The Policies of Politics and Lobbying: How to Avoid the Controversies and Penalties (article)

The Policies of Politics and Lobbying: How to Avoid the Controversies and Penalties (article)

Federal, state and local budget deficits have made it essential for every tax-exempt organization to be proactive in chasing the ever shrinking dollar and in promoting its particular mission or cause. How does an organization position itself to receive its fair share of dollars and commitment from funding sources, donors, and federal, state and local governmental entities? Some essential components include advocacy, lobbying, and politicking, terms that are sometimes confused and used interchangeably.

The following article discusses politicking and lobbying laws, including what constitutes politicking and lobbying, the advantages of electing to register under a special lobbying provision, and what are permissible activities that do not constitute prohibited political activities.

Due to the turmoil expected in the upcoming election, it will be important to keep a close eye on politicking, advocacy and lobbying. The IRS's Exempt Organizations Fiscal Year 2011 Annual Report & Fiscal Year 2012 Work Plan indicates the following, "As in any election year, EO will continue its work to enforce the rules relating to political campaigns and campaign expenditures. In FY 2012, EO will combine what it has learned from past projects on political activities with new information gleaned from the redesigned Form 990 to focus its examination resources on serious allegations of impermissible political intervention."

Politicking

The ban on political campaign activity by charities and churches was created by Congress more than a half century ago. Currently, the law prohibits political campaign activity by charities and churches by defining a Section 501(c)(3) organization as one "which 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." The IRS has adopted a vigorous and effective campaign to educate Section 501(c)(3) organizations such as charities and churches about the federal ban on political activity.

Exempt organizations may be tempted to capitalize on the election season to bring more attention to themselves by sponsoring a candidate, inserting a link to the candidate on the organization's website or by posting downloadable letters on their website preprinted with political officials' names and addresses and the legislation that they are supporting or opposing. These are all great marketing ideas that will get you noticed very quickly…by the IRS or its counterparts at the state level, the attorneys general. It may seem paranoid to refrain from letters and online materials, but the paranoia is justified. The IRS and many state attorney general offices have begun reviewing nonprofit organizations' websites.

Present-law Section 501(c) provides for 27 different categories of nonprofit organizations that generally are exempt from federal income tax. Different rules apply to lobbying and political campaign activities of such tax-exempt organizations depending upon the category of Section 501(c) under which the organization is described.

Politicking appears pretty easy to understand under Section 501(c)(3): organizations are not entitled to tax-exempt status if they participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office (which includes national, state or local). In theory, "no amount of political campaign activity is permitted" under punishment of loss of tax-exempt status, which is pretty severe, even by IRS standards.

Political campaign intervention includes any and all activities that favor or oppose one or more candidates for public office. The prohibition extends beyond candidate endorsements. Contributions to political campaign funds or public statements of position (verbal or written) made by or on behalf of an organization in favor of, or in opposition to, any candidate for public office clearly violate the prohibition on political campaign intervention. Distributing statements prepared by others that favor or oppose any candidate for public office will also violate the prohibition. Allowing a candidate to use an organization's assets or facilities will also violate the prohibition if other candidates are not given an equivalent opportunity.

Of course, there are exceptions. Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, certain voter education activities (including presenting public forums and publishing voter education guides) conducted in a non-partisan manner do not constitute prohibited political campaign activity. In addition, other activities intended to encourage people to participate in the electoral process, such as voter registration, voter guides, voting records, candidate questionnaires, issue advocacy and get-out-the-vote drives, are not prohibited political campaign activity if conducted in a non-partisan manner.

On the other hand, voter education or registration activities with evidence of bias that (a) would favor one candidate over another; (b) oppose a candidate in some manner; or (c) have the effect of favoring a candidate or group of candidates, will constitute prohibited participation or intervention.

Rev. Rul. 2007-41 contains a comprehensive list of do's and don'ts. Of particular concern are website links or endorsements, illustrated by example situations 19, 20 and 21. At its most basic, a website is a form of communication. If an organization posts something that favors or opposes a candidate for public office, the organization will be treated the same as if it distributed printed material, oral statements or broadcasts that favored or opposed a candidate.

The IRS has stated that an organization has control over whether it establishes a link to another site: "the organization is responsible for the consequences of establishing and maintaining that link, even if the organization does not have control over the content of the linked site." This can lead to serious consequences if you do not monitor the other organization's website. Since web content changes constantly, this is very difficult to do.

Advocacy and Lobbying

Not-for-profit organizations are permitted to engage in advocacy and lobbying activities but there are specific guidelines in regard to lobbying that they must adhere to in order to avoid penalties imposed by the IRS.

Advocacy shapes public policy and is the right of every member of society. Charitable organizations have by far been the biggest advocates of change, and they typically advocate to some degree. Advocacy is what drives their missions, which in the end benefits everyone. Their work has influenced city halls and statehouses around the country.

One definition of advocacy is found in the book Advocacy for Social Justice by David Cohen in a chapter entitled "Advocacy: Its Many Faces and a Common Understanding:" Advocacy is the pursuit of influencing outcomes—including public-policy and resource-allocation decisions within political, economic, and social systems and institutions—that directly affect people's lives.

Advocacy is simply "speaking up" about your organization, its mission and its purpose. Merriam-Webster Dictionary defines it as "The act or process of advocating or supporting a cause or proposal." Advocacy is a powerful weapon because almost everyone in an organization can and should advocate its mission and purpose. In addition, personal stories of an organization's conduct and accomplishments are better received than a canned marketing flyer. Everyone can be an "advocate" of his or her organization.

Depending on the situation, advocacy may or may not be considered lobbying, but lobbying always contains components of advocacy. For example, a group of individuals might come together to protest the sales of cigarettes within a certain proximity of a secondary school. In this situation, the individuals are exercising their right to freedom of speech and advocating for protection of children from cigarettes. If the protest is not effective in achieving its goals, the group of individuals may decide to go to City Hall and petition for an ordinance that would make it illegal to sell cigarettes within certain proximity of secondary schools. This now represents an attempt to influence or change legislation, which is considered lobbying.

Section 501(c)(3) states that organizations are not entitled to tax-exempt status if a substantial part of their activities is carrying on propaganda or otherwise attempting to influence legislation (commonly referred to as lobbying).

There are two key terms that should be addressed in that statement:

  • "Legislation" is defined by the IRS to include actions by Congress, any state legislature, any local council or similar governing body with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure. It does not include actions by executive, judicial, or administrative bodies.
  • "Substantial" has never been officially defined, and the commonly quoted "five-percent" test for establishing what is substantial has never been accepted by the IRS.

Charitable organizations, including those devoted to religious, educational, and cultural missions, routinely lobby Congress and local governments in support of specific objectives, whether it is to feed the homeless, rehabilitate drug abusers, support community arts, protect wetlands or serve countless other local, regional, national and international purposes.

A charity is lobbying when it states its position on specific legislation to legislators or other government employees who participate in the formulation of legislation, or urge members to do so (direct lobbying). In addition, a charity is lobbying when it states its position on legislation to the general public and asks the general public to contact legislators or other government employees who participate in the formulation of legislation (grassroots lobbying).

The federal government, including Congress and the IRS, supports lobbying by charities. Congress sent that unambiguous message when it enacted the liberal provisions under the 1976 lobby law. The same message came from the IRS in regulations issued in 1990, which support both the spirit and intent of the 1976 legislation. A charity that elects to be treated under the 1976 lobby law is not tested under the "substantial" test described above, but instead is examined under the more objective standards of the law.

Lobbying is among the most effective tools charities have to promote their causes. Organizations that elect to fall under the law are granted more leeway in their activities than those that have not so elected. Organizations that do not elect to fall under the 1976 law remain subject to the "substantial" test, and the definition of what is considered substantial lobbying is unclear. The IRS may claim that there is some absolute level of lobbying activity — measured by dollars, time, public prominence, success, website visits or importance to the nonprofit — that is substantial, but it has never defined what constitutes substantial. As a result, an organization that has not elected can never be certain when it is straying beyond the legal lobbying limits.

For organizations that elect to come under the 1976 lobby law (hereafter called electing organizations), there is a single, clear financial yardstick regarding how much lobbying a group can do up to an amount based on overall budget (less certain costs of fundraising and income production). A key distinction is that lobbying occurs only when there is an expenditure of money by the charity for the purpose of attempting to influence legislation under the 1976 lobby law. Where there is no expenditure, there is no lobbying.

In addition, the 1976 law contains provisions that describe particular activities that have some relationship to public policy and legislative issues but that are still not treated as lobbying and therefore are permitted without the dollar limit set forth below. Examples include[1]:

  • Contacts with executive branch employees or legislators in support of or opposition to proposed regulations.
  • Responses to written requests from a legislative body (not an individual legislator) for technical advice on pending legislation, even if the organization takes a position on the legislation (i.e., a request to provide testimony at a hearing).
  • Lobbying by volunteers of a Section 501(c)(3) organization only to the extent that the organization incurs expenses associated with the volunteers' lobbying. For example, volunteers working for a charity could organize a huge rally of volunteers at the state capitol to lobby on an issue and only the expenses related to the rally paid by the charity would count as a lobbying expenditure.
  • Communications to the organization's membership base on legislation — even if it takes a position on the legislation — so long as the communications do not directly encourage members or others to lobby.
  • So-called self-defense activity — that is, lobbying legislators (but not the general public) on matters that may affect the organization's own existence, powers, tax-exempt status, and similar matters are not considered lobbying.
  • Making available the results of nonpartisan analysis, study or research on a legislative issue that presents a sufficiently full and fair exposition of the pertinent facts to enable the audience to form an independent opinion. The regulations make clear that such research and analysis need not be "neutral" or "objective" to fall within this "nonpartisan" exclusion. The exclusion is available to research and analysis that take direct positions on the merits of legislation, as long as the organization presents facts fully and fairly, makes the material generally available, and does not include a direct call to the reader to contact legislators.
  • A charity's discussion of broad social, economic and similar policy issues whose resolution would require legislation — even if specific legislation on the matter is pending –so long as the discussion does not address the merits of specific legislation.

Generally, electing organizations may spend 20% of the first $500,000 of their annual expenditures ($100,000) on direct lobbying, 15% of the next $500,000 ($75,000), 10% of the next $500,000 ($50,000), and 5% of the excess over $1.5 million. The total direct lobbying expenditure limit is $1 million a year. The grassroots-lobbying limit is 25% of the direct lobbying amount.

To elect, an organization simply files the one-page IRS Form 5768 indicating that its governing body has elected to come under the provisions of the 1976 law. An election made any time during the organization's tax year is effective throughout that tax year and for succeeding years. If an organization wants to revoke its election and return to the substantial test, it can do so by filing the same form and simply checking a different box. Revocation is effective when the organization's next tax year begins.

If an electing organization exceeds its lobbying ceiling it may be assessed a penalty of 25% of the amount of the excess spending (not the total spent for lobbying). If the charity exceeds a ceiling by 50% on a four-year aggregate basis it can lose its tax exemption.

Websites

If an organization uses its website to promote issues on behalf of its constituents, it may be considered lobbying. Stating a position to the general public and asking them to contact legislators or other government employees who participate in the formulation of legislation will be considered lobbying.

A website that contains language like the following — "contact your state legislator and urge their support for HR 727" — would clearly be an example of lobbying. This problem and being labeled with the lobbying designation can be avoided by merely leaving out this type of phrase. The message should be the important content. The organization's constituencies will be left to conclude they should contact the appropriate officials.

To stay current with these guidelines, nonprofit organizations should make sure their website content is accurate and corresponds with traditional hard copy records. If you would like to discuss the ramifications of your website content or other potential lobbying activities within your organization, please contact your local CBIZ MHM tax professional.

Other useful information:


[1] Charity Lobbying in the Public Interest. "Important Exclusions from Lobbying Under the 1976 Law." http://www.clpi.org.


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The Policies of Politics and Lobbying: How to Avoid the Controversies and Penalties (article)Federal, state and local budget deficits have made it essential for every tax-exempt organization to be proactive in chasing the ever shrinking dollar and in promoting its particular mission or cause. ...2012-07-26T19:23:00-05:00Federal, state and local budget deficits have made it essential for every tax-exempt organization to be proactive in chasing the ever shrinking dollar and in promoting its particular mission or cause.