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IRC 501(c)(3) Organizations and Lobbying Activities: Rules, Exceptions, and Consequences, Lecture notes of Communication

An in-depth analysis of the rules and exceptions regarding lobbying activities for IRC 501(c)(3) organizations. It covers the distinction between lobbying and litigation activities, tax implications, and examples of how excess lobbying expenditures are calculated. Additionally, it discusses the affiliation rules for affiliated groups and the impact on exempt status.

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P. LOBBYING ISSUES
by
Judith E. Kindell and John Francis Reilly
1. Introduction
The last two years have witnessed a flurry of legislative activity regarding the lobbying
activities of tax-exempt organizations. Concerns have been raised regarding the extent of their
lobbying and whether additional limitations should be imposed. Last year, in response to some
of these concerns, the Lobbying Disclosure Act of 1995 was enacted, to become effective January
1, 1996. 2 U.S.C. 1601 et seq. In addition to requiring organizations that engage in lobbying
to register and report on their activities, the Act provides that IRC 501(c)(4) organizations that
engage in lobbying are not eligible to receive Federal funds as an award, grant, or loan.1Debate
concerning further, non-tax legislation continues.
Nevertheless, as Miriam Galston has noted in Lobbying and the Public Interest:
Rethinking the Internal Revenue Code’s Treatment of Legislative Activities,” 71 Tex. L. Rev.
1269 (1993), the primary vehicle for regulating organizations’ legislative activities is the Internal
Revenue Code. In her article, Professor Galston observes that the Code creates four separate and
very different regulatory regimes” regarding lobbying. Id. at 1275-81.
The first regime, which applies to IRC 501(c)(3) public charities, permits these
organizations to lobby so long as they do not devote a substantial part” of their activities to
attempting to influence legislation. This system has two subsets, which employ different tests
of substantiality. The older, enacted in 1934, applies facts and circumstances criteria to
determine substantial part.” The newer was introduced in 1976, by the enactment of
IRC 501(h) and IRC 4911. IRC 501(h) provides that certain public charities may make an
election and have their lobbying activities governed by expenditure tests in lieu of being subject
to the IRC 501(c)(3) substantial part” test. If the expenditure limits are exceeded, a tax under
IRC 4911 will be imposed or, if the limits are exceeded by 150 percent over a defined period,
exempt status will be lost. The tests are discussed in Parts 2 and 3.
The second regime applies to IRC 501(c)(3) private foundations. Under this regime, any
expenditures incurred for lobbying activities are treated as taxable expenditures under
IRC 4945(d)(1) and subject to the tax imposed by IRC 4945(a). Part 4 discusses this topic.
The third regime involves other federally tax-exempt organizations. Outside of
IRC 501(c)(3), there is no specific provision of IRC 501(c) that restricts lobbying activities.
Consequently, the only limit imposed on the lobbying activities of non-IRC 501(c)(3)
organizations is that the lobbying activities must be germane to the accomplishment of the
organization’s exempt purpose. As a result, the organization’s sole activity in support of its
exempt purpose may be lobbying without jeopardizing its tax exemption. This topic is discussed
in Part 5.
1See Robert A. Boisture, What Charities Need to Know to Comply with the Lobbying Disclosure Act of
1995,” 13 EOTR 35 (Jan. 1996) and Miriam Galston, Simpson’s Lobbying Provision: More Bark than Bite,” 13
EOTR 45 (Jan. 1996) for descriptions of the provisions and effects of the Lobbying Disclosure Act.
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P. LOBBYING ISSUES

by Judith E. Kindell and John Francis Reilly

  1. Introduction

The last two years have witnessed a flurry of legislative activity regarding the lobbying activities of tax-exempt organizations. Concerns have been raised regarding the extent of their lobbying and whether additional limitations should be imposed. Last year, in response to some of these concerns, the Lobbying Disclosure Act of 1995 was enacted, to become effective January 1, 1996. 2 U.S.C. 1601 et seq. In addition to requiring organizations that engage in lobbying to register and report on their activities, the Act provides that IRC 501(c)(4) organizations that engage in lobbying are not eligible to receive Federal funds as an award, grant, or loan.^1 Debate concerning further, non-tax legislation continues.

Nevertheless, as Miriam Galston has noted in Lobbying and the Public Interest: Rethinking the Internal Revenue Code’s Treatment of Legislative Activities,” 71 Tex. L. Rev. 1269 (1993), the primary vehicle for regulating organizations’ legislative activities is the Internal Revenue Code. In her article, Professor Galston observes that the Code creates four separate and very different regulatory regimes” regarding lobbying. Id. at 1275-81.

The first regime, which applies to IRC 501(c)(3) public charities, permits these organizations to lobby so long as they do not devote a substantial part” of their activities to attempting to influence legislation. This system has two subsets, which employ different tests of substantiality. The older, enacted in 1934, applies facts and circumstances criteria to determine substantial part.” The newer was introduced in 1976, by the enactment of IRC 501(h) and IRC 4911. IRC 501(h) provides that certain public charities may make an election and have their lobbying activities governed by expenditure tests in lieu of being subject to the IRC 501(c)(3) substantial part” test. If the expenditure limits are exceeded, a tax under IRC 4911 will be imposed or, if the limits are exceeded by 150 percent over a defined period, exempt status will be lost. The tests are discussed in Parts 2 and 3.

The second regime applies to IRC 501(c)(3) private foundations. Under this regime, any expenditures incurred for lobbying activities are treated as taxable expenditures under IRC 4945(d)(1) and subject to the tax imposed by IRC 4945(a). Part 4 discusses this topic.

The third regime involves other federally tax-exempt organizations. Outside of IRC 501(c)(3), there is no specific provision of IRC 501(c) that restricts lobbying activities. Consequently, the only limit imposed on the lobbying activities of non-IRC 501(c)(3) organizations is that the lobbying activities must be germane to the accomplishment of the organization’s exempt purpose. As a result, the organization’s sole activity in support of its exempt purpose may be lobbying without jeopardizing its tax exemption. This topic is discussed in Part 5.

(^1) See Robert A. Boisture, What Charities Need to Know to Comply with the Lobbying Disclosure Act of

1995,” 13 EOTR 35 (Jan. 1996) and Miriam Galston, Simpson’s Lobbying Provision: More Bark than Bite,” 13 EOTR 45 (Jan. 1996) for descriptions of the provisions and effects of the Lobbying Disclosure Act.

The fourth regime concerns the lobbying expenditures of businesses. These rules are set forth in IRC 162. Until recently, this was not a subject that particular concerned exempt organizations. Now, however, because of the lobbying disallowance provisions of the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993), exempt organizations also must consider the provisions that disallow deductions for lobbying by businesses. Part 6 discusses this topic.

  1. Lobbying Activities of IRC 501(c)(3) Nonelecting Public Charities

A. Legislative and Regulatory History

(1) The Pre-Statutory Era

Prior to 1934, there was no specific statutory restriction on the lobbying activities of charities. Early regulations, however, provided that organizations formed to disseminate controversial or partisan propaganda” were not educational” within the meaning of the statute. Treas. Reg. 45, art 517 (1919 ed.); T.D. 2831, 21 Treas. Dec. Int. Rev. 285 (1919). The import of the regulation became the subject of litigation concerning the deductibility of a contribution or bequest to an organization. The deduction was disallowed in some cases. See Herbert E. Fales, 9 B.T.A. 828 (1927) (contributions to various temperance organizations); Joseph M. Price, 12 B.T.A. 1186 (1928) (contribution to the Civic Fund of the City Club of New York); Slee v. Commissioner, 42 F.2d 184 (1930), aff’g 15 B.T.A. 710 (1929) (contribution to the American Birth Control League); Henriette T. Noyes, 31 B.T.A. 121 (1934) (contribution to a women voters’ league); Vanderbilt v. Commissioner, 48 F.2d 360 (1st Cir. 1937) (bequest to the National Women’s Party). In other cases, the deduction was allowed. See Weyl v. Commissioner, 48 F.2d 811 (2nd Cir. 1931), rev’g 18 B.T.A. 1092 (1930) (contribution to the League for Industrial Democracy); Cochran v. Commissioner, 78 F.2d 176 (4th Cir. 1935), rev’g 30 B.T.A. 1115 (1934) (contribution to the World League Against Alcoholism). In one case, a contribution to an organization was allowed, while another, to a cognate organization, was disallowed. Leubuscher v. Commissioner, 54 F.2d 998 (2d Cir. 1932), modifying 30 B.T.A 1022 (1930) (bequest to two organizations to teach the ideas of Henry George relative to the single tax on land).^2

(^2) Commentators differ on the overall import of these decisions. Dean E. Sharp, Reflections on the

Disallowance of Income Tax Deductions for Lobbying Expenditures,” 39 B.U. L. Rev. 365, 387 (1959), simply notes that these cases, as well as cases decided after 1934, are in conflict.” Others have deduced a trend. William H. Lehrfeld, The Taxation of Ideology,” 19 Cath. U. L. Rev. 52, 59 (1969), emphasizes the controversial nature of the organization’s agenda; he concludes that [o]nly the meek inherited the tax exemption.” Tommy F. Thompson, The Availability of the Federal Educational Tax Exemption for Propaganda Organizations,” 18 U.C. Davis L. Rev. 487, 498-501 (1985), contends that the determining factor in these cases was whether the organization attempted to influence legislation. (Thompson also states, at 498 n. 29, that no evidence suggests that the Service actively discriminated against organizations that advocated extreme viewpoints, or in favor of organizations that advocated mainstream viewpoints. The evidence suggests that the Service did in fact apply the standard strictly and evenhandedly.”) Laura B. Chisholm, Exempt Organization Advocacy: Matching the Rules to the Rationales,” 63 Ind. L.J. 201, 216 n. 78, after noting Mr. Lehrfeld’s and Professor Thompson’s analyses, concludes: With a few exceptions, the cases seem to support the [legislative activity] contention at least as convincingly as they support the proposition that advocacy per se or controversiality was the basis for denial of exemption or deductibility.”

obstacles.” Id. Therefore, contributions to the League were not deductible. This disallowance, accordingly, was based not upon the controversial nature of the League’s activities, nor upon its attempts to influence legislation per se; instead, it was based upon the assumption (actually, the lack of evidence to refute the assumption) that its legislative activities went beyond its charitable purposes.^5

What Slee proclaims is an analog to Trinidad’s destination of income” test -- a destination of lobbying” test. As will be discussed in the next section, this did not become the precise formulation of the statutory restriction on lobbying; nevertheless, Slee served as the basis of what was to follow.

(2) The Lobbying Restriction

In 1934, the limitation on the lobbying activities of IRC 501(c)(3) organizations, requiring that no substantial part of an organization’s activities constitute carrying on propaganda or otherwise attempting to influence legislation,” became part of the statute. Revenue Act of 1934. The legislative history is sparse.

What we do know is that the Senate Finance Committee staff drafted the provision and that it was added to the Revenue Act of 1934 as a floor amendment.^6 We also know that Senator David Reed, the ranking minority member of the Committee and the provision’s apparent sponsor, was dissatisfied with its formulation:

There is no reason in the world why a contribution made to the National Economy League should be deductible as if it were a charitable contribution if it is a selfish one made to advance the personal interests of the giver of the money. That is what the committee was trying to reach; but we found great difficulty in phrasing the amendment. I do not reproach the draftsmen. I think we gave them an impossible task; but this amendment goes much further than the committee intended to go. 78 Cong. Rec. 5, (1934).

It is not clear, however, to what extent Senator Reed was speaking for the entire Committee. If the Committee were so dissatisfied with the provision, they could have tabled it -- contributions to most charities are unselfishly motivated. Likewise, if the Congress or the Administration felt that the critical issue was that more prevention of cruelty societies and crippled children’s organizations would be affected by its enactment than selfish” organizations,

(^5) Judge Hand’s decision made no mention of the Treasury regulation. The Board of Tax Appeals decision, in

contrast, discussed it. Slee, 15 B.T.A. at 715.

(^6) The provision also contained a restriction on participation in partisan politics.” The provision, however, was

dropped in conference, so that only the lobbying restriction remained. H.R. Conf. Rep. No. 73-1385, 73d Cong., 2d Sess. 3-4 (1934). In explaining its deletion, one of the House managers, Representative Samuel B. Hill stated, We were afraid this provision was too broad.” 73 Cong. Rec. 7,831 (1934).

it would not have become law. One suspects that the provision was enacted simply because there was a general sentiment that lobbying by charities should be restricted.^7 This is not to doubt that the selfish/unselfish” formula was what Senator Reed wanted drafted, nor that, as he stated, the Committee staff tried to draft it but found it impossible. 8 However, the reference to the National Economy League seems to indicate that the Senator had embarked on a personal crusade that may not have been taken too seriously by his colleagues, who seized the opportunity to enact a broader restriction. 9

(^7) The Committee considered, and rejected, application of the provision to restrict contributions to war veterans’

associations. Id. at 5,861 (remarks of Senator Pat Harrison, chairman of the Committee).

(^8) The National Economy League is discussed in note 9. Senator Reed’s view of the League as selfishly

motivated was not universally shared. For example, in an editorial, the New York Times praised the League chairman’s (and, by implication, the League’s) patriotism, disinterestedness, and loyalty.” Useful Service,” April 27, 1933, at 16. The impossibility of starting with the National Economy League and drafting a selfish/unselfish” standard is apparent.

(^9) Senator Reed had been one of the leaders of the considerable number of Old Guard” Republicans during the

Harding, Coolidge, and Hoover administrations. After the 1932 election, however, their numbers had been drastically reduced, as had Reed’s influence. A 1933 Newsweek portrait of the Senator, Reed: Hamiltonian, Mellon Attorney, and Penn. Senator, May 6, 1933, at 18-19, presents him as a beleaguered figure, having virtually no influence and being subjected to the abuse of the acid-tongued Senator Harrison. By the time he was denouncing his own bill on the Senate floor, his situation had worsened. He was locked in a nasty primary battle for renomination; the election occurred less than two months after his floor speech; the outcome was in doubt. His opponent was his ideological opposite, the Governor of Pennsylvania, Gifford Pinchot, a leader of the Progressive wing of the Republican Party. (In addition to their ideological differences, they detested each other: Harold Ickes observed that they had always fought like two tomcats sitting on a fence.” Arthur M. Schlesinger, Jr., The Coming of the New Deal, 346 (1959).) Pinchot was not Reed’s only problem; he was also opposed by an organization that would appear to have been his natural ally, the National Economy League.

The National Economy League was one of the short-lived phenomena of the 1930’s. Organized in 1932, apparently in reaction to the Bonus March, after two years of prominence, it vanished. A revolt of the haves,” dedicated to a radical reduction in government expenditures, its leadership was anything but obscure, however. Its chief spokesman was Admiral Richard Byrd (who served as chairman until he decided to travel to the Antarctic); Nicholas Murray Butler was its honorary chairman; its original six member advisory board consisted of a former President (Calvin Coolidge), a defeated candidate for the Presidency (Alfred E. Smith), two former Secretaries of State (Elihu Root and Newton D. Baker), General of the Armies John W. Pershing, and Admiral Williams Sowden Sims. Byrd Quits as Head of Economy Group,” N.Y. Times, April 26, 1933, at 5. Mr. Lehrfeld, supra, at 63, states that it had been accorded charitable status, and the right to receive tax-deductible contributions, in a ruling letter dated November 3, 1933. Soon thereafter, it submitted its own economic program to the President and Congress. The New York Times gave front page treatment to the event and printed the text of the entire program. Roosevelt Warned Our Debt Will Rise 4 Billion in Year,” Dec. 18, 1933, at 1. The extent of benefits to war veterans was the League’s foremost concern. It repeatedly urged that benefits be limited only to those wounded in war. (Appropriations to the Veterans Administration was no small budgetary matter. In praising the League’s stand, the New York Times noted that the appropriations had reached a point where they accounted for one-third of the entire cost of the Federal government, aside from service on the national debt.” Useful Service,” April 26, 1933, at 16.) However, this position brought the League into conflict with Senator Reed, who also made the veterans’ benefits his chief concern. Lurching unexpectedly leftward, outflanking Pinchot and even Roosevelt, in January 1934, Reed sponsored legislation to restore benefits cut the year before. Reed Leads Fight on Veterans’ Cuts,” N. Y. Times, Jan. 9, 1934, at 5. The League responded by presenting its own plan and excoriating Reed’s. Plan to Simplify Veteran Aid Urged,” N. Y. Times, Feb. 19, 1934, at 4. Reed’s

written after the enactment of the lobbying restriction did not elaborate upon the statute. Reg. 86.101(6)-1 (as amended in 1935). The current action” organization regulations were proposed early in 1959 (24 FR 1420 (Feb. 26, 1959)), and adopted later that year by T.D. 6391 (24 FR 5217 (June 26, 1959)).

(3) Subsequent Statutory Developments

As part of the Tax Reform Act of 1976, Congress enacted IRC 501(h) and IRC 4911 to provide a second test for determining the amount of allowable lobbying. These provisions are discussed in Part 3 of this article. In addition, Congress enacted IRC 504 to provide, with certain exceptions, that IRC 501(c)(3) organizations that lose exempt status due to excessive lobbying may not at any time thereafter be treated as IRC 501(c)(4) organizations. IRC 504 is discussed in Part 5.

In 1987, House Ways and Means Oversight Subcommittee Chairman J.J. Pickle announced that he was initiating an investigation into the lobbying and electioneering activities of IRC 501(c) organizations. The particular focus of concern was the National Endowment for the Preservation of Liberty (NEPL), an IRC 501(c)(3) organization. The organization reportedly received funds from the Iran-Contra arms sales and used the proceeds both to finance conservative Congressional candidates in the 1986 campaign and to run negative advertisements about Congressional incumbents who opposed aid to the Nicaraguan Contras. NEPL also engaged in a considerable amount of grass roots lobbying to garner support for Contra aid. 12

The hearings resulted in the enactment of several statutes. One of these, IRC 4912, concerns the lobbying activities of nonelecting public charities. For years beginning after December 22, 1987, certain organizations whose IRC 501(c)(3) status is revoked because of substantial lobbying activities are subject to a five percent excise tax imposed by IRC 4912 on their lobbying expenditures,” for the year of loss of the exemption. Lobbying expenditure” is defined in IRC 4912(d)(1) as any amount paid or incurred by a charitable organization in carrying on propaganda or otherwise attempting to influence legislation.^13

What distinguishes lobbying activity from litigation activity, therefore, is lobbying activity, regardless of its purpose, is expressly restricted by statute, whereas litigation activity is tested on the basis of whether the particular purpose of the activity is in furtherance of the particular organization’s IRC 501(c)(3) purposes.

(^12) For a history of the 1987 legislation, see Chisholm, supra, n. 2, at 203-204.

(^13) H.R. Rep. No. 100-391, 100th Cong., 1st Sess. 1631 (1987) explains the reason for the provision:

The committee concluded that revocation of exempt status may be ineffective in the case of certain charitable organizations as a penalty or as a deterrent to engaging in more than insubstantial lobbying activities, particularly if the organization ceases operations after it has diverted all its tax-deductible contributions and exempt income to improper purposes but before it has been audited and any income tax liability has been assessed. Accordingly, the committee believes that in such cases the sanction of revocation of tax-exempt status should be supplemented by an excise tax, just as under present law excise taxes apply where a public charity electing under section

IRC 4912 also imposes a similar tax at the same rate on any manager of the organization who willfully and without reasonable cause consented to making the lobbying expenditures knowing the expenditures would likely result in the organization’s no longer qualifying under IRC 501(c)(3). There is no limit on the amount of this tax that may be imposed against either the organization or its managers.

IRC 4912(c)(2)(C) excepts private foundations from the IRC 4912 taxes because their lobbying expenditures are already subject to the tax imposed by IRC 4945. In addition, the IRC 4912 taxes are not imposed on any organization that has elected to be subject to the lobbying limitations of IRC 501(h) (IRC 4912(c)(2)(A)) or on churches and church-related organizations that are not eligible to make the IRC 501(h) election (IRC 4912(c)(2)(B)).

(4) The Constitutional Issue

In Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983), the Court addressed the question of whether the IRC 501(c)(3) restriction on lobbying violates constitutional guarantees.

Regan v. Taxation with Representation of Washington was foreshadowed by Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972); cert. denied, 414 U.S. 864 (1973), where the Tenth Circuit dismissed a claim that the IRC 501(c)(3) prohibition on lobbying and political activities was an unconstitutional restriction on the organization’s freedom of speech. In so doing, the court stated:

In light of the fact that tax exemption is a privilege, a matter of grace rather than right, we hold that the limitations contained in section 501(c)(3) withholding exemption from nonprofit corporations do not deprive Christian Echoes of its constitutionally guaranteed right of freedom of speech. The taxpayer may engage in all such activities without restraint, subject, however, to withholding of the exemption, or, in the alternative, the taxpayer may refrain from such activities and obtain the privilege of exemption.... The congressional purposes evidenced by the 1934 and 1954 amendments are clearly constitutionally justified in keeping with the separation and neutrality principles particularly applicable in this case and, more succinctly, the principle that the government shall not subsidize, directly or indirectly, those organizations whose substantial activities are directed toward the accomplishment of legislative goals or the election or defeat of particular candidates. 470 F.2d at 857.

501(h) exceeds the permitted lobbying expenditures or where a private foundation engages in any political lobbying activities.

B. Specific Issues

(1) The Meaning of Legislation”

Reg. 1.501(c)(3)-1(c)(3)(ii) provides that

1. What is the general meaning of the term legislation?”

the term legislation” includes action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure.”

Reg. 1.501(c)(3)-1(c)(3)(ii) does not

2. What is the meaning of action” as used in the phrase action by the Congress?”

elaborate on the precise meaning of the word action.” In this situation, however, one should consider the meaning of the phrase action by the Congress” for purposes of IRC 4911(e).^14 In IRC 4911(e), the phrase action... by the Congress” is used in the definition of the term legislation” and the term legislation” is used to delineate the extent to which certain organizations described in IRC 501(c)(3) may conduct certain types of lobbying activities.

IRC 4911(e)(2) provides that, for purposes of IRC 4911, [t]he term legislation' includes action with respect to Acts, bills, resolutions, or similar items by the Congress, any State legislature, any local council, or similar governing body, or by the public in a referendum, initiative, constitutional amendment or similar procedure.” In IRC 4911(e)(3), Congress limited the meaning of the term action,” as that term is used in IRC 4911, to the introduction, amendment, enactment, defeat, or repeal of Acts, bills, resolutions, or similar items.”

G.C.M. 39694 (Jan. 21, 1988) notes that it is unclear whether the phrase action by the Congress” as used in the regulations implementing the lobbying restriction of IRC 501(c)(3) for nonelecting public charities is also limited to the introduction, amendment, enactment, defeat, or repeal of Acts, bills, resolutions, or similar items. Nevertheless, G.C.M. 39694 concludes that the administration of, and compliance with, IRC 501(c)(3), IRC 501(h), IRC 4911, and IRC 4945 would be best effectuated by the application of a single definition of action by the Congress” as a phrase referring to the introduction, amendment, enactment, defeat, or repeal of Acts, bills, resolutions, or similar items.

The common denominator among Acts, bills, and resolutions is the fact that all are items that are voted upon by a legislative body. Resolutions differ from Acts in that they are a formal expression of opinion by a legislative body that has only a temporary effect or no effect at all as a legal matter. G.C.M. 39694, discussing 77 C.J.S. Resolution” § 1 (1952); Black’s Law

(^14) Prior to amendment in 1990, the regulations under IRC 4945 also referred to action by the Congress” in

defining legislation. Reg. 53.4945-2(a)(1) now expressly adopts the definition of legislation in the IRC 4911 regulations.

Dictionary 1178 (5th ed. 1979). Therefore, the

3. What is meant by resolutions or similar matters?”

determining factor in whether an action is a similar matter” is not the legal effect of the action, but whether it is an item voted upon by a legislative body.

Yes. The confirmation vote comes within

4. Does the term legislation” include the Senate’s vote on Executive Branch nominees?

the category of a similar item” since it is an item voted upon by a legislative body as discussed above. It is similar to a resolution, but is stronger than a resolution since it has a final force and effect. Notice 88-76, 1988-2 C.B. 392 (lobbying on confirmation vote on nominee for federal judgeship constitutes attempting to influence legislation for purposes of IRC 501(c)(3), IRC 4911, and IRC 4945(d)). See also Reg. 56.4911-2(b)(4)(ii)(B), Example (6) (mailing requesting recipients to write to Senators on the Senate Committee that will consider a nomination for a cabinet level post is a grass roots lobbying communication).

Reg. 1.501(c)(3)-1(c)(3)(ii) limits the

5. Does the term legislation” i n c l u d e a c t i o n s b y administrative bodies?

definition of legislation to actions by legislatures or by the public through referendum, initiative, constitutional amendment, etc. The implication that actions by administrative bodies do not constitute legislation is made explicit in the regulations under IRC 4911.

Reg. 56.4911-2(d)(3) provides that legislation does not include actions by executive, judicial, or administrative bodies. Reg. 56.4911-2(d)(4) provides that the term administrative bodies” includes school boards, housing authorities, sewer and water districts, zoning boards, and other similar Federal, State, or local special purpose bodies, whether elective or appointive. Accordingly, an organization would not be influencing legislation for purposes of IRC 4911, if it proposed to a Park Authority that it purchase a particular tract of land for a new park, even though such an attempt would necessarily require the Park Authority eventually to seek appropriations to support a new park.^15

(^15) Reg. 56.4911-2(d)(4) nevertheless concludes that, in such a case, the organization would be influencing

legislation if it provided the Park Authority with a proposed budget to be submitted to a legislative body, unless such submission is described by one of the exceptions to influencing legislation.

organizations whether they represent private interests or the interests of the public. Id. at 1142.

See also League of Women Voters of the United States v. United States, 180 F. Supp. 379 (Ct. Cl. 1960), cert. denied, 364 U.S. 822 (1960).

(2) Attempts to Influence Legislation

Attempts to influence legislation are not

1. What activities are attempts to influence legislation?”

limited to direct communications to members of the legislature ( direct” lobbying). Indirect communications through the electorate or general public ( grass roots” lobbying) also constitute attempts to influence legislation. Of course, whether a communication constitutes an attempt to influence legislation is determined on the basis of the facts and circumstances surrounding the communication in question. Both direct and grass roots lobbying are nonexempt activities subject to the IRC 501(c)(3) limitation on substantial legislative action. 16 Reg. 1.501(c)(3)-1(c)(3)(ii).^17

Reg. 1.501(c)(3)-1(c)(3)(ii) also provides that, more generally, advocating the adoption or rejection of legislation constitutes an attempt to influence legislation for purposes of the IRC 501(c)(3) lobbying restriction. This provision was tested in the case of Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972); cert. denied, 414 U.S. 864 (1973). Christian Echoes National Ministry published articles and produced radio and television broadcasts that urged recipients to become involved in politics and to write to their representatives in Congress to urge that they support prayer in public schools and oppose foreign aid. The organization argued that attempts to influence legislation would occur only if legislation were actually pending. The Tenth Circuit concluded that the regulation properly interpreted the statute, and that the organization was engaged in attempting to influence legislation, even if legislation was not pending.

The IRC 501(c)(3) regulations provide that

2. W h a t i s a n a c t i o n organization?”

an organization is not operated exclusively for exempt purposes if it is an action” organization. Reg. 1.501(c)(3)-1(c)(3) uses the term action” organizations to describe both organizations that

(^16) For IRC 501(c)(3) purposes, the distinction between direct and indirect lobbying becomes important for public

charities making the IRC 501(h) lobbying election. As discussed in Part 3, there are separate limits for total lobbying and for indirect lobbying. In addition, certain communications made to members are not considered attempts to influence legislation, while other communications to members are considered lobbying.

(^17) The regulation, with its specific inclusion of grass roots lobbying, makes clear that the portion of the decision

in Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955), that limited attempting to influence legislation” to direct appeals to the legislature is not reflective of the statute.

attempt to influence legislation and organizations that intervene in political campaigns.

For purposes of the lobbying restriction, an organization is an action” organization on either of two distinct grounds. The first occurs if a substantial part of the organization’s activities involves attempting to influence legislation. Reg. 1.501(c)(3)-1(c)(3)(ii) states that an organization will be regarded as attempting to influence legislation if it does the following:

(A) Contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation, or

(B) Advocates the adoption or rejection of legislation.

The second ground is found in Reg. 1.501(c)(3)-1(c)(3)(iv), which provides that an organization is an action” organization if it has the following two characteristics:

(A) Its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and

(B) It advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results thereof available to the public.

In determining whether an organization has these two characteristics, all of the surrounding facts and circumstances, including the articles and all activities of the organization, are to be considered.

Under IRC 501(c)(3), there are certain

3. How is nonpartisan analysis distinguished from attempts to influence legislation?

circumstances where nonpartisan analysis, study, or research of matters pertaining to legislation may be educational and will not constitute attempts to influence legislation. 18 This occurs where the material is available to the public, governmental bodies, officials, and employees, and where the organization does not advocate the adoption or rejection of legislation. See Reg. 1.501(c)(3)-1(c)(3)(iv). Several revenue rulings discuss this issue.

(^18) In Haswell v. U.S., 500 F.2d 1133, 1144 (Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975), the Court of

Claims explained what nonpartisan” means as follows:

Nonpartisan,” as used in the statute and regulations, need not refer to organized political parties. Nonpartisan analysis, study, or research is oriented to issues and requires a fair exposition of both sides of the issue involved.

The organization described in Rev. Rul. 70-79 can be distinguished from the organization discussed in Rev. Rul. 62-71, 1962-1 C.B. 85. The latter organization is a corporation formed for the purpose of supporting an educational program with regard to a particular doctrine or theory. It was the announced policy of the organization to promote its philosophy by educational methods as well as by the encouragement of political action. Most of the publications disseminated by the organization, together with a substantial part of its other activities, dealt with the theory advocated. This theory or doctrine can be put into effect only by legislative action.

Rev. Rul. 62-71 concludes that while the portion of the organization’s activities that consisted of engaging in nonpartisan analysis, study and research and making the results thereof available to the public, when considered alone, may be classified as educational within the meaning of IRC 501(c)(3), the organization was primarily engaged in not only teaching but advocating the adoption of a particular doctrine or theory that can become effective only by the enactment of legislation. Since the primary objective of the organization can be attained only by legislative action, a step that the organization encouraged or advocated as a part of its announced policy, as opposed to merely engaging in nonpartisan analysis, study and research and making the results thereof available to the public, it is an action” organization as that term is defined in Reg. 1.501(c)(3)-1(c)(3) of the regulations. Accordingly, the organization does not qualify for IRC 501(c)(3) exempt status.

In addition, it should be noted that activities which appear by themselves to be educational in nature may, in fact, be part of a broader purpose to influence specific legislative action. For example, in the case of Roberts Dairy Company v. Commissioner, 195 F.2d 948 (8th Cir. 1952), cert. denied, 344 U.S. 865 (1952), the organization prepared and distributed materials to inform its members and the public of certain tax disparities between business organizations. The court, apparently looking beyond the actual material distributed, held that since the ultimate objective was the revision of the tax laws, the organization was attempting to influence legislation.

Generally, if an organization appears

4. May appearances before l e g i s l a t i v e c o m m i t t e e s constitute attempts to influence legislation?

before a legislative committee to discuss legislation, that action will be an attempt to influence legislation. However, attempting to influence legislation does not include such appearances when the organization appears before legislative committees in response to official requests for testimony. The Service has ruled that a university’s exemption would not be jeopardized when, in response to an official request, it sent representatives who could advise a Congressional committee on the possible effects of specific legislation. See Rev. Rul. 70-449, 1970-2 C.B. 111, where the Service concludes that attempts to influence legislation as described in the regulations imply an affirmative act and require something more than a mere passive response to a Committee invitation.” While stating that the legislative history is silent on this point, the Service concludes that it is unlikely that

Congress, in framing the language of this provision, intended to deny itself access to the best technical expertise available on any matter with which it concerns itself.” 20

As noted above, legislation does not

5. May requests to executive bodies constitute attempts to influence legislation?

include actions by executive bodies. Therefore, requesting executive bodies to take some action would generally not constitute attempting to influence legislation. This is not the case where the organization requests the executive bodies to support or oppose legislation. Requesting executive bodies to support or oppose legislation is included in the purview of attempting to influence legislation.” Rev. Rul. 67-293, 1967-2 C.B. 185; Roberts Dairy Company v. Commissioner, 195 F.2d 948 (8th Cir. 1952), cert. denied, 344 U.S. 865 (1952); American Hardware and Equipment Company v. Commissioner, 202 F.2d 126 (4th Cir. 1953), cert. denied, 346 U.S. 814 (1953).

Where an IRC 501(c)(3) organization is

6. May lobbying activities of individuals be attributable to IRC 501(c)(3) organizations?

involved, it is frequently necessary to determine whether a lobbying activity is attributable to the organization or merely the act of an individual. The Service has developed attribution rules to fit a number of situations. Questions involving lobbying activity, political campaign activity, and illegal activity have provided a body of administrative law that may be used to address issues of attribution.

As is noted in G.C.M. 34631 (Oct. 4, 1971) and G.C.M. 39414 (Feb. 29, 1984), principles of agency law apply to this determination. A further discussion of the standards used is found in G.C.M. 34523 (June 11, 1971), which addresses actions attributable to colleges and universities in considering their exempt status:

Only actions by the exempt organization can disqualify it from 501(c)(3) status. Since organizations act through individuals, it is necessary to distinguish those activities of individuals done in an official capacity from those that are not. Only official acts can be attributed to the organization. Provision is made in the articles of organization by which a school is created, by its bylaws, and by other valid and proper means, for delegating authority and

(^20) Publication of Rev. Rul. 70-449 was approved in G.C.M. 34289 (May 3, 1970). G.C.M. 34289 furnished a

second rationale, i.e., the 1969 enactment of IRC 4945, with the exceptions for nonpartisan analysis, technical advice, and self-defense, was intended to restate, rather than revise, the existing definition of attempting to influence legislation. The same conclusion is expressed in G.C.M. 36127 (Jan. 2, 1975). Rev. Rul. 70-449 did not adopt this position, however; instead, as noted above, the revenue ruling states that the legislative history is silent on this point. As to whether the self-defense exception applies to nonelecting public charities, the Service has not published a precedential document adopting the favorable conclusion of G.C.M. 34289.

(3) Limits on Attempts to Influence Legislation

A determination of whether attempts to

1. When are attempts to i n f l u e n c e l e g i s l a t i o n considered substantial?

influence legislation constitute a substantial” portion of an organization’s total activities is a factual one and there is no simple rule as to what amount of activities is substantial. An often cited case on the subject, Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955), is of limited help. Seasongood held that attempts to influence legislation that constituted five percent of total activities were not substantial. The case presents limited guidance because the court’s view of what set of activities were to be measured is no longer supported by the weight of precedent. Moreover, it is not clear how the court arrived at the five percent figure.

Most cases have either tended to avoid any attempt at percentage measurement of activities or, at least, have stated that a percentage test is not conclusive. Thus, in Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1974), the Tenth Circuit rejected the use of a percentage test to determine whether activities were substantial, stating that [a] percentage test to determine whether activities were substantial obscures the complexity of balancing the organization’s activities in relation to its objectives and circumstances.” In Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975), the Court of Claims cited percentage figures in support of its determination that an organization’s lobbying activities were substantial. (The amount of the organization’s expenditures for lobbying activities ranged from 16.6 percent to 20.5 percent of total expenditures during the four years at issue.) While the court stated that a percentage test is only one measure of substantiality (and not, by itself, determinative), it held that these percentages were a strong indication that the organization’s purposes were no longer consistent with charity.

G.C.M. 36148 (Jan. 28, 1975) characterized the substantiality issue as a problem [that] does not lend itself to ready numerical boundaries.” The G.C.M. then stated:

Moreover, the percentage of the budget dedicated to a given activity is only one type of evidence of substantiality. Others are the amount of volunteer time devoted to the activity, the amount of publicity the organization assigns to the activity, and the continuous or intermittent nature of the organization’s attention to it. All such factors have a bearing on the relative importance of the activity, and should be given due consideration in determining whether its conduct is reconcilable with the requirement that it operate exclusively for exempt purposes.

We therefore think that the Service should not adopt a percentage of total expenditures test for the substantiality of nonexempt activities conducted by exempt organizations. We also think that ten percent would be unjustifiably high, even if a percentage test

were merely adopted for use as a threshold for more intensive auditing in which the Service can give due consideration to the relative importance of volunteer services and the like.

Nevertheless, while neither the Service nor the courts have adopted a percentage test for determining whether a substantial part of an organization’s activities consist of lobbying, some guidance can be derived from Seasongood and Haswell. Under Seasongood, a five percent safe harbor has been frequently applied as a general rule of thumb regarding what is substantial. Similarly, lobbying activities that exceed the roughly 16 to 20 percent range of total activities found in Haswell are generally considered substantial. (Compare these percentages to the sliding scale of percentage of expenditures allowed to organizations that elect to be governed by IRC 501(h) as discussed below.)

In determining whether an organization

2. May supporting activities also be considered attempts to influence legislation?

has engaged in attempts to influence legislation as a substantial activity, it is sometimes difficult to determine what supporting activities should be included with the proscribed attempts to influence legislation. This is often a problem where an organization has some activities that are admittedly educational. Frequently, much effort is devoted to research, discussion, and similar activities. The problem is how much of these back-up activities should be considered part of the attempts to influence legislation. In League of Women Voters of the United States v. United States, 180 F. Supp, 379 (Ct. Cl. 1960), cert. denied, 364 U.S. 882 (1960), the time spent in discussing public issues, formulating and agreeing upon positions, and studying them preparatory to adopting a position was taken into account and compared with the other activities in determining the substantiality of the attempts to influence legislation. Attempting to influence legislation does not necessarily begin at the moment the organization first addresses itself to the public or to the legislature. See also Kuper v. Commissioner, 332 F.2d 562 (3d Cir. 1964), cert. denied, 379 U.S. 920 (1964). Furthermore, all facts and circumstances must be considered in determining whether the lobbying activities of an IRC 501(c)(3) organization are substantial, not just the amount of expenditures made.

  1. Lobbying Activities of IRC 501(c)(3) Electing Public Charities

A. Legislative and Regulatory History

(1) Enactment of the Statutes

During the period from 1934 to 1976, the lobbying limitation was subject to increasing public criticism. The passage of IRC 162(e) in 1962, permitting a business expense deduction for direct lobbying expenses, led to the argument that equal treatment should be given to charitable organizations. Meanwhile, the courts were having a difficult time measuring the substantiality” of these activities.