Lobbying Rules for Not-for-Profits

22nd Annual Not-For-Profit Organizations Symposium Greater Washington Society of Certified Public Accountants
Washington, D.C. December 13, 2010

Deborah G. Kosnett
The Southern Building 805 15th Street NW, 9th Floor Washington, DC 20005 202-419-5111 dkosnett@tatetryon.com

John Pomeranz
1726 M Street, NW, Suite 600 Washington, DC 20036 202-328-3500 jpomeranz@harmoncurran.com

Agenda
501(c)(3) Lobbying Lobbying by Other Tax-Exempt Organizations Federal Lobbying Disclosure Act

501(c)(3) Lobbying: Two Tests No Substantial Part Test 501(h) Expenditure Test

No Substantial Part Test

Lobbying must be no substantial part of overall activities Measures
expenditures, volunteer and other cost-free activities, more?

Potential loss of exemption

501(h) Expenditure Test

Clear dollar-based limits
only expenditures count volunteers and other cost-free things dont

Clear definitions of lobbying Requires one-time election (Form 5768) Penalty for violations is generally an excise tax

501(h) Lobbying Limits

Budget (for most organizations)

1. Calculate organizations exempt purpose expenditures 2. Overall lobbying limit is: 20% of first $500,000 Up to 15% of next $500,000 absolute cap of $1M 10% of next $500,000 5% of remainder 3. Grassroots lobbying limit is 25% of overall limit

501(c)(3) with $1.8M Budget

Overall Lobbying Limit
$100,000 + $75,000 + $50,000 + $15,000 TOTAL = $240,000 All Lobbying (Direct & GR) $240,000

Grassroots $60,000

What is Lobbying?
Direct Lobbying Communication Expressing a View Specific Legislation Legislator (or other official or staffer involved in legislation) Grassroots Lobbying Communication Expressing a View Specific Legislation General Public
(Not members)

Call to Action

Key Point: Specific Legislation

More than just legislation that has been introduced
A bill Proposed legislation (e.g. model bills) Draft amendments Specific legislative policy proposals Congressional resolutions Treaties requiring Senate ratification

NOT Specific Legislation

Administrative rules Court opinions Agency decisions Executive orders Private (non-government) actions

Key Point: Call to Action

Urging people to contact their legislator Providing contact information for a legislator Providing a postcard, petition, web link, or other means to contact a legislator Identifying legislators who are:
- Voting on legislation - Undecided on legislation - Opposed to legislation - Representing reader
Generally, no call to action, no grassroots lobbying

Lobbying Exceptions: Nonpartisan Analysis, Study or Research Full and fair discussion of the issue
Sufficient to allow independent conclusion OK to advocate a position

Public distribution
Not just to allies

No direct call to action

Lobbying Exceptions: Request for Technical Advice

Written request Government body

Other Lobbying Exceptions:

Self Defense
lobbying on bill that would affect AVEFs existence or tax-exempt status) NOT lobbying for earmarks

Discussions of issues of broad social importance

NOT specific legislative proposals

Sample Timesheet
May 2010
Better America Project Direct Lobbying GR Lobbying Hard Truths Project Direct Lobbying GR Lobbying
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total

5 4 3

3 2

4 3

49 9 3

21

Vacation Sick Leave Total 8 8 8 8 8 8 9 8 8 8 9 8 8 90

In addition to allocating staff costs, use aggregate of staff time data to allocate indirect costs for lobbying

Lobbying: Section 501(c)(4), (5), (6) The Rules Are Different

No lobbying limits, provided lobbying is related to purpose 162(e) limits member dues deductibility, lobbying-dollar for lobbying-dollar (Federal, state, but not local lobbying) Applies to 501(c)(4), (5) and (6) organizations (except for 501(c)(4) veterans organizations and 501(c)(5) labor unions) Options:
-

Pass nondeductible lobbying costs through to members, via limits on deductibility of dues paid Pay a 35% proxy tax on lobbying expenditures, so that members may deduct dues
Copyright Tate & Tryon 2010

Lobbying: Section 501(c)(4), (5), (6)

Lobbying Includes Dollars Spent On . . .
Influencing legislation through federal and state lobbying communications (direct and grassroots), including any costs leading up to the communication Local lobbying communications are exempt Attempts to influence the general public, or segments of it, regarding legislation (grassroots) Attempts to influence a Covered Executive Branch Official (CEBO) with regard to his or her official actions or positions Monitoring is not lobbying . . . unless and until it leads to lobbying Congressional intent is that communication compelled by subpoena or federal/state law is not lobbying . . . but pretty much everything else is.
Copyright Tate & Tryon 2010

Lobbying: Section 501(c)(4), (5), (6) Who is a CEBO?

Heres the IRS list . . .
-

The President and Vice President; Any officer or employee of the White House office of the Executive Office of the President; The 2 most senior officials at each of the other Executive agencies; Any individual serving in a Level I position of the Executive Schedule and his/her immediate deputy; and Any Cabinet head and his/her immediate deputy.

Or . . . you can just ask Rule also applies to LDA reporting . . . but the definitions different (broader) Be sure to specify which definition you need: IRS or LDA

Copyright Tate & Tryon 2010

Lobbying: Section 501(c)(4), (5), (6) Lobbying Disclosure and Tax

No disclosure or proxy tax when:
-

Less than $2,000 is spent (in-house lobbying costs only) Members cant deduct dues anyway (least 90 percent of the annual dues are not deductible by members as a business expense)
Must keep records to substantiate!

Members (persons, families, entities) pay de minimis dues ($101 or less in 2009 - 501(c)(4) or (5) only! (Indexed for inflation)

Proxy tax is an excise tax no estimates needed; no same accounting method requirement

Copyright Tate & Tryon 2010

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Lobbying: Section 501(c)(4), (5), (6) Disclosure Rule to Avoid Proxy Tax
Provide members with an annual reasonable estimate of the portion of dues not deductible due to lobbying activity
-

Estimate must be provided at the time of assessment or payment Must be presented in a conspicuous and easily recognizable format

Copyright Tate & Tryon 2010

Lobbying: Section 501(c)(4), (5), (6) Lobbying Expenses

May calculate lobbying expenditures using any reasonable method Nevertheless, IRS gives you two easy methods, one hard method
-

Gross-up method Ratio method 263A method

Dont forget PAC admin expenditures - also included Taxable political expenditures are not included
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Lobbying: Section 501(c)(4), (5), (6) Calculation Methods

Gross-up method: - Lobbying salaries x 175% (225% if not including admin) - Add: T&E expense, dollars paid outside lobbyists, dues paid to other organizations that lobby, and PAC administrative expenses Ratio method: Lobbying labor hours ----------------------------- X Total cost of operations (excl o/s costs) Total labor hours - Add: T&E expense, dollars paid outside lobbyists, dues paid to other organizations that lobby, and PAC administrative expenses 263A method usually not worth the effort
Copyright Tate & Tryon 2010

Lobbying: Section 501(c)(4), (5), (6) De minimis rules all methods

Time spent by an individual on lobbying activities may be treated as zero, if less than 5% Nevertheless, all hours spent by a person on direct contact lobbying may be counted as labor hours allocable to lobbying activities
-

Direct contact lobbying - meeting, telephone conversation, letter, etc. with legislator or covered executive branch official Does not include time of those persons exclusively doing research, preparation, and other background activities

Copyright Tate & Tryon 2010

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Lobbying: Section 501(c)(4), (5), (6)

Remember . . .
Non-deductibility disclosure is always a prospective estimate True it up each year: roll overage or under-age forward (both are permitted, at least informally) this is the proxy tax waiver Be sure to make a good-faith estimate, or else IRS could deny the waiver In an associations final year, any overage most likely will be subject to a proxy tax Amount subject to proxy tax is capped at 100% of dues Report and pay tax on Form 990-T IRS rules may be used to comply with LDA reporting
Copyright Tate & Tryon 2010

Lobbying: Section 501(c)(4), (5), (6) Important Planning Tip!

Even if you never, ever plan to lobby
-

Put a non-deductibility disclosure on your dues notices AND membership applications even 0.01% should save you from the proxy tax Do NOT forget internet membership applications! Both interactive and PDF Planning to dissolve? Aim for a lobbying expense under-age in your dissolution year

Sample disclosure:
Dues payments, contributions or gifts to XYZ Association are not tax deductible as charitable contributions for federal income tax purposes. However, they may be deductible as ordinary and necessary business expenses subject to restrictions imposed as a result of XYZ's lobbying activities as defined by the Budget Reconciliation Act of 1993. XYZ estimates that the nondeductible portion of your 20XX dues -- the portion that is allocable to lobbying -- is 0.05%."

Copyright Tate & Tryon 2010

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Federal Lobbying Disclosure Act (LDA)

Does not limit the amount of lobbying the organization may do Requires public disclosure of lobbying activities Uses a different definition of lobbying
Except charities using the 501(h) election may use that definition for some purposes

Applies to all entities (although tax-exempt organizations have some special rules)
States (and some localities) have similar disclosure laws

Lobbying: Tax vs. LDA

LDA
Federal only No grassroots Includes executive branch actions (CEBOs plus) Slightly different exceptions

501(c)(3) (IRC 4911)

Includes federal, state, and local Includes grassroots No non-legislative actions (but exec. branch officials can be lobbied) Slightly different exceptions

501(c)(4), (5), (6) (IRC 162(e))

Includes federal, state, NOT local Includes grassroots Includes executive branch actions by CEBOs Slightly different exceptions

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LDA Registration
One or more Lobbyists
20% of time spent lobbying in 3 month period More than one lobbying contact

$10,000 spent on lobbying in 3 month period

501(h)-electing 501(c)(3)s may use that definition 501(c)s subject to 162(e) may use that definition

Register via Form LD-1 (electronic)

LDA Reporting
Quarterly (Form LD-2)
Due 4/21, 7/21, 10/20, and 1/20 Report:
Lobbyist names Issue areas (both general and specific) Expenditures (nearest $10,000)

Semi-Annual (Form LD-203)

Separate filings for organization and lobbyists Report political contributions and other info

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