Nonprofit Advocacy: Lobbying and Election-Related Activities for 501(c)(3)s

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Many nonprofits often desire certain legislative and public policy changes by our legislators and publicly elected officials to help further or achieve their charitable missions. Nonprofits, however, often avoid advocating for such changes because the IRS rules regarding nonprofit advocacy tend to be complex and commonly misunderstood. 501(c)(3) organizations in particular are often unsure or unaware of which advocacy activities are permissible and which advocacy activities may jeopardize their tax-exempt status. Additionally, nonprofit advocacy and compliance with IRS regulations is a common hot topic for other groups such as the media, public, and authorities, especially during election years. Given the increased attention and scrutiny to nonprofit lobbying and election-related activities that is to be expected this year, 501(c)(3) organizations would greatly benefit from becoming knowledgeable about nonprofit advocacy rules.

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Nonprofit Advocacy: Lobbying and Election-Related Activities for 501(c)(3)s

  1. 1. Nonprofit Advocacy: Lobbying and Election-Related Activities for 501(c)(3)s Gene Takagi & Emily Chan April 18, 2012A Service Of: Sponsored by:
  2. 2. INTEGRATED PLANNING Advising nonprofits in: www.synthesispartnership.com • Strategy • Planning (617) 969-1881 • Organizational Development info@synthesispartnership.comA Service Of: Sponsored by:
  3. 3. Affordable collaborative data management in the cloud.A Service Of: Sponsored by:
  4. 4. Today’s Speakers Gene Takagi Emily Chan Managing Attorney Associate Attorney NEO Law Group NEO Law GroupAssisting with chat questions: Hosting:Riley Croft, Nonprofit Webinars Sam Frank, Synthesis PartnershipA Service Of: Sponsored by:
  5. 5. Nonprofit Advocacy: Lobbying andElection-Related Activities for501(c)(3)sNonprofit WebinarsApril 18, 2012Presented by: Gene Takagi & Emily Chan Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  6. 6. Agenda • Introduction – exempt organizations • Lobbying Hypothetical Case – review of basics • Electioneering • Affiliations of exempt organizations • Citizens United Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  7. 7. IRC OrganizationsIRC Name Federal Tax Tax-deductible Exemption Contributions501(c)(3) Public Charity* Yes Yes501(c)(4) Social Welfare Yes, with limitations No Organization501(c)(5) Labor, Agricultural Yes, with limitations No & Horticultural Organizations501(c)(6) Trade Association, Yes, with same No Professional limitations as Organizations 501(c)(4) orgs527 Political Action Investment income No Organization (PAC) taxed *This presentation does not addresses private foundations and special rules for churches Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  8. 8. Charitable Deduction – 170(a)* • Deductible if for general support (subject to limits) • Not deductible if earmarked for lobbying * Applies to most U.S. 501(c)(3) organizations Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  9. 9. Business Deduction? – 501(c)(4) and (c)(5) • No deduction for certain lobbying and political expenditures – IRC §162(e) • Organization may be required to disclose percentage of dues used for lobbying and political activities (with limited exceptions) – IRC §6033(e)(1)(A) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  10. 10. Tax-Exempt Organizations • 501(c)(3) • No substantial lobbying • No electioneering • 501(c)(4) • Unlimited lobbying pursuant to its primary purpose • Some electioneering* (may not be its primary activity) • 501(c)(6) • Unlimited lobbying pursuant to its primary purpose • Some electioneering* (may not be its primary activity) * subject to state & federal campaign finance laws Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  11. 11. 501(c)(3) Lobbying Limitation • An organization is an action organization [not a 501(c)(3)] if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise • An organization will be regarded as attempting to influence legislation if the organization: • Contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or • Advocates the adoption or rejection of legislation. Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  12. 12. Legislation • includes action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  13. 13. Lobbying Hypothetical Case Prologue • Evilcorp may be violating law by dumping Substance X • Kids getting sick • We formed CHARITY to help the kids Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  14. 14. Chapter 1: No Substantial Lobbying • Want to advocate against Evilcorp • But no substantial lobbying – 501(c)(3) • Lobbying includes: • Drafting legislation • Influencing legislators to introduce legislation • Distributing lobbying materials to assist in the passage or defeat of a bill • Communicating with members and the public to encourage their legislators to support or oppose legislation Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  15. 15. Chapter 2: Non-lobbying Advocacy • Influencing an admin agency re: its regulations or rulings • Meeting with EPA re: tightening regs or changing its policies • Influencing the mayor/governor/President re: executive decisions • Meeting to get regulation changed Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  16. 16. Non-lobbying Advocacy • Influencing legislators on nonlegislative matters • To conduct an investigative hearing • Engaging in litigation • To get a favorable judicial interpretation of the law Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  17. 17. Chapter 3: Choosing One of TwoStandards • Substantial Part Test – default rule • 501(h) Expenditure Test – Form 5768 • N/A to churches, governmental units, public safety organizations, and private foundations Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  18. 18. Chapter 4: 501(h) – “Lobbying”Lobbying • Communication • Principal purpose is to influence legislation • Reflects a view on specific legislationTwo types of lobbying • Direct – to member(s) of legislative body • Grassroots – to member(s) of general public Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  19. 19. 501(h) – Not lobbying • Nonpartisan analysis, study or research • Examinations of broad social, economic and similar problems • Technical advice or assistance • Self-defense communications - IRC §4911(d)(2) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  20. 20. Chapter 5: 501(h) Expenditure Limits • Total lobbying expenditures • 20% of first $500,000 of EPE • 15% of next $500,000 of EPE • 10% of next $500,000 of EPE • 5% of remaining EPE (up to $1 million in total lobbying) – Exempt Purpose Expenditures include all amounts a charity expends to accomplish its exempt purpose (e.g., program expenses, administrative overhead expenses, lobbying expenses, and straight-line depreciation of assets used for an exempt purpose). They do not include fundraising expenses of a charity‟s separate fundraising unit or an outside fundraiser, capital expenditures, unrelated business income expenses, nor investment management expenses. • Grass roots expenditures – 25% of Total lobbying expenditures Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  21. 21. Penalties for Exceeding the Limits • In any year • Excise tax of 25% of excess (whichever excess is larger – direct or grassroots) – Form 4720 • Over any four year period • If expenditures exceed either limit by >50%, revocation and no possibility of converting to a 501(c)(4) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  22. 22. CHARITY$1.25 million in EPETOTAL LOBBYING EXPENDITURE LIMIT = $200,000 • 20% of first $500,000 = $100,000 • 15% of next $500,000 = $75,000 • 10% of next $250,000 = $25,00GRASS ROOTS EXPENDITURE LIMIT = $50,000 Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  23. 23. Chapter 6: Special CircumstancesBallot Measures & Initiatives, Referendum, Bond Measures • Legislation includes action by public in referendum or ballot initiative • Lobbying communications with public considered direct lobbying (public = legislature) • Also consider campaign finance laws Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  24. 24. Member Communications • Not lobbying if it does not encourage members to take action. • Direct lobbying if it encourages members to engage in direct lobbying. • Grassroots lobbying if it encourages members to engage in grassroots lobbying. Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  25. 25. Paid Mass Media Ad about Highly PublicizedLegislation • Presumed to be grassroots lobbying (even without a call to action) if it: • is made within 2 weeks before a vote by a legislative body/committee; • reflects a view on the general subject of the legislation; and • either refers to the legislation or encourages the public to communicate with legislators on the general subject of the legislation. - Rebuttable by demonstrating that the timing of the ad was unrelated to the upcoming legislative action. Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  26. 26. Chapter 7: CHARITY’s Strategy • Make the 501(h) election • Spend $200,000 for lobbying (including $50,000 for grassroots lobbying) • Produce and disseminate nonpartisan analysis of problem • Organize thousands of volunteers to lobby Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  27. 27. CHARITY’s Strategy • Communicate with the EPA to ensure enforcement of regs • Petition mayor for an executive decision • Communicate with city council re: conducting an investigative hearing • Sue Evilcorp over interpretation of law Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  28. 28. Epilogue • CHARITY‟s lobbying and non-lobbying advocacy pays off • Evilcorp forced to stop dumping Substance X and pay restitution to sick kids Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  29. 29. Lobbying Ethics • Legally compliant* • In furtherance of the mission (not personal gain) • Effective and efficient use of resources • Use of accurate, truthful, not misleading information • In a fair, respectful, and professional manner • No quid pro quo (gifts to legislators) • Full required disclosures • No lobbying of close relatives or former, recent employees • Not acting as a conduit for a donor Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  30. 30. Lobbying Disclosure Act of 1995 • Registration and reporting • Employee (in house) lobbyist – 20% of compensated time over 3-month period – >1 lobbying contact • Expenditure test – $11,500 threshold on lobbying activities during the applicable quarterly period – $3,000 threshold for outside lobbyists • Issue: differing definitions of lobbying Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  31. 31. CA Political Reform Act • Don‟t forget! • Required disclosures of contributions and expenditures made to support or oppose state & local candidates and ballot measures • See CA Fair Political Practices Commission (FPPC) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  32. 32. 501(c)(3) Electioneering Prohibition IRC Section 501(c)(3) provides federal tax exemption to a charitable organization so long as it “does 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.” Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  33. 33. In other words…The IRS views electioneering as:• Activities for or against a candidate for public office• On all levels – federal, state, and local Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  34. 34. ABC’s of IRC Electioneering Rules“Candidate” Any individual who offers himself or herself, or is proposed by others, as a contestant for an elective public office. No activities that support or oppose a candidate Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  35. 35. ABC’s of IRC continued…“Public Office” Any office filled by a vote of the people on any level – federal, state, or local Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  36. 36. ABC’s of IRC continued…“Nonpartisan” Working definition: that which does not tend to help or hurt the chances for election of any particular candidate or group of candidates, regardless of political party affiliation (Alliance for Justice) IRS provides for some exceptions Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  37. 37. General points No contributions (cash or in-kind) No endorsements No coordination of activities501(c)(3) organizations must act in a nonpartisan manner.No de minimis exception for 501(c)(3)s! Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  38. 38. RationaleThe prohibition is an exchange for the “government subsidy” of the benefits of the 501(c)(3) tax-exempt status and tax-deductible contributions by removing the “public subsidy” from campaign activities. Therefore the larger the public subsidy that is allowed, the less benefits you receive from the IRS.Alliance for Justice, Rules of the Game (2d ed.) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  39. 39. IRS RegulationsThe IRS regulations on electioneering touch three levels: 1. Campaign intervention activity 2. Tax-deductions for individuals 3. Taxable income of nonprofits Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  40. 40. IRS Regulations for 501(c)(3)s and 501(c)(4)s Campaign Tax-deductible Taxable income of Intervention Contributions Nonprofit Activity501(c)(3) Public Prohibited Yes NoneCharity501(c)(4) Allowed only so No Tax on investment long as it is not the income if political organization’s activities are not primary purpose*. paid from a separate segregated fund. Business proxy tax * No numerical may apply to definition political expenses. Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  41. 41. Facts and Circumstances TestThe IRS can consider any factors it finds relevant in a particular case.When has the organization crossed the line from an educational activity to campaign intervention?Alliance for Justice, Rules of the Game (2d ed.) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  42. 42. IRS Enforcement Prior to 2004: Conducted audits of returns Beginning in 2004: Political Activity Compliance Initiative (PACI)  “Fast track” targeted examinations  Purpose: (1) Notice/prevention and (2) TimelinessIRS Political Activity Compliance Initiative, Procedures for 501(c)(3) Organizations Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  43. 43. IRS Range of Penalties Permanent revocation of tax-exempt status Retroactive revocation of tax-exempt status Intermediate penalty tax Warning for minor or inadvertent mistakes? Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  44. 44. What is the FECA?The Federal Election Campaign Act (FECA) is regulated by the Federal Election Commission (FEC). FECA is triggered when a nonprofit is engaging in federal elections.FECA provides for civil and criminal penalties. Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  45. 45. ABC’s of the FECA“Public office” = federal office Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  46. 46. ABC’s of FECA continued…“Candidate” (a) raise contributions or (b) make expenditures exceeding $5,000. 2 U.S.C. § 431(2) Does not include individuals who are “testing the waters”  However, if that individual later runs for an office, FECA‟s requirements apply retroactively. Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  47. 47. RationaleThe objective of the FECA is to restrict the political influence of money and to expose all such influence to public scrutiny. Therefore, FECA aims for a system where money is either (1) voluntarily contributed by individuals and fully disclosed or (2) spent by groups and substantially disclosed.Alliance for Justice, Rules of the Game (2d ed.) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  48. 48. Are there any permissible election-related activities? Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  49. 49. Issue Advocacy Position on issues that are related to the organization‟s charitable or exempt purpose Risk: communications implicitly favor or oppose a candidateRev. Ruling 2007-41 Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  50. 50. Voter Education1. Appearances of Candidates2. Candidate Questionnaires and Voter Guides3. Candidate Forums and Debates4. Internal Communications5. Websites and Blogs6. Distribution of Candidate or Party Materials – NO!7. Endorsements – NO!Alliance for Justice, Rules of the Game (2d ed.) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  51. 51. Voter Registrations & GOTV Activities Purpose: encourage voting by eligible voters Can target specific areas and criteria  Neutral and nonpartisan Can include issue advocacy Cannot indicate a partisan purpose Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  52. 52. Candidate Education1. Attempts to persuade candidates‟ policy positions • Ethical persuasive tactics? • FECA2. Efforts to get issues on political party platforms Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  53. 53. Business Activities1. Special rules when organization‟s lists are used for partisan activities • Cost, Use, Rental, Notification, Content • Receiving lists from candidates2. Special rules for commercial transactions Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  54. 54. Staff, Volunteers, and Board Members First Amendment Free Speech and Association  Must be acting in individual capacity and not on behalf of the organization IRC – facts and circumstances FECA – “agent” relationship Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  55. 55. Fundraising1. Fundraising for the 501(c)(3) „s advocacy efforts2. Fundraising for political recipients – NO! Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  56. 56. Are we there yet?... Not quite.In addition to the IRC and FECA: FCC Office of Management and Budget (OMB) State and local governments Federal and state lobbying rules Federal and state ethics rules State tax-exemption laws (if applicable) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  57. 57. Affiliations of Exempt Organizations c3 c4/ 527 c6 527 c4/ c3 c6 Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  58. 58. (c)(4) Tax on Political ActivitiesAt the highest corporate rate on the lesser of: • Net investment income; or • Political expenditures - IRC §527(f) - Form 1120-POL ($100/$100)OR FORM A SEPARATE SEGREGATED FUND (PAC or 527) TO MINIMIZE OR AVOID THE TAX Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  59. 59. Parent-Subsidiary Structures • P is sole member of S • P appoints __% of directors of S (under S‟s bylaws) • P and S have some overlapping directors Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  60. 60. Citizens United v. FEC A U.S. Supreme Court ruling (5-4) that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment  Struck down part of the McCain-Feingold Act that barred union- and corporate-paid issue ads in the election campaigns‟ closing days.  Allows corporations to spend from general treasury funds for independent public communications that “expressly advocate” the election or defeat or clearly identified candidates.Citizens United v Federal Election Commission, 130 S.Ct. 876 (2010) Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  61. 61. Did Citizens United affect 501(c)(3)s?Short answer: NOWhy? FECA and IRC “speak” different languages FECA makes no distinction among 501(c) orgs IRC is a stricter set of rules because it makes distinction among 501(c) orgs  The 501(c)(3) electioneering prohibition restricts the express advocacy, independent expenditures, contributions, and some coordinated contributions that the FECA would potentially otherwise allow Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  62. 62. DisclaimerThe information contained in this presentation has been prepared by NEO LawGroup and is not intended to constitute legal advice. NEO Law Group has usedreasonable efforts in collecting, preparing, and providing this information, butdoes not guarantee its accuracy, completeness, adequacy, or currency. Thepublication and distribution of this presentation are not intended to create, andreceipt does not constitute, an attorney-client relationship. 201 Spear St., Suite 1100 San Francisco, CA 94105 415.977.0558 www.NEOLawGroup.com www.NonprofitLawBlog.com gene@neolawgroup.com twitter.com/gtak emily@neolawgroup.com twitter.com/emilychan Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.
  63. 63. Find listings for our current season of webinars and register at: NonprofitWebinars.comA Service Of: Sponsored by:

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