January 31, 1973
Page 2771
LOBBYING BY TAX-EXEMPT ORGANIZATIONS
Mr. MUSKIE. Mr. President, one of the most lively tax reform issues of the last Congress was whether tax-exempt organizations should be allowed to lobby without losing their tax-exempt status. A proposal introduced by the senior Senator from Pennsylvania (Mr. SCOTT) and myself eventually attracted 42 cosponsors, and a similar proposal introduced in the House of Representatives also generated much support.
Senator SCOTT and I are again working on a bill to permit lobbying by tax-exempt organizations. We hope to have the active participation and support of our colleagues again this year, and to draft our proposal in conjunction with a similar effort being made in the House.
The present unfair law which unnecessarily restricts lobbying by tax-exempt organizations continues to cry out for reform. Senator SCOTT and I would welcome the comments of our colleagues as we prepare our proposal. In this regard, I commend to them an article by Alvin J. Geske in the current issue of the American Bar Association's Tax Journal, entitled "Direct Lobbying Activities of Public Charities." This article gives an overview of the history of legislative proposals in this area and agrees with us that legislation is still needed. I ask
unanimous consent that the article be printed in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
DIRECT LOBBYING ACTIVITIES OF PUBLIC CHARITIES
(By Alvin J. Geske)
[NOTE-Alvin J. Geske (B.A. Southern Methodist University, 1964; J. D. University of Chicago, 1967) is with the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. The opinions expressed herein are those of the author and do not necessarily reflect those of the Internal Revenue Service. This article was originally prepared as a seminar paper for a graduate course at The National Law Center, George Washington University.]
Under present law, an organization exempt from taxation under section 501(c) (3) of the Internal Revenue Code of 1954 and qualified to receive deductible charitable contributions under section 170(c) (2) (hereafter referred to as a "charity") which has engaged in substantial activities relating to carrying on propaganda or otherwise attempting to influence legislation may lose its tax- exempt status under section 501(c) (3) and its qualification to receive deductible contributions.
On the other hand, a taxable organization can obtain a business deduction under section 162 for expenses relating to appearances before, or communications with, a legislative body or members thereof, to further its business interests.
Consequently, if a charity wishes to engage in direct lobbying – to communicate with, or make appearances before, a legislative body or members thereof – with respect to matters relating to its exempt purposes, it is at a substantial disadvantage when compared with a taxable organization.
For example, if a bill is being considered in the legislature of State X to control water pollution, the Doe Steel Company, one of the principal polluters of the State's rivers, can deduct expenses which relate to appearances before, submission of statements to, or sending communications to, the State legislature or any of its members or committees with respect to such bill. Furthermore, the Doe Steel Company could deduct expenses which are in direct connection with the communication of information between it and an organization of which it is a member with respect to such proposed legislation if the legislation is of direct interest to it and the organization (as it might be if the organization were a business league). The Doe Steel Company could also deduct that portion of dues paid to any organization which can be attributed to direct lobbying activities of the organization relating to this bill.
On the other hand, a charity (such as a scientific organization whose members may well have particular knowledge about the effects of pollution) would encounter substantial problems if it attempted to communicate with the State legislature on this bill. If the activities connected with such communication were found to be a substantial part of the activities of the organization and such communication did not qualify as the making available of the results of "nonpartisan analysis, study or research," it could lose its status as a section 501(c)(3) organization and its qualification to receive deductible contributions. Furthermore, the organization would be greatly hindered by the fact that the "substantiality" test as administered fails to give the organization any meaningful guidelines as to the extent or nature of the political activities which may be carried on by charities. In addition, the Internal Revenue Service's regulations as to when material constitutes the result of nonpartisan analysis, study or research give a charity so little guidance in determining whether particular materials qualify as the "result" of such activities that the charity would very likely be reluctant to make submissions to a legislature in reliance on the nonpartisan nature of the materials submitted. Since even a review of an organization's status as a section 501(c)(3) organization or an announcement by the Internal Revenue Service that it would no longer extend advance assurance of deductibility of contributions to the organization can dry up the organization's sources of funds from other exempt organizations and from individuals respectively, the charity would have a strong tendency to avoid even insubstantial political activity for fear that a particular item, even if it represents an extremely small portion of the organization's budget and activity, could lead to an investigation of, and possible revocation of, its section 501 (c)(3) exemption.
Thus, section 162 provides, in accordance with Congressional intent, a clear tax stimulus for taxpayers engaged in a trade or business for profit to communicate with, and make appearances before, legislative bodies or members thereof in connection with legislation affecting their activities entered into for profit even though the positions they are advocating may be inimical to the public interest. Conversely, section 501(c)(3), which is predicated upon activities beneficial to the public, operates as a strong disincentive for charities to communicate with, or make appearances before, legislative bodies with respect to matters relating to their charitable programs, even though some of these organizations have members and employees who are among the "most knowledgeable people in our society in areas which relate to the commonweal."
It appears that, in order for legislatures to obtain the benefit of information on all sides of legislative controversies where there are competing business and non-business interests, in accordance with Congressional intent as expressed in the Committee reports accompanying the 1962 amendments to section 162, nonbusiness groups as well as business interests should be encouraged to communicate to legislatures their views with respect to legislation and proposed legislation.
BACKGROUND
Prior to the Revenue Act of 1962, Treasury Regulations under section 162 or its predecessors had consistently provided that no deduction was allowable for expenses paid or incurred for lobbying purposes. Although these regulations were originally interpreted by the courts as precluding deductions only for expenses relating to illegitimate or unethical practices, later decisions, including Supreme Court decisions in 1941 and 1959, interpreted these regulations to preclude deductions for expenses relating to all forms of legislative activity.
Under these circumstances, there appeared to be some justification for disallowing charitable deductions to organizations which engaged in substantial lobbying activities since a contrary result would have allowed a contributor to obtain indirectly a deduction for amounts used for lobbying purposes.
As indicated above, in 1962 Congress enacted section 162(e), which allowed taxpayers to deduct expenses relating to direct lobbying activities in matters of direct interest to the taxpayer's trade or business. The legislative history indicates that Congress wished to make the change in prior law for the following reasons: (1) since expenses of direct lobbying relate to income-producing activities, an accurate measure of net income requires that they be deductible; (2) it is anomalous to allow deductions for business expenses incurred in appearing before executive or administrative officials with respect to administrative matters, or before the courts with respect to judicial matters, and not to allow deductions for similar expenses of appearing before legislative bodies; and (3) as a matter of governmental policy it is desirable for legislative bodies to have readily available to them information concerning the impact of present laws or proposed legislation on the trade or business of taxpayers.
As a result of the enactment of section 162(e), the tax law's position of basic neutrality between business interests and nonbusiness interests with respect to political activity was altered. This change and the increasing desire of many charities to engage in direct lobbying, particularly with respect to such issues as environmental protection, birth control, and health care, have lead charities to seek modification of the restrictions of section 501 (c)(3) on direct lobbying.
In opposition to the charities' contention that they should he able to engage in "substantial" program-related direct lobbying, it may be argued that, except where an expense for communicating with a legislative body qualifies as a business expense by virtue of its relationship to profit-motivated activities of a taxpayer, such an expense should be considered a nondeductible personal expense, and, consequently, a contribution to an organization which engages in such activity should also be nondeductible. The short answer to this argument is that many personal expenses not related to a taxpayer's business activities are deductible. One of these categories of deductible personal expenses is charitable contributions. The theory behind allowing charitable organizations to receive deductible contributions is that these organizations perform socially desirable functions, including some functions which relieve the government of burdens.
Since the theory underlying the charitable deduction is that the recipient organizations perform desirable functions, it would seem that as a part of such programs they should be able to inform the legislative bodies of their positions on proposed legislation or the need for legislation so long as this legislative activity is limited to matters which affect the organization's charitable program (or matters which concern the status of the organization or contributions to it).
When Congress considered major tax legislation in 1969, charities were hopeful of restoring the imbalance. At the hearings charities expressed their dissatisfaction with the substantiality tests. But Congress was in an uncharitable mood toward charities; an amendment that would have allowed charities to engage in direct lobbying without the limitation of the "substantiality" test was introduced by Senator Cooper, but never called up for consideration. In fact, the only provision in the Tax Reform Act concerning the political activities of charities further restricts the political activities of private foundations; this provision, which adds section 4945 to the Code, imposes excise taxes on amounts paid or incurred by private foundations for direct lobbying and "grassroots" lobbying activities, even if such activities are insubstantial.
RECENT LEGISLATIVE PROPOSALS
A number of bills were introduced in the Ninety-second Congress designed to provide guidelines concerning the amount and nature of lobbying activities which could be carried on by certain charities. The three proposals which appeared to generate the most support were a bill introduced by Senator Muskie in March, 1971 (hereinafter the "Muskie bill"), a bill introduced jointly by Senators Muskie and Scott in January, 19.2 (hereinafter the "Muskie-Scott bill"), and a bill introduced by Representative Ullman and others in March, 1972 (hereinafter the "Ullman bill"). These bills will be examined separately, and the approaches taken in them will be compared with other approaches suggested in recent legal literature.
On March 30, 1971, Senator Muskie introduced a bill that would revise the Internal Revenue Code to allow organizations described in section 509(a) (1), (2) or (3) (hereafter referred to as "public charities") to engage in certain direct lobbying without fear of losing their tax-exempt status or their qualification to receive deductible contributions. The key provision in this bill is a proposed amendment to section 501. This provision would add to section 501 a new subsection which would provide as follows:
(f) Appearances, etc., with respect to legislation – (1) In general – In the case of an organization described in section 509(a) (1), (2), or (3), none of the following activities shall be deemed carrying on propaganda, or otherwise attempting, to influence legislation:
(A) appearances before, submission of statements to, or sending communications to, the committees, or individual members, of Congress or of any legislative body of a State, a possession of the United States, or a political subdivision of any of the foregoing with respect to legislation or proposed legislation of direct interest to the organization; or
(B) communication of information between the organization and its members or contributors with respect to legislation or proposed legislation of direct interest to the organization.
(2) Matters of direct interest – For purposes of paragraph (1), matters of direct interest to the organization are those directly affecting any purpose for which it is organized and operated.
(3) Limitation – Paragraph (1) shall not apply to any attempt to influence the general public, or segments thereof, with respect to legislative matters, elections or referendums.
Corresponding amendments would be made to sections 170(c), 2055, 2106, and 2522 – the provisions concerning deductibility of contributions for purposes of the income tax, the estate tax, and the gift tax.
The Muskie bill follows the distinctions set out in section 162(e) by distinguishing between "grass-roots" lobbying (attempting to influence the general public or segments thereof on legislative issues) and direct lobbying and between matters of direct interest to the organization and other matters. Thus, the Muskie bill, like section 162(e), would permit only direct lobbying and only with respect to matters of direct interest to the organization.
On January 24, 1972, Senators Muskie and Scott introduced an amended version of the original Muskie bill. This new bill (the "Muskie-Scott bill") is substantially identical to the Muskie bill except that paragraph (3) of the new proposed section 501(f) would provide another limitation on the application of new proposed section 501(f) (1), the provision allowing direct lobbying by public charities. This new limitation is as follows:
"Paragraph (1) shall not apply...
(B) Unless substantially more than one-half of the expenditures of the organization referred to in paragraph (1) are normally devoted to activities other than those described in subparagraphs (A) and (B) of paragraph (1). For purposes of this subparagraph, the term "expenditures" includes only amounts paid or incurred which are substantially related (aside from the need of such organization for funds or the use it makes of the profits derived) to the exercise or performance of the charitable, educational, or other purpose or function constituting the basis for the organizations' exemption under this section (or in the case of an organization described in section 511 (a) (2) (B), to the exercise or performance of any purpose or function described in paragraph (3) of section (c) ). Nothing in this subsection shall be construed to limit or reduce the level of activities otherwise permitted an organization under paragraph (3) of subsection (c) or any other applicable provision of this title."
In introducing this new amended bill, Senator Muskie, after noting broad bipartisan support in both houses of Congress for the earlier Muskie bill, stated that this new limitation was added to the legislative proposal to alleviate concern "that the original bill might be interpreted to permit a public charity to devote its predominate activities to legislative efforts." Thus, the limitation would allow a public charity to engage in program-related direct lobbying "only if substantially more than one-half of its expenditures are normally in pursuit of its exempt functions other than lobbying."" As Senator Muskie notes, provisions of the Code added by the Tax Reform Act interpret "substantially more than one-half" as "65 percent" and "normally" as ordinarily requiring reference to the most recent four-year period of an organization's existence.
The Ullman bill, which also applies only to public charities, deals not only with "program-related direct lobbying," that is, communications with (and appearances before) legislators and legislative bodies concerning matters which directly affect a tax-exempt purpose of a charity and direct communication of information between a charity and one or more of its members concerning such a matter, but also with all other attempts to influence legislation (including all attempts to influence the general public with respect to pending legislation and all other direct lobbying on matters not directly affecting any of the charity's tax-exempt purposes). In effect, the Ullman bill would provide that an organization described in section 509 (a) (1), (2), or (3) (other than an organization described in section 509(a) (3) which is a supporting organization of an organization described in section 501 (c) (4), (5), or (6)) would not fail to qualify for exemption from taxation as an organization described in section 501(c)(3) so long as the amounts paid for lobbying activities other than program-related direct lobbying do not normally exceed five percent of the total current expenditures for charitable purposes (other than amounts chargeable to capital accounts), and amounts expended for all types of lobbying do not normally exceed 20 percent of the total current expenditures for charitable activities. The term "normally," here, as in the Muskie-Scott bill, is apparently intended to refer to the four most recent taxable years of an organization.
Thus, under this bill, a public charity could spend up to 20 percent of its current expenditures on program-related direct lobbying (so long as it did not engage in any other lobbying). Like the Muskie-Scott bill, the Ullman bill attempts to quantify the amount of program-related direct lobbying that a public charity can perform based on the charity's current expenditures; however, the Ullman bill also quantifies the "substantiality" test for other lobbying based on an expenditures test.
Consistent with the provisions of section 4945, which imposes an excise tax on a private foundation for any attempt to influence legislation, the Ullman bill provides that certain activities relating to legislation are not considered attempts to influence legislation. These activities are as follows: (1) the making available of nonpartisan analysis, study, or research; (2) "the providing of technical advice or assistance to a governmental body or to a committee or other subdivision thereof in response to a written request from such body or subdivision;" and (3) "an appearance before, or communication to, any legislative body with respect to a possible decision of such body which might affect the existence of the organization, its powers and duties, its tax-exempt status, or the deduction of contributions to such organization." Like the other bills, the Ullman bill would make corresponding amendments to sections 170, 2055, 2106, and 2522, but it would also make other amendments to these sections which would disallow any deduction for contributions for the use of a charity if the contribution is made for the purpose of influencing legislation. This provision would not appear to affect contributions to a charity but would disallow deductions for out-of-pocket expenses incurred in carrying out a charity's activities if such expenses relate to lobbying activities.
One other novel feature of the Ullman bill is that it would allow a public charity to elect to be treated under the provisions described above or to be treated under the "substantiality" test of existing law. Apparently, it was felt that determining compliance with the expenditure-based tests would require more comprehensive audits for some organizations than are required under present law and that some of these organizations would therefore prefer to be governed by the "substantiality" test.
Policy considerations similar to those which led Congress to enact section 162(e) are applicable to proposed legislation permitting program-related direct lobbying of charities. These policy considerations are as follows: (1) the "substantiality" test of present law is difficult to administer and gives little guidance to charities; (2) it is anomalous that charities can make appearances before, and submissions to, administrative or judicial bodies, but not legislative bodies, with respect to matters affecting their charitable programs; and (3) legislative bodies need information concerning the effect of legislation or proposed legislation on charitable organizations and their programs.
All three of the bills mentioned above are based on a 1969 American Bar Association resolution, reprinted with the Muskie bill in the Congressional Record. Some differences are apparent, however. The ABA resolution, which antedates the Tax Reform Act, would permit only publicly- supported charities, within the meaning of that term under former section 503(b) (3) (repealed by the Tax Reform Act) to engage in program related direct lobbying, whereas each of the three bills would permit all public charities, whether or not publicly supported, to engage in program- related direct lobbying.
The limitations of the three bills and the ABA resolution on the allowance of direct lobbying to organizations which are in some sense "public" appears to be based on a feeling that it would be "dangerous to give such power to private foundations." For if private foundations could engage in such lobbying, a wealthy individual "could set up a well-endowed private foundation to 'lobby' without limit at the taxpaying public's expense in the legislatures for legislation promoting his pet 'religious, charitable, scientific, literary, or educational' beliefs." Since publicly-supported charities generally are dependent for their support upon, and presumably must be responsive to, fairly substantial segments of the general public, there is not as serious a danger of such abuse where the charity is publicly supported.
Nevertheless, the bills appear to apply to a more appropriate class of organizations than does the ABA resolution. Allowance of program-related direct lobbying for only publicly-supported organizations fails to recognize a fundamental proposition of the Tax Reform Act – that an organization will be treated as responsive to a broad public interest because of the nature of its control or operation, as well as because of the nature of those who support it. Consequently consistent with this proposition, the appropriate dividing line is that any organization which qualifies as a "public charity" should be able to engage in program-related direct lobbying.
Another difference between the Muskie bill and the Muskie-Scott bill on the one hand, and the Ullman bill and the ABA resolution on the other, is that the Ullman bill and ABA resolution would also explicitly allow any charity to engage in direct lobbying with respect to legislation (or proposed legislation) which would affect its tax-exempt status or the deduction of contributions to it under the federal income, estate and gift tax laws. Although neither section 501(c) (3) nor the regulations thereunder indicate that more than an insubstantial amount of activity with respect to such matters may be carried on, a good case may be made for the proposition that more than an insubstantial amount of direct lobbying on such matters can be carried on under existing law.
Thus, section 4945 explicitly provides that amounts paid or incurred for direct lobbying with respect to proposed legislation affecting a private foundation's existence, its powers and duties, its tax-exempt status, or the deduction of contributions to the foundation are not taxable expenditures. The report of the Committee on Finance states, with regard to the lobbying provision, that "[e]ssentially, this provision retains the present law provision but removes the 'substantiality' test in determining whether a private foundation has made a taxable expenditure ..." However, in the absence of Treasury pronouncements clarifying this matter, it would appear desirable to clarify existing law (as the Ullman bill does) by including in a bill relating to the political activities of charities a provision specifically providing that any charity can engage in "substantial" direct lobbying with respect to proposed legislation concerning its existence, its powers and duties, its tax-exempt status, or the deduction of contributions to it.
The three bills are also quite similar to a proposal made in 1969 by Thomas C. Jorling. The Jorling proposal served as the basis for Senator Cooper's previously discussed, ill-fated, proposed amendment to H.R. 13270 (the bill which became the Tax Reform Act of 1969). The Jorling proposal would permit any section 501(c)(3) organization (including a private foundation) to engage in unlimited direct lobbying on matters of direct interest to the organization. In support of allowing private foundations as well as public charities to engage in program-related direct lobbying, it may be argued that many private foundations have valuable information and expertise which they should be allowed to make available to legislative bodies. However, as noted above, where charities are not of a sufficiently public nature, the potential for abuse by an individual using the organization for private purposes exists. In addition, the Jorling proposal, in allowing private foundations to engage in program-related direct lobbying, is too broad in scope to be consistent with section 4945 which, on the theory that private foundations need substantial restrictions on their programs to insure that they live up to their roles as stewards of public trust, imposes severe sanctions upon program-related lobbying activities of private foundations (unless such lobbying consists of the dissemination of nonpartisan analysis, study, or research, or the furnishing of technical advice or assistance).
Another shortcoming of the Jorling proposal, and the Senate floor amendment based upon it, is that its elimination of the "substantiality" test would absolutely forbid any grassroots lobbying. The proposal's proponents appear to take the position that such a provision is necessary to put charities and trade or business organizations on an equal footing. What they fail to recognize, however, is that for a trade or business organization the penalty for a minimal violation is merely disallowance of the deduction whereas for a charity the penalty for such a violation could be loss of its section 501(c)(3) status. Thus, it appears desirable to retain the "substantiality" test for grassroots lobbying, as the Ullman bill does. However, if this is done and the percentage is even five per cent as in the Ullman bill, it could result in the explicit availability of very large sums for grassroots lobbying.
Furthermore, with respect to the Jorling proposal, it is important to note that crucial to the philosophy of the Tax Reform Act is the distinction between private foundations and public charities. The Tax Reform Act recognizes that a private foundation may well be the alter ego of an individual or small group of individuals, and as such might be particularly susceptible to being used to further the personal interests of contributors, whereas public charities, by virtue of their public nature, are subject to sufficient public scrutiny to make such abuses sufficiently unlikely as not to require detailed legislative regulation of their charitable functions or the means by which such functions are achieved. Thus, since the Tax Reform Act indicates that public charities are to be given more leeway than private foundations in implementation of their programs, the philosophy behind the Tax Reform Act is not inconsistent with the liberalization of the rules concerning direct lobbying of public charities despite the references in the Committee reports to Congressional policy against use of tax deductible funds for political purposes. It is debatable, at best, as to whether the same can be said of private foundations.
Opponents of proposals such as the Muskie bill may also argue that allowance of unlimited program related direct lobbying to public charities would result in the advent of ideological organizations, organized and operated primarily to influence legislation, using deductible contributions primarily to achieve legislative goals. This problem may be solved by providing, in the bill or in committee reports, that the provision is not intended to affect that portion of the regulations under section 501 (c)(3) which denies exemption to an organization under that section if the organization's "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 the attainment of such objectives in a partisan manner. This, coupled with the restrictions on grassroots lobbying, should be sufficient to prevent the use of deductible contributions for political agitation while permitting direct lobbying on matters which are related to charitable purposes of public charities.
As previously discussed, this objection could also be met by providing, as the Ullman bill and the Muskie-Scott bill do, that a large percentage of the organization's program-related expenditures must be spent for exempt activities other than lobbying. Whether the requirement that at least 80 percent, or at least 65 percent, of the organization's expenditures be spent for exempt activities other than lobbying is appropriate or should be more (or less) stringent seems like a uniquely appropriate issue for a legislative decision.
However, it appears that allowing up to 20 percent of each charity's current expenditures to be spent for lobbying would result in permitting several billion dollars to be used for lobbying activities. Even if, due to the budget. constraints and other programs of charities, only one tenth of such a maximum estimated amount were so used, it would result in more than a half billion dollars per year being used for the program-related direct lobbying of public charities. Such an amount might well have very significant effects on the legislative process.
In addition, if an organization with a large budget, such as a university, became interested in certain legislation affecting one of its exempt purposes and had funds available, the organization could spend large sums in direct lobbying for such legislation. Thus, it has been suggested that determining how much legislative activity a public charity can engage in solely by reference to a test based upon the percentage of current expenditures used for such activities is inappropriate.
Apparently it is felt that whether legislative activity is impermissibly "substantial" should be determined on all the facts and circumstances of each case, with factors such as the total amount expended, the use of registered lobbyists, and the type of lobbying engaged in (for example, differentiating appearances at public hearings from private meetings with legislators) being considered as well as the percentage of total current expenditures used for legislative activities.
The major problem with such an approach is that the complexity would lead to great uncertainty – exactly the difficulty with present law. Also, while allowing only appearances at public hearings and communications with legislative bodies incident to such hearings would eliminate the complexity of a "facts and circumstances" test, such a limitation appears to be generally regarded as too restrictive.
Another exception which might be taken to determining the permissible amount of program- related direct lobbying by reference to expenditures is that an organization's expenditure pattern does not accurately reflect its pattern of activities. The Ullman bill's prohibition against the deduction of contributions for the use of an organization if such contributions are made for the purpose of influencing legislation is apparently designed to insure that an organization's expenditure pattern more closely reflects the pattern of its activity.
As was noted at the public hearings on the Ullman bill, allowing public charities to engage in program-related direct lobbying with respect to legislation where there is no competing business interest can not be justified by the "balancing" arguments However, such lobbying can be justified as representing the communication of information to legislatures (presumably a desirable goal even in the absence of competing business interests and even if charitable organizations have conflicting viewpoints).
Another criticism of the Ullman bill, which is also applicable to the other bills, is that there is a substantial problem in deciding who is a member of a charitable organization, since the term "member" has different meanings for different types of organizations and under differing state laws . In particular, there are substantial problems created by parent or national organizations which have subsidiaries or local affiliates since "the membership of some large parent organizations may encompass a large segment of the entire population, and communications to such memberships may assume the proportions of grassroots lobbying." However, this problem could probably be alleviated, at least to some extent, by a restrictive interpretation of the term "direct communication of information" between a public charity and its members.
Also a restrictive definition of the term "members" might restrict the use of 'the "communication with members" provision to a degree sufficient to prevent its use for grassroots lobbying.
A problem common to all three bills and to the legislative proposals discussed above is providing appropriate subject limitations for lobbying. Under section 162(e), lobbying by businesses is limited to matters of direct interest to the taxpayers, and the regulations provide that "[l]egislation or proposed legislation is of direct interest to a taxpayer if the legislation or proposed legislation is of such a nature that it will, or may reasonably be expected to, affect the trade or business of the taxpayer." When coupled with the natural limitations imposed by a profit motive, this limitation as interpreted in the regulations is probably sufficiently definite to place reasonable limits on business lobbying which can be administered with relative ease.
All the bills and proposals discussed above allow lobbying by a charity only with respect to matters of direct interest to such charity. Other than stating that "matters of direct interest to an organization are those directly affecting any purpose for which it is organized and operated," neither the Ullman bill, the Muskie-Scott bill nor the Muskie bill give any meaningful guidelines as to limitations on the subject matter of lobbying by charities. Since the articles setting forth the purposes for which charities are operated are generally very broad in scope, it would appear that this test might impose little, if any, limitation on lobbying by charities.
Jorling states that "a new set of criteria will necessarily have to be established to define the appropriate nexus between any given legislation and the nonprofit organization's purpose."
However, his only suggestion to limit the allowable subject matter concerning which a public charity may lobby is to require that the charity state the subject matter with respect to which it wishes to lobby to the Internal Revenue Service (in its exemption application or at a later time) so that the Service could make a determination of consistency between the exempt purpose and the legislative interest. If this requirement of consistency with the exempt purpose of the organization were coupled with a requirement that the lobbying be conducted only in furtherance of an exempt purpose which forms a substantial portion of the organization's exempt activities (other than lobbying), it would seem that a reasonable, meaningful restriction on the amount and nature of direct lobbying by public charities could be achieved without unduly restricting the flow of information on proposed legislation to legislatures.
CONCLUSION
In short, it appears to be desirable to treat direct lobbying expenses of nonbusiness interests and those of business interests more equally. The Ullman bill appears to accomplish this goal in a reasonable manner by providing that a public charity can engage in direct lobbying with respect to matters of direct interest to its charitable program without losing its exemption under section 501 (c)(3) or its qualification to receive deductible contributions, so long as no more than 20 percent of the organization's current expenditures for its charitable purposes are expended for lobbying activities.
The limitation of the provisions of the bill to public charities appears to be reasonable because the distinction between personal expenditures on the one hand and business and charitable purposes on the other is important in the field of lobbying expenditures. The public nature of public charities should give reasonable assurance that a broad public interest, rather than a narrow personal interest, is being served by the direct lobbying expenditures of public charities. On the other hand, such assurance is not provided in the case of such expenditures by private foundations.
Nevertheless, while the approach of the Ullman bill appears basically sound, it appears that further consideration needs to be given to the appropriate allowable expenditure percentage for program-related direct lobbying to insure that such lobbying is incident to the accomplishment of otherwise charitable purposes. It also appears that further limitations should be imposed on the scope of the "communicating with members" activities, and that reconsideration should be given to quantifying the "substantiality" test with respect to grassroots lobbying.