Charitable organizations are exempt from federal taxes under Internal Revenue Code (IRC) §501(c)(3) if they meet certain requirements. First, the organization must be organized and operated exclusively for one or more purposes outlined in 501(c)(3), which include, but are not limited to, religious, charitable, educational, literary, and scientific purposes. No earnings of the organization may inure to the benefit of any private shareholder or individual.
Furthermore, a §501(c)(3) organization may not participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office. Finally, “no substantial part” of the §501(c)(3) organization’s activities may involve the carrying on of propaganda or attempting to influence legislation.
The “Substantial Part” Test Under §501(c)(3)
Treasury Regulations Section 1.501(c)(3)-1(c)(3)(ii) outlines the “substantial part” test under §501(c)(3), which is a generally vague analysis based on facts and circumstances, and not one always depending on measures of time and expenditures. For instance, the IRS has sometimes evaluated the percentage of an organization’s annual expenditures devoted to influencing legislation. Still, in other cases, the IRS has considered the organization’s percentage of activities designed to influence legislation.
Historically, the IRS seemed to indicate that “insubstantial” meant five percent or less of an organization’s annual expenditures. The IRS even pointed to the cases of Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955) and Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert. denied , 419 U.S. 1107 (1975) in one of its continuing education program materials, stating that:
[u]nder 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.However, the IRS since has backed away from that interpretation, while simultaneously failing to replace it with a different interpretation or threshold.
Since the IRS has not offered clear guidance or set an exact threshold as to what defines “substantial,” this analysis remains very uncertain. Nonetheless, we would not advise that a charitable organization spend more than five percent of its activities and expenditures on lobbying, unless it has exercised the Section 501(h) option, as explained in greater detail below.
Under this section, lobbying does not place an organization’s tax-exempt status at risk if it is not an “action” organization or one which, by a substantial part of its activities, is attempting to influence legislation by propaganda or otherwise. Lobbying for the substantial part test includes the following:
- Attempts to influence legislation by propaganda or otherwise;
- Presentation of testimony at public hearings held by legislative committees;
- Correspondence and conferences with legislators and staff;
- Communications by electronic means; and
- Publication of documents advocating specific legislative action.
Legislation can include action by Congress, a state legislature, a local governing body, and the general public in a referendum, initiative, constitutional amendment, or similar procedure.
The Section 501(h) Election
One alternative to relying on the often uncertain “substantial part” test is to exercise the “lobbying election” under Section 501(h) of the IRC. Organizations that make the Section 501(h) election are subject to the “expenditure test,” which calculates the lobbying ceiling, or the nontaxable amount, based on their exempt purposes expenditures on lobbying. Under U.S. Code §4911(c)(2), the expenditure test calculates the lobbying ceiling as follows:
- Under $500,000 – 20% of the exempt purpose expenditures
- $500,000 – $1,000,000 – $100,000, plus 15% of the excess of the exempt expenditures over $500,000
- $1,000,000 – $1,500,000 – $175,000, plus 10% of the excess of the exempt expenditures over $1,000,000
- Over $1,500,000 – $225,000, plus 5% of the excess of the exempt expenditures over $1,500,000
For the expenditure test, lobbying includes the following types of lobbying:
- Direct lobbying is any attempt to influence legislation by communicating with a member or employee of a legislative body or with any government official or employee who may participate in formulating legislation. This type of lobbying also includes any communications an organization sends to its members encouraging them to engage in direct lobbying.
- Grassroots lobbying is any attempt to influence legislation through an attempt to affect the opinions of the general public or any segment thereof.
On top of the caps on lobbying expenditures listed above, grassroots lobbying expenditures cannot exceed 25% of the organization’s general lobbying expenditures. As a result, some organizations that solely engage in grassroots lobbying activities may not benefit from exercising the Section 501(h) election.
Lobbying expenditures include the costs of researching and preparing lobbying materials and the allocable portion of administrative, overhead, and other general expenses attributed to lobbying. However, lobbying does not include the following:
- Technical assistance or advice to a governmental body or committee in response to an unsolicited written request;
- Self-defense activities or communications concerning decisions that may affect an organization’s existence, powers, duties, §501(c)(3) status, or deductibility of contributions; and
- Nonpartisan analysis, study, or research that may advocate a particular view, if:
- presentation of the relevant facts is sufficient to enable readers to reach an independent conclusion, and
- distribution of the results is not limited to or directed toward persons solely interested in one side of a particular issue.
Contact Us Today for §501(c)(3) or Other Legal Assistance
Church Law Center gears its practice to legal matters that affect nonprofit organizations, churches, and other religious organizations, including nonprofit political activity in California. This focus allows us to concentrate on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent your interests throughout every stage of your legal matter. Call us today at (949) 892-1221, or visit us online and see what we can do for you.
