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SUBJECT: Tax Code Amendments Regarding Lobbying by Nonprofits
DATE: APRIL 12, 2001

Current Law

Many IRC 501(c)(3) organizations have made an IRC 501(h) election in order to be sure their issue advocacy does not run afoul of the ambiguous tax code language limiting the amount of lobbying they may do. The 501(h) designation authorizes lobbying by a 501(c)(3) up to a specified dollar limit. This designation removes the uncertainty and allows the nonprofit to be judged under a percentage test.

Under the percentage test of the 501(h) election, a nonprofit may spend no more than 25 percent of the allowable lobbying expenditures for grass roots lobbying, as contrasted to direct lobbying.

Proposed Amendments

Two amendments to the tax code are being proposed.

1. Remove the artificial distinction between grass roots and direct lobbying. It serves no useful purpose and it forces nonprofits to incur unnecessary and expensive bookkeeping and legal expenses to be sure they have categorized their lobbying activities appropriately.

This amendment was previously included in Sen. Roth’s tax bill in the last Congress, but it was vetoed by President Clinton. There is no known opposition to this change.

2. The current allowable spending limit for lobbying (it’s a sliding scale related to the size of one’s budget, with a maximum of $1 million) was set in 1976 and has never been updated. The proposed amendment would update the allowable limits and would index the amounts in the future to account for inflation. Updating would bring the new maximum up to $3 million.

Among FSC members, there is some division of opinion, with the American Conservative Union opposing the second amendment.

Relevant Observations

Under the current law, when either the grass roots limit or the total lobbying expenditure is exceeded, the nonprofit is assessed a tax on the overage. From the latest records available (1999), 72 nonprofits exceeded one limit or the other and paid taxes on the overages. Almost all of the taxed groups were small local nonprofits, such as sports groups, PTAs, animal groups, health groups, and arts groups. The ONLY national groups on this list are the Family Research Council and Liberty Counsel, Inc., two conservative groups. The largest tax assessments were against the Georgia Wildlife Federation and Planned Parenthood of Connecticut.

Action Needed

1. If your organization is a 501(c)(3), we need your CEO to write to your friends in Congress to urge support for one or both of these amendments. There is no bill number, as we expect these amendments will be added to a major tax bill.

2. If you are a fund raising agent or vendor for 501(c)(3) organizations, please contact those clients and advise them of these proposed amendments. They will probably want to write letters of support to their Members of Congress.