Lobbying Activities of Tax-exempt Nonprofit Organizations: the Section 501(h) Safe Harbor
| Publication year | 1995 |
| Pages | 2711 |
1995, December, Pg. 2711. Lobbying Activities of Tax-Exempt Nonprofit Organizations: The Section 501(h) Safe Harbor
A previous article published in the September 1995 issue of this column(fn1) summarized limitations imposed by the Internal Revenue Code ("Code")(fn2) on the political activities of nonprofit organizations that are exempt from federal income taxes under Code § 501(c)(3). That article referred to § 501(h), which provides an elective safe harbor for determining the "substantiality" of the lobbying activities of a § 501(c)(3) organization. In this article, the author explores the § 501(h) elective safe harbor in detail.
Section 501(c)(3) limits the lobbying activities of § 501(c)(3) organizations.(fn3) The statute provides that "no substantial part" of the organization's activities may consist of lobbying. The substantiality of an organization's lobbying activities is ordinarily determined according to a subjective facts-and-circumstances balancing test that measures lobbying activity "in relation to its objectives and circumstances in the context of the totality of the organization,"(fn4) taking into consideration the importance of the lobbying activities to the organization's objectives and the level of the organization's lobbying expenditures (dollars, time, and effort) in comparison to nonlobbying expenditures.
Because neither the IRS nor applicable case law provides reliable guidance for applying the substantiality test, it is difficult to predict how the test will be applied. Dissatisfaction with the subjectivity of the test led to the enactment in 1976 of Code § 501(h), which provides an elective safe harbor under which the substantiality of a § 501(c)(3) organization's lobbying is determined objectively by comparing the organization's lobbying expenditures to its total budget. For electing organizations, the substituted objective test is known as the "expenditure test."(fn5)
Electing § 501(c)(3) organizations may make objectively calculable expenditures for lobbying activities without violating the expenditure test, which is based solely on amounts spent on lobbying activities. If an electing organization complies with § 501(h), it will not lose its federal income tax exemption, even though its lobbying activities would otherwise violate the subject substantiality test.(fn6)
Code § 501(h) is available only to certain § 501(c)(3) organizations,(fn7) specifically:
1) educational institutions, described in § 170(b)(1)(A)(ii);
2) hospitals and medical research organizations, described in § 170(b)(1) (A)(iii);
3) organizations that support government schools, described in § 170(b) (1)(A)(iv);
4) organizations that are supported by government contributions or public charitable contributions, described in § 170(b)(1)(A)(vi); and
5) organizations that have been classified as "public charities":
a) either under § 509(a)(2), which compares an organization's support from gifts, grants, membership dues, admissions, and sales with its support from passive investment income and unrelated business taxable income;
b) or, under § 509(a)(3), which applies to an organization that exists to support another "public charity."
Ineligible organizations are: (1) churches and certain related organizations;(fn8) (2) private foundations;(fn9) and (3) "action" organizations, that is, organizations that have objectives, even though otherwise exempt, that can be accomplished only through the enactment of legislation.(fn10)
A § 501(c)(3) organization may make the § 501(h) election at any time during a tax year by filing IRS Form 5768, effective for that entire tax year and for all succeeding tax years until the election is voluntarily revoked by the organization or involuntarily revoked by the IRS.(fn11) A newly created organization may submit Form 5768 to the IRS with its initial application for recognition of tax-exempt status (Form 1023).(fn12)
A § 501(c)(3) organization may voluntarily revoke its § 501(h) election by filing a notice of revocation with the IRS, effective for the entire tax year in which the notice is filed, in which event the subjective substantiality test will apply retroactively to the beginning of that tax year.(fn13) A § 501(c)(3) organization's election may be involuntarily revoked by the IRS if the organization ceases to be eligible under § 501(h).(fn14)
The expenditure test is enforced: (1) through § 4911, which imposes a 25 percent excise tax on the "excess lobbying expenditures" of an electing § 501(c)(3) organization; and (2) through § 501(h)(1), which automatically revokes the tax-exempt status of an electing organization that repeatedly violates the expenditure test.
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