Advocacy

If an organization has not elected to lobby under 501(h) and have its lobbying limits measured by the “expenditure test,” its lobbying limits will be measured by the “substantial part of activities test.” If it is determined that an organization has engaged in lobbying beyond an insubstantial amount, that organization will generally lose its federal tax-exempt status. However, if an organization has elected to qualify under 501(h), its lobbying limits will be measured by the “expenditure test.” If an organization exceeds the limits established under this test, it must pay an excise tax based on the amount exceeding the limit. Therefore, under the “expenditure test,” exceeding the lobbying limit results in the organization having to pay a monetary fine, not in the complete loss of the organization’s tax-exempt status. However, a nonprofit can lose its tax-exempt status under the “expenditure test” if it exceeds the lobbying limit for four consecutive years.

The basic definition of lobbying as presented in the Internal Revenue Code 501(c)(3) is “carrying on propaganda, or otherwise attempting, to influence legislation.” Two categories of lobbying are identified:  Direct lobbying is “any attempt to influence any legislation through communication with any member or employee of a legislative body or with any government official or employee who may participate in the formation of legislation.” The communication must be about pending legislation to constitute lobbying. Note that the focus is on legislative bodies. This does not include judicial, executive, and administrative bodies. As a result, an organization that encourages an executive or administrative body to do something will not normally be considered to have engaged in lobbying. Grassroots lobbying, on the other hand, is “any attempt to influence legislation through an effort to affect the opinions of the general public or any segment thereof.”  To be grassroots lobbying within the terms of the Internal Revenue Code, there must be: (1) reference to specific legislation, (2)  a specific viewpoint on the legislation, and (3) encouragement of the recipient to take action with respect to the legislation. The tax code has more restrictions on grassroots lobbying than direct lobbying.

According to the Iowa Principles and Practices for Charitable Nonprofit Excellence, "organizations are limited under the Internal Revenue Code to 'insubstantial' activities to influence legislation." (XI, A, 2) The amount of lobbying activities in which a 501(c)(3) public charity can engage is subject to more specific tests for what is "insubstantial". The Code establishes two standards for measuring an organization’s compliance with those limitations, and the organization itself may elect which standard will be employed. One test is known as the “substantial part of activities test.” This test requires that “no substantial part of a charity’s activities… be carrying on propaganda or otherwise attempting to influence legislation.” The wording is vague, and the test’s exact meaning has proven difficult to establish. In an attempt to establish a baseline, some courts have said that lobbying expenditures in excess of 5% of an organization’s total expenditures are substantial, but the circumstances surrounding the individual case are also taken into account. An attempt by Congress in 1976 to create a more objective standard for measuring an organization’s compliance with lobbying limits resulted in what has become known as the “expenditure test.” The test is found in IRC secs. 501(h) and 4911, and establishes limits based on a percentage of an organization’s exempt purpose expenditures. Chapter 3 of IRS Publication 557 more thoroughly describes lobby expenditure limits under the expenditure test.