I. Federal Tax Code Limitations on Public Charity Lobbying and Political Campaign Activities

Advocacy
A public charity can engage in an unlimited amount of advocacy in furtherance of its exempt purposes as long as that advocacy does not constitute lobbying or political campaign activity. This type of unrestricted advocacy may take many forms, including public education, nonpartisan research, and nonpartisan voter education, and can lay the groundwork for future lobbying activity.

Lobbying
What is Lobbying?
The Code recognizes two types of lobbying – direct lobbying and grassroots lobbying. In order for advocacy to be considered direct or grassroots lobbying, the communication must reflect the organization’s view on specific legislation.  “Legislation,” in this context, includes action by Congress, a state legislature, local council or similar governing body, and the general public in a referendum, initiative, constitutional amendment, or similar procedure. It generally does not include action by an executive branch of government or independent regulatory agencies.

Direct lobbying refers to attempts to influence specific legislation through communication with a member or employee of a legislative body or a government official who participates in the formulation of legislation.  A “member of a legislative body” generally includes members of Congress, state legislators, county supervisors and commissioners, city council members, members of international bodies with legislative power, legislative staffers, and the general public when voting on a ballot measure. Communication with other government employees, such as executive or administrative officials and staff, will be considered lobbying if those officials participate in the formulation of legislation and the purpose of the communication is to influence legislation. However, in general, communication with judges, executive branch officials, school board members, members of other similar local special purpose bodies, and members of the public when not voting on ballot measures do not qualify as communication with a member of a legislative body, and are therefore excluded from  the definition of “direct lobbying.”

Grassroots lobbying refers to attempts to influence specific legislation by urging the public to take action with respect to the legislation. Common actions that constitute grassroots lobbying include: (1) directing the public to contact a legislator for the purpose of influencing legislation, (2) providing the contact information for a legislator, (3) providing a means to contact the legislator (e.g., a petition or postcard), or (4) publicly identifying a legislator as being opposed to or undecided about the organization’s view on the legislation.

Public Charity Lobbying Limits
A section 501(c)(3) public charity may engage in direct or grassroots lobbying as long as it does not devote a substantial part of its overall activities to lobbying activities (the “substantial part test”). There is no bright line rule stating what constitutes a “substantial” amount of lobbying activity. Whether an organization has devoted a substantial part of its activities to lobbying depends on all facts and circumstances, including the time of both compensated and volunteer workers devoted to lobbying activity and lobbying expenditures. If a public charity engages in a substantial amount of lobbying activity in any one year, the Internal Revenue Service (IRS) can revoke its tax-exempt status causing all of the organization’s income to be subject to tax. In addition, the IRS may impose a tax equal to 5% of lobbying expenditures on the organization and, separately, on any manager who agreed to make the expenditures knowing the organization would likely lose its tax-exempt status.

There is little guidance about what constitutes “substantial” lobbying activity and the consequences resulting from a violation of the substantial part test are severe. As a result, many organizations desire a more definite set of rules. Fortunately, Congress responded in 1976 when it enacted Code Sections 501(h) and 4911 setting forth the “expenditure test” as an alternative to the substantial part test. Charities seeking clearer limitations for their lobbying activities may elect to be subject to the “expenditure test” instead of the substantial part test by filing Form 5768 with the IRS (also known as making “a 501(h) election”).

While the substantial part test takes into consideration all facts and circumstances, including time spent by volunteers on lobbying activity, the expenditure test is concerned only with an organization’s lobbying expenditures. Under the expenditure test, lobbying will not jeopardize a charity’s tax-exempt status unless the organization’s lobbying expenditures exceed 150% of the lobbying expenditure allowance set by the Code taking into account the current year and the previous three years. For the first three years of its first election an organization need only take into consideration the years in which the election has been in effect as long as its lobbying expenditures do not exceed 150% of the lobbying expenditure allowance for those years . A public charity that has made a 501(h) election can spend up to twenty-five percent (25%) of its lobbying expenditure allowance on grassroots lobbying or up to the entire amount on direct lobbying. Lobbying expenditures in excess of this allowance will be subject to a 25% tax. Also, for electing charities, the Code exempts certain activities from the definition of lobbying including nonpartisan analysis or research, discussions of broad social, economic, and similar problems, requests for technical advice, and certain “self-defense” communications made by the organization to a legislative body or its representatives.

Political Campaign Activity
In addition to placing limits on lobbying activity, the Code prohibits a public charity from engaging in political campaign activity. An organization engages in political campaign activity when it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. Whether an organization is participating or intervening in a political campaign depends on all of the facts and circumstances of each case. The IRS often looks for whether the communication, in content, structure, or distribution, evidences a bias or preference with respect to the views of any candidate or group of candidates. A “candidate for public office” is anyone who offers himself or herself, or is proposed by others, as a contestant for an elective office at the federal, state or local level. Participation in a political campaign might include actions such as endorsing or supporting financially a candidate for public office, a political party or a political action group or making statements in favor of or in opposition to a candidate. Certain voter education activities, such as releasing voter guides or legislative scorecards can, if structured appropriately, be conducted in a non-partisan manner and not constitute political campaign activity. A public charity that engages in any political campaign activity will lose its tax-exempt status.

II. Creating an Affiliated 501(c)(4) Organization

The limitations placed on public charity lobbying and political campaign activity may not allow a charity to engage in the level of advocacy necessary to achieve a desired policy outcome.  One option in this instance is to establish a 501(c)(4) social welfare organization. Contributions to a 501(c)(4) are not deductible as charitable contributions, but 501(c)(4)s may engage in an unlimited amount of lobbying as long as the issues relate to the exempt purpose of the organization. In addition, 501(c)(4) organizations may engage in limited political campaign activities, subject to campaign finance laws, as long as these activities are not its primary activity. Charities should consider the operational and strategic implications of this decision, including:

• if there is a sufficient donor base to support a new 501(c)(4) organization;
• if additional advocacy tools will complement the 501(c)(3)’s advocacy efforts;
• whether the organization’s policy issue has been politicized in a way that makes it difficult to discuss in a non-partisan manner; and
• the effect of establishing an affiliated 501(c)(4) on the organization’s reputation.

Below are a few more considerations for public charities that plan to establish an affiliated 501(c)(4) organization.

Legal Separation
The 501(c)(4) must be a separate legal entity from the 501(c)(3). Usually, 501(c)(4) organizations are established as corporations under state law and, as such, are required to observe corporate formalities. The two organizations should maintain their own books and records, bank accounts, mailing addresses, and file their own tax returns and applications for tax-exempt status.

The board of directors of the 501(c)(4) organization must operate independently from the 501(c)(3), including holding distinct meetings. The 501(c)(3) and 501(c)(4) may have board members in common. If the boards completely overlap, careful attention must be paid to keep meetings and decisions separate so that it is clear which board is acting at a given moment. Even with careful recordkeeping, there are reasons to keep board overlap to a minority of the board. Minority overlap will allow the disinterested majority of the board of each entity to approve financial transactions (e.g., grants or loans) between the entities and protect the interests and separate existence of both entities. Further, if the 501(c)(4) will engage in any political campaign activity, it is often advisable to increase the separation between the two entities to reduce the risk that any political activity of the (c)(4) may be attributed to the 501(c)(3).

Financial Separation
A 501(c)(3) must not subsidize the day-to-day operations of an affiliated 501(c)(4). If the two entities will share office space, equipment, and/or staff, the (c)(4) must pay its share of the cost. Typically, this arrangement is memorialized in a written cost-sharing agreement.

Shared employees should keep written time records in order to support allocation of salary between the two organizations. This is critical if the (c)(4) will engage in political campaign activity since the (c)(3) may not directly or indirectly support the political activity of the (c)(4).

As in the case with employee time, the (c)(4) should pay its fair share for any office space or equipment used so that the (c)(3) is not subsidizing the (c)(4)’s activities. The (c)(4) might sublease office space from the (c)(3) at fair market value, pay its share of the rent to the landlord directly, or even pay the full amount of rent and allow the (c)(3) to occupy the space free of charge.

Operational Separation
The charity may not control or give the appearance that it controls the everyday activities of the (c)(4). The (c)(3)’s and (c)(4)’s purposes may align, but each organization should maintain and document its own levels of authority and responsibility in day-to-day operations. Set up good legal compliance systems from the beginning and train staff so they know these systems and can make sure they function effectively.

There are a number of other considerations when establishing an affiliated 501(c)(4) organization, including issues related to applying for tax-exempt status, startup costs, joint fundraising, grants or loans between the organizations, and whether the two entities can share other resources, such as donor lists or a website.  To navigate these issues, it is helpful to seek qualified counsel.

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August 9, 2019 – Politico – Liberty University [1]
Disclaimer – This article discusses the nonprofit governance principles at issue in publicly-reported allegations in an attempt to glean a clear lesson for current and future nonprofit leaders. We have no knowledge of the truth of the facts in the article discussed, and merely reference them for purposes of discussing nonprofit governance issues applicable to nonprofit leaders.

On August 9, 2019, Politico Magazine posted an article about alleged discontent by current and former Liberty University officials. The article described governance issues related to a variety of matters ranging from real estate deals, loans, political events, and the evolution of Liberty University since the death of its founder, the Rev. Jerry Falwell Sr. in 2007.

The overarching theme from the article – issues that arise from control over a major nonprofit institution by a family, or perhaps one person – can provide lessons in governance for the sector. In the paragraphs that follow, I’m going to walk through some of the allegations from the Politico article in order to highlight key governance lessons for nonprofit leaders.

Overview of the allegations
One of the undisputed statements in the article is that Jerry Falwell Jr., currently the President of Liberty University, is central to the University’s revenue-generating activities. Also undisputed is that the University’s finances have dramatically improved under Mr. Falwell Jr.’s leadership, ballooning from assets of $259 million in 2007 to $2.5 billion in 2017. Understandably, these two factors may have generated substantial goodwill and a certain level of trust from the University’s trustees, who have faith in their President’s ability to grow the University and reach more students.

What gave rise to concerns of some current and former University officials, and scrutiny from the media, were transactions in which Mr. Falwell Jr. was allegedly steering university business opportunities to his friends and family. As I discuss in the paragraphs that follow, there are steps that other similarly-situated nonprofits can take to help avoid these types of conflicts of interest, or, if they do arise, provide evidence to reporters and concerned staff that the nonprofit’s dealings are fully above-board.

A Powerful President
One detail that is clear throughout much of the recent reporting on Liberty University is that Mr. Falwell Jr. is the main decision-maker at the University[2].  Major strategic decisions, such as where and when to make substantial investments of the University’s time and resources in the near and medium term, seem to have begun and ended on his desk. This raises the question – what is the appropriate role of the President of a nonprofit organization vis-à-vis its Board?

It’s not uncommon for a Board to give its President a substantial amount of authority, especially where the President has a track record of success. While the Board bears ultimate legal oversight responsibility for the nonprofit, Board members aren’t expected to be involved in all day-to-day decisions. Boards can pass resolutions specifying what the President’s (or other senior staff’s) authority is to enter into agreements or to otherwise bind the nonprofit. A nonprofit’s Bylaws also sometimes describe, and thereby limit, the role of the nonprofit’s senior-most staff.

It’s important, however, for the Board to keep abreast of big or risky transactions (such as purchases of real property, investments in unrelated businesses, or c-suite staffing) to ensure the parameters set by the Board are observed. Periodic reviews of the President’s performance should be standard, with a report issued to the full Board and communicated to the President. Among other, broader issues relating to the President’s performance, a periodic review allows the Board to re-evaluate whether the guidelines in the Bylaws and any Board resolutions are appropriate or if they should be clearer about what transactions require Board approval and what authority the President has to act alone.

A lesson for nonprofit leaders is that they should build parameters for their officers into their core policies, officers’ job descriptions, and even occasionally the Bylaws. In addition, the Board should provide ongoing oversight of the senior staff, and the Board must review their performance regularly. This is for the Board’s and the staff’s benefit – whenever roles and authorities are clearly defined, an officer has greater clarity as to whether he or she is effectively carrying out his or her responsibilities effectively, and the Board can more easily and objectively assess an officer’s actions against established performance criteria.

Conflict of Interest can be Managed
Another theme in the recent reporting on Liberty University is conflict of interest (whether actual or apparent). Mr. Falwell Jr. disputed allegations that he or the University acted improperly, while reports and sources in those articles argued that Mr. Falwell Jr. used his position to improperly benefit himself, his family, and his friends. Examples included allegedly directing business to his son, co-investing University assets with a business partner, and issuing University-backed loans to friends.

We don’t know enough facts for certain to determine whether the transactions described were actual conflicts of interest and, further, whether those transactions were inappropriate. Some conflict of interest transactions can be in the best interests of a nonprofit. For instance, imagine a situation in which a nonprofit needs to build a new gymnasium to support its community programs. If the only contractor in town capable of building a gymnasium also happens to sit on the nonprofit’s Board, that doesn’t mean the nonprofit can’t move forward. It just means that the nonprofit’s Board needs to manage the conflict of interest carefully to make sure the contractor doesn’t abuse his position on the board to overcharge for the construction of the gymnasium.

The process of managing a conflict of interest usually includes a few key features. First, a written conflict of interest policy should be approved by the Board. This policy should (i) require that any conflicts, or potential conflicts, be disclosed, (ii) outline how potential conflicts are to be reviewed, and (iii) state in what circumstances alternatives should be sought, and (iv) spell out how the conflict transaction can be approved. The policy should require any conflicted individual to recuse themselves from the discussion and deliberation of the conflict transaction (other than to answer questions asked by the other board members).

Written evidence of the review and approval should be kept on hand. The process creates a record that can be used to rebut accusations of improper benefits. Just as clearly defined roles and responsibilities (discussed above) protect the organization, the board, and the individuals involved, a good conflict of interest policy protects everyone. The individuals who allegedly have a conflict can insulate themselves from later critique; the board can demonstrate it followed a robust and fair process; and the nonprofit can be sure its assets are not improperly used to benefit an insider. Sample conflict of interest policies abound and many states (such as New York) require nonprofits to include certain elements in their policies.

Policies are Helpful
The article on Liberty’s alleged problems also implies that rules that applied to some employees didn’t seem to apply to all. One example was a Liberty University employee, John Gauger, who also ran an online business that was paid by Liberty and on which Mr. Gauger was alleged to have worked while technically being on-the-clock for Liberty. Other instances included allegations that Mr. Falwell Jr.’s wife Becki took part in employment decisions regarding Liberty staff, and that Trey Falwell, the son of Mr. Falwell Jr., was allowed to work with Mr. Gauger, operate a real estate business, and manage properties owned by Liberty, all while serving as a vice president of the University.

There could be legitimate reasons to permit staff to work on outside business during work hours, to outsource staff decisions to experts in HR or bring in real estate experts to manage a vast portfolio of properties. For instance, when a nonprofit seeks to attract talent in a particular industry, the nonprofit may offer flexibility in terms of working time, location, and outside businesses. When it is not able to compete at industry pay scales, the nonprofit may rely on outside professionals if it lacks in-house human resources capabilities. Problems arise, however, when the organization doesn’t have an adequate decision-making process in place, such that decisions appear to be made arbitrarily, or it appears that assets are being used for a private purpose.

Presumably, Liberty University has an employee handbook that addresses issues such as conflict of interest, engaging in outside employment, and grounds for dismissal. Unclear in the Politico article is whether those policies were followed in the course of dealings with Mrs. Falwell, Trey Falwell, or Mr. Gauger. If they were, the Board and the nonprofit should have kept a paper trail to demonstrate that their policies were properly implemented and any exceptions made were justifiable.

Every nonprofit with employees should take the time to re-examine its employment policies to make sure they (1) comply with local, state, and federal law and (2) meet the organization’s needs. If the leadership wants to cultivate an entrepreneurial environment within the organization, it can remove any restrictions on outside activities as long as staff are meeting their responsibilities to the organization. What matters is whether the Board and senior staff have thought about the policies, communicated them to throughout the organization, and implemented the policies fairly. The Board and President should periodically review the policies to ensure they are up to date and being properly applied.

Political Activity
Lastly, the Liberty University story makes a number of references to “political campaign activity” – the oft-underenforced third rail for 501(c)(3) organizations. Liberty University was alleged to have tweeted support of a candidate for federal office, as a “thank you” for making a speech at the University’s convocation. Furthermore, the University’s Chief Information Officer was hired by a presidential candidate to try to increase the candidate’s poll numbers. The University was also alleged to have rearranged its calendar in order to influence local elections.

The IRS definition of 501(c)(3) organization includes a prohibition on political campaign activity. Under the definition, an organization that wants to be exempt from federal income taxation under section 501(c)(3) of the Internal Revenue code cannot “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”

Colleges and universities are uniquely situated, being treated as public spaces (or quasi-public spaces) for First Amendment purposes but with civically-engaged students who crave civic and political engagement. There are many politics-adjacent activities that all 501(c)(3)s, including colleges and universities, can engage in, such as voter registration drives, hosting candidate fora, and overseeing student groups that are expressly political (College Republicans, for example). These activities should be carefully undertaken with the advice of counsel to ensure that the activities stay within the permissible bounds of the organization’s 501(c)(3) exemption.

Nonprofit leaders, even those like Mr. Falwell Jr. who are closely associated with the organization they lead, are also allowed to hold and express their own political views. They can campaign with or for their chosen candidates. But nonprofit leaders must be careful that their personal activities stay separate from the organization they lead or they jeopardize the organization’s exemption. As always, a trusted legal advisor is indispensable to ensure leaders don’t sacrifice their First Amendment rights while the organization preserves its tax exemption.

In Conclusion
Sometimes my clients hate it when I tell them to adopt a conflict of interest policy. They don’t like reviewing their employee handbook. Executive Directors want the freedom to make quick decisions and boards don’t want the hassle of looking over everyone’s shoulder. But as I tell my clients, and as the article on Liberty University bears out, a lack of process can come back to hurt you. Even if the organization reaches the same decision, a good process provides backup for the Board and the organization’s leaders to defend their decisions against critics within and without. And perhaps most importantly, a good process protects the organization so it can focus on achieving its charitable mission.

[1] This post references the version of the Politico Magazine article, ‘Someone’s Gotta Tell the Freakin’ Truth: Jerry Falwell’s Aides Break Their Silence: More than two dozen current and former Liberty University officials describe a culture of fear and self-dealing at the largest Christian college in the world, By BRANDON AMBROSINO, available at http://politico.com/magazine/story/2019/09/09/jerry-falwell-liberty-university-loans-227914 on September 09, 2019

[2] Such as https://www.washingtonpost.com/outlook/2019/07/24/inside-liberty-universitys-culture-fear-how-jerry-falwell-jr-silences-students-professors-who-reject-his-pro-trump-politics/?noredirect=on (accessed 9.11.19, published 7.24.19); https://world.wng.org/2018/08/papered_over (last accessed 9.11.19, published 8.16.18); https://www.reuters.com/article/us-usa-falwell-trainer-exclusive/exclusive-falwell-steered-liberty-university-land-deal-benefiting-his-personal-trainer-idUSKCN1VH283 (last accessed 9.11.19, published 8.27.19).

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But nonprofits must also be aware of the limitations on how they may carry out these activities. While 501(c)(3) organizations are not allowed to engage in “political activity”, they are allowed to educate their members and the general public. They are also allowed to focus on populations that don’t typically vote in order to increase participation in the electoral process.

The Restrictions

Public charities (a type of 501(c)(3) organization) enjoy numerous perks under the federal tax code. They are eligible to receive tax-deductible contributions and their income from those donations and program revenue isn’t taxable. Congress, in exchange for those benefits, places certain restrictions on public charities. For one, public charities are not allowed to engage in candidate election advocacy, in other words, they are not allowed to advocate or oppose candidates for political office. Public charities also cannot engage in a “substantial” amount of legislative advocacy (i.e. lobbying). The penalties for violating these restrictions are severe, up to and including the revocation of an organization’s tax-exempt status.

What Public Charities Can Do

Every public charity is affected by the outcome of the democratic process. Many serve vulnerable and disadvantaged individuals who are disproportionately impacted by the outcome of elections but historically have not voted at the same rate as other demographics. For many public charities, increasing their constituents’ participation in the democratic process may fall squarely within their exempt purpose. These organizations SHOULD try to increase their constituents’ engagement with the democratic process but must make sure they don’t do so in a way that favors or appears to favor a particular candidate or party.

Here are some examples of activities that public charities can engage in, along with some important considerations:

Candidate Fora

Public charities can host a forum in which candidates are invited to answer questions relevant to the charity and the general public. The forum should cover a wide range of topics. All major candidates should be invited and offered equal time. Many public charities will bring in an independent moderator to build an additional firewall against accusations that any questions demonstrate partisanship by the nonprofit. Local media personalities and journalists often make excellent moderators, as they are already attuned to salient topics.

If your organization hosts a candidate forum, make sure the questions asked of the candidates inform the audience about a broad range of topics. You should also start and end the forum by reminding the audience that your organization does not endorse or oppose any candidate or party.

Note that while you should invite all candidates if any candidate declines to attend, it doesn’t mean the forum can’t move forward. You might consider alternatives for candidates whose schedules conflict, such as written statements, or holding another forum at a later date, if practical.

Consider what format will best achieve your goal of educating the audience about important issues. For legal and practical reasons, a candidate forum should not devolve into a partisan argument or an ad hominem fight. Take steps that will prevent this – impose time limits, screen audience questions, and limit access to the microphone.

Finally, set some guidelines to deter unwanted politicking. Don’t invite political parties or PACs. Remind the candidates that the forum is not a campaign stop – and that they are not to ask for donations. Avoid stump speeches. A forum is an opportunity to educate the public – so do your best to keep it that way.

Voter Guides

As is true for a candidate forum, public charities should use a voter guide to ask questions of all candidates and make sure they touch on a range of topics. While you cannot edit a candidate’s response, you can place conditions, such as word limits, on their response. If a candidate submits a response in excess or the word limit or in violation of another guideline, ask them to revise their response or simply omit any information beyond the word limit or in violation of the guidelines.

Educating Candidates

If a candidate expresses an interest in the work your nonprofit does, you can follow up by providing literature or meeting with the candidate to introduce him or her to your programs. A guiding principle, however, is that the communication must remain strictly nonpartisan. If you send literature to one candidate, be sure to send the same to the other candidate(s) in the race. You may also invite candidates to visit your facilities, to demonstrate your importance to the community you serve. Again, be sure that the same invitation is given to all candidates.

Voter Registration Drives

A voter registration drive must be nonpartisan. Informational materials provided should be politically neutral. Never ask potential voters who they plan to vote for, and certainly don’t limit registration in a partisan way. Choose the location for your drives by focusing on areas where you expect to find populations who historically don’t vote or aren’t registered – not based on any political criteria. If you’re registering voters at an event run by another group, double check with the organizers which other groups might be attending. Consider reaching out to state or local election officials to help you identify neighborhoods or areas with low voter registration. You are allowed to focus on the areas or people you already serve.

The Mechanics of Voting

For new voters, teaching about the mechanics of voting is also allowed. Ask your local election officials whether they can bring in a sample voting machine so new voters can familiarize themselves with it. Show them a sample ballot, and if there are ballot initiatives, share them with your constituents and help them understand what is often very long, confusing language. Again, as with all of the voter education activities discussed here, make sure your explanations don’t stray into political commentary – try to stay objective!

Get-Out-The-Vote

If the people your organization serves face barriers to getting to the polls, such as physical disabilities or lack of transportation, your organization can arrange assistance to support their participation. Make sure to use nonpartisan criteria determine who to assist, and focus on areas or individuals who are actually in need of assistance.

Political engagement in the United States is on the rise. Nonprofits can and should be part of the conversation by ensuring voters are well informed and prepared to vote in November.

The post Nonprofits and Voter Engagement – Yes You Should! first appeared on Perlman Sandbox.

Questions

In order to obtain tax-exempt status, charities cannot spend a substantial part of their activities attempting to influence legislation (aka lobbying). This means charities are allowed to lobby, but only an insubstantial amount. But what is or is not lobbying? Can an exempt organization escape the lobbying limitation if it opposes an Executive Order? What if the charity urges its supporters to call their senators to oppose a cabinet nominee? Can a charity support the organization of a march that supports its charitable mission?

The Rule

A charity can engage in advocacy around its core causes, but has to be cautious when its advocacy places the charity in the position of supporting or opposing legislation or nominees. The IRS prohibits organizations exempt under section 501(c)(3) from being organized or operated as “action” organizations. Generally this prohibition requires exempt organizations to spend an insubstantial amount of time and resources to lobbying. Unfortunately, there is no clear definition of “substantial” or “insubstantial” in the eyes of the IRS. So while a charity may lobby, the line between the safe amount of advocacy and too much lobbying can sometimes be hard to draw. The rules are stricter for private foundations – any time or resources spent on lobbying or political activity by a private foundation is considered a taxable expenditure.

Some types of lobbying are easy to identify. If a charity contacts their senator or representative to urge a vote in favor or against a particular bill, the charity is engaged in direct lobbying. If the charity encourages its supporters to take action in favor or against a particular piece of legislation, the charity is engaged in grass roots lobbying. Direct and grass roots lobbying are subject to the IRS’s rules on lobbying.

Cabinet and Judicial Nominations

At first glance, a cabinet or judicial nomination might not seem like “legislation.” Charities might think they are allowed to contact their legislators about nominees, or urge supporters to do so, without considering those activities as lobbying. But under long-standing guidance, the IRS considers a legislature’s advice and consent on the nomination process for cabinet appointees and federal judges to fall within the definition of “legislation.” Therefore, if a charity attempts to sway a legislator in favor or against a cabinet or judicial appointee (either directly or via public opinion), the charity is engaged in lobbying. In the case of a private foundation, such lobbying will trigger a tax liability.

Executive Orders

An Executive Order, on the other hand, is outside the legislative process. A charity can attempt to rally support for or opposition against an Executive Order without triggering the restriction on lobbying so long as it does not urge lawmakers to pass new legislation in response to the order. This applies equally to public charities and private foundations.

Marches & Rallies

In recent weeks numerous high-profile marches and rallies were organized around the country in support of or opposition to a number of causes. Some were in response to particular actions by the Executive Branch, while others were organized to support women’s rights, immigrants’ rights, or refugees’ rights. Where a march furthers a charity’s exempt purpose it is not lobbying. Consider a pro-environment march organized by a charity whose mission involves protecting the environment – the expenditures by the charity will further the charity’s mission, and are entirely appropriate. So long as a march or rally is not in support of or opposition to legislation, or a particular candidate for political office, the charity’s activities will not be subject to the lobbying or political action restrictions imposed by the IRS. As noted above, a march or rally in response to an Executive Order would not be considered lobbying, since an Executive Order is not legislation.

We Lobbied or We Want to Lobby– Now What?

If a 501(c)(3) already lobbied, or it wishes to lobby in the future, there are a few steps the organization should take. The first is to set up accounting and bookkeeping procedures that ensure all expenditures on lobbying activity are clearly accounted for. A public charity may choose to make a 501(h) election which will provide a fixed limit on what the charity can spend on lobbying. While the 501(h) election imposes a limit, it also acts as a safe harbor – the charity knows exactly how much it can spend on lobbying activity. Under 501(h), a charity may use up to 20% of the first $500,000 of its exempt-purpose expenditures to lobby – the limit increases depending on the size of the charity’s expenditures on charitable activities.

Charities should note that the 501(h) election only applies to the money spent on lobbying activities. If the charity has very cost effective methods of lobbying (such as rallying support on social media), it will be able to engage in a significant amount of lobbying activity.

A public charity also has the option to forego the 501(h) election. The charity would then be subject to the “insubstantial part test.” The test examines whether the charity’s lobbying activities are “substantial” or “insubstantial”, the vague standard set by the IRS.

Get Help

In today’s political climate, many charities find themselves confronting challenging questions regarding lobbying and political activity. While some of these questions have straightforward answers, others require careful consideration. A charity’s decisions around lobbying and political activity have potentially significant consequences, ranging from possible taxes to loss of exemption.  If you have any questions regarding lobbying or political activity, consultation with a legal professional may be a good idea.

The post Charities Can Lobby – But What Activities are Lobbying? first appeared on Perlman Sandbox.

Why 501(c)(3) organizations are different

Nonprofits must agree not to engage in political activity in order to be exempt from federal income taxation and receive tax-deductible contributions, each a substantial subsidy from the federal government. The prohibition on political activity for nonprofits is right in the statute, which states that a 501(c)(3) must not “participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” Note that the prohibition on political activity does not have a threshold, nor is its application limited to federal races. The prohibition applies to political activity in support of or opposition to the candidates for President of the Unites States, as well as to the candidates for the local school board and every political candidate in between. The IRS has published additional guidance that describes in greater detail what nonprofits can and cannot do, including 21 hypothetical fact patterns that are very illustrative

But what about the First Amendment?

Nonprofits are made up of individuals – employees, officers, board members, and volunteers. Each of those individuals has a first amendment right to express his or her political views. Where a nonprofit has to be careful, however, is when the individual expresses his or her views in a way which could be attributed to the nonprofit.

The easy example of an individual safely exercising her first amendment right is a CEO of a non-profit out to dinner with friends. She may voice her opinion about a presidential candidate without fear of jeopardizing the nonprofit’s 501(c)(3) status because no one around the table will reasonably assume that she was speaking in her professional capacity. If the same CEO were speaking as a representative of the nonprofit on a panel at a conference, however, she should not provide an opinion of any candidate. Of course, there are many possible scenarios which fall somewhere in between where nonprofits and their leaders need to be careful and possibly seek the advice of counsel.

What 501(c)(3)s Can and Cannot Do

Nonprofits are allowed to engage in non-partisan activities in the run-up to an election, such as voter registration drives or education around a particular issue – see our list below for a breakdown of specific activities that a 501(c)(3) can engage in. In addition, a 501(c)(3) is allowed to engage in lobbying (attempting to influence legislation) so long as the lobbying activity does not constitute a “substantial” part of its activities. Of course, “substantial” is a fuzzy term, so the IRS allows most nonprofits (but not churches) to set a monetary limit to their lobbying activity (called a 501(h) election) below which no tax penalties will be assessed, so that nonprofits have some certainty when their lobbying activities will trigger tax consequences.

What 501(c)(3) organizations CAN do

501(c)(3) organizations may safely engage in the following activities:

1. Educate the public on issues and generally encourage participation in the political process.
2. Make presentations on your organization’s issue to platform committees, campaign staff, candidates, media, and the general public
3. Educate all candidates and political parties on your issues.
4. Continue your normal lobbying on issues, subject to the limitations described above.
5. Work on behalf of a ballot measure.
6. Conduct or participate in a nonpartisan candidate forum, so long as the forum: (a) is open to all candidates, (b) is run in a balanced way, and (c) includes a broad range of nonpartisan questions for the candidates.
7. Rent or sell mailing lists to candidates at fair market value, if made available to all candidates.
8. Conduct voter registration drives and nonpartisan get-out-the-vote efforts, subject to the following limitations:

• Drives must be designed to educate the public about the importance of voting.
• Activities cannot be biased for or against any candidate or party.
• Nonprofits can target areas in nonpartisan ways. For instance, nonprofits may target low-turnout areas, low-income populations, minority populations, and students.
• Nonprofits may target registration and turnout efforts to the areas or people they serve.

What 501(c)(3) organizations CANNOT do

To maintain 501(c)(3) tax exempt status, organizations may not undertake the following activities:

1. Endorse or oppose a candidate—implicitly or explicitly.
2. Contribute money, time, or facilities to a candidate.
3. Coordinate activities with a candidate.
4. Restrict rental of your mailing list and facilities to certain candidates.
5. Set up, fund, or manage a Political Action Committee (PAC), established under section 527 of the tax code mainly for electoral activity

These restrictions do not in any way prohibit officers, members, or employees from participating in a political campaign as private citizens, assuming those individuals ensure their actions or statements are not attributed to the organization.

If you are in any doubt regarding whether your organization’s activities might risk revocation of tax-exempt status, be sure to reach out to a lawyer with knowledge of the non-profit sector for specific advice.

The post Political Activity and Nonprofits – 501(c)(3)s Beware! first appeared on Perlman Sandbox.