Expert Advice

By William Ramseyer
     
      A number of confusing local, state, and federal laws and regulations govern lobbying activities in general. And when nonprofit organizations undertake such activities, they are also controlled by the Internal Revenue Code and associated regulations. The legal controls are quite complex and filled with exceptions and vague terms. Still, there are ways you can help a nonprofit client interested in lobbying avoid the more obvious pitfalls.
      Because a nonprofit that violates the lobbying rules can lose its tax-exempt status and be subject to huge fines, the earlier you become involved, the better. The best time is before the group is founded, which would allow you to determine the form of nonprofit most suited to the lobbying it wishes to do. The second-best option is before any lobbying has occurred; you can then determine the types and amounts of lobbying permitted. Better than nothing is before the end of the fiscal year in which the lobbying has taken place, which at least allows you to select the method of IRS scrutiny that will be applied to the activity.
      Basically, lobbying is an attempt to influence legislation. However, nothing is simple when defined by the Internal Revenue Code. First, there are two types of lobbying: "direct" and "grassroots." And different rules control each of them.
      Direct lobbying is defined as a communication?usually with a public official who has a role in formulating or approving legislation?that refers to specific legislation and expresses a point of view on it. Grassroots lobbying is a communication to the public that refers to specific legislation, expresses a point of view on the legislation, and urges the recipient to take action.
      In real life, confusion arises in these classifications. For example, contacting the public to urge action on a specific initiative is, surprisingly, considered direct lobbying, because in such cases the public is deemed to be the legislature.
      There are also numerous exceptions to the rules. For example, attempting to influence legislation that directly affects a nonprofit, such as a proposed change in the donation rules for nonprofits, is not considered lobbying.
      And different rules apply to different types of nonprofits. For example, according to Internal Revenue Code section 501(c)(3), nonprofits?traditional charitable, educational, or cultural organizations?may do some lobbying, but it may not be a "substantial part" of their activities. Section 501(c)(3) organizations classified as private foundations that get all of their funding from one source may not do any lobbying at all. But nonprofits exempt under one of the other parts of section 501(c), such as social-welfare organizations under (c)(4) and business leagues under (c)(6), are essentially not restricted in the scope of their lobbying. Also, communications about legislation to members of a nonprofit, as opposed to the public, are deemed direct rather than grassroots lobbying.
      A nonprofit organized under section 501(c)(3) may lobby if it can pass the substantial-part-of-activities test, but that test can be difficult to apply. However, there is an alternative. A section 501(c)(3) nonprofit may select an alternative test under Internal Revenue Code section 501(h). If the nonprofit files Form 5768 before the close of its fiscal year, the alternative test will be used. This is purely a financial test: The organization may spend 20 percent of its first $500,000 in exempt expenditures, and declining percentages up to a maximum of $1 million for lobbying. No more than 25 percent of the total lobbying expenditures may be for grassroots lobbying.
      The section 501(h) test is appealing because of its certainty. Other than some complexities over "exempt purpose expenditures," you can rely on fixed limits. Also, if your client exceeds the limits, there is only a monetary penalty of 25 percent of the excess expenditures.
      Sometimes, however, specific factors make section 501(h) a poor choice. For example, it is a bad fit for an organization that spends 10 percent of its budget exclusively on grassroots lobbying. Also, it is a poor choice if the organization's budget is very large, so the $1 million limit using the section 501(h) test would amount to less than 10 percent of total exempt expenditures. In such cases, if the lobbying were carefully set up, your client could spend more and still meet the substantial-activities test.
     
      William Ramseyer (wmr83@earthlink.net), a private practitioner in Pasadena, focuses on nonprofit organizations.
     

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