Lobbying expense pitfalls for exempt organizations.

• Author: Moore, Philip E.

In this election year, tax-exempt organizations may be involved in legislative activities that, if found to be substantial, could cause them to lose exempt status.

As in 1992 and 1996, on July 5, 2000, the IRS issued a news release (IR-2000-47), cautioning Sec. 501(c)(3) charitable organizations to stay within its guidelines for political campaign activities. These organizations cannot endorse candidates, make donations to campaigns, engage in fundraising or become involved in any way that may benefit a specific candidate. If an organization is found to have engaged in this prohibited activity, it can risk loss of its tax-exempt status or be subject to an excise tax on the money spent on that activity. Further, contributions to an organization that loses its exempt status due to political activities are not deductible by the donors for Federal income tax purposes.

The Service's warning should also be expanded to include lobbying activities. Charitable organizations exempt under Sec. 501(c)(3) are subject to limits on lobbying expenses and must be very cautious with respect to these activities.

Sec. 501(c)(3) states that "no substantial part of the activities" of an organization may be "carrying on propaganda, or otherwise attempting, to influence legislation." Payment of expenses for these activities is classified as direct or grass roots lobbying expenditures.

Direct lobbying, as defined by Regs. Sec. 56.4911-2(b)(1)(i), is any attempt to influence legislation through direct communication with a member of a legislative body or its employees who have direct participation in the formulation of the legislation. The communication is considered direct only if it refers to specific legislation and reflects a particular view on such legislation. Legislation, as defined by Regs. Sec. 56.4911-2(d)(1), includes any action by Congress, state or local legislatures, or by the public in a referendum, ballot initiative, constitutional amendment or similar procedure. An example of direct lobbying would be any attempt made to influence a Senate representative who is preparing legislation containing provisions that could directly affect an organization.

Grass roots lobbying communication, as defined in Regs. Sec. 56.4911-2(b)(2), is "any attempt to influence any legislation through an attempt to affect the opinions of the general public." Similar to direct lobbying, the communication must refer to specific legislation, give an opinion on such legislation...