Public Policy

CLPI Public Policy Positions

IRS Rules Governing Charitable Lobbying - October 2010

Background

In 1934, Congress acted to include the restriction that “no substantial part” of a charity’s activities may involve influencing legislation. The vagueness and uncertainty surrounding the “substantial part” test, combined with the extreme sanction of revocation of exempt status, caused controversy and confusion that chilled permissible charitable policy input and undermined effective tax compliance.

In 1976, to provide more objective standards regarding a charity's permissible participation in lobbying activities, Congress passed legislation allowing 501(c)(3) organizations (excluding churches, private foundations and certain other organizations) to elect a substitute for the “substantial part” test – the so-called 501(h) election. A charity making the 501(h) election may spend up to a specific percentage of its annual exempt-purpose expenditures on lobbying. The sliding scale of percentages created by 501(h) begins at 20 percent of the first $500,000 and has an overall cap of $1 million.

The IRS has encouraged charities to elect to come under 501(h) because of its simplicity and certainty. However, as an “opt-in” test that has never been institutionalized within the sector, more than 90 percent of charities remain under the default “substantial part test.”

In addition, under section 501(h), the amount of expenditures for grassroots lobbying – that is, attempts to “influence legislation through an attempt to affect the opinions of the general public or any segment thereof" – is subject to further limitations. Expenditures for grassroots lobbying are limited to 25 percent of the overall ceiling. For example, if a charity is permitted to spend $100,000 for lobbying, no more than $25,000 may be spent on grassroots lobbying. A 25 percent excise tax applies to lobbying expenditures that exceed these ceilings.

The statute does not index for inflation the lobbying expenditure allowances determined under either the percentages based on exempt-purpose expenditures or the overall $1 million cap. As a result, the expenditure allowances have not changed since 1976, and inflation has cut away more than two-thirds of their value since then.

Under a proposal supported by several former government officials, professionals, academics and practitioners in the exempt organizations area, Congress would enact a single lobbying standard for non-church, public charities based on an updated version of the 501(h) reform standard that was adopted in 1976.

The “substantial part” test would be eliminated, and a modified 501(h) test would become the single standard for all non-church public charities. The modified 501(h) test would be updated and improved by eliminating the grassroots-direct lobbying distinction and indexing the lobbying levels for inflation without an overall cap.

Reason for Change

By eliminating the “substantial part” test and updating the 1976 tax law for non-church, public charities, Congress can remove unnecessary confusion and costs while providing greater assurance of taxpayer compliance. The complexity of having two sets of IRS rules and the failure to index the lobbying levels are undermining the 1976 reforms.

Small to mid-size charities, comprising more than 90 percent of the nation’s one million charities, are harmed by the complexity, confusion and administrative burdens of the current system. By indexing and creating a single set of rules, larger charities also would be able to take advantage of the 1976 reforms. Currently, the unadjusted 1976 levels and overall cap have effectively precluded many from doing so.

For these and other reasons, charities, philanthropy, government and the public would be well served by simplifying and updating the IRS rules on charitable lobbying.

Legislative History

Most recently, the Charitable Aid, Recovery and Empowerment (CARE) Act of 2005 (S. 1780, 109^th Congress) and the Charitable Giving Act of 2005 (H.R. 3908, 109^th Congress) included language that would remove the grassroots lobbying sub-ceiling. In the 108^th Congress, both the Senate and House approved similar legislation (S. 476 and H.R. 7, respectively), which also included language removing the grassroots lobbying sub-ceiling. That legislation, unfortunately, did not advance to conference committee. Similar language was also included in the Taxpayer Refund and Relief Act of 1999 (H.R. 2488, 106^th Congress), which was approved by Congress but ultimately vetoed for unrelated issues.

Organizational Support

Over the past few years, many diverse organizations – large and small, national and local, conservative and liberal – have indicated support for simplifying and/or indexing the charitable lobbying rules based on the 1976 reforms. These charitable organizations include but are not limited to: Alliance for Children and Families, Alliance for Justice, American Cancer Society, American Heart Association, American Symphony Orchestra League, Concerned Women for America, Defenders of Wildlife, Focus on the Family, Free Speech Coalition, Girl Scouts of the USA, Goodwill Industries, Independent Sector, Institute for Higher Education, National Council of La Raza, National Council of Nonprofits, Natural Resources Defense Council, Paralyzed Veterans of America, United Way of America and YMCA of the USA. We would expect to garner a similar, broad coalition of support for an updated proposal.

The House Appropriations Subcommittee on Labor, Health and Human Services, Education and Related Agencies approved a budget for the Corporation for National and Community Service that is $90 million less than the President’s proposed level. The bill also fails to fund the Nonprofit Capacity Building program championed by Senators Baucus (MT-D) and Grassley (IA-R). Click here to see their supportive letter to Senators Harkin and Cochran, urging them to appropriate the full $5 million for FY 2010 that Congress specifically authorized for the Program.

The Senate Appropriations Committee will soon begin marking up the FY 2010 Labor, Health & Human Services, and Education Appropriations bills. The Edward M. Kennedy Serve America Act, signed into law in April, authorized the expansion of national service programs as well as the creation of a $25 million Nonprofit Capacity Building Program over 5 years. The President’s budget, however, does not include funding for many programs at levels authorized by the Serve America Act and there have been attempts to specifically remove the express reservation of funds language for the Nonprofit Capacity Building Program. Please tell your Senators and Representative to fully fund the Serve America Act.

On June 24, the Senate Appropriations Committee approved the Commerce, Justice and Science FY 2010 appropriations bill (H.R. 2847) that included a $400 million budget for the LSC. The bill also removes certain restrictions on nonprofits receiving LSC funds that prohibit a number of services even if performed with state, local and private funds, especially legislative and administrative advocacy. These restrictions, which have been in place since 1996, interfere with the effective and efficient delivery of legal services for the poor. Please visit the Brennan Center for Justice for analysis and a timeline of events.

The bill is expected to be voted on by the Full Senate in mid-July, and it will then be reconciled by a conference committee in September.

Serve America Act
CLPI supported this legislation to triple the size of our nation’s service programs by sending e-mail alerts to constituents updating them on the bill’s progress as well as encouraging them to contact their senator in support of the bill without proposed anti-advocacy restrictions.

Foxx Motion
The Foxx provision – an Istook-like amendment – would have prohibited individuals and organizations that participate in National Service programs from engaging in certain activities, including lobbying, even with private funds and outside the context of National Service. CLPI worked closely with partners to ensure that this language was not included in the Senate version of the bill and that the Act did not take a step back from existing law.

Nonprofit Capacity Building Initiative
The Nonprofit Capacity Building Initiative was offered as an amendment to the Serve America Act by Senators Baucus and Grassley. CLPI partner, the National Council of Nonprofits, played a lead role in getting this $25 million fund inserted into the legislation and then eventually passed.

CLPI has partnered with the Open Society Policy Center and a wide range of consumer, human rights, environmental, civil rights, health and good government organizations to seek clarifications and improvements to President Obama’s Executive Order on ethics and lobbying. The coalition has taken the position that the Executive Order’s presumptive employment restrictions against lobbyists that have lobbied on an issue or at an agency harm public-interest lobbyists and can be remedied in a way that actually advances the fundamental purposes of an accountable, responsive democracy. 

Please click here to see the coalition’s letter to President Obama on the Executive Order on Ethics and accompanying memorandum.

Please click here to see the coalition's letter to President Obama on the one year anniversary of the Executive Order on Ethics  and the corresponding press release.

CLPI is leading efforts to build on the 501(h) test to simplify and strengthen the rules for charitable lobbying by charities of all sizes and ideologies. CLPI and others endorse eliminating the grassroots and direct lobbying distinction and increasing and indexing the lobbying limits under the 501(h) test. A 2001 Joint Committee on Taxation report said, “there is no significant policy rationale for the separate limitations on grassroots lobbying.”

The existing limits on lobbying expenditures are not indexed for inflation and have not been changed since 1976. As a result, inflation has cut away more than two-thirds of their value since they were enacted into law. It’s time to simplify the rules around nonprofit lobbying; there has never been a more important time to have your voice heard.

The current federal tax rules that define political campaign intervention activity--prohibited for section 501(c)(3) organizations and limited for other 501(c) groups—are too often vague, ambiguous, overbroad, internally inconsistent with other similar regulations and overly complex. 

CLPI is collaborating with a group of tax-exempt lawyers and organizations and are in the beginning phases of discussing this issue and possible solutions. For more information on this effort, visit the OMB Watch site.

CLPI recently signed on to a letter requesting the inclusion of best practices and expanding scope of whistleblower protections for private sector health care workers who challenge fraud, waste, abuse or violations of the standards and controls in the current health care legislation.

The Whistleblower Protection Enhancement Act (HR 1507) offers federal workers the right to jury trials when they are harassed for blowing the whistle on fraud, waste and abuse. Since its original approval in 1989, the Whistleblower Protection Act has been watered down and offers very few remaining protections to federal workers from agency retaliation. Part of restoring public trust in government, including around economic recovery issues, depends on whistleblowers as the frontline defense against waste, fraud and abuse. Visit the Government Accountability Project for more information.

Targeted legislation would have undermined the rights of charities and social welfare organizations to engage in important civic and policy matters. Multiple bills would have required organizations engaged in voting activities to register as “political committees,” created more ambiguous language surrounding nonprofits and their activities and required any 501(c) to disclose all donors contributing more than $1,000 if that organization mentioned a candidate for public office during broadly defined primary and general election periods.  CLPI worked with state organizations, the American Cancer Society, NCRP, NVEN and state partners on this effort.

CLPI signed on to CREW’s letter to Senate and House leaders asking that all committees post recorded roll call votes on their Web sites within 24 hours of their casting and make them easily accessible through an online database.

CLPI and OMB Watch submitted comments to the IRS on the new 990 form, Schedule C, relating to civic participation through lobbying and political activities. The letter recommends improved organization of the form for easier navigation, more clearly defined definitions for “substantial lobbying” as well as suggestions to clarify instructions for more accurate reporting.