terry miller terry@terrymiller.biz rules, recordkeeping & advanced strategies public charity...

Terry Millerwww.terrymiller.biz

Terry@TerryMiller.biz

Rules, Recordkeeping

& Advanced Strategies

Public Charity Lobbying

1. Review IRC 501(h), 4911, & Regs• Recordkeeping; Reporting

• Identifying Lobbying

• Excise Tax & Revocation

2. Describe & discuss advanced operational strategies

Agenda

Overview

• public charities may lobby, within limits

• 2 tests: facts and circumstances test OR IRC 501(h) expenditure test

• expenditure test requires election: Form 5768

• most, but not all, public charities are eligible (churches & certain affiliates, government units, supporting

organizations to (c)(4,5,6) organizations, 509(a)(4) testing for public safety)

History: The Law Evolves

• 1930: Slee v. Commissioner of Internal Revenue

• 1934: “no substantial part” added to IRC 501(c)(3)

• 1954: prohibition on candidate “intervention” added to IRC 501(c)(3)

• 1976: IRC 501(h) and 4911 added to provide more certainty

• 1990: defining regulations adopted

Electing 501(h) v Non-Electing

a)Note: 2008 990,

b)narrative appears gone

501(h) Recordkeeping: 3 Steps

1) Calculate Lobbying Allowances a/k/a “Lobbying Nontaxable Amount”

2) Identify Lobbying ActivitiesMust keep in mind special rules

3) Calculate Lobbying Expenditures

Lobbying Allowances - the Formula

• 2 allowances: Total, and “Grassroots”• Total allowance:

sliding scale % of Exempt Purpose Expenditures• 20% of first $500K

• 15% of next $500K

• 10% of next $500K

• 5% over $1.5M

• Maximum allowance = $1M (occurs at $17M EPE)

• Grassroots allowance is 25% of total allowance

Exempt Purpose Expenditures

Reg. 56.4911-4

Usually all expenses, EXCEPT:

a) costs of “separate fundraising unit” (2 or more staff)

b) payments to fundraising counsel or professional fundraisers

c) capital expenditures (s/l depreciation OK)

d) investment management expenses

e) certain excise taxes

f) certain transfers (see Reg. 56.4911-4(e))

Calculate Lobbying Allowance(“lobbying non-taxable amount”)

• Exempt Purpose Expenditures = $1,760,000

20% x 500,000 = 100,000

15% x 500,000 = 75,000

10% x 500,000 = 50,000

5% x 260,000 = 13,000

EPE 1,760,000 238,000 = total allowance

x 25%

59,500 = grassroots allowance

Example:

Identify Lobbying Activity

• “Direct Lobbying” is communication with legislator about specific legislative proposal, expressing a view, with intention to influence the legislation

>> Reg 56.4911-2(b)(1)

• “Grassroots Lobbying” communication with the public, about specific legislative proposal, expressing a view, calling for action to communicate with a legislator to influence the legislation

>> Reg 56.4911-2(b)(2)

Direct v. Grassroots Lobbying

Calls to Action

Direct:

1. Tells recipient to contact legislator

2. Provides legislator contact info

3. Provides response mechanism

Indirect:

4. Lists key, allied, opposed, or undecided legislators on a specific legislative proposal

What is NOT Lobbying? 1

1) Volunteer effort (501(h) is an expenditure test) >> Reg 56.4911-2(b)(4)(ii)

2) Attempts to influence executive branch matters >> Reg 56.4911-2(b)(1)(i)

3) Communications with the public expressing a view on specific legislation, with NO call to action>> Reg 56.4911-2(b)(2)(ii)

4) Communications with members expressing a view on specific legislation, with NO DIRECT call to action

>> Reg 56.4911-5(b)

What is NOT Lobbying? 2

5) Communications about a Broad Social Problem are not a specific legislative proposal, by definition >> Reg 56.4911-2(c)(2)

6) Nonpartisan Analysis Study & Research>> Reg 56.4911-2(c)(1)

• substantial non-lobbying distribution, not just to one side of a proposal >> Reg 56.4911-2(b)(2)(v)(E)

• full exposition of the facts >> Reg 1.501(c)(3)-1(d)(3)

• may express a view, but only contain an indirect call to action >> Reg 56.4911-2(c)(1)(vi),(vii)

What is NOT Lobbying? 3

7) Requests for opinions, recommendations and Technical Advice by a legislative body, committee or sub-committee

>> Reg 56.4911-2(c)(3)

8) Self-defense lobbying (affects existence, powers & duties, tax-exempt status, or deductibility of contributions) >> Reg 56.4911-2(c)(4), 2(d)(3)

What is NOT Grassroots Lobbying?

1) Communication with the public on ballot measures is DIRECT lobbying

>> Reg 56.4911-2(b)(1)(iii)

2) Communication with members encouraging them to make a DIRECT lobbying contact (but NOT encouraging them to “tell your friends and neighbors”)

>> IRC 4911(c)(3)(A)

What MAY BE Lobbying?

1) Subsequent Use of Nonpartisan Analysis Study & Research within six months may render the earlier preparation costs grassroots lobbying >> Reg 56.4911-2(c)(1)(v)

2) Mass Media advertisements within 2 weeks of a highly publicized vote by legislative body or committee even with NO call to action >> Reg 56.4911-2(b)(5)

3) Also don’t forget: Preparation for Lobbying (could be either type),

Contact with executive branch officials to encourage action on specific legislation (direct), and

accidentally saying in a membership communication “so tell your friends and neighbors” (grassroots)

Identifying Lobbying: Flowchart

Advanced Topics: Mixed Purpose / Mixed Audience

>> Reg 56.4911-3

Allocate Lobby / non-Lobby

Lobby: “tell public”

Direct call to action

Only indirect call to action

Members Only (>85%)

reasonablesplit

100% grassroots

100% direct 0% lobby, 100% educ

Primarily Members (>50%)

reasonable split

100% grassroots

split % mbrs: dir public: gr

split % mbrs: educ public: gr

Primarily non-Members (the Public)

same specific subject; all grassroots

100% grassroots

100% grassroots

100% grassroots

Calculate Lobbying Expenditures

Cost Allocation Basics

• Direct costs (travel, publications, lobbyist fees, mailing costs, media)

• Portion of mixed-purpose activities (case-by-case analysis & allocation)

• Staff cost (timesheets or incident reports)

• Proportionate share of Overhead

Allocation must be “fair and Allocation must be “fair and reasonable“reasonable“

Sample Timesheet 1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total

Adopt a Kid Project

6 8 7 8 4 5 3 4 4 49

Direct Lobbying 4 2 3 9

GR Lobbying 3 3

Health Project

2 1 4 5 3 2 4 21

Direct Lobbying

GR Lobbying

Vacation

Sick Leave 8 8

Total 8 8 8 8 8 8 9 8 8 9 8 90

Sample Timesheet 21 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total

Adopt a Kid Project

Unadopted Kids Memo 6 6 12

Adoption Day Event 2 8 4 5 7 4 30

“I’m adopted” Ads 5 5

Tax Incentive Work 7 3 4 14

Health Project

2 1 4 5 3 2 4 21

Direct Lobbying

GR Lobbying

Vacation

Sick Leave 8 8

Total

8 8 8 8 8 8 9 8 8 9 8 90

Staff Member Total Hours Direct Lobbying

% of hours

for Direct

Grassroots Lobbying

Executive Director 2010 449 22.3% 111

Deputy Director 2000 151 7.6% 58

Research Director 2150 100 4.7% 99

Research Assistant

1901 0 0% 32

Special Program Coordinator

1939 0 0% 0

Total 10,000 700 300

Percentage of Total Hours

7.0% 3.0%

Sample Staff Time Summary% of

hours for GR

5.5%

3%

4.6%

1.7%

0%

Cost Center or Workpaper?

• Always keep:• contemporaneous source documents (time

records) always best

• records on mailings and distributions

• samples of contents

• copies of Web pages, email alerts

• Cost center or Workpaper?• Cost Center: allows for careful monitoring

• Workpaper: allows flexibility

Reporting: 990 Schedule A, Pg 2

a)Note: this is no longer the form as of the 2008

b)Form 990. A similar question (just yes/no) is now on

c)Part IV of Core Form

Reporting: 990 Schedule A, Page 5

a)Note:

b)2008

c)Form 990

d)is very

e)similar but

f)this part

g)is now in

h)Schedule C

Reporting: non-Electing Charities, Part VI-B

Line Ite

ms

a)Note: 2008 Form 990 is very similar but this part

b)is now in Schedule C

Reporting: Electing Charities, Part VI-A

4 year test

1 year test

a)Note:

b)2008

c)Form 990

d)is very

e)similar but

f)this part

g)is now in

h)Schedule C

Excise Tax & Revocation

Electing Charities• excess lobbying, either type, in any one

year: 25% excise tax (if both exceeded, the higher of the two)

• revocation only if exceed either allowance by 150% over any given four-year period

• State A.G. might have questions about excise tax as use of charitable funds

Non-Electing Charities• excess = revocation

AdvancedStrategy

Ideas

Use a (c)(4) “bank”

• Electing charity makes controlled grants, one for grassroots lobbying, one for direct lobbying to an affiliated or allied 501(c)(4) (or (c)(5) or (c)(6)) allied organization each year+fully spends allowance, no tax

+prevents need to overspend in some years, paying tax on prior years

+tidy; all lobbying done by affiliateReg 56.4911-3(c)

Always make substantial non-lobbying distribution• Electing charity always takes research

results and prepares a study, which it distributes widely for public education purposes +assists with allocation of research efforts

between lobbying and non-lobbying; documents that the primary purpose is not lobbying

+Tip: maintain a list of professors & press & other nonprofits

Reg 56.4911-2(b)(2)(v)(E)

Know “Donors” = “Members”

• Members are those who contribute more than nominal amount of time or money (and some honorary). All donors should be characterized as members; they need not vote on corporate business+Communications with members are favored

as 1) direct lobbying even with a direct call to action, and 2) as education only if the call to action is merely indirect

Reg 56.4911-5(f)(1)

Carefully Parse Your List• Parse sub-lists in the database so that

mailings can be structured / controlled as “only” to members (allows 15% other), “primarily to members” (over 50%) or “primarily to the public” as needed+The rules permit substantial flexibility in

allocations between lobbying and non-lobbying if a mailing is to only, or primarily members

+The rules treat communications to members without a direct call to action as mere education: unlimited

+Careful parsing also facilitates making substantial non-lobbying distribution (professors, press, interested nonprofits – on all sides of an issue)

>> Reg 56.4911-3, -5

Establish Annual Patterns• Plan to engage in certain activities

annually, establishing a pattern+most relevant to avoiding appearance of

prohibited candidate electioneering: Is it electioneering to have banquet speaker who is allied officeholder seeking re-election?

+annual voting record scoring tied to legislative cycle rather than election cycle: Is it lobbying? Electioneering?

+polling and survey research on public opinion about relevant public policy issues: Is it annual research or lobbying preparation?

Adopt New Fiscal Year

• Adopt fiscal year-end that applies two annual lobbying allowances to:+one legislative session, or

+preparation and campaigning on one ballot measure

Learn to do NPASR

• >> Reg 56.4911-2(c)(1)

• Non Partisan Analysis, Study, and Research is NOT lobbying, even if it reaches a conclusion about what legislative proposal is best, and even if it contains an indirect call to action+substantial non-lobbying distribution (“at

least as great as the lobbying distribution?”)

+cannot only distribute to one side or the other

+educates the public, lays a base for later battles

+easier to raise charitable money to support

Calculate and monitor theexcise taxable amount and revocation ceiling

• Measure questionable transactions (“is it preparation for lobbying?”); if not reported as lobbying, verify these costs will not exceed allowance by 50% for a four-year period+think of it like a reserve account

Master Calls-to-Actiondirect? indirect? none?

+ NPASR: expresses a view, only has indirect call to action: NOT lobbying

+ communications with members that expresses a view about specific legislation and only has an indirect call to action: NOT lobbying

+ grassroots lobbying vs. public education: communication to general public that expresses a view on specific legislation but has no call to action: NOT lobbying

+ SOP 98-2: is it a feature or a bug?+ if adopted for Form 990, allows lobbying activity to

potentially hide as fundraising+ some groups inadvertently issue lobbying calls to action in

order to solve the 98-2 call to action as v. pure fundraising

Master Discussion of Broad Social Problems

• Master discussion of broad social problems and calling for action as part of the early stages of a larger debate and issue campaign

Train Staff

• Staff training: make sure that program staff know what is direct lobbying and what is grassroots lobbying+document the training efforts to show IRS in

support of time records

+add to employee manual certain controls?

+allows staff to account for time accurately

+allows staff to construct issue campaigns strategically

Train Members• Member training: make sure members

and financial supporters are trained in advance, and have an easy-to-save (refrigerator magnet?) list of legislators and policy-makers+later, communications to members about

specific legislation, and expressing a view, even if including an INDIRECT call-to-action (key legislators), will not be lobbying, and the members will hopefully know what to do

>> Reg 56.4911-5(b)

Issue Campaigns = 5 Year Planning

• Learn to do five-year planning and budgeting for the full arc of an issue campaign+begins with public education and calls

for action on broad social problem

+moves into specific lobbying

+in some cases may move into candidate accountability

Plan for List ownership by an IRC 501(c)(4,5,6) if possible• Arrange for the list to be held by an

affiliated non-charity if possible; it allows much greater flexibility - CAUTION: cannot spend charitable money

building the list if owned by non-charity

+(c)(4,5,6) may provide use to (c)(3) for free, or charge fair market value

+(c)(4,5,6) may do “list enhancement” merging in voter participation information

Arrange Invitations to give Technical Advice• Technical Advice does not require the

same “full and fair exposition of the facts” test that NPASR does+friendly committee chairs can often arrange

to invite testimony in writing

+helps create a substantial non-lobbying purpose for research costs

Understand the “Macintosh” rules for Private Foundations

• Private Foundation may provide support for a specific project that includes lobbying, so long as the grant is less than the non-lobbying portion+foundations may need education on this

point

+Alliance for Justice booklet: “Foundation Support for Advocacy: Myth vs. Fact”

Learn to recognize Self-Defense Lobbying• Self-Defense exception is NOT about budget

cuts or reductions in funding. Examples are:+attempt to repeal property tax exemption for

charities through ballot measure or legislature

+attempts to change deductibility of certain gift items such as highly appreciated stock

+ legislative or ballot measure efforts to make it harder for employers to allow charitable solicitation of employees for charities that lobby

Know when to revoke Section 501(h) election

• Authorities differ on this point, but possible scenarios for revocation include:+budget sufficiently large that 5% is well over $1M

maximum 501(h) allowance

+no direct lobbying, but grassroots is a bit over 5%

+the IRS targeted audit program continues

+cases where substantial non-lobbying VOLUNTEER effort would reduce the substantiality of lobbying under facts and circumstances

end