Public Charity & Private Foundation Rules on Advocacy, Education & Lobbying

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Here’s a situation that has been coming up increasingly for our clients in recent years: There’s a new social movement gaining traction in the community – perhaps a clever hashtag, calls for public support or requests for donations. If you are a leader of a 501(c)(3) tax-exempt organization (such as an executive or senior employee, an officer or board member), you may be wondering whether your organization is allowed to show public support for social movements, legislative actions or other public advocacy efforts without jeopardizing the organization’s 501(c)(3) tax-exempt status. You may even be getting pressure from staff or your stakeholders to do so. 

So can you jump on the #bandwagon? The answer – a favorite of the legal profession – is that it depends.

Political Activity

Under the Internal Revenue Code, 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Contributions to political campaign funds or public statements of position (verbal or written) made on behalf of a 501(c)(3) organization in favor of, or in opposition to, any candidate for public office clearly violate the prohibition against political campaign activity. Contributions to a Political Action Committee (PAC) are also expressly prohibited. Violating these prohibitions may result in revocation of tax-exempt status and the imposition of certain excise taxes. 

In contrast, leaders of exempt organizations can, in their individual capacities, support or denounce candidates. However, they must be cautious and ensure that any individual statements or actions are not associated with their organizations in any way, i.e., not using their organization’s letterhead, posting from their organization’s social media or including their position held in the organization along with their signature.

Further, 501(c)(3) organizations are allowed to take positions on issues of public policy – even ones that divide politicians – as long as in doing so they avoid the prohibited conduct mentioned above (i.e. stop short of endorsing a specific candidate, donating to a PAC, etc.) In that case, supporting or otherwise acknowledging a social movement and the issues it is concerned with in general would not run afoul of the political prohibition. Thus, simply endorsing the message behind a social movement, even using the trending hashtag, should not be problematic and would not likely threaten their organization’s tax-exempt status.

Lobbying

Lobbying, in contrast, is not expressly prohibited for 501(c)(3) organizations, although very different rules apply to public charities versus private foundations (the latter of which, as discussed below, are effectively prohibited from lobbying in their own right). 

Public Charities – Lobbying allowed as long as not “Substantial”

“Lobbying” for purposes of the Internal Revenue Code generally includes any attempt to influence legislation or specific legislative proposals at the federal, state or local level through direct communications (i.e., with legislature, etc.) or grassroots communications (i.e., with the public). For public charities, lobbying is allowed but cannot comprise a “substantial” part of the organization’s activities.
 
Substantiality can be measured in two ways. The first is a fairly ambiguous “facts and circumstances” test which looks at all of the financial and human resources of the organization devoted to the activity. Sanctions for violation of this limitation can be severe, including loss of tax-exempt status and the imposition of excise taxes on organization managers. Unfortunately, it is unclear how much lobbying is “too much” lobbying and so this is an inherently risky approach whenever lobbying is more than de minimis. The other way to measure lobbying is a “bright line” rule that will only apply if an election is made by the organization through filing IRS Form 5768. This bright line rule implements a sliding scale limitation based on expenditures, i.e., the greater the amount of exempt purpose expenditure, the greater the amount of lobbying allowed. For example, if the amount of an organization’s total expenditures is less than or equal to $500,000, the amount of lobbying expenditure allowed is 20% of the total. This sliding scale explicitly contemplates tax-exempt purposes expenditures up to and in excess of $17 million and allows for a maximum expenditure of $1 million on lobbying. Sanctions for violating this limit are more flexible and do not result in the imposition of taxes on managers. 

As with the distinction between political activity and taking a position on matters of policy discussed above, it is likewise important to distinguish between issue education and issue advocacy, on one hand, and lobbying, on the other. Issue advocacy involves activities that promote, highlight and call for public support on issues or concerns that are not tied to any specific piece of legislation or a candidate running for public office. Fortunately, there is no limit on expenditures for issue advocacy. This ultimately benefits nonprofit organizations that have a focus on particular issues, because issue advocacy encompasses all of an organization’s programs which seek to educate and inform the public on such issues. In contrast, interactions with lawmakers and the presentation of material because a piece of legislation is being developed or voted on or to support or oppose the legislation would be engaging in direct lobbying subject to the above-discussed limits. 

Going back to our social movement example, as a public charity, if the social movement was mission-aligned and the organization engaged in issue education and issue advocacy, separate and apart from any specific legislation under consideration, the public charity would not be considered to be engaging in lobbying and there would be no limitations or risk with respect to such education and advocacy.    

Private Foundations – Lobbying is a Taxable Expenditure

While public charities are able to engage in limited amounts of lobbying, private foundations are subject to rules that treat lobbying as “taxable expenditures” and are liable for excise taxes on such spending under Section 4945 of the Internal Revenue Code. Taxable expenditures result in imposition of tax on both the private foundation and on foundation managers that knowingly and willingly approve the expenditure. Put simply, private foundations can’t lobby. 

Notwithstanding this prohibition, is there any way that a private foundation could support a new and emerging social movement directly opposed or in support of specific legislation? Yes, but only indirectly: a private foundation can make a grant to a public charity which has demonstrated support for the social movement. However, it is imperative that the grant is not earmarked for the lobbying activities of the public charity. Instead, the grant should be unrestricted or for general support. It is also recommended that the grant agreement or letter expressly provide that the grant is “not earmarked for lobbying.” This protects the private foundation in the event the public charity decides to use a portion or all of the grant towards lobbying, as such use would then be an independent decision of the public charity.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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