Attorney Freeman Durham has put together a memo on permissible and impermissible political activity for 501(c)(3) organizations. We thought it was important to do this so that GLBT organizations would know exactly what they could and could not do in the political arena. Our very special thanks to Freeman for compiling and interpreting this information!

POLITICAL ACTIVITIES OF 501(c)(3) ORGANIZATIONS

501(c)(3) Exempt Organizations

A 501(c)(3) organization is an organization that is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code, and to which tax-deductible contributions may be made. In general, these are religious, charitable, or educational organizations. Public Charity vs. Private Foundation

There are two different types of 501(c)(3) organizations: public charities and private foundations.

A private foundation is generally an organization supported by a single family or company, or other small group of major donors. A private foundation will generally file an annual Form 990-PF, and pay a 2% excise tax on its interest, dividends, and other investment income.

A public charity is an organization that derives its support primarily from a broad donor base or from the activities that are the reason for its exemption. Generally, a 501(c)(3) organization must have a ruling from the IRS to be classified as a public charity. A public charity will generally file an annual Form 990.

Restrictions on Political Activities

A 501(c)(3) organization is prohibited from participating in any campaign for public office. Therefore, a 501(c)(3) organization cannot endorse a candidate for office, provide support for electing a candidate, or oppose the election of a candidate. While it might provide information about the voting record or positions of candidates on issues of importance to the organization, that information should be presented in a nonpartisan manner and not suggest an endorsement by the organization.

A 501(c)(3) organization cannot attempt to influence legislation as a substantial part of its activities. Legislation is the act of creating a law. For this purpose, a referendum is considered legislation. A private foundation is subject to 10% excise tax on all expenditures it makes in an attempt to influence legislation. If the expenditure is not repaid within a short time after the IRS learns of the problem, there is an additional 100% excise tax. Furthermore, if a foundation manager has knowingly violated these rules, or refuses to agree to the repayment, the manager is subject to a 2.5% or 50% excise tax, respectively.

A public charity must report activities related to its attempts to influence legislation on its annual Form 990. Generally, it must describe the activities, indicate whether paid staff or volunteers were involved, and how much was expended. Whether or not its legislative activities will be considered a “substantial part of its activities” will depend on the facts and circumstances of each case. However, if the public charity elects to apply Section 501(h) of the Internal Revenue Code, then whether or not its legislative activities will be considered a “substantial part of its activities” will be purely on the basis of its expenditures.

Substantial Part Defined

For public charities, there is no clear definition of “substantial part of its activities” if the Section 501(h) election is not made. However, the Section 501(h) rules provide a clear definition and suggest a rough idea of what it means even for those organizations not making the 501(h) election. If the Section 501(h) election is made, a public charity is subject to an excise tax of 25% of its “excess expenditures”. For this purpose, excess expenditures are those that exceed the annual limits. In the case of an organization that spends up to $500,000 on its exempt functions, the annual limit for total expenditures to influence legislation is 20% of the organization’s exempt purpose expenditures. Within this total limit, the annual limit for attempts to influence legislation by getting voters to contact a legislative body or elected representatives (“grass roots lobbying”) is 5% of the organization’s exempt purpose expenditures. This 5% limit does not apply to direct lobbying of a legislative body or elected representatives. This 5% limit also does not a referendum, where the voters themselves are considered the legislative body. If the Section 501(h) election is made, a public charity’s tax exempt status is not put at risk by attempts to influence legislation unless its average expenditures on such activities over a five year period exceeds 150% of the annual limits.

Attempts to Influence Legislation (Lobbying) Defined

Attempts to influence legislation include communications with any elected member or employee of a legislative body concerning a specific proposal for legislation, and communications with any other government official or employee who may participate in the formulation of such legislation. This is considered direct lobbying.

Attempts to influence legislation also include efforts to affect the options of the general public (or a segment of the public) on a specific proposal for legislation that encourage the recipient to take action. This is considered “grass roots” lobbying. For this purpose, a communication will be treated as directly encouraging the recipient to take action if it states that the recipient should contact a legislative body or government official, or provides a mail or email address or telephone number for doing so, or provides a petition or postcard for doing so. A communication will be treated as encouraging the recipient to take action (but not directly encouraging the recipient to take action – for relevance of this distinction, see exception for communications with members below) if it identifies whether a specific legislator is supporting, opposing, or undecided on the issue, or identifies the recipient’s representative in the legislative body, or identifies the members of the committee or subcommittee who will consider the proposal.

It is important to note, however, that in the case of a referendum, the general public is considered to be the legislative body, so communications to the general public with respect to the referendum are considered to be direct lobbying and not grass roots lobbying.

Activities That are Not Considered Lobbying

The following activities are not considered to be attempts to influence legislation:

1. Communications that do not refer to a specific proposal for legislation, or that do not reflect a view on such legislation.
2. Communications that make available the results of nonpartisan analysis, study, or research. To be considered nonpartisan, it must provide an independent and objective exposition of the issue. It may advocate a particular position or viewpoint so long as there is a sufficiently full and fair exposition of the pertinent facts to allow the reader to form an independent conclusion. Distribution of the results may not be limited to those on one side of the issue. It may not directly encourage action by the recipient. Subsequent use with grass roots lobbying efforts may cause the nonpartisan analysis, study, or research to be considered part of the grass roots lobbying. (Subsequent use with direct lobbying efforts will not cause the nonpartisan analysis, study, or research to be considered part of the direct lobbying.)
3. Communications that providing technical advice or assistance to a governmental body in response to a written request from such body. The request must come from the body or a committee, not just a particular member.
4. Appearances before or communications with a legislative body with respect to possible legislation that might affect the existence of the organization, its powers, or its tax status. This “self-defense” exception is limited to those organizations whose legal status is threatened by proposed legislation.
5. Communications by a public charity with its own members on legislation of direct interest to the organization and its members. For this exception to apply, the communication must be directed only to the organization’s members, and must not directly encourage the organization’s members to engage in direct or grass roots lobbying. If the communication directly encourages the organization’s members to contact their elected representatives or other public officials, then it will be treated as direct lobbying by the organization. If the communication directly encourages the organization’s members to contact members of the general public to take action, then it will be treated as grass roots lobbying by the organization. If a communication that directly encourages recipients to contact their elected representatives or other public officials, and is directed primarily to members but at least 15% but less than 50% to non-members, then a share of the cost must be treated as grass roots lobbying based on the non-member percentage of the total distribution.

Determining the Cost of Lobbying

If an activity is considered to be direct or grass roots lobbying, the costs of that activity include amounts paid directly or indirectly for printing, mailing, and other distribution costs; the allocable share of current or deferred compensation for organization’s employees involved in such lobbying; any out-of-pocket expenses related to such lobbying; the allocable share of administrative, overhead, and other general expenses; and the allocable share of the costs of any communications with members treated as lobbying.

Helpful Hints

Both public charities and private foundations should be conscious of these rules if any political activity is considered. Public charities that engage in efforts to influence legislation should keep careful records of lobbying activities to make reporting accurate.

For public charities, communications with members on an issue of importance to the organization will not be considered lobbying unless the communication directly encourages the members to take action. If an organization’s members are alerted to an issue of importance to the organization, many will take the hint without the direct suggestion from the organization that they lobby. This exception is useful to avoid the reporting requirements for lobbying activities. It can also be useful to conserve the organization’s lobbying dollars for more important activities.

For public charities that have not made the 501(h) election, the 20% limit on total lobbying and the 5% limit on grass roots lobbying should be applied more broadly to reflect not only the organization’s expenditures, but also its activities and focus as a whole. Communications by a public charity regarding a referendum will generally be considered direct lobbying, and not grass roots lobbying, and therefore will be subject to the 20% limit rather than the 5% limit.