There are two important exceptions to the general limitation on lobbying activity.

Non-Partisan Analysis

The Treasury Regulations specifically state that "engaging in nonpartisan analysis, study, or research and making the results thereof available to the public" will not disqualify an organization from an exemption. [FN1] Thus, journalism outlets acting as non-partisan watchdogs or commentators on political issues will not be classed as action organizations because of that activity. For example, in Technical Advice Memorandum 98-35-003, the IRS found that an organization that commented on political issues and legislation was not engaged in lobbying:

It is clear that [the non-profit] engaged in various activities of a political nature. However, many of these matters were of an educational nature and were related to the overall consumer educational program carried on by [the non-profit]. In other instances specific legislation was not even pending before Congress when the activities were carried on. [The non-profit] has no political agenda and has not backed or supported any candidate for election. [The non-profit] has encouraged its audience to write to Congress and express their opinion and [the non-profit]'s publications have provided the names and addresses of Congressmen. However, [the non-profit] never dictated what its readers should say to their Congressmen. [FN2]

However, news organizations should expect that the IRS will carefully review a non-profit's political research and commentary to be sure that it is actually non-partisan. Note also that analysis of particular candidates for election might be deemed to be partisan if it inures to the benefit or detriment of a particular candidate, even if the analysis is neutral in tone and does not consider formal party affiliation. [FN3]

Insubstantial Lobbying Activity

Although tax exempt organizations are completely barred from endorsing particular candidates or engaging in substantial lobbying activity, they are permitted to engage in an insubstantial amount of lobbying activity that does not support a particular candidate. The IRS applies one of two tests to determine whether a non-profit's lobbying activity is substantial. Importantly, the non-profit has the ability to choose which test is applied, by either doing nothing or filing a form with the IRS.

(a)    The Substantial Part Test

If the non-profit does nothing, the default test applied by the IRS will be the "Substantial Part" test:

Whether an organization's attempts to influence legislation, i.e., lobbying, constitute a substantial part of its overall activities is determined on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial.

Under the substantial part test, an organization that conducts excessive lobbying in any taxable year may lose its tax-exempt status, resulting in all of its income being subject to tax. In addition, section 501(c)(3) organizations that lose their tax-exempt status due to excessive lobbying, other than churches and private foundations, are subject to an excise tax equal to five percent of their lobbying expenditures for the year in which they cease to qualify for exemption.

Further, a tax equal to five percent of the lobbying expenditures for the year may be imposed against organization managers, jointly and severally, who agree to the making of such expenditures knowing that the expenditures would likely result in the loss of tax-exempt status. [FN4]

Because the "Substantial Part" test is vague and circumstance-driven, it can be difficult for an organization to be sure when it has crossed the line into engaging in substantial political activity.

(b)    The Expenditure Test

In the alternative, a tax-exempt educational organization may at any time file IRS Form 5768 and thereby elect to have the IRS apply the "Expenditure Test," which provides substantially more clarity:

Organizations other than churches and private foundations may elect the expenditure test under section 501(h) [of the Internal Revenue Code] as an alternative method for measuring lobbying activity. Under the expenditure test, the extent of an organization's lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount specified in section 4911. This limit is generally based upon the size of the organization and may not exceed $1,000,000, as indicated in the table below.

Organizations electing to use the expenditure test must file Form 5768, Election/ Revocation of Election by an Eligible IRC Section 501(c)(3) Organization to Make Expenditures to Influence Legislation, at any time during the tax year for which it is to be effective. The election remains in effect for succeeding years unless it is revoked by the organization. Revocation of the election is effective beginning with the year following the year in which the revocation is filed.

Under the expenditure test, an organization that engages in excessive lobbying activity over a four-year period may lose its tax-exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess. [FN5]

Barring rare circumstances, the clarity of the "Expenditure Test" means that there are few drawbacks to electing this test in the event that an organization is inclined to engage in some degree of lobbying.

RETURN TO THE CHART

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¹ Treas. Reg. § 1.501(c)(3)-1(c)(3)(iv) (as amended in 2008).
² I.R.S. Tech. Adv. Mem. 98-35-003 (July 24, 1998).
³ See Ass'n of the Bar of the City of New York v. Comm'r, 858 F.2d 876, 879-881 (2nd Cir. 1988) (rating candidates for judicial elections held to be impermissible political intervention, even though ratings were based upon neutral criteria and did not consider party affiliation). See also IRS Fact Sheet FS-2006-17 (discussing activity in connection with candidates and elections that might run afoul of prohibition of political endorsements/support).
⁴ See http://www.irs.gov/charities/article/0,,id=163393,00.html (last updated July 20, 2011).
⁵ See http://www.irs.gov/charities/article/0,,id=163394,00.html (last updated July 20, 2011).