Election-year focus on lobbying and political activities of public charities.

• Author: Kurhajetz, Gretchen

Political and lobbying activities undertaken by some charities have drawn recent scrutiny from the IRS, Congress and the media. According to a recent IRS report, political intervention by charities noticeably increased during the 2004 election season, with nearly 75% of the completed examinations revealing that the charities under examination had engaged in some degree of prohibited political activity.

The IRS's findings are especially relevant during this election year. Charities need to monitor closely their activities to avoid engaging in prohibited political or lobbying activities, which can trigger a variety of IRS sanctions. The rules for political and lobbying activities of public charities vary depending on the type, scope and amount of activity conducted.

Lobbying Activity

Lobbying activities include attempts to influence legislation. Legislation includes action by Congress, state legislatures, local councils or similar governing bodies with respect to acts, bills, resolutions or similar items. Legislation does not include actions by executive, judicial or administrative bodies. An organization attempts to influence legislation by contacting, or urging the public to contact, members or employees of a legislative body for the purposes of proposing, supporting or opposing legislation, or by advocating the adoption or rejection of legislation.

Public charities may engage in lobbying as long as it does not constitute a "substantial part" of their total activities. The Code uses one of two tests to determine whether a charity engages in a permissible level of lobbying: the "substantial part" test or the elective expenditure test.

Under the "substantial part" test of Sec. 501(c)(3), the IRS considers both quality and quantity. If it determines a public charity has engaged in excessive lobbying activities, it may revoke the charity's tax-exempt status. Also, with the exception of churches, the Service may impose excise taxes on both the organization and its managers.

On the other hand, Sec. 501(c)(3) organizations (other than churches and private foundations) can elect the expenditure test under Sec. 501(h). This election provides an alternative mechanical method, under which the charity's lobbying activities will not jeopardize its tax-exempt status as long as its expenditures do not exceed certain limits. If the charity exceeds its lobbying expense limit in any one year, it becomes subject to a 25% excise tax on the excess expenditures...