Political and Legislative Activity By Private Foundations

Client Advisory

June 13, 2002
by M. Antoinette Thomas

Private foundations are limited in the political and legislative activities they may undertake. Under the Internal Revenue Code tax, exempt private foundations are prohibited from participating in any political campaign for or in opposition to any candidate for public office (the political campaign prohibition) and from undertaking activities which involve carrying on propaganda or otherwise attempting to influence legislation (the lobbying prohibition).

1. The political campaign prohibition. Under Internal Revenue Code ("IRC") section 501(c)(3), an organization may be exempt from federal income tax only if it "does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for political office." IRC §501(c)(3). This prohibition applies to all exempt organizations, including private foundations.

This is an absolute prohibition and no amount of political activity is permissible. The standards developed by the IRS in connection with campaign activity are encompassing and are based on the "facts and circumstances" of each case. Some of the situations considered to constitute prohibited political campaign activity are as follows:

  1. Issue advocacy during an election campaign where a candidate is identifiable by the issue he supports, even though he is not named in the materials. (1)

  2. Urging members to become party committee persons. (2)

  3. Rating candidates for public office. (3)

  4. Taking out newspaper advertisements advising church members to vote against candidates seen to oppose church teachings. (4)

  5. Publishing voters' guides with candidates' voting records which evidence a bias in their presentation or which rate candidates solely with respect to one issue. (5)

The "candidate" in question must be running for an elective office and not an appointive office (although if legislative approval of an appointment is required, advocacy for or against the nominee is subject to the lobbying prohibition). (6) The rule extends to a candidate's activity as early as an announcement that he or she is forming an exploratory committee and to a campaign committee's activity to draft a candidate even without that candidate's active participation. Statements may be made for or against incumbents of elective office until they announce that they are running for re-election to that office or election to a new office. (7)

The penalty for violation of this rule is draconian: loss of tax-exemption. In addition, penalty taxes are imposed on a private foundation's expenditures for campaign activities and the funds must be recouped because such payments are prohibited "taxable expenditures" under IRC §4945(d)(2) (see the discussion of penalties in Section 2 below).

2. The lobbying prohibition. IRC section 501(c)(3) also states that an organization qualifies for tax-exemption only if "no substantial part of the activities . . . is carrying on propaganda, or otherwise attempting, to influence legislation . . . ." Unlike the political campaign prohibition, exempt charitable organizations may in theory carry on insubstantial amounts of lobbying activity, and many public charities do so. Private foundations, however, are not permitted to expend any sums to carry on lobbying activities because any expenditures for such activities, including the share of overhead expenses which are allocable to such activity, are taxable expenditures under IRC section 4945(d)(1). (8)

Lobbying activity is defined to be advocacy for or against a legislative action. A legislative action is an "action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure." (9) The prohibited communication or other activity must refer to specific legislation, including legislation that has already been introduced and proposals for specific legislative, and must put forward a view on behalf of the foundation with respect to such legislation. (10)

Under the private foundation rules, prohibited taxable expenditures include "any amount paid or incurred by a private foundation to carry on propaganda, or otherwise to attempt, to influence legislation. An expenditure is an attempt to influence legislation if it is for a direct or grassroots lobbying communication. . . ." (11) Direct lobbying is any attempt to influence legislation through any member or employee of a legislative body or any governmental official or employee who may participate in the formulation of legislation. Grassroots lobbying is an attempt to influence legislation by affecting the opinions of the general public and encouraging the recipient of the communication to take action with respect to the legislation. (12)

Advocating for or against an action by an administrative body, such as a school board, housing authority, zoning board and the like, is not generally considered to be an attempt to influence legislation. (13) It should be noted that in most cases governmental budgetary decisions are legislative and taking a position on a particular budget is lobbying. (14) Legislative confirmation of appointments is also consider to be legislation.

In contrast to lobbying activities, a foundation may undertake educational activities which discuss in a factual non-partisan fashion issues raised by legislation so long as the foundation (i) does not advocate or urge people to take action with respect to legislation, and (ii) presents a balanced discussion of the viewpoints and positions. (15) It may also discuss "broad social, economic, and similar problems" with legislators, even if those problems are the subject of legislative proposals, "so long as such discussion does not address itself to the merits of a specific legislative proposal and so long as such discussion does not directly encourage recipients to take action with respect to legislation." (16)

An additional concern for private grant-making foundations is that they not make grants to other organizations to carry out legislative activities since indirect lobbying is also prohibited. As a result, care must be taken in making grants to public charities that conduct permitted lobbying activities. Such grants are not considered to be indirect lobbying expenditures if (i) the grant by the private foundation is a general support grant and is not earmarked, either by a written or oral agreement, for the lobbying activity, or (ii) the grant is for a specific project, it is not earmarked for lobbying, and the total amount of all of the foundation's grants to that public charity for that project in that year do not exceed the charity's non-lobbying portion of the budget for that project: in other words, there is no requirement to trace the grantee's use of funds so long as the grantee could have used other funds for the lobbying activity. (17)

The penalties for making a taxable lobbying expenditure are the imposition of an excise tax on the foundation equal to 10% of the amount of the expenditure and an excise tax on the foundation manager who knowingly made or approved the expenditure equal to 2½% of the expenditure. In addition, to the extent possible, the monies must be recovered. This recovery would likely require a return of salaries or other allocable overhead expenses. If the taxable expenditure is not corrected within the notification period provided by the IRS, then the penalty taxes jump, respectively, to 100% and 50% of the amount of the expenditure. Furthermore, if the lobbying activities are more than insubstantial, the foundation's exemption may be revoked.

3. State law. For tax exemption, the IRC requires that an organization's governing instruments provide that it be "organized" and "operated" for only exempt purposes and not for any impermissible purposes. As a result, the Certificate of Incorporation of a private foundation must include provisions that the foundation will not (i) engage in an activity that the IRC prohibits, (ii) engage in political or lobbying activities, and (iii) make any taxable expenditures under IRC §4945. In addition, many states have statutory law which converts IRC §4945 into prohibited activity for private foundations for state enforcement purposes. (18)

As a result of these provisions, a violation of the IRS rules would likely be a breach of directors' and officers' duty of care to the foundation. Consequently, the state Attorney General could take the position that any penalties imposed by the IRS on the foundation are recoverable from the officers and directors and could seek their removal. (19)

4. Expression of personal views. These rules do not prevent any foundation manager or employee from stating personal views or undertaking individual action. This should not be done at a foundation function, on foundation letterhead, or under the auspices, actual or apparent, of foundation approval. A disclaimer of foundation representation might even be appropriate in certain circumstances, such as a letter to the editor urging the public to oppose Senate approval of a Cabinet nomination from a person, in a private capacity, who is a foundation director.

1. See Technical Advice Memorandum 8936002.

2. General Counsel Memorandum 39811.

3. Association of the Bar of the City of New York v. Comm'r, 858 F.2d, 876 (2nd Cir. 1988), cert. den., 490 U.S. 1030 (1989).

4. Branch Ministries, Inc. v. Rossotti, 211 F.2d 137 (D.C. Cir. 2000).

5. See, e.g., Private Letter Ruling 9609007.

6. IRS Notice 88-76 (1988).

7. Technical Advice Memorandum 9130008.

8. Reg. §53.4945-2(a)(1); Reg. §56.4911-3(a).

9. Reg. §1.501(c)(3)-1(c)(3); Reg. §56.4911-2(d)(1)(i).

10. Reg. §56.4911-2(b)(1)(ii) and 2(ii).

11. Reg. §53.4945-2(a)(1).

12. Reg. §56.4911-2(b)(1) and (2).

13. Reg. §56.4911-2(d)(4).

14. Id.

15. Reg. §53.4945-2(d); Revenue Procedure 86-43.

16. Reg. §53.4945-2(d)(4).

17. Reg. §59.4945-2(a)(6).

18. See, e.g., EPTL §8-1.8(a)(5).

19. See, e.g., In re Estate of Carvel, 168 Misc.2d 442 (Surr. Ct. Westchester Co. 1996).

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2018 Carter Ledyard & Milburn LLP.
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