Explainer: Why Don't Non-Profits Lose Their Tax-Exempt Status for Lobbying?

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Non-profits can lose their tax-exempt status if they engage in lobbying, but the rules are vague enough that most political activities go unpunished.

Consider the case of the non-profit American Legislative Exchange Council, or ALEC. Over the past year, ALEC has been the subject of a New York Times investigation, a Common Cause IRS complaint, and a website devoted to "exposing" ALEC as a thinly-veiled, tax-subsidized lobbying group, and the source of over 800 model bills that eventually found their way into state legislatures.

Nearly 2,000 state legislators are members of ALEC, which is filed as a non-profit 501(c)(3) charitable organization. Many of those legislators, after attending ALEC conferences and meeting with business leaders, bring draft bills back to their home states.

Those bills, often written by public officials and private interests working in concert, have served as the basis for a wide variety of legislation that, according to the same critics, tends to skew conservative. One such example is Florida's "Stand Your Ground Law," which loosened restrictions on gun use, and became infamous after the Trayvon Martin shooting in February.

Considering all that, the part about ALEC being a charitable organization makes some observers queasy. The same can be said of the progressive website Media Matters, another 501(c)(3) whose tax-exempt status has also come into question. Similarly, churches and religious organizations court criticism for going tax-free whenever they engage in political speech.

But all of these groups may be protected by IRS rules that allow a lot of leeway for non-profits to join the conversation, without meeting the legal definition of "lobbying."

When is it lobbying?

The Internal Revenue Code prohibits a non-profit from devoting "more than an insubstantial part of its activities to attempting to influence legislation by propaganda or otherwise." It gives little more concrete definition than that.

"'Substantial' is a pretty vague term," said Michael Cortés, Chairman of the Center for Lobbying in the Public Interest, a non-profit that lobbies to make it easier for non-profits to lobby. (Cortés admits it's a little meta.) "It's kind of in the eye of the beholder. It's not spelled out in quantitative terms."

For that reason, and to avoid getting in trouble, Cortés' organization recommends that non-profits wishing to lobby take something called a 501h election, which will permit them to try and influence legislation, while limiting the amount of money they're able to spend in the process.

When you don't make a 501h election, as ALEC has not, your non-profit is subject to the fuzzier rules. By which metrics can you determine if a "substantial" part of their operation is "influencing legislation"?

"From a distance, it looks to me like much of what they do is not lobbying under the Internal Revenue Code, and some of what they do might be," Michael Cortés said. "If they are approaching legislators and asking them to vote this way or that on a proposed piece of legislation, they’re definitely getting into lobbying territory."

"You can talk to anyone about an issue and what the right policy should be," said Barbara Schatz, a law professor at Columbia University who specializes in non-profits. "There's no problem with that. What's defined as lobbying is talking to people involved in the legislature about a particular piece of legislation."

Model legislation

Non-profits aren't supposed to advocate for or against specific bills in their communications, but what about coming up with their own, like ALEC? Does that count as lobbying?

The Internal Revenue Code restricts non-profits from influencing legislation, but defines legislation as "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."

Technically, a model bill drafted by a non-profit organization for advocacy or educational purposes may not qualify as "legislation" because it's an action by an independent third party.

"If they’re talking about new policy ideas and trying to develop them in a collaborative way, without addressing a specific bill that’s already been introduced, a lot of that would probably not be lobbying," Michael Cortés explained.

Mentioning a bill by name seems to be a red flag in the internal revenue code. Drafting one is more of a gray area.

"If they're pressing model bills on legislators, I think that meets the definition of lobbying," said Barbara Schatz. "Drafting it may not be, but pressing it on a legislature, I think it is."

Tough to prove

Michael Cortés said there's a lot of misunderstanding among charitable organizations about what they're allowed to do when it comes to advocating or lobbying — it's why his organization exists.

The bottom line is that non-profits can lobby if they make a 501h election, but they'll be limited in how much they can spend on lobbying. Otherwise, 501(c)(3)s aren't allowed to lobby at all, but they are allowed to do a lot of things that look like lobbying.

In both cases, the Internal Revenue Code is fairly clear that non-profits aren't allowed to participate in a political campaign, or support or oppose a candidate.

The legal and linguistic gymnastics of advocacy rules, on the other hand, could make it very hard to prove ALEC, or any non-profit, deserves to lose its tax-exempt status.