1. The Lobbying Election. The definition of activities considered to constitute "lobbying," as well as the extent to which a 501(c)(3) organization may conduct such activities before incurring penalties, varies depending on whether the organization has chosen to make the "election" under Section 501(h) of the Code. Most informed 501(c)(3) organizations that lobby choose to make the election, and, consequently, are governed by a special "expenditures" test, rather than the "substantiality" test governing nonelectors.
In stark contrast to the very vague and sparse rules governing nonelectors, the expenditures test provides mathematical methods to concretely determine the extent to which an electing organization may engage in lobbying without incurring penalty taxes or losing 501(c)(3) status. Congress enacted the expenditures test and related rules (found in Sections 501(h) and 4911 of the Code) to relieve the uncertainty of the substantiality test.
Other key advantages of "electing" are the numerous exceptions provided for what is considered lobbying, the imposition of penalty taxes for excessive lobbying instead of the immediate loss of tax exemption, a safe harbor (margin for error) for organizations that exceed the lobbying limits in a given year, an exclusion for lobbying time "donated" by volunteers (including board members), and a lower Internal Revenue Service ("IRS") audit risk.
The lobbying election is made by filing, at any time, the simple one-page Form 5768 with the IRS. Note that the lobbying election is not available to 501(c)(3) organizations that constitute "supporting organizations" (i.e., those public charities, such as many associations' related foundations, that receive their public charity status through their support of a 501(c)(4), (c)(5), or (c)(6) organization that itself meets one of the public support tests). The following rules and definitions apply only to 501(c)(3) organizations that make the lobbying election.
2. Definition of Lobbying. To be considered lobbying, a communication must refer to and reflect a view on a specific legislative proposal or legislation that has been introduced before a legislative body (federal, state or local). Actions by executive, judicial or administrative bodies (e.g., regulations) are excluded from the definition of lobbying. Lobbying may either be direct or grassroots. Grassroots lobbying is more limited than direct lobbying. Direct lobbying is any attempt to influence legislation through a communication with any member or employee of a legislative body, or with any other governmental official who may participate in the formulation of legislation, if the principal purpose is to influence legislation. The communication must refer to specific pending or proposed legislation and reflect a view on the legislation. A communication made to the general public on the subject of a public referendum, ballot initiative, or similar election will be considered direct lobbying if the communication reflects a view on the subject of the vote. Direct lobbying also includes communications by an association to its members directly encouraging them to engage in direct lobbying. When directed solely to members, a communication is not lobbying if it only indirectly encourages members to engage in lobbying.
Grassroots lobbying is defined, except with regard to a limited category of mass media communications (for which special rules apply), to include only those communications to the general public that:
- (i) refer to specific pending or proposed legislation;
- (ii) reflect a view on that legislation; and
- (iii) encourage the recipient to take action with respect to such legislation (this third element is often referred to as a "call to action").
For both direct and grassroots lobbying, all costs of researching, preparing, planning, drafting, reviewing, copying, publishing, and mailing a direct or grassroots lobbying communication - including amounts paid as current or deferred compensation for employees' services attributable to these activities - must be counted as lobbying expenditures. In addition, the allocable portion of administrative, overhead and other general expenses attributable to these activities also must be treated as lobbying expenditures. However, if the primary purpose for incurring an expenditure is a non-lobbying purpose (and if the "fruits" of the expenditure are, in fact, used for such a non-lobbying purpose), then no portion of the expenditure needs to be allocated to lobbying. See below for a discussion of cost allocation between lobbying and non-lobbying purposes. Also see below for a discussion of the use of non-lobbying material in connection with a subsequent lobbying communication.
3. Exclusions from Definition of Lobbying. Certain activities are excluded from the definition of lobbying:
- (i) Lobbying does not include providing technical assistance or advice to a governmental body or committee in response to its unsolicited written request (note two caveats: (a) cannot be a request from merely an individual member of that body or committee, and (b) the response must be made available to every member of the requesting body or committee);
- (ii) Lobbying does not include self-defense activities - communications with legislators concerning decisions which may affect the organization's existence, powers and duties, 501(c)(3) status, or tax deductibility of contributions;
- (iii) Lobbying does not include making available the results of nonpartisan analysis, study or research, defined as a full and fair exposition of a particular subject that may advocate a view so long as the presentation of the relevant facts is sufficient to enable readers to reach independent conclusions (e.g., presenting information on both sides of a legislative controversy in a balanced and objective manner) (note two caveats: (a) grassroots lobbying communications which directly encourage action do not qualify under this exception, and (b) in order to take advantage of this exception, distribution of studies, reports, etc. may not be limited to, or directed toward, persons interested solely in one side of a particular issue);
- (iv) lobbying does not include examining and discussing broad social, economic, and similar policy issues whose resolution would require legislation - even if such legislation is pending - so long as the organization's discussion does not address the merits of the specific legislation;
- (v) lobbying does not include communicating with a government official or employee other than (a) a communication with a member or employee of a legislative body that would otherwise constitute lobbying, or (b) a communication with the principal purpose of influencing legislation; and
- (vi) lobbying does not include communications between an organization and its members (broadly defined) about pending or proposed legislation, unless the communications directly encourage the members to attempt to influence legislation (or directly encourage the members to urge nonmembers to attempt to influence legislation). Note that this exclusion will apply so long as a majority of the communication's recipients are members.
Subsequent Use Rule. In certain narrowly defined circumstances, the subsequent grassroots lobbying use of "advocacy communications or research materials" (those materials that refer to and reflect a view on specific legislation, do not directly encourage grassroots lobbying, but do not otherwise satisfy the exception for nonpartisan analysis, study, or research) that originally contained no lobbying communications may cause the original expense incurred in developing the materials to be treated as a lobbying expenditure. This could occur most frequently with respect to certain nonpartisan analysis, study, or research reports that are initially created without any accompanying lobbying messages, but are later used in connection with grassroots lobbying communications. In such event, the "subsequent use" rule may convert the original expense (in its entirety) into a grassroots lobbying expenditure. However, there are two broad safe harbors in which the subsequent use rule will not apply - one relates to the primary purpose of the original materials and the other relates to the timing of the subsequent use.
Under the primary purpose safe harbor, the subsequent use rule will not apply if the organization can demonstrate that the primary purpose of the original materials (i.e., the primary purpose for incurring the original expense) was a non-lobbying purpose. Where the organization makes a substantial distribution of the materials in their non-lobbying form either prior to or contemporaneous with the grassroots lobbying distribution, the IRS will presume a non-lobbying primary purpose. In the case of "nonpartisan analysis, study, or research," whether the distribution is substantial will depend upon the particular facts and circumstances, including normal distribution patterns of similar materials. In the case of other "advocacy communications or research materials," the non-lobbying distribution must be at least as extensive as the grassroots lobbying distribution.
Under the timing of subsequent use safe harbor, the determinative factor is the amount of time between when the organization paid the original expenses and when the subsequent use occurred. All expenses paid more than six months before the subsequent use are protected from the application of the subsequent use rule.
The subsequent use rule will not cause any communications or research materials to be considered direct lobbying communications.
4. Limitations on Permissible Lobbying. Under the expenditures test, an organization can quantify exactly how much lobbying it may engage in each year. A sliding scale specifies the amount an organization may expend on all lobbying activities in relation to the amount it spends on most of its other activities (i.e., expenditures in furtherance of the organization's tax-exempt purposes). Under Section 4911(c)(2) of the Code, the maximum allowable annual lobbying is the sum of:
- (i) 20% of the first $500,000 of an organization's exempt purpose expenditures, plus
- (ii) 15% of the second $500,000 of such expenditures, plus
- (iii) 10% of the third $500,000 of such expenditures, plus
- (iv) 5% of the remainder of such expenditures,
On top of this cap, there is a further restriction that an organization may not spend more than 25% of its permitted lobbying total on grassroots lobbying.
It is important to note that lobbying expenditures include, among other things, the value of the allocable portion of staff time attributable to lobbying; such salary allocations must be substantiated through the use of time records (see below).
If annual limits are exceeded, a 25% excise tax is imposed on the amount of "excess" lobbying expenditures (i.e., 25% times the greater of the amount by which lobbying expenditures exceeded the allowable total limit or by which grassroots lobbying expenditures exceeded the allowable grassroots limit).
An organization's 501(c)(3) status will be revoked only if the sum of total lobbying expenditures or total grassroots lobbying expenditures over a four-year period exceeds 150% of the four-year sum of the maximum permissible amounts - a considerable safe harbor. Note that a 501(c)(3) organization that loses its tax exemption because of excessive lobbying or prohibited political campaign activities cannot then convert to a 501(c)(4) organization.
Because the extent of an organization's lobbying is measured only by expenditures (and not, for example, by time expended), lobbying efforts by members (volunteers) - including unpaid officers and directors - on behalf of an association that do not incur expense by the association are not subject to any limitation and are not counted toward the association's lobbying totals. If the association incurs expenses (e.g., travel expenses) in connection with its members' lobbying efforts, only those expenses (and nothing more) will be counted toward its lobbying totals.
Affiliated organizations. The expenditures test contains methods of aggregating the lobbying expenditures of related organizations in order to prevent the creation of numerous entities to avoid the lobbying limitations. Where two or more 501(c)(3) organizations are members of an "affiliated" group and at least one of the members has made the 501(h) election, the calculations of lobbying and exempt purpose expenditures must be made by taking into account the expenditures of the entire group. If these expenditures exceed the permitted limits, each of the electing member organizations must pay a proportionate share of the penalty excise tax, with the nonelecting members (if any) treated under the substantiality test. Generally, two organizations are deemed to be "affiliated" where (i) one organization is bound by decisions of the other on legislative issues pursuant to its governing instruments (e.g., Articles of Incorporation, Bylaws), or (ii) the governing board of one organization includes enough representatives of the other (an "interlocking governing board") to cause or prevent action on legislative issues by the first organization. Where a number of organizations are "affiliated" (such as in the case of certain association-chapter structures), all of them are treated as one group of affiliated organizations. However, if a group of autonomous organizations controls an organization but no single organization in the controlling group alone can control that organization, the organizations are not considered an affiliated group by reason of the interlocking directorates rule.
5. Lobbying Records and Cost Allocation. Under Code Section 501(h), detailed disclosure as part of the annual Form 990 filing and thorough recordkeeping are required. It is the responsibility of the association to maintain documentation of its direct and grassroots lobbying expenditures. If an activity has mixed (direct and grassroots) lobbying or both lobbying and nonlobbying aspects, the association will be expected to allocate the expenditures, pursuant to the rules set forth below. (See also the discussion of the primary purpose test above.) Employee time records, financial reports, invoices from outside suppliers (e.g., printing bills), postage receipts, and other documentation of expenditures should identify those spent on direct and grassroots lobbying, and should allocate expenditures for mixed lobbying (direct and grassroots) and mixed purpose (lobbying and nonlobbying) activities.
As stated above, all amounts paid or incurred for, or in connection with, direct and grassroots lobbying communications - including amounts paid or incurred as current or deferred compensation for employees' services attributable to lobbying, as well as the allocable share of overhead expenses attributable to lobbying - are included within the organization's total "lobbying expenditures."
A mixed grassroots and direct lobbying communication must be treated as a grassroots communication except to the extent that the organization demonstrates that the expenditure was incurred "primarily" for direct lobbying purposes, in which case a reasonable allocation must be made between the direct and grassroots lobbying purposes served by the communication.
For lobbying communications that also serve bona fide non-lobbying purposes, there are two alternate allocation rules. Which rule is used depends upon whether the communication is sent primarily to members or non-members. The rules are generally more favorable for member communications.
For communications that are sent primarily to bona fide members (i.e., communications sent to more members than non-members), the organization must make a reasonable allocation between the amount expended for the lobbying purpose and the amount expended for the non-lobbying purpose. Including as a lobbying expenditure only the amount expended for the specific sentence or sentences that encourage the recipient to action is not considered a reasonable allocation.
For communications that are not sent primarily to bona fide members, all costs attributable to the lobbying portion and to those parts of the communication that are on the same specific subject as the lobbying message must be included as lobbying expenditures. Whether or not a portion of a communication is on the same specific subject as the lobbying message will depend upon the surrounding facts and circumstances. In general, a portion of a communication will be on the same specific subject as the lobbying message if that portion discusses an activity that would be directly affected by the legislation that is the subject of the lobbying message. Moreover, discussion of the background or consequences of either the legislation or of an activity directly affected by the legislation also will be considered to be on the same specific subject as the lobbying communication.
Transfers Treated as Lobbying. A transfer of money or property by a 501(c)(3) organization to an individual or entity will be treated as a lobbying expenditure if it is earmarked for that purpose. A transfer of money or property by a 501(c)(3) organization for less than fair market value to a non-501(c)(3) organization that lobbies will be treated as a lobbying expenditure unless it is a "controlled grant" or unless certain other exceptions apply. Also see below for a discussion of transfers by private foundations to 501(c)(3) public charities that lobby.
6. Private Foundations. 501(c)(3) organizations that are private foundations are subject to excise tax on any amounts paid or incurred (i) in an attempt to influence legislation, or (ii) in an attempt to influence the outcome of any public election or to carry on certain voter registration drives. The definition of lobbying, and the exceptions thereto, are similar to the definitions and exceptions described above. As long as a private foundation does not earmark a grant for lobbying, it may make a general purpose grant to a 501(c)(3) public charity that lobbies without incurring penalty tax liability. A private foundation also may make a grant to support a specific public charity project that includes lobbying, so long as the grant is not earmarked for lobbying and so long as it is not larger than the amount budgeted by the grantee for the nonlobbying portion of the project.
7. Conclusion. Associations exempt from tax under Section 501(c)(3) must keep lobbying activities within specified limits. Grassroots lobbying is limited more than direct lobbying. To avoid incurring liability for excise taxes or loss of tax-exempt status, care should be taken to ensure compliance with the expenditures test under Section 501(h) and to enable such associations to take advantage of the opportunities provided by these rules.
Due to the numerous exceptions to the definition of lobbying for 501(c)(3) organizations, properly planned and structured, it is frequently possible for 501(c)(3) organizations to conduct all desired government affairs activities within the confines of the 501(c)(3) structure. This option should be thoroughly explored before any structural organizational changes are made, such as the establishment of an affiliated entity (e.g., as a 501(c)(4) organization) to conduct lobbying activities.