Lobbying Rules and Restrictions for Public Charities

LOBBYING RULES AND RESTRICTIONS FOR PUBLIC CHARITIES

By Ben Tesdahl

Powers, Pyles, Sutter & Verville

I. General Overview and Misconceptions About Lobbying

A. The Substantial Part Test

Section 501(c)(3) of the Internal Revenue Code ("Code") states that "no substantial part" of a charity's activities may consist of influencing legislation. The IRS has never quantified the "substantial part" test, although some practitioners have attempted to come up with rough rules of thumb. However, the IRS has often stated that there is no precise numerical limit under this test. Instead, the IRS tends to look at all the facts and circumstances, including how much time, money and effort were expended for lobbying. Because of the vagueness of the “substantial part test,” many charities avoid lobbying altogether or believe their lobbying efforts can only be miniscule. In addition, even charities that do lobby often fail to keep track of lobbying time spent by unpaid volunteers, even though such record keeping is necessary.

B. The Expenditure Test

Because the "substantial part" test is so vague, Congress and the IRS developed something called the "expenditure test" under sections 501(h) and 4911 of the Code. If a charity makes the section 501(h) election on the appropriate IRS form (Form 5768), that charity's lobbying limits will be governed solely by how much money its spends on lobbying.

C. Who Should Make The 501(h) Lobbying Election?

Because the expenditure test is much more concrete and often more advantageous than the "substantial part" test, it is generally to most charities’ advantage to make the election. There are two primary situations where the election may not be advantageous. One situation is where a charity expects to spend more than $1 million each year on lobbying, and that amount is still an insubstantial part of its total budget. The other situation is where a charity engages almost entirely in grass roots lobbying; in this instance, the substantial part test may allow for slightly more leeway than would the expenditure test.

The remainder of this outline describes the lobbying rules and limitations under the section 501(h) expenditure test and explains how to use those rules to your advantage.

II. What is Lobbying?

A. Direct Lobbying

In general, "direct lobbying" consists of any oral or written communication that meets all three of the following elements:

1. It refers to "specific legislation" (including any introduced bill, Act, resolution or legislative amendment; any specific legislative proposal supported or opposed by the charity; and any ballot measure, referendum, or constitutional amendment);

2. It "reflects a view" on that legislation; and

3. It is addressed to a legislator, an employee of a legislative body, or any other government official participating in the formulation of legislation.

Most lower level charity staff members would not be involved in direct lobbying of legislators or their staff. However, in the event staff are ever asked to do such lobbying, paid staff members should keep track of their time and their expenses for such lobbying. (Note that volunteer staff need not keep track of their time, since their work does not cost the charity anything.) In addition, a charity must keep track of the cost of hiring professional lobbyists who engage in direct lobbying, as well as all amounts paid to other organizations for direct lobbying.

B. Grass Roots Lobbying.

In general, a "grass roots lobbying communication" is one which satisfies all three of the following elements:

1. It refers to specific legislation (as defined above);

2. It reflects a view on that legislation; and

3. It contains a "call to action." A call to action includes:

(a) urging readers to contact their legislators;

(b) stating a particular legislator's address or telephone number;

(d) identifying a legislator as being opposed to a charity's view, undecided about the legislation, the recipient's representative, or a member of the legislative committee that will consider the legislation. [NOTE: It is permissible to merely identify the sponsor(s) of legislation.]

A charity's limitations on grass roots lobbying are far more restrictive than those for direct lobbying, and most staff members would be involved in grass roots lobbying communications. Therefore, staff members must thoroughly understand how to determine whether any particular public communication (most likely written) contains a grass roots lobbying communication.

C. Nonlobbying

Finally, staff members should understand what does not constitute lobbying. The following types of communications are not lobbying. Thus, staff need not keep track of their time and expenses for:

1. Communications to the executive or judicial branches or to administrative agencies.

2. Communications constituting (a) "nonpartisan study, analysis, and research" in which a full and fair exposition of the issue is presented and disseminated to the general public, or (b) discussions of "broad social, economic and similar problems" which do not refer to specific legislation.

3. Communications in response to a written request for technical advice from a legislative body.

4. "Self-defense lobbying" aimed at preserving the legal existence, powers, or duties of the lobbying charity itself.

5. Any communication missing one of the three elements listed above for direct or grass roots lobbying.

III. What Are the Section 501(h) Lobbying Limitations

A charity's lobbying limitations are based on a percentage of its total expenditures each year for its various charitable purposes (referred to as "exempt purpose expenditures").

A. Expenditure Limits. In general, total lobbying expenditures (i.e., expenditures for direct lobbying plus grass roots lobbying) must not exceed 20% of the first $500,000 of exempt purpose expenditures, plus a sliding scale percentage thereafter, with a total lobbying limitation of no more than $1 million in any one year. The grass roots lobbying limit is 25% of the total lobbying limit (i.e., 25% of 20% = 5%). The tax return for charities (IRS Form 990) has a section for calculating these limits each year.

B. Penalties. If a charity exceeds either of the lobbying expenditure limits, it will have to pay a 25% excise tax on the excess amount. If either lobbying limit is exceeded by an average of 150% over a four-year period, the charity would lose its tax-exempt status.

C. Example: As an example of how the above limitation would be applied, if a charity had $500,000 of charitable purpose expenditures in a particular year, it could spend 20% of that amount ($100,000) on total lobbying (both direct and grass roots combined), but grass roots lobbying could never exceed 25% (i.e., $25,000) of that total lobbying amount without the charity incurring a tax. As this example shows, grass roots lobbying limits are very restrictive and can be easily exceeded if careful lobbying expense records are not kept.

IV. Tracking and Allocating Lobbying Expenditures

Because a charity's written materials often contain both lobbying and nonlobbying communications, and because some of these written materials are sent to both members and non-members, a charity cannot properly calculate its lobbying limitation unless it can accurately determine both the cost of producing the lobbying information in each communication and the percentage of the recipients of a communication that are members. Although the lobbying rules are complex and comprise dozens of pages, the following brief guidance should help charities better understand the basics of these rules.

A. What Are the Costs of a Lobbying Communication

Once it has been determined that a lobbying communication has occurred, it must next be determined the amount expended for that communication. Generally, all costs incurred in preparing and disseminating the communication must be captured, including the allocable portion of staff salaries and deferred compensation, any out-of-pocket and travel expenses, and a portion of administrative, overhead, and other general expenditures attributable to the communication. This would include an appropriate percentage of the expenses of researching, drafting, reviewing/editing, copying, publishing, and disseminating the communication.

Because allocations of costs are so important, a charity's staff must keep accurate records of any time spent on lobbying communications. A daily time sheet which categorizes the cost of all lobbying efforts should be utilized by paid staff whenever possible.

V. Practical Lobbying Tips – Using the Rules to Your Advantage

A. Omit a Call to Action. Omitting a "call to action" is one of the easiest ways to avoid making a grass roots lobbying communication in the first place. Staff should remember that many times, it is possible to make a dramatic point regarding legislation and yet totally avoid having that communication count as lobbying. The key is to refer to the legislation and express a strong view on it, but avoid asking the readers to contact their legislators and avoid mentioning any legislators who are voting on the matter. Many times, the readers of such a message will go ahead and take appropriate action on their own without having to be told to do so.

B. Use the Cheapest Means Possible. If there must be grass roots lobbying, try to do it as cheaply as possible, since only expenditures of money are counted.

1. For example, try to use unpaid volunteers to draft and/or disseminate the lobbying message. Their efforts do not count towards your lobbying limit because there is no cost associated with their time.

2. Alternatively, a lobbying message sent over the Internet can reach millions of people at a very small total cost, whereas sending the same message by mail involves grass roots lobbying costs for postage, envelopes, paper, etc.

STAFF LOBBYING TIME SHEET

NAME OF EMPLOYEE: ______

NAME OF LOBBYING PROJECT: ______

(Note: List time and expenses for only this one project on this form)

The time and expenses for the project listed on this time sheet pertain to either direct lobbying or grass roots lobbying because the project will result in a communication (check one):

___ To a legislator or any of the staff of a legislator which “reflects a view” (pro or con) on “specific legislation” (including any bill, Act, legislative amendment, specific legislative proposal, ballot measure, referendum or constitutional amendment); OR

___ To the public which refers to specific legislation (as defined above), reflects a view (pro or con) on that legislation, and contains a “call to action” (including: urging readers to contact their legislators; stating a legislator’s phone, address or similar information; providing a tear-off post card or petition; or identifying a legislator as being opposed to NMSF’s view, undecided about the legislation, the recipient’s representative, or a member of the committee that will consider the legislation. [BUT: It is OK to merely name the main sponsors of a bill.]

NOTE: If neither of the above descriptions are applicable, the project is NOT a

lobbying project and you need NOT keep track of your time and expenses.

IF THIS IS A LOBBYING PROJECT, ATTACH A COPY OF THE FINAL LOBBYING COMMUNICATION, IF AVAILABLE, AND TURN THIS SHEET IN TO YOUR SUPERVISOR. IF YOUR WORK ON A PROJECT WILL NOT BE COMPLETED WITHIN ONE MONTH, TURN IN TIME SHEETS AT THE END OF EACH MONTH ANYWAY AND INDICATE THAT YOUR WORK ON THE PROJECT IS STILL ONGOING. EVEN IF WORK IS STILL IN PROGRESS, ALL LOBBYING TIME SHEETS FOR WORK THROUGH THE END OF THE FISCAL YEAR MUST BE TURNED IN IMMEDIATELY AFTER THE END OF THE FISCAL YEAR.

WHAT COSTS WERE INCURRED ON THIS LOBBYING PROJECT FOR THIS EMPLOYEE?

A. Salary Expenses for Lobbying work on this Project:

DATE Estimate of Time Spent on the Project Each Day and Description of Activity

(Include all time spent on research, drafting, reviewing, editing, copying, and/or disseminating the lobbying message. Record time to the nearest 15 minutes.)

______

TOTAL LOBBYING HOURS ON THIS PROJECT: ______hours.

B. Misc. Out of Pocket Expenses by this employee for Lobbying on this Project

(Include travel, hotel, pay phone calls, outside copying, and other vendor costs)

DATE Description and Amount of Expense (Attach receipts, if available)

______

TOTAL OUT OF POCKET COSTS: $ ______

{D0280999.DOC / 1 }