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

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

Gene Takagi & Emily Chan
April 18, 2012

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A Service
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Nonprofit Advocacy: Lobbying and
Election-Related Activities for
501(c)(3)s
Nonprofit Webinars
April 18, 2012

Presented by: Gene Takagi & Emily Chan

Copyright © 2012 Nonprofit Exempt Organization.. All rights reserved.

Agenda

• Introduction – exempt organizations

• Lobbying Hypothetical Case – review of basics

• Electioneering

• Affiliations of exempt organizations

• Citizens United


IRC Organizations
IRC Name Federal Tax Tax-deductible
Exemption Contributions
501(c)(3) Public Charity* Yes Yes
501(c)(4) Social Welfare Yes, with limitations No
Organization
501(c)(5) Labor, Agricultural Yes, with limitations No
& Horticultural
Organizations
501(c)(6) Trade Association, Yes, with same No
Professional limitations as
Organizations 501(c)(4) orgs
527 Political Action Investment income No
Organization (PAC) taxed

*This presentation does not addresses private foundations and special rules for churches


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


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)


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


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.


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


Lobbying Hypothetical Case

Prologue

• Evilcorp may be violating law by dumping Substance
X

• Kids getting sick

• We formed CHARITY to
help the kids


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


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


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


Chapter 3: Choosing One of Two
Standards

• Substantial Part Test – default rule

• 501(h) Expenditure Test – Form 5768
• N/A to churches, governmental units, public safety
organizations, and private foundations


Chapter 4: 501(h) – “Lobbying”

Lobbying
• Communication
• Principal purpose is to influence legislation
• Reflects a view on specific legislation

Two types of lobbying
• Direct – to member(s) of legislative body
• Grassroots – to member(s) of general public


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)


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


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)


CHARITY

$1.25 million in EPE
TOTAL LOBBYING EXPENDITURE LIMIT
= $200,000
• 20% of first $500,000 = $100,000
• 15% of next $500,000 = $75,000
• 10% of next $250,000 = $25,00

GRASS ROOTS EXPENDITURE LIMIT
= $50,000


Chapter 6: Special Circumstances

Ballot 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


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.


Paid Mass Media Ad about Highly Publicized
Legislation
• 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.

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


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


Epilogue

• CHARITY‟s lobbying and non-lobbying advocacy
pays off

• Evilcorp forced to stop
dumping Substance X and
pay restitution to sick kids


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


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


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)


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.”


In other words…

The IRS views electioneering as:

• Activities for or against a candidate for public
office

• On all levels – federal, state, and local


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


ABC’s of IRC continued…

“Public Office”

 Any office filled by a vote of the people on any level
– federal, state, or local


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


General points

 No contributions
(cash or in-kind)

 No endorsements

 No coordination of activities

501(c)(3) organizations must act in a nonpartisan
manner.

No de minimis exception for 501(c)(3)s!


Rationale

The 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.)


IRS Regulations

The IRS regulations on electioneering touch three
levels:
1. Campaign intervention activity

2. Tax-deductions for individuals

3. Taxable income of nonprofits


IRS Regulations for 501(c)(3)s and 501(c)(4)s
Campaign Tax-deductible Taxable income of
Intervention Contributions Nonprofit
Activity

501(c)(3) Public Prohibited Yes None
Charity

501(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.


Facts and Circumstances Test

The 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?


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) Timeliness

IRS Political Activity Compliance Initiative, Procedures for 501(c)(3) Organizations


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?


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.


ABC’s of the FECA

“Public office”

 = federal office


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.


Rationale

The 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.



Are there any permissible election-related
activities?


Issue Advocacy

 Position on issues that are related to the
organization‟s charitable or exempt purpose

 Risk: communications implicitly favor or oppose a
candidate
Rev. Ruling 2007-41


Voter Education

1. Appearances of Candidates
2. Candidate Questionnaires and Voter Guides
3. Candidate Forums and Debates
4. Internal Communications
5. Websites and Blogs
6. Distribution of Candidate or Party Materials – NO!
7. Endorsements – NO!


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


Candidate Education

1. Attempts to persuade candidates‟ policy positions
• Ethical persuasive tactics?

• FECA

2. Efforts to get issues on political party platforms


Business Activities

1. Special rules when organization‟s lists are used
for partisan activities
• Cost, Use, Rental, Notification, Content

• Receiving lists from candidates

2. Special rules for commercial transactions


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


Fundraising

1. Fundraising for the 501(c)(3) „s advocacy efforts

2. Fundraising for political recipients – NO!


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)


Affiliations of Exempt Organizations

c3 c4/ 527
c6

527 c4/ c3
c6


(c)(4) Tax on Political Activities

At 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


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


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)


Did Citizens United affect 501(c)(3)s?

Short answer: NO
Why? 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


Disclaimer

The information contained in this presentation has been prepared by NEO Law
Group and is not intended to constitute legal advice. NEO Law Group has used
reasonable efforts in collecting, preparing, and providing this information, but
does not guarantee its accuracy, completeness, adequacy, or currency. The
publication and distribution of this presentation are not intended to create, and
receipt 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


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