Finance, HR & Business Operations Conference
Washington, DC
June 7-8, 2012

2
Intro and Overview
Advocacy
Lobbying
Political
Intervention

3
Charity
(legislative)
Lobbying
Intro and Overview
Advocacy
Political
Intervention
Association
Lobbying

Lobbying Definition
5
•
IRC 162(e)(1) disallows deduction for lobbying expenditures
•
IRC 162(e)(3) extends the disallowance to dues or similar amounts paid to tax exempt organizations that are allocable to lobbying expenses

Lobbying Definition
6
•
The disallowance covers three types of activities:
–
Direct lobbying of Congress and state legislatures
–
Indirect lobbying of any legislature through grassroots lobbying and influencing the public through referenda
–
Direct communication with top federal executive branch officials on any official matter

Lobbying Definition
7
•
Direct Federal and State Legislative Lobbying
–
Influencing legislation means “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 formulation of legislation.”

Lobbying Definition
8
•
Direct Federal and State Legislative Lobbying
–
“Legislation” is defined in IRC 4911(e)(2) and includes
“action with respect to Acts, bills, resolutions, or similar items by the Congress, any State legislature, any local council, or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure.”
–
“Action” is limited to the introduction, amendment, enactment, defeat, repeal of Acts, bills, resolutions, or similar items

Lobbying Definition
9
•
Direct Federal and State Legislative Lobbying
–
Treas. Reg. Section 162-29 clarifies “influencing legislation”
–
Includes any attempt to influence legislation through a
“lobbying communication” and related activities done to make or support the lobbying communication
–
Such activities include research, preparation, planning and coordination

Lobbying Definition
•
Direct Federal and State Legislative Lobbying
–
“Lobbying communication” includes communication with a member or employee of a legislative body (or other govt. official who may participate in the formulation of legislation)
–
The communication must refer to specific legislation and reflect a view on it or
–
Clarify, amplify modify or provide support for views reflected in a prior lobbying communication
10

Lobbying Definition
•
Direct Federal and State Legislative Lobbying
–
“Specific legislation” includes a specific legislative proposal that has not been introduced in a legislative body
–
Does not include a communication that is compelled by subpoena or by law
–
“Legislative body” does not include executive, judicial, or administrative bodies or local councils
11

Lobbying Definition
•
Grassroots Lobbying
–
IRC 162(e)(1)(C) denies a deduction for grassroots lobbying – influencing the general public with respect to “legislative matters or referendums”
–
Applies to the federal, state and local levels
–
“legislative matters or referendums” is not defined
–
Legislative matters may be broader than legislation
12

13
Lobbying Definition
•
Grassroots Lobbying
–
Trade association’s communication with members may constitute grassroots lobbying
•
Identification of communication as “grassroots lobbying” can be difficult
•
Can be grassroots lobbying if communication attempts to develop a grassroots opinion about pending legislation

Lobbying Definition
•
Direct communication with top federal executive branch officials on any official matter
–
Includes the President, Vice-President, certain members of the Executive Office of the President
–
Other high level executive officials
14

Allocation of Costs
•
Allocation of costs to lobbying must be by a reasonable method (Treas. Reg. Section 162-
28)
•
Reasonable methods include:
–
Ratio method
–
Gross-up method
–
IRC Section 263A
•
Lobbying costs include labor and general and administrative
15

Allocation of Costs
16
•
Ratio method
–
Costs are allocated based on the ratio of lobbying hours to total hours x total costs of operations
–
Add third party labor costs
•
Gross-up method
–
175% of basic lobbying costs
–
Basic lobbying costs are costs of wages or similar labor costs
–
Does not include pension, profit-sharing employee benefits, and similar costs

17
Allocation of Costs
•
IRC Section 263A
–
Can allocate costs using the inventory capitalization method under IRC section 263A
–
Can be a complex methodology

Lobbying Definition
•
IRC 501(c)(3) Definition (Treas. Reg. Section 1.501(c)(3)-
1(c)(3) )
–
Applies to organizations not electing under 501(h)
–
Can’t qualify for 501(c)(3) status if an action organization
–
Action organization is one where a substantial part of its activities is attempting to influence legislation by propaganda or otherwise
–
Lobbying does not include nonpartisan analysis, study or research and making the results available to the general public
18

Lobbying Definition
•
IRC 501(c)(3) Definition
–
Attempting to influence legislation includes contacting or urging public to contact members of a legislative body for purpose of proposing, supporting or opposing legislation or
–
Advocates the adoption or rejection of legislation
19

Lobbying Definition
•
IRC 501(c)(3) Definition
–
Legislation includes action by Congress, any state legislature, any local council or similar governing body, or
–
Action by the public in a referendum, initiative, constitutional amendment or similar procedure
20

Lobbying Definition
•
IRC 501(c)(3) Definition
–
Definition of what constitutes lobbying can be vague
–
How much is “substantial” is unclear
–
Measure of substantiality is not just by expenditures but can include things like volunteer hours and other resources devoted to the activity
–
There are no statutory exceptions to lobbying
21

501(h) Election
•
IRC section 501(h) is an expenditure test as an alternative to the substantial part test
•
Organizations eligible to elect include colleges, hospitals, 509(a)(1), 509(a)(2) and 509(a)(3) organizations
•
IRC section 4911 defines lobbying expenditures and imposes a 25 % tax on excess lobbying expenditures
22

501(h) Election
•
Allowable lobbying expenditures are determined on sliding scale based on the organization’s exempt purpose expenditures
•
Maximum allowed is $1,000,000
•
Grass roots nontaxable amount is 25% of total
(maximum of $250,000)
•
If nontaxable amount over a four year period is exceed by 150%, the organization loses it exempt status
23

24
501(h) Election
•
IRC section 4911 defines lobbying expenditures as those made for the purpose of “influencing legislation”
•
Defined as any attempt to influence legislation through:
–
An attempt to affect the opinion of the general public or segment thereof (grass roots) or
–
Communication with a member or employee of a legislative body or with a government official or employee who may participate in the formulation of legislation (direct)

25
501(h) Election
•
Legislation is defined to include:
–
Actions with respect to Acts, bills, resolutions, or similar items by Congress, a state legislature, or local counsel or
–
By the public in a referendum, initiative or constitutional amendment
•
“Action” is limited to introduction, amendment, enactment, defeat or repeal of
Acts, bills, resolutions, or similar items

26
501(h) Election
•
Expenditures include all costs of preparing direct or grass roots lobbying communications including current and deferred compensation, administrative overhead and other general expenses
•
In general, all costs of researching, drafting, reviewing, copying, publishing, and mailing communication are included as well

What is Lobbying?
27
Direct Lobbying
Communication
Expressing a View
Specific Legislation
Legislator
Grassroots Lobbying
Communication
Expressing a View
Specific Legislation
General Public
Call to Action

28
501(h) Election
•
Statutory Exceptions to lobbying definition:
–
Examination and discussion of broad social, economic or similar problems
–
Response to a written request from a government body
–
“Self-defense” communications
–
Nonpartisan analysis, study and research

29
•
Written request
•
Government body
Caution!
Not for grassroots lobbying

Lobbying Exceptions: Self Defense
Responding to legislation that affects the organization’s:
– existence
– powers and duties
– tax-exempt status
– deductibility of contributions
Caution!
Not for grassroots lobbying
30

•
“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
31

Lobbying
33
•
“Too Much” Lobbying
–
(c)(6) – None
–
(c)(3) Statute – loss of exemption
•
No substantial part

Lobbying
34
•
“Too much” con’t.
•
(c)(3) w/ (h) election:
– annual limits
• excise tax
–
4-year cumulative limits
• loss of exemption

Lobbying
•
501(h) election:
–
History
–
Process (Form 5768)
–
Implications
–
Pros/Cons
35

36
Lobbying

Lobbying Disclosure Act
38
•
Has its own definitions – different from tax code
•
Associations covered by proxy tax rules
(162(e) and electing public charities (under
501(h)) may use tax definitions measuring expenditures

Lobbying: Tax vs. LDA
LDA
•Federal only
•No grassroots
•Includes executive branch actions
•Slightly different exceptions
501(c)(3)
(IRC § 4911)
501(c)(4), (5), (6)
(IRC § 162(e))
•Includes federal, state, and local
•Includes grassroots
•No non-legislative actions
•Slightly different exceptions
• Includes federal, state, NOT local
• Includes grassroots
• Includes executive branch actions by specific officials
• Very limited exceptions
39

LDA Covered Executive Officials
•
President and Vice President
•
Employees of the Executive Office of the
President
•
Any official in Executive Level I through V position
•
Any member of the uniformed services at grade 07 or above
•
Schedule C employees
40

162(e) Covered Executive Officials
•
President and Vice President
•
Employees 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
•
Any Cabinet head and his/her immediate deputy
41

FECA
“Electioneering Communications”
•
Broadcast ad
•
Identifies candidate
•
Viewable by electorate
•
30/60 day pre-election window
42

Political Activity Spectrum
501(c)(3)
Activity
“Soft”
527s
Super
PACs
Traditional
PACs
501(c)(6)
Activity
Primary Secondary
43
Purely
Nonpartisan
Activity
Campaign
Intervention
Express
Advocacy
Contributions &
Coordination

•
Two sides of the same coin…
44

45
The IRS Test
“Facts and Circumstances”
Based on analysis of all the facts and circumstances, did the organization intervene in a political campaign?

Policy Advocacy or Electioneering
•
Same test for 501(c)(3)/501(c)(4)/527
–
Minor exceptions in scope
•
Rev. Rul. 2004-6
–
Activity by social welfare/labor/trade association that triggers 527(f) tax (“exempt function”)
•
Rev. Rul. 2007-41
–
Permissible 501(c)(3) activity versus campaign intervention
46

What is Electioneering?
47
Electioneering
•
Expressly support or oppose candidates
•
Endorse candidates
•
Contribute to candidates
•
Rate or score candidates on the issues
•
Compare organization’s position to candidate’s
•
Provide other assistance to candidates
Not Electioneering
•
Register voters
•
Educate voters about candidates
•
Take positions on issues
•
Educate candidates
•
Get out the vote

“All the Facts and Circumstances”
48
Good Facts
•
No reference to candidate or elections
•
External factor driving timing
•
Broad range of issues
•
History of similar work on issue
Bad Facts
•
Reference to candidate
•
Timing motivated by election
•
Politically motivated targeting
•
Compare preferred position to candidate position
•
“Wedge issues”

Issue Advocacy
Key Risk Factors
•
Comparing organization’s preferred position to candidate’s position
•
Advocacy on issues known to divide candidates for a particular office
•
Timing close to an election
–
Unless driven by external event outside of the control of the organization (e.g. a legislative vote)
49

Example
• http://coalitionforamericanjobs.com/2011/08/watch
-the-new-coalition-for-american-jobs-tvadvertisement/
Ad run by c6 Coalition for American Jobs spent
$56,650 near the Ames straw poll in mid-August on several stations in Iowa
50

Political Intervention
•
Candidate identified
•
Timing coincides with electoral campaign
•
Targets voters
•
Identifies the candidate’s position on an issue
•
Wedge issue in the campaign
•
Not part of an ongoing series
•
Identifies specific legislation, or an event outside the
•
Timing driven by event outside the organization’s
•
Candidate identified solely as a government official in a
•
Candidate identified solely in the list of key or principal
51

52
Whatever you call electioneering…
•
501(c)(3)s must not do it
•
501(c)(4)s, 501(c)(5)s, and 501(c)(6)s must not do too much of it (> 50%)
•
527s must not do too little of it (< 50%)

Reporting
•
Lobbying – statutory (c)(3)
–
Schedule C, Part II-B reporting

55
Reporting
•
Lobbying – (c)(3) w/ (h) election
–
Schedule C, Part II-A reporting
•
Line 1 – Annual Grassroots and Overall Limitations
•
Line 2 – 4-year Averaging Period

Reporting
•
Calculation - “Exempt Purpose Expenditures”
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Regulations: Included expenditures
•
Charitable purposes
•
Deferred compensation
•
Allocable overhead
•
Lobbying, including lobbying rule exclusions (nonpartisan analysis, broad social/economic problems examination, technical advice, self-defense)
57

Reporting
•
Calculation - “Exempt Purpose Expenditures”
58
–
Regulations: Excluded expenditures
•
Separate fundraising unit, including non-employees
–
Two or more persons spending majority of time
•
UBI or PF excise taxes
•
Expenses incurred for production of income, such as endowment manager
•
Transfer to affiliated group member
•
IRS-determined limit-inflating expenditures

Reporting
•
Lobbying – (c)(6)
–
Choice of:
•
Taxed at highest marginal rate; or
•
Notice to members
–
Benefits of notice over paying tax
•
No follow-up w/ members required
•
No asking members for more dues
•
Tax consequences likely at lower overall rates
59

Reporting
•
(c)(6) Dues
Disallowance
–
Exceptions:
•
Substantially all
(90%) nondeductible
•
Only in-house lobbying < $2,000
•
No prior year carryover
60

Reporting
•
Dues notices:
– applies to dues or “similar” amounts
– lobbying deemed to be paid first out of dues
–
“reasonable estimate” of % of current year dues
– carryover to following taxable year:
•
Statute only refers to excess of expenditures
•
Too late for following taxable year
63

64
Reporting

Reporting
65
Dues
Estimated Lobbying 20
Carryover 0
Total Estimated
6033(e) Lobbying
Dues Notice %
Dues Disallowed
Actual Lobbying
Under/Over
Notification
Year 1
200
20
10%
20
30
10
20%
40
35
-5
Year 2
200
30
10
40
10%
20
15
-5
Year 3
200
25
-5 ???
20
Cumulative
80
80
0

990 Reporting
•
Political Intervention- 501(c)(6)
–
Form 990 Part IV, question 3
–
Schedule C, Part I-A
–
Schedule C, Part I-C
•
Amount expended
•
Amounts contributed to other organizations
•
List of payments made to 527 organizations
•
Description of direct and indirect political campaign activities, total expenditures and volunteer hours
67

990 Reporting
•
Political
Intervention-
501(c)(6)
–
Complete Form
1120-POL
–
Taxed at 35%

990 Reporting
•
Political Intervention- 501(c)(3)
–
Form 990 Part IV, question 3
–
Schedule C, Part I-A
•
Description of direct and indirect political campaign activities, total expenditures and volunteer hours
–
Schedule C, Part I-B
•
Amount of excise tax under IRC section 4955 incurred by the organization and organization managers
•
Whether Form 4720 was filed
•
Whether correction was made
69

LDA Reporting
•
Quarterly (Form LD-2)
–
Due 4/20, 7/20, 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
71

Elizabeth Kingsley, JD
Attorney
Harmon, Curran, Spielberg
+ Eisenberg, LLP
Phone: 202-328-3500
Email: bkingsley@harmoncurran.com
Richard J. Locastro, CPA, JD
Nonprofit Tax Principal
Gelman, Rosenberg & Freedman CPAs
Phone: 301-951-9090
Email: rlocastro@grfcpa.com
Stephen J. Kelin, CPA, JD
Nonprofit Tax Principal
Gelman, Rosenberg & Freedman CPAs
Phone: 301-951-9090
Email: skelin@grfcpa.com