Tax aspects of lobbying by public charities.

• Author: Matoney, Joseph P.

In general, the majority of clients in a CPA practice are profit-oriented entities. However, many tax advisers do have a few tax-exempt organizations (e.g., public charities and churches) as clients, some taken on in response to requests of clients who are board members or contributors to the organizations. Since many public charities are governed by managers and part-time boards not attentive to tax consequences, it is important that tax advisers of such organizations be generally familiar with the unique rules governing public charities in order to protect their clients.

The ability of public charities to conduct lobbying activities has long been limited by Sec. 501(c)(3).(1) Under this section, "no substantial part" of the activities of an exempt organization can constitute "carrying on propaganda, or otherwise attempting, to influence legislation . . . ." Failure to comply with this restriction can result in the loss of tax-exempt status and the imposition of a tax. However, Sec. 501(h) provides safe harbors that permit an organization to engage in limited lobbying activities without losing its tax-exempt status. To avail itself of these safe harbors, an organization must file an election under Sec. 501(h).

This article will examine the election; provide an overview of the regulations governing how the lobbying safe harbors are applied; and outline the circumstances under which organizations should make the Sec. 501(h) election or forgo it.

Advantages of Making the Election

Organizations making the election under Sec. 501(h) have two distinct advantages. First, they know exactly how much they can spend without incurring a tax on their lobbying activities. Secondly, even if they exceed the safe harbor limit, and incur a tax on excess lobbying activities, they can pay the tax and still preserve their tax-exempt status. It is important to emphasize that nonelecting organizations are not governed by these rules and may not rely on the available safe harbors. Such organizations must instead test their fate in court while clinging to the vague requirement that "no substantial part" of their activities be lobbying, along with the knowledge that if they cross this vague line they face the loss of their tax-exempt status.(2)

Tax advisers should ensure that their clients are aware of this distinction in deciding whether to make the election and be subject to the potential increased cost of complying with the safe harbors. In this case, an ounce of prevention may be the only reasonable choice when there is no cure.

Direct Lobbying and Grass Roots Expenditures

Lobbying expenditures are defined as the sum of direct lobbying expenditures plus grass roots lobbying expenditures.(3) Direct lobbying involves an attempt to influence legislation through communication with a member of a legislative body or its employees.(4) The communication will be recognized as direct lobbying only if it refers to specific legislation and reflects a view on such legislation.(5) Legislation is defined to include any action by Congress, state legislatures or other similar local legislative body, or by the public in a referendum, ballot initiative, constitutional amendment or similar procedure.(6) Legislative bodies do not include executive, judicial or administrative bodies.(7)

Example 1: A public charity might attempt to influence a parks department to acquire a specific parcel of land for use as a public park. Such an action would not constitute lobbying. At the same time, attempting to influence the local legislative body to appropriate funds for this purpose would constitute lobbying.(8)

Attempts to influence legislation through an effort to sway the opinions of the general public or a segment of the general public constitute grass roots lobbying. In order to be recognized as grass roots lobbying, the communication must refer to specific legislation, reflect a view on such legislation and encourage the recipient to take action regarding the legislation.(9) By definition, encouraging a recipient to take action means that the communication states that the recipient should...