Recently, the Charitable Activities Section of the Department of Justice filed a lawsuit against a private foundation and its directors. We have received a number of inquiries from concerned citizens who want to know how or if nonprofit organizations can lawfully engage in lobbying activities. The following is a very general guide to this area of the law.
Public Charity or Private Foundation
Private foundations hold §501(c)(3) charitable, tax exempt status. Most §501(c)(3) organizations are classified as either a public charity or a private foundation. Both are often called "nonprofit." The difference between the two lies in the source of contributions; a public charity typically receives donations from the public, while a private foundation may only draw support from a limited group, such as a family. Because of the limited source of contributions, the organization is treated as a "private foundation" under IRC §509. Private charitable foundations are funded with tax-deductible contributions, just like public charities.
The possibility of abuse arises when an organization is financially supported by a limited number of people rather than the general public. Why? Those who give the most in donations often control what an organization does. Because of this potential abuse, Congress enacted more restrictive rules for private charitable foundations than for public charities. To qualify as a public charity, an organization must pass a "public support test" by demonstrating that most of its gifts, grants and contributions do not come from a limited few. IRS regulations set out the applicable tests.
Private Foundation Rules
One restriction on private foundations is that they may not engage in certain "taxable expenditures." State law (ORS 65.036(5)) also prohibits these types of expenditures. The IRS identifies five types of taxable expenditures, further defined by regulations and procedures:
- §4945(d)(1) Taxable expenditures include those spent to carry on propaganda, or otherwise attempt to influence legislation, including grass roots lobbying and direct lobbying by communicating to the general public.
- §4945(d)(2) Taxable expenditures include those spent to influence the outcome of any specific public election, or to carry on a partisan voter registration drive (directly or indirectly).
- §4945(d)(3) Taxable expenditures include grants to individuals unless the grants are conducted pursuant to a procedure that is approved in advance by the IRS. Even if grants are made on an objective basis, the pre-approved process must be followed.
- §4945(d)(4) Taxable expenditures include grants to organizations which do not qualify for public charity status and for which the private foundation does not exercise "expenditure responsibility," including a pre-grant inquiry, written grant agreement, written report from grantee, and disclosing the grant on IRS form 990-PF.
- §4945(d)(5) Taxable expenditures include funds spent for any purpose other than proper charitable purposes. Although education of the public is a proper purpose, "educational purposes" are defined by IRS Rev. Proc. 86-43, and may not include biased, distorted, unsupported, or inflammatory statements.
The strict prohibition on lobbying contained in IRC §4945(d)(1) and ORS 65.036(5) applies only to private foundations. While there is no similar prohibition for public charities, IRS rules do provide that "no substantial part" of the organization's activities may be lobbying. A public charity has the opportunity to make an election by filing IRS form 5768, which helps identify the dollar limitations for the lobbying activity. Charities should contact their legal advisor to see if such an election is appropriate. Both types of §501(c)(3) organizations are prohibited from engaging in "political" expenditures, but this prohibition is limited to the support for or opposition to candidates for political office.