Lobbying: What Does It Mean For 501(c)(3) Organizations?

OVERVIEW

501(c)(3) organizations that engage in federal lobbying are subject to at least two separate—and very different— definitions of lobbying in order to comply with applicable federal tax and lobbying disclosure laws. This QuickCounsel will review the definitions and reporting requirements for 501(c)(3) public charities under the Internal Revenue Code (the "Code") and under the Lobbying Disclosure Act ("LDA") and provide a guide for compliance efforts under each legal framework.

FEDERAL TAX LAW

Nonprofit organizations that qualify for federal income tax exemption as public charities1 under Section 501(c)(3) of the Code are subject to heightened restrictions on lobbying and political activities. Carrying on propaganda or otherwise attempting to influence legislation may not constitute a "substantial part" of the activities of an organization exempt under Section 501(c)(3); exceeding the "substantial part" limit places an organization at risk of losing its exempt status. Further, the Code prohibits such organizations from engaging in any political activities. Whether an organization's attempts to influence legislation are substantial will be determined by a vague facts and circumstances "substantial part" test, unless an organization elects to have such determination made pursuant to an expenditure test, by filing a 501(h) election with the Internal Revenue Service ("IRS").

The No Substantial Part Test

Under the substantial part test, codified in part in Section 1.501(c)(3)-1(c)(3)(ii) of the Treasury Regulations, an organization's tax-exempt status will not be at risk because of lobbying, provided such organization is not classified as an "action" organization, or an organization, "a substantial part of its activities is attempting to influence legislation by propaganda or otherwise." The definition of lobbying under the substantial part test includes the following:

Attempts to influence legislation by propaganda or otherwise; Presentation of testimony at public hearings held by legislative committees; Correspondence and conferences with legislators and their staffs; Communications by electronic means; and Publication of documents advocating specific legislative action. Legislation is defined to include action by Congress, a state legislature, a local council or similar governing body, and the general public in a referendum, initiative, constitutional amendment, or similar procedure. The determination of whether an organization's lobbying activities are substantial is generally based on a facts and circumstances analysis. In some cases, the IRS has taken into consideration the percentage of the organization's expenditures devoted to influencing legislation on an annual basis. See Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975). In others, it has determined substantiality based on the percentage of the organization's activities that constitute influencing...

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