An Introduction To Lobbying By Charities

An Introduction To Lobbying By Charities

Article posted in Legislative on 2 November 2000| comments
audience: National Publication | last updated: 18 May 2011


In this article, Rosemary E. Fei, Esq. explores the current status of the rules on lobbying applicable to charities, including the ramifications of electing or failing to elect under Code Section 501(h).

by Rosemary E. Fei

Rosemary E. Fei is a principal at the law firm of Silk, Adler & Colvin in San Francisco, CA. Her firm represents nonprofit and tax-exempt organizations exclusively, and her practice spans the full range of nonprofit and tax-exempt legal issues, with emphasis on political advocacy issues and nonprofit corporate governance. She is the Chair of the Board of Redefining Progress, a member of Asian Americans/Pacific Islanders in Philanthropy and the Exempt Organizations Committee, Tax Law Section, American Bar Association, and a former director of CompassPoint Nonprofit Services and The Marine Mammal Center. She has guest lectured or taught courses at both the Institute for Nonprofit Organization Management and the Law School of the University of San Francisco, Stanford University Law School, and Boalt Hall School of Law. Before joining Silk, Adler & Colvin, Fei was a general business lawyer, a Federal election law compliance officer and budget director for the Dukakis Presidential campaign, and an attorney in the U.S. Department of State. She received her undergraduate degree, summa cum laude, from The Wharton School, University of Pennsylvania, and she graduated from Harvard Law School, cum laude, in 1986.

These days, the term lobbyist has become, for some, synonymous with everything that is considered unsavory about politics in America. But the fact of the matter is that lobbying, whether by big corporations, special interests, or nonprofits, is a crucial part of the legislative process.

The term lobbying came about more than a century ago when Ulysses S. Grant was President. At that time, President Grant was known to take a drink or two in a hotel across from the White House after work. Word soon spread that if you wanted to talk to the President, the hotel bar was the place to find him, and accordingly, every afternoon, the lobby was filled with people trying to influence the President. Frustrated with these hordes, President Grant finally asked the hotel manager if he could do something about those "lobbyists." The word has been a part of our culture ever since.

Lobbying restrictions, however, did not become part of the statutory requirements for tax-exempt status until some decades later. Prior to 1930, there was no statutory restriction on legislative or lobbying activities by charities (a term used here to mean organizations exempt under Section 501(c)(3) of the Internal Revenue Code), and only a few scattered judicial interpretations addressed the issue.

In 1930, a court denied charitable tax-exempt status to the American Birth Control League because it disseminated materials to legislators and to the public advocating repeal of laws prohibiting birth control, thus precluding it from being exclusively charitable, educational, or scientific, as the court then understood those terms (Slee v. Commissioner of Internal Revenue).1

In 1934, Congress enacted a lobbying restriction on charities into law by changing the definition of organizations qualifying under Section 501(c)(3), to require that "no substantial part of [its] activities [ ] is carrying on propaganda, or otherwise attempting, to influence legislation."2

The "No Substantial Part" Test

From 1934 to 1976, this remained the sole standard for lobbying by charities: That a charity may not devote a substantial part of its activities to attempting to influence legislation. Put another way, a charity (other than a private foundation) may engage in legislative lobbying without risking its tax-exempt status, so long as lobbying is an insubstantial part of its overall activities.

There are certain activities that clearly are not restricted as lobbying under the "no substantial part" test. These include:

  • Attempts to influence an administrative agency regarding its Regulations and rulings.

  • Petitioning the President, governor, or mayor on executive decisions.

  • Attempting to influence legislators on nonlegislative matters, such as conducting investigative hearings or intervening with a government agency.

  • Engaging in litigation to obtain favorable interpretations of the law from the judicial branch of government.

If the difference between qualifying or not for Section 501(c)(3) exemption rests on whether your lobbying is substantial, quantifying what "substantial" means is paramount, but has proved elusive. For example, in an early court case, spending less than 5% of the charity's volunteer time and effort (but no money) on lobbying was considered insubstantial.3 Later decisions,4 however, cast doubt on the usefulness of a percentage test, stating that all the facts and circumstances of an organization's legislative and other activities would have to be examined. One court even seemed to suggest that a single official position statement could be deemed substantial activity, if it had sufficient impact on the legislative process.5

The penalty on a charity for miscalculating the substantiality of its lobbying activities is extreme: The Internal Revenue Service (IRS) can revoke a charity's 501(c)(3) tax exemption, retroactive to the date lobbying became a substantial activity. Although the IRS may be reluctant to impose this ultimate penalty in practice, loss of exemption threatens a charity's continued existence. The mere possibility of this catastrophic outcome has had a severe chilling effect on charities engaging in advocacy.

In response, in 1976, Congress added Section 501(h) to the Internal Revenue Code, as part of the Tax Reform Act of 1976.6 This created an alternative to the "no substantial part" test, and represented express Congressional recognition that, within limits, lobbying can be a legitimate charitable activity benefiting the public, for which the use of deductible contributions is appropriate.

Before turning to an examination of Section 501(h), it is important to note that the "no substantial part" test is still the law for a charity that does not (or cannot) elect to be governed by Section 501(h) with respect to its lobbying activities.

The Section 501(h) Expenditure Test

Section 501(h) provides that an otherwise qualifying charity will not be denied Section 501(c)(3) status for engaging in too much lobbying, so long as its lobbying expenditures do not exceed certain calculable dollar limits. Below those limits, Section 501(h) provides for a tax on lobbying expenditures that exceed certain other limits. Section 4911, referred to in Section 501(h), contains the details as to how both sets of limits are calculated, how lobbying is defined (and exceptions to the definition), and which expenditures on lobbying activities must be counted against the limits. The activities listed above which are not lobbying under the "no substantial part" test, are also not lobbying under Section 501(h); and there are additional activities that are lobbying under the "no substantial part" test, but not under Section 501(h).

Who can make the election? As noted above, Section 501(h) is an alternative to the "no substantial part" test. A charity must choose, or "elect" in tax law jargon, to be governed by Section 501(h). Certain types of charities are not eligible to make the election, and must remain under the pre-existing test. They include:

  • churches and related entities;
  • governmental units;
  • organizations that testing for public safety; and
  • private foundations.7

Most "public charities" may make the election, including:

  • schools, universities, and other educational institutions;
  • hospitals;
  • organizations supporting government schools;
  • organizations publicly supported by grants and donations;
  • organizations publicly supported by grants, donations, and exempt function income; and
  • supporting organizations to public charities.

How to make the election. A charity makes a one-time filing of IRS Form 5768, at any time during the first tax year in which it wants the election to be effective. Thereafter, the election remains in effect until the charity revokes it, also by filing IRS Form 5768. The revocation will not be effective until the tax year after the year in which it is filed. A charity can switch the Section 501(h) election on and off repeatedly. Although a charity can file its election at any time during the year, it will need to have lobbying expenditure tracking systems in place from the beginning of the year, since it will have to report lobbying expenditures for the entire first year for which the election is in effect. You should always keep a copy of Form 5768 as filed, and give another to the charity's accountant, because the IRS does not acknowledge receipt. Once the election has been made, for each tax year in which it is effective, the charity must report its lobbying expenditures by completing Part VI-A of Schedule A to IRS Form 990.

Note that making the 501(h) election has no impact on an organization's Section 501(c)(3) status or foundation classification.

Calculating the expenditure limits. Section 501(h) focuses on lobbying expenditures rather than lobbying activities, capping lobbying expenditures as a percentage of "exempt purpose expenditures." Exempt purpose expenditures includes everything a charity spends to accomplish its exempt purposes, such as:

  • program service expenses;
  • administrative and overhead expenses;
  • lobbying expenses; and
  • straight-line depreciation of assets.

The following are not included:

  • apital expenditures;
  • expenses related to managing investments;
  • unrelated business income expenses; and
  • fundraising expenses, but only if paid to an outside vendor for fundraising, or incurred by a separate fundraising unit within the charity.

Once you know total exempt purpose expenditures, calculate the total lobbying limit by adding up:

  • 20% of the first $500,000 of exempt purpose expenditures;
  • 15% of the second $500,000 of exempt purpose expenditures;
  • 10% of the third $500,000 of exempt purpose expenditures; and
  • 5% of exempt purpose expenditures over $1,500,000.

But if the resulting number is greater than $1,000,000, which is reached at exempt purpose expenditures of $17 million, your total lobbying limit is $1,000,000. This number is not indexed for inflation.

The grass roots lobbying limit is one-quarter of the total lobbying limit.

To prevent abuse, the rules provide that certain affiliated charities will be treated as one unit in calculating the total lobbying limit for the affiliated group.8

Basic definitions. The Regulations implementing Section 501(h) and Section 4911 contain many useful definitions. The most important are:

Legislation refers to acts, bills, resolutions, or similar items voted on by Congress, any state legislature, any local council, any similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. Legislative bodies in foreign countries are included. "Legislation" includes both legislation that has already been introduced in a legislative body, and any specific legislative proposal (though it may not have been introduced) that an organization either supports or opposes. Votes to confirm or reject executive branch nominees (like Supreme Court Justices) are considered legislation,9 as are votes to approve government budgets, and votes by the Senate to consent to a proposed treaty. The lobbying Regulations do not differentiate between various types of action on legislation-introduction, amendment, enactment, defeat, and repeal are all treated the same way.

Direct lobbying is communicating with any member or employee of a legislative body, or (but only if the principal purpose of the communication is lobbying) with any government official or employee who may participate in the formulation of the legislation, that refers to legislation, and reflects a view on that legislation.

Grass roots lobbying is a communication with the general public (or any segments thereof), that refers to legislation, reflects a view on that legislation, and contains a call to action.

A call to action is any of the following ways of encouraging the recipient to take action with respect to legislation:

  • Stating that the recipient should contact a legislator or an employee of a legislative body, or contact any other government official or employee who may participate in the formulation of legislation.

  • Giving the address, telephone number, or similar information of a legislator or an employee of a legislative body.

  • Including a petition, tear-off postcard, or similar material for the recipient to communicate with a legislator or an employee of a legislative body (or other government official involved in the legislation).

  • Specifically identifying one or more legislators who will vote on the legislation as: 1) opposing the charity's view on the legislation; 2) being undecided; 3) being the recipient's representative in the legislature; or 4) being on the committee or subcommittee that will consider the legislation.

The first three types are considered direct calls to action; the last is considered nondirect.

Selected special rules. Along with the basic definitions, the Regulations address some specific situations where special rules apply.

Ballot measure advocacy. Where a communication refers to and reflects a view on a measure that is the subject of a referendum, ballot initiative, or similar procedure, the general public in the state or locality where the vote will take place constitutes the legislative body. Accordingly, if such a communication is made to one or more members of the general public in that state or locality, it is direct lobbying, rather than grass roots lobbying. In the case of a ballot measure that is placed on the ballot by voter petitions, it becomes legislation when the petition is first circulated among voters for signature.

Communications with members. Under the lobbying Regulations, a person is a member of a charity if the person pays dues, or makes a contribution of more than a nominal amount of time or money, or is one of a limited number of honorary or life members; members need not have voting rights in the organization. Communications to members are treated as internal communications, within the organization, so that a communication to members on legislation that asks them to contact legislators is treated as direct lobbying, rather than grass roots lobbying. However, if members are asked to go outside the organization and urge nonmembers to lobby their legislators, it is grass roots lobbying.

Mass media advertisements. A paid mass media advertisement will be presumed to be grass roots lobbying if it: 1) is made within two weeks before a vote by a legislative body or committee; 2) concerns highly publicized legislation; 3) reflects a view on the general subject of that legislation; and 4) either refers to the legislation or encourages the public to contact legislators on the general subject of the legislation, even though it does not include any call to action. This presumption may be overcome by showing that the timing of the advertisement was unrelated to the upcoming vote.

Important exceptions. Certain communications that would otherwise fall within the definition of lobbying will not be treated as lobbying so that associated expenses will not count against a charity's lobbying limits, if they meet the requirements of an exception to the lobbying definitions. The most important exceptions are:

Nonpartisan analysis, study, or research. An independent and objective exposition of a particular subject matter that includes a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion is not lobbying, even if a particular position or viewpoint is advocated. The mere presentation of unsupported opinion will not qualify, however. Distribution of the communication may not be limited to, or directed toward, persons who are interested solely in one side of a particular issue. A communication that includes any direct call to action (discussed above) cannot qualify under this exception.

Responding to requests for technical advice. Providing technical advice to a governmental agency or legislative committee or subcommittee in response to a request from the agency or legislative body is not lobbying. The request must be in writing, and must be made in the name of the committee or agency, rather than any individual member. The charity's communication must be made to the entire agency or legislative body, rather than provided only to those on one side of an issue.

Self-defense lobbying. Appearances before, or communications to, any legislative body with respect to a possible decision by that body that might affect the existence of the charity, its powers and duties, its tax-exempt status, or deductibility of contributions to it, are not reportable lobbying activities. This exception does not cover legislation, such as an appropriations bill, which would merely (in the eyes of the IRS) affect the charity's success or scope of its operations.

Recordkeeping, allocations, and reporting. The prospect of deciding how to track and calculate lobbying expenditures in order to make reports required by Section 501(h) can be daunting, and is frequently cited by smaller charities as a reason not to elect. Generally, all that is required is common sense and a good accountant. There is no guidance on these issues in the statute, and only a little guidance in the Regulations, although some special situations are addressed in detail there. Unless the Regulations address a particular issue, the best practice is to use reasonable approaches, applied in good faith, and consistently. A summary of the basic rules follows.

Out-of-pocket expenses associated with lobbying activities (such as payments to lobbyists; travel expenses to meet with legislators; costs of researching, writing, developing, printing or producing, and mailing, or otherwise distributing lobbying communications; telephone calls to legislators, etc.) must be included. Internal overhead expenses (staff salaries, benefits, rent, etc.) must be allocated between lobbying and nonlobbying. A common approach (although by no means the only acceptable one) is for paid professional staff to keep time records showing the hours devoted to direct lobbying, grass roots lobbying, and nonlobbying activities. This information is then used to allocate compensation and benefits for those timekeepers, and the aggregate percentage of total professional staff time devoted to the two forms of lobbying is used to allocate other overhead costs.

Sometimes a communication, such as an issue paper, which was originally prepared as a nonlobbying piece, may be used later in lobbying efforts, such as when the issue becomes the subject of legislation. Unless there was a substantial nonlobbying use of the materials at the same time, or before a grass roots lobbying use occurs, or unless the grass roots lobbying use occurs more than six months after the expenses to research and prepare the nonlobbying materials were incurred, the costs to research and prepare the materials may have to be treated as a grass roots lobbying expense.

Mixed purpose communications (where a lobbying communication is mixed with fundraising, educational, or other messages, or where direct and grass roots lobbying messages are delivered in one communication) are the subject of detailed rules. Under those rules, the proper allocation of expenses associated with mixed purpose communications depends on whether they were distributed to members, the public, or both, as well as what percentage of the content relates to each type of message.

Penalties for excessive lobbying. As noted above, if a charity that has not elected to be governed by Section 501(h) engages in substantial lobbying, it risks loss of its tax-exempt status. By contrast, if, in any year, an electing charity exceeds its total lobbying limit or grass roots lobbying limit for the year, it pays a tax equal to 25% of the excess. If the charity exceeds both limits, the 25% tax is imposed only on whichever excess is larger. This tax is automatically due to the IRS when the charity files its Form 990 for the year in which the excess lobbying expenditures occurred, using IRS Form 4720 to report and pay the tax.

Revocation of tax-exempt status for an electing charity only occurs where excess lobbying expenditures have been substantial over a period of years. If, over any four-year period, the charity's lobbying expenditures exceed its aggregated annual limits for the period (total lobbying or grass roots lobbying) by more than 50%, the charity will automatically lose its Section 501(c)(3) tax exemption. That charity will not have the option of converting to a Section 501(c)(4) organization, where unlimited lobbying is permitted; it will, instead, become a taxable entity.

Deciding Whether To Make The Section 501(h) Election

If a charity engages, or may someday engage, in lobbying activities on more than the most occasional and minor basis, its management and board of directors should consider whether making the Section 501(h) election would benefit the charity. While each charity's situation is unique, there are several factors that might influence a charity's decision in any event.

First, the detailed Regulations provide clarity and certainty on a number of questions and at several levels that are not present where (old) court cases are the primary source of guidance. (This factor can be particularly appealing to a charity's legal counsel.)

There are a number of activities that are not lobbying for Section 501(h) expenditure purposes, but are lobbying for non-electing charities. Among the most important are:

  • using volunteers to lobby;
  • endorsing legislation without spending money to promote the endorsement;
  • public commentary on pending legislation without a call to action; and
  • self-defense lobbying.

For small organizations, the level of lobbying permitted under Section 501(h) (up to 20% of program expenditures) would clearly be considered a substantial activity, far in excess of the level its legal advisors would permit under the "no substantial part" test. However, for a charity with a very large budget, $1 million in lobbying could represent an insubstantial part of its activities. Since the $1 million cap is not indexed, its value in real dollars has fallen dramatically, and large charities may find they can do more lobbying without electing. The 501(h) election may also be more restrictive than the "no substantial part" test where a charity's lobbying is solely or primarily grass roots lobbying, rather than direct. This is because the grass roots ceiling is so low relative to the total lobbying limit.

A nonelecting charity that fails the "no substantial part" test for even one tax year risks losing its Section 501(c)(3) status. In addition, for each year of excessive lobbying activities, the charity is subject to a 5% tax on the entire amount that it spent for lobbying that year. A 5% tax can also be imposed on organization managers who knowingly, willfully, and without reasonable cause agreed to the expenditures.10 For an electing charity, except in extraordinary situations, the only penalty for excessive lobbying in a single year is the excise tax of 25% of the excess amount.

Finally, if a charity lobbies on the Federal level, and its lobbying activities are sufficient to trigger registration and reporting under the Lobbying Disclosure Act of 1995 (LDA), which is beyond the scope of this article, electing charities may choose to use either the 501(h) definitions or the definitions given in the LDA, whichever are more favorable (i.e., result in less reporting), in complying with the LDA. A nonelecting charity must use the definitions found in the LDA.


There are two arguments frequently made against electing to be governed by Section 501(h) that deserve to be refuted here. First, charities often voice the fear that making the election will somehow increase their chances of being audited by the IRS. The IRS has repeatedly, consistently, and at the highest levels, assured the charitable sector that electing to be governed by Section 501(h) will not increase a charity's chances of an IRS audit. To the contrary, IRS officials have indicated that lobbying by an eligible charity without making the election is an audit flag.

Secondly, charities often argue that the tracking and reporting of lobbying expenditures required of electing charities by Section 501(h) is too onerous. In response to this view, the IRS added a new section to Schedule A to Form 990. Nonelecting charities that lobby must complete Part VI-B of Schedule A. Electing charities are asked to report only dollar figures. Nonelecting charities must report on volunteer lobbying, and provide narrative descriptions of their lobbying activities. While noncompliance with these reporting requirements has been widespread in the past, it is likely that pressure from the press and the public to report lobbying accurately will increase as Form 990s become easily available and searchable on-line on the Internet. In short, any charity that lobbies must put in place an appropriate accounting system to track its lobbying activities, whether it elects Section 501(h) treatment or not.


  1. 42 F.2d 184 (2nd Cir. 1930).back

  2. This restriction on legislative lobbying found in Section 501(c)(3) should not be confused with the absolute prohibition on charities' participating or intervening in campaigns of candidate for public office, which was added to the statute 20 years later, and which is not addressed by this article.back

  3. Seasongood v. Commissioner of Internal Revenue, 227 F.2d 907 (6th Cir. 1955).back

  4. Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972), cert. den. 414 U.S. 864 (1973).back

  5. Kuper v. Commissioner, 332 F.2d 562 (3d Cir. 1964), cert. den. 379 U.S. 920 (1964).back

  6. Treasury Regulations implementing Section 501(h) (and the related Section 4911 enacted at the same time) were not finalized, however, until 1990.back

  7. Although private foundations are governed by the "no substantial part" test with respect to continued eligibility for exemption, private foundations and their foundation managers are subject to taxes under IRC § 4945 on "taxable expenditures," which include amounts paid or incurred "to carry on propaganda, or otherwise attempt, to influence legislation" as defined in that section. Effectively, private foundations are banned from legislative lobbying entirely.back

  8. IRC § 4911(f).back

  9. Charities lobbying on these confirmation votes may be subject to the tax on political organizations under IRC § 527.back

  10. IRC § 4912. This penalty tax scheme does not apply to churches and church-related organizations.back

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