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Part 7. Rulings and Agreements

Chapter 25. Exempt Organizations Determinations Manual

Section 3. Religious, Charitable, Educational, Etc., Organizations (Cont. 3)

7.25.3  Religious, Charitable, Educational, Etc., Organizations (Cont. 3)

7.25.3.16 
Inurement, Private Benefit, and Intermediate Sanctions

7.25.3.16.8  (02-23-1999)
Permissible Benefits

  1. Tax advantages or other incidental benefit to an individual or entity from transactions with a controlled exempt organization does not necessarily result in private benefit or inurement of net earnings.

  2. A charity purchased securities from its creator for less than the fair market value. The creator claimed a charitable contribution equal to the difference between the fair market value of the securities and the price at which they were sold to the charity. Although the transaction may have resulted in an advantage to the creator the charity profited from the transaction and its exemption was not affected. Wiilam Waller, et al. v. Commissioner, 39 T.C. 665 (1963), acq., 1963–2 C.B. 5. See also Rev. Rul. 69–39, 1969–1 C.B. 148.

  3. Where a business corporation donated lands and money to a foundation to establish a public park, exemption was not jeopardized by the donor’s retention of the right to use as a brand symbol a scenic view located in the park. Rev. Rul. 66–358, 1966–2 C.B. 218.

  4. A corporation created an organization to operate a replica of an early 19th Century American village named after the corporation. The corporation donated the land upon which the village was located and provided a substantial amount of financial support. Although the corporation benefits by having its name mentioned in conjunction with the organization’s advertising program, such benefits are merely incidental to benefits flowing to the general public from access to the village and its historic structures. Rev. Rul. 77–367, 1977–2 C.B. 193.

  5. An organization subsidized recent law graduates who provided free legal services to low income residents of economically depressed communities. Any private benefit derived by the legal interns is incidental to the public charitable purpose. Rev. Rul. 72–559, 1972–2 C.B. 247.

7.25.3.16.9  (02-23-1999)
Digests of Precedent

  1. Nurses’ registers—A nonprofit community nursing bureau that maintains a register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses, for the benefit of hospitals, health agencies, doctors and individuals, as a community project, qualifies for IRC 501(c)(3) exemption. It receives financial support from community organizations and public contributions. Rev. Rul 55–656, 1955–2 C.B. 262.

  2. Employee benefits—A trust organized to pay pensions to retired employees is not exempt under IRC 501(c)(3). Rev. Rul. 56–138, 1956–1 C.B. 202.

  3. Hospitals—The necessary criteria for a hospital to qualify for exemption as a public charitable organization are outlined. Modified by Rev. Rul. 69–545, to remove the requirement relating to caring for patients without charge or at rates below cost. Rev. Rul. 56–185, 1956–1 C.B. 202.

  4. Nurses’ registers; maintaining an employment registry—A nurses’ association that maintains an employment registry primarily for the employment of members is not entitled to IRC 501(c)(3) exemption. Rev. Rul. 61–170, 1961–2 C.B. 112.

  5. Research and development—An organization that makes research grants for the development of new machinery to be used in particular commercial operations and retains all the rights to the new developments does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 65–1, 1965–1 C.B. 226.

  6. Business benefits—A nonprofit organization that makes funds available to authors and editors for preparing teaching materials and writing text books, and under the terms of the contract with the publisher receives royalties from the sales of published materials and then shares them with those individuals, does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–104, 1966–1 C.B. 135.

  7. Trusts—reversionary interest—A trust that provides for the reversion of principal on termination to the creator does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 66–259, 1966–2 C.B. 214.

  8. Public park—Where a business corporation donated lands and money to a foundation to establish a public park, exemption under IRC 501(c)(3) was not jeopardized by the donor’s retention of the right to use as a brand symbol a scenic view located in the park. Rev. Rul. 66–358, 1966–2 C.B. 218.

  9. Investments benefiting insiders; family controlled foundations—A foundation, controlled by the creator’s family and operated to enable the creator and his family to engage in financial activities beneficial to them, results in the foundation’s ownership of non-income-producing assets which prevents its carrying on a charitable program commensurate in scope with its financial resources. It is not entitled to exemption. Rev. Rul. 67–5, 1967–1 C.B. 123.

  10. Financial support of other organizations—An organization provides financial assistance to exempt organizations by distributing funds at periodic intervals. It carries on no operations other than to receive contributions and incidental investment income, not accumulated. It is exempt from tax. Rev. Rul. 67–149, 1967–1 C.B. 133.

  11. Private benefit; personal grants—An organization whose sole activity is the operation of a "scholarship fund" plan that makes payments to pre-selected, specifically named individuals, does not qualify for exemption. Rev. Rul. 67–367, 1967–2 C.B. 188.

  12. Commercial drug testing—A nonprofit organization primarily engaged in testing drugs for commercial pharmaceutical companies does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–373, 1968–2 C.B. 206.

  13. Pension plan—An organization created pursuant to the will of a stockholder of a company to pay pensions to all retired employees of that company does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 68–422, 1968–2 C.B. 207. See also Rev. Rul. 56–138, 1956–1 C.B. 202.

  14. Financial support of other organizations—An organization will not jeopardize its exemption even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for IRC 501(c)(3) purposes. Rev. Rul. 68–489, 1968–2 C.B. 210.

  15. Permissible benefits—A charitable organization’s exemption from tax will not be affected by purchasing securities from its creator (and sole trustee) at the price he paid for them and reselling them at a profit. Rev. Rul. 69–39, 1969–1 C.B. 148.

  16. School bus transportation—A nonprofit organization formed by parents of pupils attending a private school that provides school bus transportation for its members’ children serves a private rather than a public interest. Rev. Rul. 69–175, 1969–1 C.B. 149.

  17. Deferred or retained interests—The exempt status of an organization is not affected by the acceptance of an income-producing asset subject to a reserved life estate in the transferor or in exchange for an annuity specifically charged against the asset. Rev. Rul. 69–176, 1969–1 C.B. 150.

  18. Perpetual care—A testamentary trust established to make annual payments to exempt charitable organizations and to use a fixed sum from annual income for the perpetual care of the testator’s burial lot is not exempt under IRC 501(c)(3). Rev. Rul. 69–256, 1969–1 C.B. 150.

  19. Private benefit—An organization, formed and controlled by a medical doctor to conduct research programs consisting of examining and treating patients who are charged the prevailing fees for services rendered, is not exempt under IRC 501(c)(3). Rev. Rul. 69–266, 1969–1 C.B. 151.

  20. Private benefit—An irrevocable inter vivos trust which provides that a fixed percentage of income must be paid annually to the settlor with the balance to charity is organized and operated for private interests. Rev. Rul. 69–279, 1969–1 C.B. 152.

  21. Hospital specialist—The exempt status of a hospital under IRC 501(c)(3) will not be jeopardized where, after arms’ length negotiations, it enters into an agreement with a hospital based specialist for compensation on the basis of a fixed percentage of the departmental income. Rev. Rul. 69–383, 1969–2 C.B. 113. See also Rev. Rul. 69–545, 1969–2 C.B. 117.

  22. Hospital; office building leased to medical group—The leasing of its adjacent office building, and the furnishing of certain services, by an exempt hospital to a hospital-based medical group is not unrelated trade or business. Rev. Rul. 69–463, 1969–2 C.B. 131.

  23. Financial support of other organizations—A nonprofit organization, created to construct and maintain a building for the exclusive purpose of housing and serving exempt member agencies of a community chest, may be exempt. The performance of a particular activity that is not inherently charitable may nonetheless further a charitable purpose. The overall result in any given case is dependent on why and how that activity is actually being conducted. Rev. Rul. 69–572, 1969–2 C.B. 119.

  24. Industrial association—A nonprofit organization composed of members of a particular industry to develop a new and improved use for existing products of the industry is not exempt under IRC 501(c)(3) but may qualify under IRC 501(c)(6). Rev. Rul. 69–632, 1969–2 C.B. 120.

  25. Resource conservation—A nonprofit organization formed to preserve and improve a lake used extensively as a public recreational facility qualifies for exemption under IRC 501(c)(3). Rev. Rul. 70–186, 1970–1 C.B. 128.

  26. Day care center—A children’s day-care center that is primarily funded by Federal grants and is not restricted to children of employees of the sponsoring employer but instead is open to members of the community and selects children on the basis of financial needs and children’s needs, is exempt under IRC 501(c)(3). Rev. Rul. 70–533, 1970–2 C.B. 112.

  27. Cooperative art gallery—A cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 71–395, 1971–2 C.B. 228.

  28. City Bar Association—A city bar association exempt under IRC 501(c)(6) that primarily directs its activities to the promotion and protection of the practice of law may not be reclassified as an educational or charitable organization under IRC 501(c)(3). Rev. Rul. 71–505, 1971–2 C.B. 232.

  29. Low income housing—An organization formed to provide low income housing to families but giving preference for housing to employees of a farm proprietorship operated by the individual who created and controls the organization does not qualify for exemption under IRC 501(c)(3). Rev. Rul. 72–147, 1972–1 C.B. 147.

  30. Business benefits; legal aid—An organization formed to provide legal services for low income residents of economically depressed communities is exempt as a charitable organization under IRC 501(c)(3). Rev. Rul. 72–559, 1972–2 C.B. 247.

  31. Medical peer review—A nonprofit organization formed by members of a State medical association to operate medical peer review boards is primarily furthering the common business interests of members and exempt under IRC 501(c)(6) but not exempt under IRC 501(c)(3). Rev. Rul. 74–553, 1974–2 C.B. 168. See also Rev. Rul. 73–567, 1973–2 C.B. 178.

  32. Law library—An organization operating a law library whose rules limit use to members of a local bar association composed of substantially all of the members of the legal profession in the municipality qualifies for exemption under IRC 501(c)(3). Rev. Rul. 75–196, 1975–1 C.B. 155.

  33. Hospitals; purchase of intangible assets by related organization—The purchase, in a transaction not at arm’s length, of all the assets of a profit-making hospital by a nonprofit hospital corporation at a price that includes the value of intangible assets, determined by the capitalization of excess earnings formula by an independent appraiser, does not result in the inurement of the hospital’s net earnings to the benefit of any private shareholder or individual or serve a private interest precluding exemption. Rev. Rul. 76–91, 1976–1 C.B. 149.

  34. Educational; for-profit school converted to nonprofit school—An organization that purchases or leases at fair market value the assets of a former for-profit school and employs the former owners, who are unrelated to the current directors, at salaries commensurate with their responsibilities, is operated exclusively for educational and charitable purposes. An organization that takes over a school’s assets and its liabilities, which exceed the value of the assets and include notes owed to the former owners and current directors of the school, is serving the directors’ private interests and is not operated exclusively for educational and charitable purposes. Rev. Rul. 76–441, 1976–2 C.B. 147

  35. Testing cargo containers—An organization that inspects and certifies the safety of cargo shipping containers is not operated exclusively for the purposes of testing for public safety or for scientific purposes. Rev. Rul. 78–426, 1978–2 C.B. 175. Rev. Rul. 65–61 distinguished.

  36. Benefit to founder, rent-free facility—In an IRC 7428 action, the Tax Court upheld the Service’s determination that the organization, whose secondary purpose was promotion of the (hand) papermaking industry, was not described in IRC 501(c)(3). The organization also provided rent-free facilities to the founder, although the founder received no compensation for his work with the organization. The Service had determined that promotion of the papermaking industry was a substantial non-exempt purpose and that the organization provided private benefit to the founder. The court ruled that the organization had not carried its burden of proof to show the Service’s determination was erroneous. The Church of the Living Tree v. Commissioner, T.C. Memo 1996–291 (1996).

7.25.3.17  (02-23-1999)
Attempting to Influence Legislation

  1. IRC 501(c)(3) expressly limits the amount of lobbying an organization can do without jeopardizing exempt status, providing "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation…"

    1. The limitation on the lobbying activities of IRC 501(c)(3) organizations was added to the statute by the Revenue Act of 1934. The legislative history is sparse.

  2. In Regan v. Taxation with Representation of Washington, 461 U.S. 540 (1983), the Supreme Court addressed the question of whether the IRC 501(c)(3) restriction on lobbying violates constitutional guarantees. The Court unanimously held that the IRC 501(c)(3) restriction on lobbying activities violates neither the freedom of speech guarantee of the First Amendment nor the equal protection doctrine of the Fifth Amendment. Concerning the First Amendment issue, the Court stated that this aspect of the case was controlled by its decision in Cammarano v. United States, 358 U.S. 498 (1959). In Cammarano, the Court upheld a Treasury Regulation (antecedent to the passage of IRC 162(e)), that denied business expense deductions for lobbying activities.

  3. As to TWR’s equal protection claim, the Court stated that the general rule of statutory classifications is that such classifications are valid if they bear a rational relation to a legitimate governmental purpose, and that "[l]egislatures have especially broad latitude in creating classifications and distinctions in tax statutes." 461 U.S. at 547. The Court noted that while statutes are subject to a higher level of scrutiny if they interfere with the exercise of a fundamental right, such as freedom of speech, the IRC 501(c)(3) legislative restriction does not infringe upon freedom of speech; therefore, the statutory distinction in treatment of IRC 501(c)(3) and IRC 501(c)(19) organizations need only have a rational basis. The Court found such a basis.

    1. Regan v. Taxation with Representation of Washington was foreshadowed by Christian Echoes National Ministry, Inc. v. United States, 470 F.2d 849 (10th Cir. 1972); cert. denied, 414 U.S. 864 (1973), where the Tenth Circuit dismissed a claim that the IRC 501(c)(3) prohibition on lobbying and political activities was an unconstitutional restriction on the organization’s freedom of speech.

  4. Reg. 1.501(c)(3)–1(c)(3) state that an organization is not operated exclusively for exempt purposes if it is an "action" organization. The term "action organization" describes both organizations that attempt to influence legislation and organizations that intervene in political campaigns, which are discussed in IRM 7.25.3.17.

  5. The two kinds of legislative action organizations are:

    1. An organization that attempts to influence legislation as a substantial part of its activities. Reg. 1.501(c)(3)–1(c)(3)(ii) provides that an organization will be regarded as attempting to influence legislation if it: contacts or urges the public to contact members of a legislative body for the purpose of proposing, supporting, or opposing legislation, or advocates the adoption or rejection of legislation.

    2. An organization with the two characteristic set out in Reg. 1.501(c)(3)–1(c)(3)(iv): its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and it advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results thereof available to the public. In determining whether an organization has such characteristics, all the surrounding facts and circumstances, including the articles and all activities of the organization, are to be considered.

7.25.3.17.1  (02-23-1999)
Attempts to Influence Legislation

  1. Attempts to influence legislation are not limited to direct appeals to members of the legislature (direct lobbying). Indirect appeals to legislators through the electorate or general public (indirect or "grass roots" lobbying) also constitute attempts to influence legislation. Both direct and indirect lobbying are nonexempt activities subject to the IRC 501(c)(3) limitation on substantial legislative action.

    1. Whether a communication or an appeal constitutes an attempt to influence legislation is determined on the basis of the facts and circumstances surrounding the communication in question.

    2. For IRC 501(c)(3) purposes, the distinction between direct and indirect lobbying becomes important for public charities making the IRC 501(h) lobbying election. (Discussed at IRM 7.25.3.17.2) There are separate limits for total lobbying—IRC 4911(c)(2) lobbying nontaxable amount—and for indirect Iobbying—IRC 4911(c)(4) grassroots nontaxable amount.

    3. In addition, certain communications made by an IRC 501(c)(3) organization to its members (described in IRC 4911(d)(2)(D)) are not considered attempts to influence legislation, while other communications to members (described in IRC 4911(d)(3)) are considered lobbying.

  2. Attempting to influence legislation includes requesting that an executive body support or oppose legislation. See, Rev. Rul. 67–293, 1967–2 C.B. 185, Roberts Dairy Company v. Commissioner, 195 F.2d 948 (8th Cir. 1952), cert. denied, 344 U.S. 865 (1952). American Hardware and Equipment Company v. Commissioner, 202 F.2d 126 (4th Cir. 1953), cert. denied, 346 U.S. 814 (1953).

  3. Attempting to influence legislation does not include appearing before a legislative committee in response to an official request for testimony.

    1. Rev. Rul. 70–449, 1970–2 C.B. 111, held that a university’s exemption would not be jeopardized when, in response to an official request, it sent representatives who could advise a congressional committee on the possible effects of specific legislation.

  4. The legislative restriction applies to activities undertaken by the organization itself. Thus in Rev. Rul. 72–513, 1972–2 C.B. 246, the legislative activities of a student newspaper did not jeopardize the exemption of the sponsoring university.

  5. Study, research, and discussion of matters pertaining to government and even to specific legislation, may, under certain circumstances, be educational activities rather than attempts to influence legislation. This is so where the study, research, and discussion do not serve merely as a preparatory stage for the advocacy of legislation. (Of course, the primary inquiry is the purpose of the study, research, or discussion.)

    1. In Rev. Rul. 64–195, 1964–2 C.B. 138, and Rev. Rul. 70–79, 1970–1 C.B. 127, a nonprofit organization was held exempt under IRC 501(c)(3) when it engaged in non-partisan study, research, and assembly of materials on prospective court reform legislation and disseminated those materials to the public.

    2. Compare, however, Rev. Rul. 62–71, 1962–1 C.B. 185, which precludes exemption to an organization that, as its primary objective, advocates the adoption of a doctrine or theory that can become effective only by the enactment of legislation.

7.25.3.17.1.1  (02-23-1999)
"Legislation" Defined

  1. Reg. 1.501(c)(3)–1(c)(3)(ii) provides that legislation includes: "... 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."

  2. The term legislation includes foreign as well as domestic laws. Rev. Rul. 73–440, 1973–2 C.B. 177.

  3. Notice 88–76, 1988–27 I.R.B. 34, clarifies that attempts to influence the confirmation of a federal judicial nominee by the Senate is attempting to influence legislation.

  4. IRC 501(c)(3) does not distinguish between "good" legislation and "bad" legislation. For example, Rev. Rul. 67–293, 1967–2 C.B. 185, holds that an organization substantially engaged in promoting legislation to protect or otherwise benefit animals is not exempt under IRC 501(c)(3) even though the legislation it advocates may be beneficial to the community. Similarly, see Murray Seasongood v. Commissioner, 227 F.2d 907 (6th Cir. 1955); John F. Dulles, Exr. v. Johnson, 273 F. 2d 362 (2nd Cir. 1959).)

    1. Although there is contrary precedent, the majority of courts have held that it is not necessary or possible to distinguish between good and bad legislation. This is in accord with the traditional view dating back many years and now reenforced by dicta of the Supreme Court in Cammarano et ux. v. United States, 358 U.S. 498, 512 (1959), to the effect that the statutory restriction on attempts to influence legislation simply "made explicit" a longstanding judicial principle that "political agitation as such is outside the statute, however innocent the aim."

    2. Direct holdings include League of Women Voters of the United States v. United States, 180 F. Supp. 379 (Ct. CI. 1960), cert. denied, 364 U.S. 822 (1960), and Alan B. Kuper v. Commissioner, 332 F.2d 562 (3rd Cir. 1964), cert. denied, 379 U.S. 920 (1964)).

7.25.3.17.1.2  (02-23-1999)
"Substantial" Defined—No Election Made Under IRC 501(h)

  1. Attempts to influence legislation that are less than a substantial part of the organization’s activities will not deprive it of exemption. Whether a specific activity of an exempt organization constitutes a "substantial" portion of its total activities is a factual issue, and there is no simple rule as to what amount of activities is substantial.

    1. The earliest case on this subject, Seasongood v. Commissioner, supra, held that attempts to influence legislation that constituted five percent of total activities were not substantial.

    2. Seasongood provides only limited guidance because the court’s view of activities to measure is no longer supported by the weight of precedent. Further, it is not clear how the court arrived at the five percent figure.

  2. Most courts have not attempted to measure activities by percentage or have stated that a percentage test is not conclusive.

    1. In Christian Echoes National Ministry v. United States, 470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973), at 855, the court explicitly rejected using a percentage test to determine whether lobbying activities were substantial, stating "[a] percentage test to determine whether the activities were substantial obscures the complexity of balancing the organization’s activities in relation to its objectives and circumstances."

    2. In Haswell v. United States, 500 F.2d 1133 (Ct. Cl. 1974), cert, denied, 419 U.S. 1107 (1975), the court used percentage figures to find that an organization’s lobbying activities comprised between 16.6 percent to 20.5 percent of its expenditures in the years in issue. The court concluded that the organization was substantially engaged in lobbying activities. Although the court said that a percentage test is not the only measure of substantiality, it held that in this case the results of such a test were a strong indication that the organization’s purposes were no longer consistent with charity.

  3. Supporting activities, for example, research, must be analyzed to determine if they should be included with attempts to influence legislation. This can be difficult where the activity also serves educational purposes.

    1. In League of Women Voters of the United States v. United States, supra; and Alan B. Kuper v. Commissioner, supra, the courts held that attempts to influence legislation may begin before an organization first addresses itself to the public or to the legislature. Accordingly, they considered time spent discussing public issues, formulating and agreeing on positions, and studying them preparatory to adopting a position, and compared that time with the other activities in determining the substantiality of the attempts to influence legislation.

  4. A private foundation may be liable for Chapter 42 excise taxes on its legislative expenditures under IRC 4945 even though the attempts by an organization to influence legislation have been determined to be insubstantial and the organization’s exemption is not jeopardized by the legislative activity.

  5. For years beginning after December 22, 1987, certain organizations whose IRC 501(c)(3) status is revoked because of substantial lobbying activities are subject to a five-percent excise tax imposed by IRC 4912 on their lobbying expenditures. IRC 4912 also imposes a similar tax at the same rate on any manager of the organization who willfully and without reasonable cause consented to making the lobbying expenditures knowing the expenditures would likely result in the organization’s no longer qualifying under IRC 501(c)(3). There is no limit on the amount of this tax that may be imposed against either the organization or its managers.

  6. The IRC 4912 taxes do not apply to private foundations, which are subject to the tax imposed by IRC 4945. Nor do they apply to any organization that has elected to be subject to the lobbying limitations of IRC 501(h), or is not eligible to make the IRC 501(h) election (churches and certain church-related organizations).

7.25.3.17.1.3  (02-23-1999)
"Substantial" Defined for Organizations That Elect Under IRC 501(h)

  1. To establish more precise standards for determining whether an IRC 501(c)(3) exempt organization’s legislative activities are substantial, Congress enacted IRC 501(h) as part of the Tax Reform Act of 1976. (P.L. 94–455). Eligible public charities (listed in IRC 501(h)(4)) may elect the IRC 501(h) substantiality test. Non-electing organizations (whether eligible or not) will be subject to the ordinary facts and circumstances substantiality test of IRC 501(c)(3).

    Note:

    The IRC 501(h) substantiality test applies for taxable years beginning after December 31, 1976.

  2. On November 5, 1986, a Notice of Proposed Rulemaking (1986 NPRM), containing proposed regulations implementing IRC 501(h) and IRC 4911, was published in the Federal Register. Controversy ensued, particularly over the definition of grass roots lobbying and the allocation rules. The Service and Congress received more than ten thousand letters from charities and their members requesting withdrawal of the proposed regulations. These comments were generated by concerns that the regulations were overly restrictive and would have a "chilling effect" on charities’ involvement in the policy making process.

  3. The Service did not withdraw the 1986 proposed regulations, but publicly stated in an information release, IR–87–49 (April 9, 1987), that it would reconsider key portions of the regulations. Two days of public hearings were held in 1987. In June 1987, the Service announced the establishment of a Commissioner’s Exempt Organizations Advisory Group (as had been suggested by Rep. Dan Rostenkowski, Chairman of the Committee on Ways and Means). At public meetings held on September 17, 1987, and February 26, 1988, possible revisions to the 1986 proposed regulations were discussed with this Advisory Group. Substantial revisions to the regulations were published in proposed form in 1988.

    1. In contrast to the reception accorded the 1986 proposed regulations, the publication of the 1988 proposed regulations resulted in less than 100 written comments. The comments were almost uniformly favorable. The 1988 proposed regulations were discussed with the Commissioner’s Exempt Organizations Advisory Group at a public meeting held on January 10, 1989, and a formal public hearing was held on April 3, 1989.

  4. The final regulations were published in T.D. 8308, 55 FR 35579 (Aug. 31, 1990), and contained few technical changes from the 1988 proposed regulations. They were made effective as of the date of publication.

  5. IRC 501(h) establishes a sliding scale of permissible "lobbying non-taxable amounts" . Nontaxable amounts are computed for both total and grass roots lobbying. Nontaxable amounts are deemed insubstantial, and expenditures under the nontaxable amounts will result in neither tax nor revocation. Expenditures in excess of the nontaxable amounts are called "excess lobbying expenditures" . An excise tax under IRC 4911 is imposed on lobbying expenses that exceed permissible non-taxable amounts. If lobbying expenditures exceed both the permitted total lobbying amount and the grass roots amount, the IRC 4911 tax is imposed on whichever excess is greater.

    Note:

    "Affiliated" organizations are treated as one for purposes of lobbying expenditures.

  6. IRC 4911(a)(2) provides that, for purposes of IRC 4911, the term "excess lobbying expenditures" for a taxable year means the greater of the following amounts:

    1. The amount by which the lobbying expenditures made by the organization during the taxable year exceed the lobbying nontaxable amount for such organization during such taxable year, or

    2. The amount by which the grass roots expenditures made by the organization during the taxable year exceed the grass roots nontaxable amount for such organization for such taxable year.

  7. IRC 4911(c)(2) provides that the nontaxable amount of lobbying expenditures is the lesser of $1,000,000 or an amount determined under a sliding scale, set forth in the statute, of percentage of exempt purpose expenditures. The nontaxable amount of grassroots lobbying expenditures is 25 percent of the nontaxable amount of lobbying expenditures.

  8. If an IRC 501(c)(3) organization engages in lobbying activities, and if it has elected to be covered by the provisions of IRC 501(h), lobbying may cause revocation of its exempt status only if the amounts spent on such lobbying "normally" exceed 150 percent of either of the permissible amounts over a base period, or grass roots expenditures exceed 150 percent of the grassroots lobbying nontaxable amount for the base years. Therefore, the tests of whether an organization is an "action" organization, set forth in Reg. 1.501(c)(3)–1(c)(3) and described below, should not be used to determine whether an organization that has made the IRC 501(h) election has engaged in substantial lobbying activities.

    Note:

    Reg. 1.501(h)–3(c)(7) provides that in general, the term "base years" means the determination year and the three taxable years immediately preceding the determination year. The base years, however, do not include any taxable year preceding the taxable year for which the organization is first treated as described in IRC 501(c)(3).

  9. Reg. 1.501(h)–3(b)(2), however, provides a special exception for an organization’s first election. Under this exception, for the first, second, or third consecutive determination year for which an organization’s first expenditure test election is in effect, the organization will not be denied exemption from tax by reason of IRC 501(h) if, taking into account as base years only those years for which the expenditure test election is in effect the following conditions are met:

    1. The sum of the organization’s lobbying expenditures for such base years does not exceed 150 percent of the sum of its lobbying nontaxable amounts for the same base years; and

    2. The sum of the organization’s grass roots expenditure for those base years does not exceed 150 percent of the sum of its grass roots nontaxable amounts for such base years.

  10. IRC 504 provides that IRC 501(c)(4) status is precluded (after October 3, 1976), for organizations once described as public charities (except for churches, conventions of churches, etc.), but no longer described as public charities because of excessive lobbying.

  11. IRC 504(b) authorized the Secretary of the Treasury to prescribe regulations to prevent avoidance of this rule, including avoidance by transferring all or part of the assets of an IRC 501(c)(3) organization to an organization that is controlled by the same persons who control the IRC 501(c)(3) organization. These regulations are set forth in Reg. 1.504–2.

  12. In determining whether an organization has attempted to avoid IRC 504 by transferring any of its assets, the term "transfer" includes any use by, or for the benefit of, the recipient, except transfers made for adequate and full consideration. Generally, a transfer that involves the following five elements will cause loss of exemption to the recipient:

    1. The transfer is from an IRC 501(c)(3) organization that is determined to be an "action" organization or is denied exemption by IRC 501(h);

    2. At the time of the transfer or at any time during the recipient’s next ten taxable years, the recipient is controlled (directly or indirectly) by the same persons who control the transferor;

    3. The transfer is made (1) after the date that is 24 months before the earliest of the effective date of the determination IRC 501(h) that the transferor is not exempt, the effective date of the Commissioner’s determination that the transferor is an "action" organization, or the date on which the Commissioner proposes to treat it as no longer described in IRC 501(c)(3), and (2) before the transferor again is recognized as an organization described in IRC 501(c)(3);

    4. The recipient is exempt from tax under IRC 501(a) but is neither an organization described in IRC 501(c)(3), nor a qualified pension plan described in IRC 401(a) to which the transferor contributes as an employer; and

    5. The amount of the transfer exceeds the lesser of 30 percent of the net fair market value of the transferor’s assets or 50 percent of the net fair market value of the recipient’s assets, computed immediately before the transfer.

7.25.3.17.2  (02-23-1999)
Exempt Purpose Expenditures for Organizations That Elect Under IRC 501(h)

  1. Reg. 56.4911–4 provides rules under IRC 4911(e) for determining an electing public charity’s "exempt purpose expenditures." The regulation also provides that, in determining exempt purpose expenditures, no expenditure shall be counted twice by an organization.

  2. Under Reg. 56.4911–4(b), amounts paid or incurred by an organization that are exempt purpose expenditures include the following:

    1. Amounts paid or incurred to accomplish a purpose enumerated in IRC 170(c)(2)(B) including certain transfers made by the organization;

    2. Amounts paid or incurred as current or deferred compensation for an employee’s services in connection with an IRC 170(c)(2)(B) purpose;

    3. The allocable portion of administrative overhead and other general expenditures attributed to accomplishing IRC 170(c)(2)(B) purposes;

    4. All lobbying expenditures;

    5. Amounts paid or incurred for activities that are not considered lobbying because they are described in Reg. 56.4911–2(c), e.g., nonpartisan analysis, study, and research, or member communications described in Reg. 56.4911–5 that are not lobbying expenditures;

    6. A reasonable allowance for exhaustion, wear and tear, obsolescence or amortization, of assets to the extent used for one or more of the above purposes computed on a straight-line basis; and

    7. Certain fund-raising expenditures (but see IRC 4911(e)(1)(C) and Reg. 56.4911–4(c)(3) and Reg. 56.4911–4(c)(4)).

  3. There are two types of transfers that will be treated as an exempt purpose expenditure:

    1. a transfer made to an organization described in IRC 501(c)(3) in furtherance of the transferor’s exempt purposes that is not earmarked for any purpose other than one described in IRC 170(c)(2)(B). Therefore, a payment of dues by a local or state organization to, respectively, a state or national organization that is described in IRC 501(c)(3) is considered an exempt purpose expenditure of the transferor to the extent it is not otherwise earmarked. Reg. 56.4911–4(d)(2).

    2. a "controlled grant," but only to the extent of the amounts that are paid or incurred by the transferee that would be exempt purpose expenditures if paid or incurred by the transferor. Reg. 56.4911–4(d)(3).

7.25.3.17.2.1  (02-23-1999)
Expenditures That Are Not Exempt Purpose Expenditures for Organizations That Elect Under IRC 501(h)

  1. Under Reg. 56.4911–4(c), exempt purpose expenditures do not include the following types of expenditures:

    1. Amounts paid or incurred that are not described in Reg. 56.4911–4(b);

    2. The amounts of any transfer described in Reg. 56.4911–4(e);

    3. Amounts paid to or incurred for a "separate fund raising unit" of the organization or of an affiliated organization;

    4. Amounts paid to or incurred for any person not an employee, or any organization not an affiliated organization, if paid or incurred primarily for fund raising, but only if such person or organization engages in fund-raising, fund-raising counseling or the provision of similar advice or services;

    5. Amounts paid or incurred chargeable to a capital account, determined in accordance with the principles that apply under IRC 263 or IRC 263A, with respect to an unrelated trade or business;

    6. Amounts paid or incurred for a tax that is not imposed in connection with the organization’s efforts to accomplish an IRC 170(c)(2)(B) purpose, such as taxes imposed under IRC 511(a)(1) and IRC 4911(a); and

    7. Amounts paid or incurred for the production of income.

  2. Reg. 56.4911–4(e) provides that three types of transfers cannot be considered exempt purpose expenditures:

    1. a transfer made to a member of any affiliated group (as defined in Reg. 56.4911–7(e)) of which the transferor is a member. Reg. 56.4911–4(e)(2).

    2. a transfer that the Commissioner determines artificially inflates the amount of the transferor’s or transferee’s exempt purpose expenditures. The regulation provides that this determination generally will be made if a substantial purpose of a transfer is to inflate those exempt purpose expenditures. When this determination is made, the transfer will not be considered an exempt purpose expenditure of the transferor; rather, it will be an exempt purpose expenditure of the transferee to the extent that the transferee expends the transfer in the active conduct of its charitable activities or attempts to influence legislation. Standards similar to those found in Reg. 53.4942(b)–1(b) (relating to operating foundations) may be applied in determining whether the transferee has expended amounts in the "active conduct" of its charitable activities or attempts to influence legislation. Reg. 56.4911–4(e)(3).

    3. a transfer that is not a "controlled grant" and is made to an organization not described in IRC 501(c)(3) that does not attempt to influence legislation. Reg. 56.4911–4(e)(4).

  3. Costs incurred by volunteers in carrying on grass roots lobbying (e.g., going door-to-door to seek signatures for petitions to be sent to legislators in favor of a specific bill) are not lobbying or exempt purpose expenditures made by the organization.

    1. Further, the volunteers may not deduct their out-of-pocket expenditures. See IRC 170(f)(6).

    2. However, the organization’s costs of soliciting the volunteers’ help and its costs of training the volunteers are grass roots expenditures, as are the costs of preparing, copying, distributing, etc., the petitions and any other materials on the same specific subject used in the door-to-door signature gathering effort.

7.25.3.17.3  (02-23-1999)
Lobbying Expenditures

  1. For public charities that elect to be covered by IRC 501(h), lobbying expenditures are expenditures made for the purpose of influencing legislation (as defined in IRC 4911(d)). IRC 501(h)(2)(A). An electing public charity’s lobbying expenditures for a year are the sum of its expenditures during that year for direct lobbying communications ( "direct lobbying expenditures" ) plus its expenditures during that year for grass roots lobbying communications ( "grass roots expenditures" ).

7.25.3.17.3.1  (02-23-1999)
Direct Lobbying

  1. "Direct" lobbying involves attempts to influence legislation through communication with any member or employee of a legislative body. It also involves attempts to influence legislation through communication with any government official or employee (other than a member or employee of a legislative body) who may participate in the formulation of the legislation, but only if the principal purpose of the communication is to influence legislation. IRC 4911(d)(1)(B); Reg. 56.4911–2(b)(1)(i).

  2. A communication with a legislator or government official will not be treated as a direct lobbying communication in accordance with Reg. 56.4911–2(b)(1) unless it both:

    • refers to "specific legislation" ; and

    • reflects a view on such legislation.

  3. Therefore, a position letter on a pending bill prepared by an organization’s employee and distributed to members of Congress or personal contacts by the employee with members of Congress or their staffs to seek support for the organization’s position on the bill would constitute direct lobbying. Reg. 56.4911–2(b)(4)(i), Example (1).

  4. In contrast, a letter sent to a member of Congress requesting that he or she write an administrative agency regarding proposed regulations recently published by that agency and also requesting that she state her support for a particular type of permit granted by the agency is not a direct lobbying communication. Reg. 56.4911–2(b)(4)(i), Example (2).

  5. Similarly, sending a paper to a state legislator on a particular state’s environmental problems that does not reflect a view on any specific legislation that the organization either supports or opposes likewise is not a direct lobbying communication. Reg. 56.4911–2(b)(4)(i), Example (3).

7.25.3.17.3.2  (02-23-1999)
Grass Roots Lobbying

  1. "Grass roots" lobbying is the attempt to influence legislation by affecting the opinions of the general public or any segment of the public. IRC 4911(d)(1)(A); Reg. 56.49 11–2(b)(2)(i).

  2. Reg. 56.4911–2(b)(2)(ii) sets forth a three-part test for determining whether communications with the general public will be treated as grass roots lobbying communications. The communication will be considered a grass roots lobbying communication only if it meets all three of the following requirements:

    1. The communication refers to specific legislation;

    2. The communication reflects a view on such legislation; and

    3. The communication encourages the recipient of the communication to take action with respect to such legislation.

  3. The third element (requiring the communication to encourage the recipient to take action) is commonly referred to as the "call to action" requirement. Essentially, what this requirement means is that no matter how clearly an organization identifies the specific legislation and comments on the merits of that legislation (for example, "passage of S. 549 would mean the end of civilization as we know it" ) when it communicates with the general public, the absence of any further statement that encourages the recipient to take action would mean that the communication could not be considered a grass roots lobbying communication.

  4. Reg. 56.4911–2(b)(2)(iii) provides a definition of encouraging a recipient to take action with respect to legislation. To be considered a "call to action," a communication must do any one of the following:

    1. state that the recipient should contact an individual described in Reg. 56.4911–2(b)(1)(i);

    2. state the address, telephone number, or similar information of a legislator or an employee of a legislative body;

    3. provide a petition, tear-off postcard or similar material for the recipient to communicate with any individual described in Reg. 56.4911–2(b)(1)(i); or

    4. specifically identify one or more legislators who will vote on the legislation as: opposing the organization’s view with respect to the legislation; being undecided with respect to the legislation; being the recipient’s representative in the legislature; or being a member of the legislative committee or subcommittee that will consider the legislation. Merely naming the main sponsor(s) of the legislation for purposes of identifying the legislation will not constitute encouraging the recipient to take action.

  5. Unless a communication with the general public meets all three of the Reg. 56.4911–2(b)(2)(ii) requirements, it will not be a grass roots lobbying communication.

  6. In certain cases, a communication that does meet all three of the requirements may not be a grass roots lobbying communication. Reg. 56.4911–2(b)(1)(iii) provides that, solely for purposes of IRC 4911, where a communication refers to and reflects a view on a measure that is the subject of a referendum, ballot initiative or similar procedure, the general public in the State or locality where the vote will take place constitutes the legislative body, and individual members of the general public are considered legislators. Accordingly, if such a communication is made to one or more members of the general public in that state or locality, the communication is a direct lobbying communication (unless it comes under the exception for nonpartisan analysis, study or research.

7.25.3.17.3.3  (02-23-1999)
Legislation

  1. Reg. 56.4911–2(d)(1)(i) provides that "legislation" includes action by the Congress, any state legislature, any local council, or similar legislative body, or by the public in a referendum, ballot initiative, constitutional amendment, or similar procedure.

  2. "Legislation" includes a proposed treaty required to be submitted by the President to the Senate for its advice and consent from the time the President’s representative begins to negotiate its position with the prospective parties to the proposed treaty.

  3. Under Reg. 56.4911–2(d)(1)(ii), "specific legislation" includes both legislation that has already been introduced in a legislative body and specific legislative proposals that the organization either support or oppose.

    1. In the case of a referendum, ballot initiative, constitutional amendment, or other measure that is placed on the ballot by petitions signed by a required number or percentage of voters, an item becomes "specific legislation" when the petition is first circulated among voters for signature.

  4. Before amendment in 1990, the regulations under IRC 4945 provided that "attempts to influence legislation" included communications "with respect to legislation being considered by, or to be submitted imminently to, a legislative body." Reg. 53.4945–2(a)(1) (1990). When the regulations under IRC 4911 were finalized, the standard "to be submitted imminently" was not used in Reg. 56.4911–2(d)(1)(ii) and it was deleted from the IRC 4945 regulations. As the Preamble to the regulations explains, a temporal standard is inappropriate and underinclusive given the nature of the legislative process.

    Example:

    long before many specific legislative proposals are formally introduced as a bill, they are subject to intensive scrutiny, debate, and controversy. Also, effective lobbying could prevent a bill from ever being introduced. Consequently, reference to legislation proposed or adopted in one state that urges its adoption in another state constitutes a specific legislative proposal in the other state even though no such bill has been introduced there. Reg. 56.4911–2(d)(1)(iii), Example (2).

  5. Legislation may be identified either by its formal name or by a term that has been widely used in connection with specific pending legislation,e.g., "the President’s plan for a drug-free America." Reg. 56.4911–2(b)(4)(ii)(B), Example (1).

  6. Legislation may also be identified merely by its content and effect. See Reg. 56.4911–2(d)(1)(iii), Example (1).

7.25.3.17.4  (02-23-1999)
Organizations Eligible to Elect Under IRC 501(h)

  1. IRC 501(h)(3) provides that the provisions of IRC 501(h) will apply to any eligible IRC 501(c)(3) organization that has elected to have those provisions apply.

  2. To be eligible to make the IRC 501(h) election, the IRC 501(c)(3) organization must be an organization described in IRC 501(h)(4) and it must not be a disqualified organization described in IRC 501(h)(5).

  3. The IRC 501(c)(3) organizations described in IRC 501(h)(4) are as follows:

    1. Educational institutions as described in IRC 170(b)(1)(A)(ii);

    2. Hospitals and medical research organizations as described in IRC 170(b)(1)(A)(iii);

    3. Organizations that support government schools as described in IRC 170(b)(1)(A)(iv);

    4. Organizations publicly supported by charitable contributions as described in IRC 170(b)(1)(A)(vi);

    5. Organizations publicly supported by admissions, sales, etc. related to their exempt purpose as described in IRC 509(a)(2); and

    6. Organizations that are public charities because they are a supporting organization described in IRC 509(a)(3) of an IRC 501(c)(3) organization that is described in IRC 509(a)(1) or IRC 509(a)(2).

7.25.3.17.4.1  (02-23-1999)
Organizations Not Eligible to Elect Under IRC 501(h)

  1. IRC 501(c)(3) organizations may not elect to be covered by the provisions of IRC 501(h) if they are not described under IRC 501(h)(4) or if they are disqualified under IRC 501(h)(5).

  2. The organizations that are ineligible to make an IRC 501(h) election are as follows:

    1. Churches or conventions or associations of churches as described in IRC 170(b)(1)(A)(i);

    2. Integrated auxiliaries of a church or convention or association of churches (IRC 508(c) and IRC 6033);

    3. Organizations described in IRC 501(c)(3) and affiliated with at least one church or convention or association of churches or an integrated auxiliary (an "affiliated group" within the meaning of IRC 4911(f)(2));

    4. Organizations that are public charities because they are a supporting organization described in IRC 509(a)(3) of certain organizations exempt under IRC 501(c)(4), IRC 501(c)(5), or IRC 501(c)(6);

    5. Organizations engaged in testing for public safety and thus described in IRC 509(a)(4); and

    6. Private foundations.

7.25.3.17.4.2  (02-23-1999)
How IRC 501(h) Election is Made

  1. An eligible organization makes the election under IRC 501(h) by filing the Form 5768. Under IRC 501(h)(6), the electi