General Rule:  No substantial part of the activities of an organization described by IRC Section 501(c)(3) may be the carrying on of propaganda or otherwise attempting to influence legislation.

This general rule has unnecessarily deterred many public charities from engaging in activities to influence legislation, more commonly referred to as lobbying.  A charity’s board of directors should consider whether lobbying would be an effective strategy and if so, whether the board members have a fiduciary duty to their organization to engage in lobbying in order to best further the organization’s mission.  Greater understanding of the applicable laws will allow charities more freedom to incorporate lobbying as part of their strategic plan. 

Key issues to consider include:

1. What is lobbying in context of the prohibition imposed by the general rule?
2. What types of advocacy activities are not considered lobbying and are not subject to the prohibition?
3. How much lobbying is considered a substantial part of an organization’s activities?

The answers to these questions depend in part on the charity’s decision on which of two standards it chooses to measure its compliance:

1. The Substantial Part Test.
2. The 501(h) Expenditure Test.

Charities are automatically subject to the standard set forth by the Substantial Part Test; they must file the very simple, one-page Form 5768 to elect to be subject to the 501(h) Expenditure Test.  For most charities with annual budgets under $17 million that engage or plan to engage in lobbying , the Expenditure Test will be preferable.  Note, however, that churches and related entities, governmental units and certain organizations that test for public safety may not make the 501(h) election and remain subject to the standard set forth by the Substantial Part Test.

Substantial Part Test:

1. Lobbying activities are not specifically defined beyond "activities attempting to influence legislation."
2. While neither the statute nor regulations carve out specific exclusions from the scope of lobbying activities, the following activities would not be considered lobbying:
   • Attempting to influence an administrative agency with respect to its regulations or rulings.
   • Attempting to influence the President, a governor or mayor with respect to his or her executive decisions.
   • Attempting to influence legislators on nonlegislative matters (e.g., to conduct an investigative hearing, to intervene with a government agency).
   • Engaging in litigation to obtain a judicial interpretation of the law.
3. Neither the statute nor regulations define how much lobbying would be considered substantial.  In one early case, Seasongood v. Commissioner of Internal Revenue, 227 F.2d 907 (6th Cir. 1955), devotion of less than 5% of an organization’s time and effort was found to be insubstantial.  Later, in Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1974), the Tenth Circuit rejected the use of a percentage test to determine whether activities were substantial.  However, in Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975), the Court of Claims cited percentage figures (lobbying expenditures of 16.6% to 20.5% of total expenditures over the four-year period in question) to support its determination that an organization’s lobbying activities were substantial.  Currently, the test is generally thought to consider all the facts and circumstances of an organization’s lobbying activities, including cash expenditures, volunteer efforts and donated resources.  Accordingly, a charity must document all of its lobbying activities and expenses if it decides to be subject to the Substantial Part Test.

   If a charity engages in substantial lobbying in any one year, it may have its tax-exempt status revoked.  In addition, violation of the Substantial Part Test may result in the imposition of:  (a) a 5% tax on the organization on all lobbying expenditures, and (b) a 5% on organizational managers (e.g., directors and officers) who permitted such expenditures knowing that it would jeopardize the organization’s tax-exempt status.  IRC Section 4912.

501(h) Expenditure Test:

1. The following definitions apply to electing charities (those that elect to be subject to the 501(h) Expenditure Test):

   A Direct Lobbying Communication is any attempt to influence legislation through communication with (a) any member or employee of a legislative body (e.g., Congress, state assembly or senate, county board of supervisors) or (b) any other government official or employee who may participate in the formulation of legislation, but only if its principal purpose is to influence legislation, and it reflects a view on specific legislation (proposed or pending law or bill).

   A Grassroots Lobbying Communication is any attempt to influence legislation through an attempt to affect the opinion of the general public (or any segment), but only if it reflects a view on specific legislation and encourages the recipient to take action (contact legislators) with respect to such legislation.

   Legislation includes action by a legislative body or by the public in a referendum, ballot initiative, constitutional amendment or similar procedure.

   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, nor investment management expenses.

2. The following activities are specifically not considered lobbying for electing charities:

   Nonpartisan analysis, study or research which may advocate a particular position or viewpoint so long as:  (a) there is sufficiently full and fair exposition of the pertinent facts (and not just unsupported opinions) to enable the public or an individual to form an independent opinion or conclusion; (b) the distribution of the results is not limited to, or directed toward, persons who are interested solely in one side of a particular issue; and (c) subsequent use does not cause it to be treated as a grassroots lobbying communication (e.g., direct encouragement for recipients to take action within 6 months).

   Examinations and discussions of broad social, economic and similar problems; provided that:  (a) they do not address themselves to the merits of a specific legislative proposal; and (b) they do not directly encourage recipients to take action with respect to legislation.

   Technical advice or assistance provided to a governmental body or committee in response to a written request from such body or committee.

   Communications pertaining to self-defense by the organization to a legislative body or its representatives and with respect to a possible action by such legislative body that might affect the existence of the organization (or an affiliate), its powers and duties, its tax-exempt status, or the deductibility of contributions to the organization.  Under this exception, a charity may similarly make an expenditure to initiate legislation if such legislation concerns a matter listed above.

3. An otherwise qualified electing charity will not be denied exempt status as a 501(c)(3) organization because of substantial lobbying so long as its total lobbying expenditures and grassroots expenditures do not normally exceed the following limits:

Total Lobbying Expenditures (direct and grassroots):

• 20% of the first $500,000 of Exempt Purpose Expenditures, plus
• 15% of the next $500,000 of Exempt Purpose Expenditures, plus
• 10% of the next $500,000 of Exempt Purpose Expenditures, plus
• 5% of the remaining Exempt Purpose Expenditures up to a total cap of $1 million (which would be reached when total Exempt Purpose Expenditures are at $17 million).

Grassroots Expenditures:

• The applicable limits are 1/4 of the corresponding Total Lobbying Expenditure Limits.

Unlike a non-electing charity that may have its exemption revoked if it engages in substantial lobbying for a single year, an electing charity will be subject to revocation of its tax-exempt status if, over a four-year period, either its total lobbying or grassroots expenditures exceed the appropriate aggregated annual limit over the period by more than 50%.  However, if an electing charity exceeds either the total lobbying or grass roots expenditures limit in any one year, it must pay an excess lobbying expenditures tax equal to 25% of the excess.

It is important to understand that an electing charity is not subject to limits on lobbying activities that do not require expenditures (e.g., unreimbursed lobbying by volunteers).

For more information about lobbying, see future posts and the following sites:

Alliance for Justice – Worry-Free Lobbying for Nonprofits:  How to Use the 501(h) Election to Maximize Effectiveness

Center for Lobbying in the Public Interest – FAQs

NPAction – Legal Information – Lobbying

The Nonprofit Lobbying Guide (1999) by Bob Smucker (publ. by Indendent Sector)

Lobbying Issues, IRS 1997 EO CPE Text