Fall 2005 E-Newsletter

Lobbying and Political Activities by Nonprofit Organizations

This November Californians are facing multiple special elections, and nonprofit organizations are asking how involved they can get in campaigns for legislation and candidates.

The answer to this question depends primarily on two separate factors: (1) the federal tax exemption classification of the entity asking the question; and (2) the type of activity intended, namely, whether the organization seeks to influence legislation ("legislative lobbying") or the outcome of an election for public office ("candidate activities").

This article discusses two types of entities: (1) those classified as public charities (and not private foundations) under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"); and (2) non-charitable tax exempt organizations, such as business leagues (exempt under Code Section 501(c)(6)) and social welfare organizations (exempt under Code Section 501(c)(4)).

Public charities are governed by stringent regulations with regard to their legislative lobbying and candidate activities.

Public charities are absolutely prohibited from partaking in any candidate activities. They may not support or oppose a candidate for public office.

Public charities may perform limited amounts of legislative lobbying. However, the specific amount of lobbying that may be performed is governed by two different regimes and the entity may select the regime used.

The first regime is called the "substantial part test." Under this test, lobbying must not constitute a substantial part of the entity’s activities. If it does, the entity may lose its tax exempt status. Unfortunately, the Code regulations and case law do not provide a hard and fast rule for how much lobbying constitutes "substantial." The substantial part test is used by the IRS unless the entity has elected to use the second regime, the 501(h) election.

If the entity would prefer to know exactly how much lobbying it may perform, it may elect, under Code Section 501(h), to have its lobbying activities limited solely on the basis of its lobbying expenditures. The 501(h) election calculates allowable lobbying expenditures based upon the exempt purpose expenditures of the organization. It provides the following lobbying limits: (1) 20% of the first $500,000 in exempt purpose expenditures; (2) 15% of the next $500,000 in exempt purpose expenditures; (3) 10% of the next $500,000 in exempt purpose expenditures; and (4) 5% of all exempt purpose expenditures above $1,500,000 to a maximum limit of $1,000,000.

In addition to the certainty provided by the mathematical formula set forth above, the IRS has promulgated extensive and detailed regulations regarding lobbying under the 501(h) election.

Organizations exempt under other subdivisions of Code Section 501(c), such as trade or professional associations (501(c)(6)) and social welfare organizations 501(c)(4) may perform a greater amount of candidate activities and legislative lobbying than public charities.

These types of organizations, commonly referred to as "noncharitable organizations," may conduct unlimited amounts of legislative lobbying so long as such activities are in furtherance of the organization’s tax exempt purpose. For example, it may not be permissible for a labor union to lobby for the rights of endangered species.

In addition, noncharitable organizations may conduct candidate activities. However, such activities must be secondary to the organization’s purpose. If candidate activities constitute the primary activity of the organization, the organization’s tax exempt status may be revoked or the organization may be treated as a political entity under Code Section 527, which could result in negative tax consequences.

As the political season rapidly approaches, tax exempt organizations should carefully analyze the potential tax consequences of any candidate activities or legislative lobbying they intend to conduct. This analysis should involve careful consideration of the organization’s type of exemption and the corresponding restrictions that apply.

The discussion contained herein is general in nature. There are numerous exceptions and other rules that apply to specific types of organizations. These rules and regulations may affect how the general rules discussed above apply to any particular organization. Therefore, legal counsel should be consulted prior to conducting any legislative lobbying or candidate activities.

1 This discussion does not apply to organizations that are recognized as private foundations under Section 509(a) of the Code. Private foundations are subject to more stringent regulations concerning lobbying and political activities. In addition, this article does not discuss various provisions applicable to churches recognized under Code Section 501(c)(3). Such organizations are governed by other provisions in the Code.