Measuring Lobbying by Private Foundations: Substantial Part Test
Like other section 501(c) (3) organizations, private foundations are subject to limitations or prohibitions with respect to lobbying and political campaign activities.
Whether a foundation’s attempts to influence legislation, i.e., lobbying, constitute a substantial part of its overall activities is determined based on all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures made by the foundation to the activity, when determining whether the lobbying activity is substantial.
Under the substantial part test, a foundation that conducts excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax.
A private foundation is subject to a twenty percent tax on all of its lobbying expenditures, regardless of whether they are substantial. A tax equal to five percent of the lobbying expenditures for the year may be imposed against organization managers, jointly and severally, who agree to the making of such expenditures knowing that they were lobbying expenditures.
In addition, if the private foundation does not correct the violation by recovering (or attempting to recover) the amounts spent, a tax equal to one hundred percent of the expenditure may be imposed. When this additional tax is imposed and a foundation manager refuses to agree to part or all of the correction attempts, a tax equal to fifty percent of the expenditure may be imposed on the manager.