizations, social welfare organizations, and various "action" organizations which do not qualify as "charities" under Code § 501(c)(3).

§ 501(c)(4) organizations can engage in an unlimited amount of lobbying so long as the lobbying relates to the purpose of the organization. This latitude extends to direct lobbying and grassroots lobbying.

§ 501 (c)(6) Organizations

§ 501(c)(6) organizations include "business leagues", trade associations, professional associations, chambers of commerce, real estate boards, and boards of trade. This category of tax-exempt organization also is permitted to engage in unlimited direct lobbying and grass-roots lobbying, so long as the lobbying serves the common interest of the members of the organization.

A business deduction (Code § 162) is ordinarily available for dues paid by members to § 501(c)(6) organizations. However, if the § 501(c)(6) organization engages in lobbying, a portion of dues that would otherwise be deductible by members are rendered non-deductible. The Omnibus Budget Reconciliation Act of 1993 added Code § 162(e)(1), which provides that no deduction will be allowed for dues paid to a § 501(c)(6) organization to the extent that the organization spends funds in connection with influencing legislation (whether by direct lobbying or grass roots lobbying); or for any communication with a "covered executive branch official" in the attempt to influence the official actions or positions of the official. Not all communications are considered "lobbying," as noted above.

End Notes:

1. This summary does not address all issues, exceptions, and exclusions. Before embarking on lobbying, an exempt organization should consult with its legal counsel to obtain specific advice. There are a number of issues which must be considered, particularly in the case of Code §501 (c)(3) organizations. Federal laws, apart from tax, also affect lobbying. For the most part, these laws are not discussed herein.

2. You should determine in advance if a proposed activity or communication will be considered "lobbying."

3. Not all Code § 501 (c)(3) entities are eligible to make the election. For example, churches and certain private foundations are not allowed to make the election. Be sure to check to see if your organization qualifies for the election.