Rules, Recordkeeping & Advanced Strategies

1. Public Charity Lobbying Rules, Recordkeeping & Advanced Strategies Terry Miller www.terrymiller.biz Terry@TerryMiller.biz

2. Agenda • Review IRC 501(h), 4911, & Regs • Recordkeeping; Reporting • Identifying Lobbying • Excise Tax & Revocation • Describe & discuss advanced operational strategies

3. 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)

4. 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

5. Electing 501(h) v Non-Electing • Note: 2008 990, • narrative appears gone

6. 501(h) Recordkeeping: 3 Steps • Calculate Lobbying Allowances a/k/a “Lobbying Nontaxable Amount” • Identify Lobbying Activities Must keep in mind special rules • Calculate Lobbying Expenditures

7. 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

8. Exempt Purpose Expenditures • Reg. 56.4911-4 Usually all expenses, EXCEPT: • costs of “separate fundraising unit” (2 or more staff) • payments to fundraising counsel or professional fundraisers • capital expenditures (s/l depreciation OK) • investment management expenses • certain excise taxes • certain transfers (see Reg. 56.4911-4(e))

9. Calculate Lobbying Allowance(“lobbying non-taxable amount”) Example: • 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 1,760,000238,000 = total allowance x 25% 59,500 = grassroots allowance

10. 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 actionto communicate with a legislator to influence the legislation >> Reg 56.4911-2(b)(2)

11. Direct v. Grassroots Lobbying

12. Calls to Action Direct: • Tells recipient to contact legislator • Provides legislator contact info • Provides response mechanism Indirect: • Lists key, allied, opposed, or undecided legislators on a specific legislative proposal

13. What is NOT Lobbying? 1 • Volunteer effort (501(h) is an expenditure test)>> Reg 56.4911-2(b)(4)(ii) • Attempts to influence executive branch matters>> Reg 56.4911-2(b)(1)(i) • Communications with the public expressing a view on specific legislation, with NO call to action>> Reg 56.4911-2(b)(2)(ii) • Communications with members expressing a view on specific legislation, with NO DIRECT call to action >> Reg 56.4911-5(b)

14. What is NOT Lobbying? 2 • Communications about a Broad Social Problem are not a specific legislative proposal, by definition>> Reg 56.4911-2(c)(2) • 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)

15. What is NOT Lobbying? 3 • Requests for opinions, recommendations and Technical Advice by a legislative body, committee or sub-committee >> Reg 56.4911-2(c)(3) • Self-defense lobbying (affects existence, powers & duties, tax-exempt status, or deductibility of contributions) >> Reg 56.4911-2(c)(4), 2(d)(3)

16. What is NOT Grassroots Lobbying? • Communication with the public on ballot measures is DIRECT lobbying >> Reg 56.4911-2(b)(1)(iii) • 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)

17. What MAY BE Lobbying? • 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) • 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) • 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)

18. Identifying Lobbying: Flowchart

19. Advanced Topics: Mixed Purpose / Mixed Audience

20. 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 reasonable“

21. Sample Timesheet1

22. Sample Timesheet 2

23. Sample Staff Time Summary

24. 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

25. Reporting: 990 Schedule A, Pg 2 • Note: this is no longer the form as of the 2008 • Form 990. A similar question (just yes/no) is now on • Part IV of Core Form

26. Reporting: 990 Schedule A, Page 5 • Note: • 2008 • Form 990 • is very • similar but • this part • is now in • Schedule C

27. Reporting: non-Electing Charities, Part VI-B Line Items • Note: 2008 Form 990 is very similar but this part • is now in Schedule C

28. Reporting: Electing Charities, Part VI-A • Note: • 2008 • Form 990 • is very • similar but • this part • is now in • Schedule C 1 year test 4 year test

29. 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

30. AdvancedStrategyIdeas

31. 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 affiliate Reg 56.4911-3(c)

32. 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)

33. 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)

34. 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

35. 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?

36. 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

37. 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

38. 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

39. Master Calls-to-Action direct? 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

40. 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

41. 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

42. 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)

43. 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

44. 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

45. 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

46. 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”

47. 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

48. Know when to revokeSection 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

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