Nonprofit organizations that conduct federal lobbying must be cognizant of at least two different definitions of lobbying in order to comply with applicable federal tax law and federal lobbying disclosure laws. Section 162(e) of the Internal Revenue Code (the “Code”) defines “lobbying” and requires most tax-exempt organizations either to pay a proxy tax on lobbying expenditures or inform their members that a portion of their membership dues are non-deductible as a result of such expenditures. The federal Lobbying Disclosure Act (the “LDA”) provides a second definition of “lobbying” and requires organizations to track and disclose the amount spent on such activities.
This QuickCounsel will review the definitions and reporting requirements for non-501(c)(3) tax-exempt organizations under federal tax law and under the LDA.
Section 162(e) of the Code denies a deduction for the amount an organization spends on lobbying. Most trade and professional organizations exempt under 501(c)(6) and labor unions and farm bureaus exempt under 501(c)(5) are subject to the requirements of Section 162(e) (as are most taxable business entities). Membership organizations that are subject to Section 162(e) and that conduct lobbying may either:
- Disclose to their members what percentage of their dues are nondeductible because they are used for lobbying; or
- Pay a 35-percent proxy tax on lobbying expenditures.
Regardless of the method chosen, they must disclose the amount spent on lobbying on their Form 990 informational returns. Most membership organizations choose to report the nondeductible amount to their members.
“Lobbying” under Section 162(e) includes five broad categories of activity:
- Influencing legislation:
Any attempt to influence legislation through communication with (i) any member or employee of Congress; (ii) any member or employee of a state legislature; or (iii) any federal or state government official or employee who may participate in the formulation of legislation.
- Grassroots lobbying:
Any attempt to influence the general public, or segments thereof, with respect to elections, legislative matters, or referenda. This includes urging association members to engage in grassroots lobbying.
- Communications to covered federal executive branch officials:
Any direct communication with a covered federal executive branch official in an attempt to influence the official actions or positions of such official. Covered federal executive branch officials include the President, the Vice President, employees of the Executive Office of the President, and any individual serving in Executive Schedule level I or designated by the President as having Cabinet level status, and any immediate deputy of any of the foregoing.
- Political activities:
Any activity which constitutes participation or intervention in any political campaign at the federal, state, or local level, the expenditures for which are not already subject to tax under Code Section 527(f).
- Supporting activities:
All research, preparation, planning, and coordination (including deciding whether to make a lobbying communication) engaged in for a purpose of making or supporting a lobbying communication or political activity (as defined above) are treated as carried out in connection with such communication or activity. In other words, lobbying includes the time spent on any background activity engaged in for a purpose of supporting a future planned lobbying communication.
The regulations implementing Section 162(e) state that a covered organization may use any reasonable method to calculate the amount spent on lobbying. An accurate calculation typically includes tracking employees’ time spent lobbying, allocating overhead costs to lobbying activity, and factoring actual lobbying expenses (e.g., travel, payments to outside consultants, publications, etc.) into the total. The regulations also permit an organization to make reasonable allocations for activities that are conducted for both lobbying and non-lobbying purposes.
In addition to complying with the tracking of lobbying activities under federal tax law, nonprofit organizations that lobby also may be required to register under the LDA if one or more of their employees spends more than twenty percent of his or her time on lobbying activities. The LDA also requires organizations to submit quarterly reports to Congress regarding their lobbying activities, including the amount spent on lobbying. The LDA definition of “lobbying” differs significantly from the definition used under Section 162(e).
Under the LDA, “lobbying activities” include “lobbying contacts” as well as efforts in support of such contacts, including preparation and planning activities, research, and other background work that is intended, at the time it is performed, for use in contacts, and coordination with the lobbying activities of others.
Under the LDA, “lobbying contacts” are communications with “covered officials.” Lobbying contacts may be oral, written, or electronic. A contact is not a lobbying contact unless it involves:
- The formulation, modification, or adoption of federal legislation;
- The formulation, modification, or adoption of a federal rule, regulation, Executive Order, or other program, policy, or position of the United States government;
- The administration or execution of a federal program or policy (including the negotiation, award, or administration of a federal contract, grant, loan, permit, or license); or
- The nomination or confirmation of a person for a position subject to confirmation by the Senate.
There are a number of exceptions to these four categories. The following exceptions do not constitute “lobbying contacts” (and therefore preparation for such contacts does not constitute “lobbying activity”) and are particularly relevant to nonprofit organizations:
- Administrative requests, such as requests for a meeting or about the status of a matter;
- Testimony given before a committee or sub-committee of Congress;
- Speeches, articles, or publications made available to the public or distributed through radio, television, or other methods of mass communication;
- Information provided in writing in response to a request by a covered official;
- Information required by subpoena, a civil investigative demand, or otherwise compelled by the federal government (including information compelled by a contract, grant, loan, permit, or license);
- Communications in response to a notice in the Federal Register and directed toward the official listed in the notice;
- Written comments filed in the course of a public meeting;
- Any communication that is made on the record in a public proceeding; and
- Petitions for agency action made in writing and made part of the public record.
The term “covered legislative branch official” includes all elected Members of Congress and the Senate, as well as all employees and officers of Congress. The definition of “covered executive branch officials” is more specific. It includes:
- The President;
- The Vice President;
- Admirals and generals;
- Any officer or employee, or any other individual functioning in the capacity of such an officer or employee, in the Executive Office of the President;
- Any officer or employee in a position listed in levels I through V of the Executive Schedule; and,
- Schedule C political appointees.
The “Executive Schedule” delineates the most senior positions in the administration. Schedule C posts are typically non-career policy-making or “political” appointees, and confidential secretaries and administrative assistants of key appointees within an agency.
Even if an organization directs a communication to a covered official—e.g., a Schedule C appointee at a government agency—it is not a lobbying contact if the communication is part of the public record before the agency (e.g., through a formal docketing process).
Reporting Expenses under the LDA
Although many organizations will be subject to both Code and LDA reporting requirements for lobbying, a provision of the LDA permits organizations to track and disclose lobbying expenditures using section 162(e) rather than the LDA definition. For many organizations, the LDA definition is far narrower than the Code’s definition of “lobbying.” If the organization elects to use the Internal Revenue Code definitions, they must, however, use the LDA’s definition with respect to the legislative branch, and the Code definition with respect to the executive branch, to determine which individuals are considered to be lobbyists and which agencies have been lobbied.
Nonprofit organizations that are sensitive to having high dollar amounts reported on their LDA reports may consider opting to track lobbying activities separately under both the Code and the LDA. This approach will increase recordkeeping obligations, but will likely allow an organization to report a lower, more accurate estimate of federal lobbying expenditures to the Clerk of the House and the Secretary of the Senate, as the LDA does not require organizations to report state lobbying and grassroots lobbying expenses.
Federal tax law and the Lobbying Disclosure Act contain different restrictions, disclosure requirements, and thresholds for nonprofit in-house counsel to consider. This QuickCounsel provided an overview of the federal tax law and LDA requirements applicable to nonprofit organizations. In-house counsel with an understanding of such requirements will be able to effectively engage in lobbying activities while maintaining compliance with federal law.
- Playing Politics: A Menu of Options for Associations to Consider (September 2011)
- Grassroots Lobbying: A Legal Primer (Summer 2011)
- Federal Ethics and Lobbying Rules (May 2011)
- Myths about Lobbying, Political Activity, and Tax Exempt Status (June 2010)
- Supreme Court Decision Opens New Doors for Associations (February 2010)
- The New Form 990: Defusing Governance, Political Activities, Compensation, and Other Issues (December 2009)
- The Mechanics of Lobbying Disclosure Completing LD-1, 2, & 203 (June 2008)
- Tax Information for Charities & Other Non-Profits, Internal Revenue Service
- IRS Summary of "Nondeductible Lobbying and Political Expenditures"
- Lobbying Disclosure Act Guidance, Office of the Clerk, U.S. House of Representatives
|The information in this QuickCounsel should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This QuickCounsel is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
Published June 15, 2009 (Updated on October 17, 2011)