The House Republicans released their tax bill—“The One, Big, Beautiful Bill”—this afternoon. It is a sweeping piece of legislation that includes a variety of provisions that would directly impact the philanthropic community. Private foundations and public charities should track the bill and its components carefully. They also should consider whether and to what extent they can engage in advocacy around the various proposals without engaging in impermissible lobbying or political campaign activity.
Private Foundations: No Lobbying Permitted
Private foundations are strictly prohibited from directly or indirectly engaging in attempts to influence legislation at any level of government unless an enumerated exception applies.1 “Legislation” for these purposes means actions by Congress, state legislatures, local councils or similar governing bodies, or public referenda or ballot measures. It includes the introduction, amendment, enactment, defeat, or repeal of acts, bills, resolutions, or similar items. “The One, Big, Beautiful Bill” is “legislation” for these purposes.
Public Charities: “Insubstantial” Lobbying Permitted
In contrast, a public charity is permitted to engage in lobbying activity so long as the lobbying activity remains an “insubstantial part” of the organization’s overall activities. The default test for public charities to determine how much lobbying is permissible is subjective and takes into account all relevant facts and circumstances. Because the subjective nature of the default test can make planning difficult, many public charities elect instead to opt into the “501(h) expenditure test” in order to take advantage of clearer definitions and guidelines. The remainder of this Alert assumes that an organization has made the 501(h) election.
Self-Defense Exception
The Treasury Regulations include an important, albeit infrequently-used, exception to the definition of “lobbying” for private foundations and for charities that have made the 501(h) election. The self-defense exception is extremely narrow and only applies to lobbying with respect to matters that go to the heart of an organization’s existence, powers, duties, tax-exempt status, and deductibility of contributions to it. It does not apply to policy matters, even those at the center of an organization’s beliefs or values. Further, it only covers direct lobbying (e.g., communications with legislators or members of their staff reflecting a view on specific legislation). It does not cover grass roots lobbying (e.g., communications encouraging the public to contact their legislators to support or oppose specific legislation).
As viewed against The One, Big, Beautiful Bill, the self-defense exception:
- Permits a private foundation with assets of $50,000,000 or more to lobby Congress to oppose the proposal to increase the net investment income tax set forth in Section 4940 of the Internal Revenue Code.2
- Permits public charities and private foundations to lobby Congress in support of the proposal to extend the charitable income tax deduction to non-itemizers, or to support an expansion of the proposed $150 deduction ($300 for joint filers).
- Permits a university with a “student adjusted endowment” of more than $750,000 to lobby Congress to oppose proposals to increase the university endowment tax.
- Permits a private foundation or a public charity that would be subject to the proposed expansion of the excess compensation tax set forth in 4960 to lobby Congress in opposition to that proposal.
- Permits a private foundation or a public charity that provides qualified transportation fringe benefits or operates certain parking facilities to lobby Congress in opposition to the proposed “unrelated business taxable income” treatment of amounts paid or incurred for such items.
- DOES NOT PERMIT a private foundation to lobby Congress in support of or opposition to the legislation generally or on any item that does not directly impact the foundation’s existence, powers, duties, tax-exempt status, or deductibility of contributions to it.
- DOES NOT PROHIBIT a public charity from lobbying Congress in support of or opposition to the legislation outside of the self-defense exception so long as the charity properly tracks and reports it as lobbying and so long as the lobbying, when combined with the charity’s other lobbying activity, is at a permissible level.
**It is important to note that it is very unclear as of the writing of this Alert whether lobbying in opposition to the legislation’s “terrorist supporting organization” proposals would qualify for the self-defense exception. Organizations should proceed with extreme caution.**
Other Lobbying Exceptions
The Treasury Regulations include other important exceptions to the definition of “lobbying” for private foundations and for charities that have made the 501(h) election. Two often-cited exceptions are the (a) nonpartisan analysis, study, or research exception, and the (b) technical advice or assistance exception.
- The nonpartisan analysis, study, or research exception permits an organization to issue a report or other communication that advocates a particular position or viewpoint as long as there is a sufficiently full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion. The report or other communication may even refer to and reflect a view on specific legislation, provided that it does not include a direct encouragement (as specifically defined in the Treasury Regulations) to take action. Determining whether a particular report or communication qualifies for this exception can be a highly subjective exercise.
- The technical advice or assistance exception permits an organization to take a position on specific legislation as long as the communication is in response to a written request by a government body, a governmental committee, or a subdivision of either. The written request must be in the name of the body, not an individual member thereof, and the organization’s response must be narrowly restricted to only the scope requested by the governmental body. The response must be made available to every member of the requesting body, committee, or subdivision.
Critical Reminder! Political Campaign Prohibition
Private foundations and public charities are strictly prohibited from engaging in any political campaign activity.3
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This Alert does not constitute legal guidance in any manner. C3 Legal would be pleased to talk with you about how these rules might apply to your organization.
Caution! Be aware that other federal, state, and local laws requiring lobbyist registration and reporting often have different definitions and rules from those discussed in this Alert. Compliance with the 501(c)(3) rules does not guarantee compliance with those other rules. Your organization should consult with qualified lobbying counsel for guidance on compliance with those rules.
1Addressing the full scope of the definition of “lobbying” and relevant exceptions exceeds the scope of this Alert.
2The plain language of the legislation suggests that the asset level is calculated by aggregating the assets of a private foundation with those of its related organizations . . . including non-exempt related organizations.
3Addressing the full scope of the political campaign activity prohibition exceeds the scope of this Alert.